In this issue

1 Editorial

2 Select Concerns When Planning Project Construction Insurance3 Canadian Retirement Market: A Portrait

bflcanada.ca

B A R R Y F.L O R E N Z E T T I

BEN

EFIT

SRI

SKS

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E D I T O R I A L W I N T E R 2 0 1 6V O L U M E 9 I S S U E 1

Ihave addressed certain effects of globalization in this bulletin in the past. It is yet another consequence of this reality that I wish to comment on today.

M&A activity has gone up in the insurance world in 2015. Expectations are that this activity level will continue to be vigorous in the next few years with insurers from all over the globe making offers to take over some of their competitors locally and abroad. Although this can mean good news for insurers who broaden their position in the market, it is not so for clients in the long term. It used to be that the large North American or European insurers would acquire competitors; this is no longer the

case. Insurers from every continent wishing to spread their geographical reach are now studying their peers for opportunities.

The offer in insurance had already been reduced sig-nificantly during other consolidation periods going back several decades so the current trend is the logical continuation of the process. However, the softness of the markets during the past few years has nullified the effects of consolidation as capacity has contin-ued to flood the market and competition has raged on between insurers.

While we are still a far cry from the possibility of a cartel-type control of the markets by insurers, any thinning of the offer is, by definition, detrimental to clients. How far is this trend going to take us? Large commercial clients with good loss experience have benefitted from the unusually long and ongoing soft market. Despite any M&A activity, past or future, as long as the market remains in its current state, clients will not feel any impact, or very little, from the consolidation due to the high level of competition between insurers to acquire or retain clients.

However, when the current cycle finally ends, a few years down the road no doubt, some of these clients will definitely be on the losing end. Fewer insurers, however large they may be, still means less choices for clients: fewer insurers interested in underwriting their risk and less flexibility for policy wordings.

This is not a problem for companies with very large risks who spend millions in premium annually. It is another question altogether for mid-market clients or even large enough clients who do not have to spend as much on their premiums in the current cycle. Small commercial clients as well as personal lines clients being locked into their local insurance markets neither benefit from global soft cycles nor suffer from global hard markets.

Our feature article, written by Art Jukes, Vice President, Client Executive at our Calgary office, dis-cusses some of the contractual pitfalls to look out for when insuring a construction project. As for our Benefits Consulting Practice, Iulia Pana discusses the different sources of retirement revenue available to Canadian workers.

2 BFL makes a difference

A R T J U K E SVICE-PRESIDENT - CLIENT EXECUTIVE BFL CANADA INSURANCE SERVICES INC. CALGARY

RISKS AND BENEFITS

SELECT CONCERNS WHEN PLANNING PROJECT CONSTRUCTION INSURANCE

“ Professional parties’ contracts with owners or constructors often seek to obtain liability limitations for the professional services.”

Amyriad of worries – of varying complexity – may arise when plan-ning construction insurance, from delayed execution to contract and insurance clauses. While hardly an exhaustive list, the following reviews at a basic level a selection of specifi c concerns that represent aspects

often presented to insurers, brokers and insureds alike.

BUILDER’S RISK EXCLUSION OF FAULTY DESIGN, WORKMANSHIP AND MATERIALSThis concern has existed for decades, but persists and may pose signifi cant ramifi cations in certain claims scenarios. Historically, in dozens of cases, Canadian courts have deter-mined resultant damage narrowly, rejecting coverage on the basis (to paraphrase) that the whole of the project, the entirety of its design or all the subject matter of the contract was faulty, thus effectively leaving little or no separate portion of the project subject to resultant damage coverage.

Indeed, some insurers’ standard forms for Builder’s Risk Insurance continue to utilize exclusions along the following lines (less likely in “manuscript” wordings):

The cost of making good faulty workmanship, materials or design unless physical damage not otherwise excluded by this policy results, in which case this policy shall insure such resulting damage.

Based on what ends up being an ambiguous clause, brokers sought to develop an exclusion whereby the resultant damage exception might be more widely considered applicable. Initially, some developed their own clauses, but many gravitated to the so-called Defect Exclusion clauses (especially DE4; DE5) or to the London Engineering Group clauses (LEG 2 and 3). Without getting into the small details, LEG 2/96 provides a good working example (punctuation per the Acciona v. Allianz case referenced below) and that is why we thought it relevant to replicate here:

The Insurer(s) shall not be liable for:

All costs rendered necessary by defects of material work-manship, design, plan or specifi cation, and should damage occur to any portion of the Insured Property containing any

of the said defects the cost of replacement or rectifi cation which is hereby excluded is that cost which would have been incurred if replacement or rectifi cation of the Insured Property had been put in hand immediately prior to the said damage.

For the purpose of this policy and not merely this exclusion, it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan or specifi cation.

LEG 2 carves out what is excluded, the inference being that all other damage is covered. There is no guarantee LEG 2 is suited to every situation, but such alternate clauses typically attempt to qualify more precisely what is resultant. Moreover, such alternate exclusion clauses should always be considered, given their strong potential to benefi t insureds.

A further approach to resolving the resultant damage concern – albeit neither often seen nor agreed by underwriters – is to assign a large deductible to the risk of faulty workmanship, materials and design. However, while it does not exclude the risk, a high retention creates an additional fi nancial burden to be borne by the Insured.

