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Mark Rysberg Publications

Construction Contract Clauses, Part 7 – Indemnification and Insured Contract Coverage

by | 10 October 2017 | , , , ,

Indemnification provisions frequently appear in construction and commercial contracts. They operate to shift risk from the party being provided indemnification to the party providing indemnification. The principle behind such risk shifting is to shift potential risks onto the party or parties that are best able to prevent, mitigate, or insure those risks. In that respect, indemnity provisions do not necessarily need to be a source of disagreement during contract negotiation.

Consider, for example, indemnification provisions that require one party to indemnify and defend other parties from the risks relating to personal injury and property damage. At first blush, the party who is to provide such indemnity may feel that they should not assume those risks. However, agreeing to a well-drafted provision requiring indemnification for personal injury or property damage can be a benefit to all of the parties—including the party providing the indemnity. Here is how that can occur.

Construction Contract Clauses, Part 6 – Waiver of Claims for Insured Losses

by | 29 June 2017 | , , , ,

Many insurance sections of construction contracts contain language whereby the parties involved in the construction project waive all claims against all other parties involved in the project for insurable losses such as property damage and personal injuries.

Owner and Contractor waive all rights against each other and their respective officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them for all losses and damages caused by, arising out of or resulting from any of the perils or causes of loss covered by such policies and any other property insurance applicable to the Work; and, in addition, waive all such rights against Subcontractors and Engineer, and all other individuals or entities identified in the Supplementary Conditions as loss payees (and the officers, directors, members, partners, employees, agents, consultants, and subcontractors of each and any of them) under such policies for losses and damages so caused.

Construction Contract Clauses, Part 5 – Conversion Clauses

by | 29 June 2017 | , , , ,

A conversion clause arises in the context of contract termination. There are generally two types of termination; termination for cause and for convenience. Each type of termination differs with respect to the basis for termination, as well as the limitations on payment rights the terminated party retains post-termination. A conversion clause operates to convert a wrongful termination into a termination for convenience. The following is an example of a conversion clause.

If it is determined, by litigation, arbitration or otherwise, that termination for default was unjustified for any reason, the termination shall be deemed a termination of convenience and Subcontractor’s remedies shall be limited to those provided for as a termination of convenience.

Construction Contract Clauses, Part 4 – Express Trust Clauses

by | 29 June 2017 | , , ,

An express trust clause can be used in a construction contract to create a trust over payments received by a contractor or subcontractor. The effect of establishing a trust is that it creates property rights in construction project payments and obligates the contractor receiving such payments to fulfill the fiduciary duty of using the trust funds to pay the named beneficiaries. The following is an example of an express trust clause:

All payments made by Contractor to Subcontractor shall be held in trust for the benefit of the Contractor and those persons having contracted with Subcontractor to provide materials or labor to the project.

Construction Contract Clauses, Part 3 – Site Investigation Clauses

by | 13 June 2017 | , , ,

A site investigation clause is a provision in a construction contract that indicates that one of the parties has made an inspection of the property, project, or location where certain services, labor, or material will be provided, and that the party making the inspection is satisfied that performance will be possible given the circumstances. The following is an example of a site investigation clause:

Each contractor shall examine the construction site and area and compare its findings with the Drawing and Specification and shall inform and satisfy itself as to all matters necessary for carrying out the work; including but not limited to, general working conditions, labor and equipment requirements, accessibility, condition of the premises, obstructions, drainage conditions, actual levels, excavating, filling, etc. The Contractor shall investigate all conditions as to character of the site and character of existing structures at or adjacent to the site, and the character and extent of the Owner’s and other Contractors’ operations in the area, and in connection with the project, and shall take all such matters into account in submitting its bid. No allowance or extra payment will be subsequently made because of any such items or conditions occasioned by the Contractor’s failure to make such comparison and examination or on account of interferences from the Owner’s, Construction Manager’s and other Contractors’ activities, or by reason of any error or oversight on the Contractor’s part.

