Insurance for Contractors – When Cash Flow is Tight.

by R. Scott Wolff, CIC, CRIS, Premier Risk Management, LLC.
What traps NOT to fall into and how to better protect your business?When is money not tight or not of concern? It seems that money is always an issue among contractors no matter how big or how small the firm, it all comes down to cash flow. Now that the economy is slowing a bit, especially in the residential arena, many contractors will be focused on their insurance premiums and how can they reduce their costs when their policies renew.

It is very easy for all of us to focus on the bottom line premium when it comes to our insurance coverage but by doing so can lead to potentially disastrous coverage deficiencies especially for contractors.

Today, the purchase of insurance has become extremely complex. Insurance company forms vary from one to the next. The level of coverage offered by each carrier also will differ. Below we will discuss some areas of coverage to pay particular attention to so you won’t get burned:

  • Make sure that your agent or broker has an industry focus on construction. Many times clients are with the wrong broker. The reason for this can be many things but the one thing for certain is that the broker does not have a real focus on this class of business. The problem with being represented by a broker that does not focus on the industry should be obvious. For one thing they do not know what your real concerns are on a daily basis and how to address your most pressing insurance related issues or what your real exposures are and how best to address them. In addition to that, they are not up on which insurers may be best for you in terms of coverage and price. Ask the following questions – Is your agent/broker a specialist in construction insurance? What is the real reason you are working with your current agent? Is your agent proactive in suggesting additional coverage improvements or ways to reduce costs over the long haul?
  • Focus on coverage and not premium. You are probably shaking your head at this suggestion, but what if your insurance program cost you only $10? You might think that that is a great deal. But what if your $10 insurance policy did not cover you for a claim that you think you should have been covered for and that claim could potentially bankrupt your company and end your livelihood? How good was that purchase? You might feel at that point that even the $10 dollars was wasted since the policy did not cover you for your claim. You might be right! The point is to make sure that you are covered for the exposures and risks that you face and make certain they are addressed in your insurance program.

The construction insurance market is in turmoil today. Insurance companies are providing coverage options that include exclusions, warranties and other types of coverage limitations. Unfortunately, many of these exclusions pertain to exposures that you expect your insurance policy to protect you against. Instead it excludes them from coverage. Some of the exclusions you may see are such things like “designated work exclusion”; “independent contractors exclusion”; “professional liability exclusion”; “multi unit residential exclusion”; “foundation work”; “EFIS exclusion”; and “microbial matter exclusion”. Each one of these needs to be reviewed and addressed to see if it may have a potential impact relative to your business should a claim arise. Remember the old saying, “You get what you pay for.”

  • Make sure that the contracts you enter into are reviewed by your attorney and that insurance related responsibilities are addressed by your insurance advisor. Over and over again contractors enter into agreements that they can not possibly live up to, they are in breach of contract the minute they sign on the dotted line. Today in the construction industry every owner is holding the GC accountable, every CG is holding their subcontractors accountable and everyone is named as an additional insured on someone else’s policy and everyone is holding everyone else harmless. It’s beyond crazy. It takes some expertise to figure out how best to structure and insurance program to address these issues.
  • Take a long term view rather than a short term view on your insurance program. We all get stuck on the short term “how much is my premium this year?” and it’s a very easy thing to do. With everything there are cycles. When there is a hard insurance market, capacity is low, coverage is difficult to obtain and premiums are high. During a soft insurance market just the opposite takes place, capacity among insurance carriers seems endless, broad coverage is bountiful and premiums are low. The problem with this scenario is that when premiums are low and your losses stay the same as in the hard market, your loss ratio increases which will make your account unattractive in a moderate to hard market, thus potentially increasing your costs substantially. The approach should be to manage your entire insurance program for the long haul which will steady your costs year to year. This means implementing sound safety practices and risk management techniques designed to address both short and long term risks.

At this point you may be asking yourself how do I know if I am well protected? What if you are not sure? What if an analysis of the previous material above leaves you with an uncomfortable feeling? What can you do to check the adequacy of your current program?

Insurance Due Diligence, Insurance Check-up or Insurance Review comes to mind quickly. What does this mean? This is a process similar to other fact-finding procedures performed by someone with specialized knowledge whereby they review the situation, facts and circumstances, they render an opinion and recommendations on how to correct

any deficiencies of coverage etc. and then you act on the recommendations. The entire process is designed to do one thing – protect your company assets at the least possible cost.

How can this be accomplished? Step one is to find the appropriate person to perform the review. You could bring in another broker or agent to assist you. Or you could hire an independent consultant. Here are some questions to ask as you review those options: What experience do they have with construction risks? Are they well informed with regard to coverage and the insurance marketplace specific to the construction industry? What opportunities are there for conflict of interests? Do they sell insurance? Do they accept commissions? If you bring in a consulting firm will you work with a principle of the consulting firm or an associate? If you use an agent or consultant, are the fees fixed or based on time?

Once you decide on who will perform your review then timing is the next issue. An insurance review can be performed at anytime; it does not necessarily have to be performed at renewal time. A review can work well right after the renewal or in the middle of the term. You can use it to prepare or set strategy for your renewals.

The objective of the review is to make certain that you have the correct combination of coverage, risk management and cost based on your exposures. The sooner you have a review performed the quicker you can begin to lower your insurance costs over the long haul.

For more information on this or other insurance topics please contact:

R. Scott Wolff, CIC, CRIS
Premier Risk Management, LLC.
777 Terrace Ave.
Hasbrouck Heights, NJ 07601
Insurance Consultants & Advisors
201-727-1119
swolff@premierriskmgt.com
www.premierriskmgt.com