Although this article is not presented as a legal dissertation, readers may wish to refer to two current legal cases which in part contemplate

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the foregoing discussion (as well as illustrate the further and wider complexity of legal determination generally): Ledcor Construction Limited v. Northbridge Indemnity Insurance Company, 2015 ABCA 121 (CanLII) and Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company, 2015 BCCA 347 (CanLII). [Court of Appeal cases potentially subject to Supreme Court of Canada rulings.] These cases help illustrate once again why it is of utmost importance to tackle the subject of Faulty Design, Workmanship and Material.

BUILDER’S RISK PROFESSIONAL SERVICES EXCLUSION Again, although not a new concern, the “Builder’s Risk Professional Services Exclusion” remains one presented relatively frequently. While faulty design related coverage may be provided by Builder’s Risk policies, underwriters expect to subrogate against culpable professional service providers. Such policies typically contain a clause allowing for such subrogation, even where the professional services provider is otherwise added to the policy as an insured.

Conversely, professional parties’ contracts with owners or constructors often seek to obtain liability limitations for the professional services. This may present problems when arranging a Builder’s Risk coverage (especially if the contract is already signed).

In such contracts, Builder’s risk underwriters may accept limiting liability to some reasonable degree, especially if an adequate level of Professional Liability coverage is provided for the project. However, such limitation may otherwise result in additional premium or the need to “back cover” for the professional exposure into the Builder’s Risk policy at an additional cost.

CONTRACTUAL ‘CARVE OUT’ OF INSURANCE Ironically, contractual caps or limitations of liability clauses too often neglect to make exceptions respecting available loss recovery from liability insurance policies required pursuant to the same contract.

As a result, insurance that would have responded to claims between contractual parties is rendered unrecoverable to the project to the extent the insurer can utilize such contractual cap or limitation as a complete defence to claim amounts that would otherwise have been determined as indemnifiable, but fall above contractual caps or limitations amounts.

The above are three examples of the many contractual and/or insurance issues that may arise on construction projects. It is highly recommended to work with a brokerage firm well versed in these matters to avoid unpleasant surprises.

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BFL CANADA INSURANCE SERVICES INC.

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1167 Kensington Crescent NW, Suite 200 Calgary, AB  T2N 1X7 Tel: 403 451-4132 Fax: 403 313-3365

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Comments or suggestions to: publications@bflcanada.ca1-866-688-9888

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I U L I A PA N AGROUP ANNUITY PLANS ADVISORBFL CANADA CONSULTING SERVICES INC.MONTREALCANADIAN RETIREMENT

MARKET: A PORTRAIT

Retirement savings programs are a part of an employer’s global compensation strategy, in the same way as salary, vacations and group insurance. They are also key human resources tools that can help to achieve broader business objectives, increase productivity and attract and retain key employees.

For employees, having a workplace retirement savings program can encourage them to save for retirement and therefore alleviate the stress caused by not having enough money put aside for that life stage.

At retirement, an employee could receive income from three sources: Government Programs, Retirement Savings and Personal Savings.

The base of the income comes from Government Programs, such as the Canada Pension Plan or Quebec Pension Plan (CPP/QPP) and Old Age Security (OAS).

The average annual benefi ts paid out by these two programs for a 65 year old is $13,400 (2014), which is not enough income to rely on at retirement.

BENEFITS

In fact, the Federal government believes so strongly in this revenue source that it created the Pooled Registered Pension Plans (PRPP) and opened up the discussion about the need for all employees to have access to an employer sponsored Retirement Savings Program. The Quebec government now requires almost all employers to offer a Retirement Savings Plan (called the Voluntary Retirement Savings Plan - VRSP). The Ontario government will implement the ORPP (Ontario Retirement Pension Plan) in 2017. Other provinces are thinking of implementing similar solutions.

The last source is composed of a person’s Personal Savings, such as RRSPs, TFSA, savings accounts, house, etc.

All three sources are important as we cannot place the onus on a single one of them to insure Canadian workers hold enough funds at retirement. Therefore, an employer offering a Retirement Savings Program contributes to solving an important retirement issue!

BFL makes a difference

BFL CANADA CONSULTING SERVICES INC.

181 University Avenue, Suite 1700Toronto, ON  M5H 3M7Tel: 416-599-5530Fax: 416-599-5458

1167 Kensington Crescent NW, Suite 200Calgary, AB  T2N 1X7Tel: 403-451-4132Fax: 403-313-3365

3448 Stanley StreetMontreal, QC  H3A 1R8Tel: 514-843-3632Fax: 514-843-3842

2590 Laurier Boulevard, Suite TBC 600Quebec, QC  G1V 4M6Tel: 418-658-6337Fax: 418-654-2045

Personal Savings

RetirementSavings Employer Programs

Government Programs

The second source of retire-ment income comes from Retirement Savings Employer Programs that are established by employers. It is a key layer, since it not only provides money for retirement, but also offers:

• Institutional grade investment options at a rea-sonable cost;

• Education and tools to participants (on savings, investments, etc.);

• Retirement prepared-ness seminars, etc.