Captive Insurance Changes for 2017

by | 4 April 2017 | , ,

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed into law. Proponents and sponsors of captive insurance structures often refer to the tax benefits of I.R.C. Section 831(b), which allows eligible insurance companies to make an election to be taxed only the company’s taxable investment income.

In effect, the 831(b) election allows such insurance companies to collect a set amount of insurance premium without having to pay tax on said premiums. Effective January 1, 2017, insurance companies electing taxation under 831(b) can collect up to $2.2 million in insurance premiums while being taxed only on the taxable income generated from the collection and retention of such premiums.

Captive Insurance Structures Designed for Different Needs, Goals and Funding Abilities

by | 29 March 2017 | , ,

Captive insurance entities can be structured in a variety of ways depending on the participant’s needs, goals, and funding abilities. The following are some of the more common structures that can be used.

Pure Captive
In this model, a captive insurance company is typically a wholly-owned subsidiary of a parent company. These captives are usually closely controlled by the parent company and are generally used by companies that have insurance and risk management needs that are significant enough to justify the financial costs of being solely responsible for the captive’s operational costs. Companies that consider forming a pure captive generally do so to improve risk management and to maximize the benefits of I.R.C. 831(b) election thereby sheltering up to $2.2 million in taxes.

Captive Insurance and Risk Retention

by | 24 February 2017 | , ,

The concept behind captive insurance companies is based on the principle that rewards are derived from the assumption and retention of risk. Traditional insurance vehicles purchased through third-party agents is directed at shifting definable risks onto insurance companies that assume such risks based on weighing the statistical probability that, when viewed in the aggregate, the costs to the insurance company for paying claims will be less than the premiums the insurance company charges for assuming those risks. In that sense, insurance companies operate on the business model that they generate revenue, and ultimately profit, by assuming risk. A captive insurance company operates on a similar principle with the main difference being that rewards are the result of retaining risks by the parent company rather than shifting those risks to traditional insurance companies. In short, captive insurance companies are formed as part of a risk management strategy to take advantage of the economic benefits derived from risk retention. One of the more notable benefits of captive insurance models relates to the tax benefits provided to so-called micro captives. Under I.R.C. Section 831(b), micro captives can elect to only be taxed on investment income and avoid tax on income derived from the collection of up to $2.2 million in insurance premiums. As a result, incorporating captive insurance concepts as part of a risk management strategy can provide opportunities to go beyond simply planning for catastrophic and non-catastrophic losses.

Michigan Prevailing Wage Update

by | 15 February 2017 | , ,

Michigan’s prevailing wage law faces potential repeal in 2017. The first three bills proposed by the Michigan Senate are directed at repealing the laws that require labor on Michigan public construction projects be paid at prevailing wage rates akin to union-level wages. This is not the first time this issue has surfaced in Michigan and in other states across the country.

Proponents of repealing prevailing wage contend that requiring higher labor costs is passed through to the taxpayers whereas the opposition claims that prevailing wage results in higher-quality public improvements and a fair wage for the people of Michigan that perform the improvements. The debate over these issues is expected to be heated and continue throughout the year. Check back for additional updates about this issue and the future of Michigan’s prevailing wage legislation on public construction projects.

Construction Contract Clauses Part 2- Flow-Through Provisions

by | 15 November 2016 | , , ,

Construction contracts are intended to define and memorialize the parties’ expectations regarding how they will perform during the course of a construction project. This series will examine clauses that are routinely found in construction contracts and provide a brief explanation of what they are and why they are important.

Flow-through provisions are common in construction contract documents. In essence, when a general contractor enters into a construction contract with an owner, the general contractor obligates itself to perform certain functions and services for the owner. The general contractor then subcontracts some of those functions to sub-contractors. A flow-through provision is language in a contract that makes one party obligated to fulfill the obligations of another party. In essence, by way of example, if properly drafted, it could prevent a subcontractor from arguing that the obligations it owed a general contractor were different from the obligations the general contractor owed the owner. However, the language of these provisions needs to be carefully read and construed to determine precisely the specific obligations of the parties.