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ASCM Insights

When the Time for Crisis Management Is Now

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Serious damage caused by Hurricane Ida is once again forcing industries of all kinds to refocus on best practices for responding to major events. An effective recovery plan focuses on minimizing, to the extent possible, out-of-pocket costs related to hurricane damage and subsequent recovery efforts and maximizing the ability to transfer risk of the hurricane damage and subsequent recovery efforts to others. Following are some tips for how to achieve these objectives.

Speak with an informed and unified voice. Designate key individuals — owners, general contractors, subcontractors, suppliers, vendors, sureties, lenders, insurers, and employees — to handle specific tasks. Consider identifying specific individuals who are subject-matter experts to serve as your company’s voice for a particular subject (for example, identifying one or two people to understand the potential insurance coverage and to be the point of contact for claims adjusters). Accurate, consistent, coordinated and timely communication is essential to further the best interests of the project.

Review contractual rights and responsibilities. Assess project contracts, with a particular focus on any force majeure clause, to determine potential rights and responsibilities. In assessing the clause, pay particular attention to what type of recovery the clause provides (for instance, schedule relief only or schedule and monetary relief) and any notice requirements. Contractual notice requirements for force majeure events are often short, so do not delay, even if you can only provide a basic notice. And put it in writing.

Evaluate your insurance portfolio. The most likely sources for insurance coverage for damaged projects are builder’s risk insurance, property insurance and marine cargo insurance. Other potential sources of insurance coverage, depending on the circumstances, include professional errors and omissions insurance, commercial general liability insurance, and subcontractor default insurance. Of course, the existence and extent of coverage will depend on the language of the policy, so it is important to gather them together and review the terms of each in order to maximize potential recovery. And, in order to effectively use the insurance your company has purchased, it is critical to comply with all notice requirements and to keep the insurers informed throughout the recovery process, especially when it comes to having the opportunity to view damage prior to mitigation or recovery efforts. Again, having one or two coordinated point people to deal with insurance issues, claims adjusters and investigations will reduce potential issues.

Provide notice to sureties or lenders, if needed. This will avoid late notice, waiver or similar defenses down the road.

Document, document, document. Record the costs and schedule delays you have incurred. For both force majeure and insurance claims, this is critical. Good documentation maximizes claim recovery and minimizes costly, after-the-fact reconstruction. Consider creating weather-event-specific cost codes.

Remember your subs and suppliers. Check-in with subcontractors, suppliers and vendors to determine the extent they have been impacted by the hurricane. Then, coordinate force majeure or insurance claims as appropriate (considering whether a subcontractor in particular has a back-to-back force majeure clause with the upstream contractor) and address any supply chain issues that have arises. These may include delay claims or inability of suppliers to satisfy delivery deadlines or changes in quantities of supplies.

Look to interim or fast funding. Consider whether there may be the potential to negotiate a funding agreement or interim payment with affected project participants/insurers to provide an immediate source of funds to commence hurricane recovery and avoid, at least in the short term, disputes regarding what damage or delay was caused by the hurricane and the recovery efforts. If you are looking to negotiate such an arrangement with an insurer, note the deductible and any contractual provision as to which party is responsible for it.

Consider the after-effects on manpower and licensing. You will not be the only company looking for workers, and the cost of the job is likely going to rise because of higher wages and per diem expenses. Communication about this issue between owners, contractors, suppliers and others will be critical to laying the foundation to work together to effectively address the problem.

Words matter. Although you are working in crisis mode, what you say now, in the heat of getting work done with perhaps not enough information, matters a lot. Project participants and other interested parties are noting what has been damaged, how it was damaged, how much it is going to cost to get back up and running, and how long you are going to be delayed. You may inadvertently set expectations that are difficult to overcome if, down the road, your estimates prove to be low. Particularly with respect to insurance recovery, how you frame an issue can affect whether there is full coverage, partial coverage or no coverage at all. Accurate, timely and consistent communication is essential in recovery and damage-mitigation efforts.

About the Author

Eric Ruzicka Partner, Dorsey & Whitney

Eric Ruzicka is a partner at the international law firm Dorsey & Whitney and a commercial litigator who specializes in the area of construction litigation. He has been litigating complex commercial matters for more than two decades in a wide range of areas and advised companies during the rebuilding following Hurricanes Harvey and Irma.

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