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The Construction Advantage
Final Rule Increases Involvement in Small Business Association Programs
In July 2019, the United States Small Business Association (the “SBA”) issued an interim final rule that will allow approximately 90,000 additional businesses to participate in its loan and contracting programs.
To be eligible for the SBA’s loan and contracting programs, a business must, in relevant part, qualify as a “small business” under the SBA’s size standards. Although the size standards vary by industry, the size standards are generally based on the number of employees or the amount of the annual receipts of the business.
The SBA defines “annual receipts” as the total (gross) income, plus the cost of goods sold. The SBA averages a company’s annual receipts over a certain number of years, which is known as the “look-back period.” Under the interim final rule, the SBA will increase the look-back period from three (3) years to five (5) years. As a result, the SBA anticipates that the increased look-back period will allow more businesses to achieve or regain small business status.
Additionally, the interim final rule will adjust the SBA’s annual receipt threshold for inflation. Over the past five (5) years, businesses within the construction industry could not qualify as a small business without satisfying a specific annual receipt threshold, such as:
- The annual receipt requirement for general, heavy, and civil construction companies was $36,500,000.
- The annual receipt requirement for specialty contractors, including electrical, concrete, plumbing, HVAC, and painting was $15,000,000.
Effective August 19, 2019, the SBA will adjust its annual receipt threshold by nearly 8.4%. As a result, additional businesses within the construction industry could become eligible for the SBA loan and contracting programs. To qualify as a small business under the new standards, certain businesses within the construction industry must meet the following annual receipt requirements:
- General, heavy and civil construction companies with average annual receipts of $39,500,000 (increase of about 8.2%); and
- Specialty contractors, including electrical, concrete, plumbing, HVAC and painting, with average annual receipts of $16,500,000 (increase of about 10%).
The SBA anticipates that an additional 90,000 business will gain small business status under the adjusted size standards, which allow those businesses to participate in the SBA loan and contracting programs. As a result, the SBA could award up to $750,000,000 in additional federal contracts to small businesses and up to 120 additional small business loans totaling nearly $65,000,000.
The SBA’s adjusted size standards are effective as of August 19, 2019. The SBA intends to review the new limits as part of its second five-year review. As a result, the SBA has requested comments on the new limits, which must be submitted by September 16, 2019.
Should Contractors Carry Design Errors and Omissions Insurance?
Contractors who want to manage their risks well should understand their insurance policies and what they do and do not cover. Traditionally, contractors have relied on commercial general liability (“CGL”) policies to cover most of the risks associated with their building projects. CGL policies do not, however, cover all risks. As contractors explore different project delivery systems such as design-build or construction management, provide in-house design services, or use subcontractors such as mechanical contractors who include design or engineering services as part of their work, they take on new risks and obligations to their clients that may not be covered under their CGL policies. As they evaluate their insurance programs they should review and consider whether to add design errors and omissions insurance.
Commercial General Liability Coverage
As background it is important to understand commercial general liability coverage. Most CGL policies are written on forms published by the Insurance Services Office, Inc. (“ISO”) so the language is standard no matter which carrier you use. For the carrier to have an obligation to defend your claim and pay your loss, you must have an “occurrence,” which is essentially an accident that you do not expect or intend. Usually that is a single event, but it can also be something that happens over time, such as a leak.
There must also be a personal injury or damage to property other than your own work. CGL policies exclude coverage to “your work” and “your product.” For example, if a wall you built tips over and crushes someone else’s car, the insurance should pay for the car but not to rebuild the wall.
The ISO CGL form on its face may provide protection against the occurrence even if it is a result of your alleged design rather than construction error (but only if there is an “occurrence” that causes personal injury or property damage), but it is not unusual for carriers to add an endorsement to the policy excluding or limiting coverage for design errors. To understand your coverage you must review the policy itself, and also the endorsements attached to the policy that put important limits on your coverage.
You figure out which policy covers your claim by the date of the “occurrence;” but courts differ as to what that date is. Court could look to the policy you have on the date an injury is sustained , the date of it is discovered, the date the injury could have been discovered, or the date a claimant was exposed to the cause of the injury; damage caused by continuous exposure such as water infiltration may trigger multiple policies over an extended period of time.[1]
Design Errors and Omissions Insurance and Gaps in Commercial General Liability Coverage
There are many risks that traditional CGL coverage does not pick up that may get covered under a design errors and omission (“E&O”) policy. This article will list some coverage gaps and how an E&O policy might cover them. At the outset, it is important to understand that there are no standard ISO-type forms for E&O insurance; policies vary from carrier to carrier and may even be negotiable for larger companies. It is important to review (or have someone review) an E&O policy to make sure it covers particular risks that concern you.
