Natural Disasters and Risks to Construction Projects

by Mark A. Cobb

As a Construction Law Firm working throughout Georgia, we stay very busy. Licensing requirements to maintain a law license in Georgia are very strict so we pick only the highest caliber continuing legal education opportunities available to construction attorneys. Recently, Mark Cobb was able to attend the American Bar Association’s (ABA’s) Forum on Construction Law Symposium where he was able to learn from some of the finest construction professionals in the country!

This year’s topic involved how construction attorneys can help their clients and the impact of natural disasters. Our clients often have projects in areas of higher risk of natural disaster including hurricanes, earthquakes, and flooding. The speakers included lead counsel for FEMA, major airport counsel, and the City Manager for Miami Beach discussing contract provisions, owner and general contractor duties and obligations, and post-catastrophe responses. Below are some of the highlights that caught Mark’s attention during this three-day construction law seminar:

State and Local Building Codes: Hurricane Michael caused a complete revision of the building codes along Florida’s coastal waters; however, these codes however, are not statewide. Last year, Hurricane Michael devastated Mexico Beach, Florida and the surrounding area. However, it was a Category Five Hurricane and it maintained Category 1 strength well into neighboring Georgia. In fact, our law office in South Georgia suffered leaks and was without utilities for several days. With significant natural disasters becoming more frequent, other areas of the country should consider revising their building codes to mitigate the damages which may occur.

Construction Disaster Preparedness Plans: Ever project–and certainly every project in a known risk area–should have a preparedness procedure plan in the event of a natural disaster. Every construction project is different so please make sure that issues such as the type of construction, the type of exposure (high winds, avalanche, etc.) possible, and look at the project scheduling to determine what phases of construction may be more prone to risk (e.g., what will be the status of the project during Hurricane Season?)

These plans should include all of the parties. For example, the owner may have more local or governmental contacts which may help in a crises situation; there should be a plan for handling all of the building materials including loose materials, unfinished building envelope, temporary structures, and shored floors and walls. Don’t forget to allocate responsibility for these supplies as loose aggregate can become projectiles in high-wind situations. Also, don’t forget to consider who owns the suppliers may make a difference as to whom is responsible for securing materials during a crises A comprehensive disaster plan should include post-disaster re-mobilization, labour, and subcontractor responses, and it will take into account the key players, the designated lead, a communication plan, and alternate access points in case a bridge or highway is inaccessible. In addition, it is vital to project the project documents and data from damage. Often, post-event situations will result in environmental hazards. Identifying and knowing the potential risks at the start of the project allows for a plan to reduce the delays and damages which might occur in the event of disaster.

Construction Insurance: Every type of construction project should maintain adequate insurance coverage. It is imperative to always know (i) what type of property is covered by an insurance policy and (ii) the exclusions. One example is whether or not a policy covers “earth movement” or “earthquakes”; all earthquakes are “earth movement” but not “earth movement covers many more things such as avalanche, sinkholes, soil compaction as well as earthquakes.

Few project owners or general contractors do this, but during the course of construction, they should monitor the subcontractor’s insurance to make sure that policies stay intact and do not lapse.

  • Builders Risk Insurance: Builders’ Risk Insurance covers individuals for damages to itself, and we have blogged about this topic several times before. An important component is that the coverage amount is based upon the value of the project at the time of the loss. Accordingly, the value of the policy increases as the project approaches completion. BRI typically includes permanent works (i.e., actual buildings) as well as temporary works (e.g., scaffolding, fences, concrete forms, etc.) The value of the real estate where the project occurs is not usually insured under BRI. BRI often does not cover (i) contractor tools and equipment, (ii) natural disasters, (iii) design-defect, or (iv) wear-and-tear such as corrosion and rust.
  • Flood Insurance: Often CGL policies may not cover all of the insurance needs, and it’s important to know about (and possibly purchase) National Flood Insurance Coverage (NFIP). Since this is generally available (with lower limits), a project owner or a development might consider adding this policy to pay the high-deductible of more traditional flood insurance.
  • Parametric Insurance: Parametric Insurance policies are becoming more prevalent. Since they pay upon certain, identifiable acts such as sustained wind velocity, lack of sunlight, or amount of rain, more owners are fining these to be attractive alternatives to delay damages or traditional insurance claims.

Construction Contracts: From the owner’s contract with the prime contractor to the subcontractor’s contracts with suppliers, the negotiated provisions of a construction contract can make all of the difference. Some examples which stand out include contract provisions which require a preparedness plan with special concerns for a particular construction project.

  • Force Majeure. Force majeure provisions are frequently found in the boilerplate provisions of many contracts; however, most parties (and often their attorneys) do not review these provisions carefully or draft them adequately. Force majeure provisions typically excuse performance of the contract in the event of a natural disaster; however, they seldom delve much deeper leaving questions open to common law. There may be obligations risks which should be included in these provisions such as a parties obligation for their failure to mitigate risks.
  • Impossibility of Performance. There are situations where the project may be delayed indefinitely due to road closures, bio-hazards, bridge collapse, etc. Thus, parties may wish to include a clause in their contracts which allow the parties to terminate the contract after a specific amount of time such as 90 days.
  • Price Escalation Clause: After potential risks become actual damages, obtaining supplies may become more difficult. Even though many states have laws preventing price-gouging, you do not want the availability of goods to be influenced by others who may be willing to pay more. It is possible to have the contracts with suppliers build in guaranties and limits to price escalation in the event of a natural disaster.

Understanding the risks of construction projects allows the owners, developers, design professionals, general contractors and subcontractors to make a cooperative plan to potentially save the project as a whole with little to no damage or, at least, significantly mitigate their damages.  Understanding the schedule, planning for weather-related conditions, and implementing forward-thinking construction contracts are a great way to begin putting together a disaster plan for your at-risk construction projects.

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