E&O insurance covers you for negligent performance of professional services, i.e. where there are claims that the services did not meet the standard of care of similar professionals in the same community performing similar services.[2] Within policy limits, it will cover substantially all damage caused by the negligence. Damages are generally measured as financial losses as opposed to the damage to person or property caused by the alleged negligence. Most E&O policies are “claims made” policies. This means that the policy in place when the claim is made and reported to the carrier will cover the claim, not the policy in place when the insured did the allegedly negligent work.
- As described above, CGL coverage excludes damages to your own work. E&O may pick that up. For example, if an owner sues a contractor because an HVAC system was not properly designed, or because calculations it prepared (or had a subcontractor prepare) were inadequate, the E&O coverage should cover the cost of replacing the defective system. It may also cover delay or loss of use damages to the owner, diminished value of the project, and other indirect or financial damages.
- Your CGL policy endorsements could exclude design as opposed to construction risk (you should check). E&O coverage will pick the design risk.
- Your CGL coverage may not cover all damage caused by errors by your design subs or design type work by your regular subs. An E&O policy should pick up most of this risk.
- Your CGL policy may not cover you for construction management services. Construction management contracts may include responsibilities for supervision, estimating, scheduling, and design or “value engineering” decision making. E&O coverage may protect against liability to clients for overruns due to estimating errors, replacement of work defective due to design errors, failing to notice a trade contractor improperly performing its work, and other damages due to alleged failures in your professional judgment or supervision.
- Your CGL policy may exclude “economic loss”, that is, financial losses other than damages to property of others or personal injury (such as delay damages, cost overruns due to an estimating error, or cost to remove and replace your own work), especially where there is no personal injury or property damage. E&O policies will generally offer broader coverage of indirect and economic loss.
- You do not get the full benefit of E&O coverage just by requiring the engineers and designers you use to carry E&O coverage. Even if you require your design professionals to carry E&O insurance, there may be gaps in that coverage:
- E&O coverage is “claims made” while CGL is “occurrence” based. This means that courts and the parties will look at different policy periods for E&O compared with CGL coverage. For example, if a design-related claim is made 5 years after the project is complete, the E&O policy triggered will be the one in place when the claim is made, not the one when the designer did the work or when the failure happened. You can control your own design coverage from year to year, but not so much your independent designers, especially if you aren’t working with a designer any more or it is out of business.
- Generally, you can’t be named as an “additional insured” on an E&O policy. You won’t be able to contract to make a direct claim for coverage against your designer’s carrier if you face a claim. You will have to make a claim against the designer as a direct negligence or breach of contract claim, or under an indemnification provision in your contract.
- The designer’s policy covers all of its projects; if there is more than one claim against your designer, the other claims could cannibalize the policy. Attorneys’ fees also count against policy limits. E&O coverage is expensive, and claims tend to be large relative to the policy limits. The coverage may disappear before getting to your claim.
There are a wide variety of insurance products that can add protection for design risk, running from endorsements to CGL or umbrella policies, separate contractor’s professional liability E&O insurance, and project-specific professional coverage. Unless you are the rare contractor strictly limiting your work to construction based on owner-furnished plans and designs, you may want to consider some form of design E&O coverage. Every contractor should carefully review its coverage, keeping in mind that it is the policies and not the certificates or declaration pages that govern. Since the policies are not generally written in understandable English, you should get the help of your agent, and for serious areas or if you are confused, insurance counsel. To fully implement your insurance program, you should coordinate your coverage with your contract forms so that the coverage matches the insurance, indemnification, and subrogation provisions of your contracts. Doing all of that should maximize the value of your insurance (and legal) spending and reduce your risk of a catastrophic loss.
[1] Much as CGL policies are written on forms, the insurers may change the forms and coverage by endorsements. The endorsements may change the CGL coverage in important ways including coverage (or not) for your incidental design services andcoverage for damages caused to or by a subcontractor’s work. To fully understand your coverage you must review the policies and endorsements with your agent and, if you have particular concerns, with an attorney who understands insurance coverage issues.
[2] Design professionals and others performing design services must be careful when signing client contracts not to assume a higher standard of care than this, as it may impair coverage.