Are You Properly Insured?
Construction insurance pricing continues to be soft in the current market with rates, after falling precipitously in the period 2004 to 2008, landing softly with continued slight decreases to flat renewals. There are signs in the marketplace that underwriters will be looking for rate increases due to increasing medical costs associated with workers compensation and adverse loss history, but competitive pressures from other carriers continue to suppress rates.
Contractors who control their losses through effective risk management techniques continue to benefit from the soft marketplace. Contractors who are incurring losses will see their insurance carriers attempt to get some rate increases.
In a soft construction insurance marketplace, it’s a good time to negotiate or get back some coverages that may have been restricted or taken away in the early part of the decade. It’s also a good time to evaluate your limits to see if you have the appropriate amount and check pricing to see if it makes sense to increase them.
Some other coverages that you may want to take a closer look at are mentioned below. Some of these coverages are often overlooked as most of a contractor’s attention is focused on workers compensation and liability insurance.
There are many construction companies that do not purchase crime coverage. They believe that because they don’t handle a lot of cash or inventory, they are not susceptible to theft. Theft of materials from a jobsite by an employee is more common than most people think. Without crime coverage, theft by an employee is not covered.
Computers within the office open the door to theft from within the company via money transfer but also from cyber theft from the outside. Computer hacking and fund transfers are not limited to the Nigerian man seeking to bring funds back to the United States. Computer fraud is relatively easy to achieve if employees or people from the outside have access to your computers or data. Make sure your crime policy covers theft and embezzlement via the computer for both employees and from outside sources.
A question that often comes up is “How much crime insurance do I need to buy?” The Surety Association of American suggests using 20 percent of current assets, plus 10 percent of annual revenues.
Crime coverage is a relatively inexpensive policy to buy and with the advancement of computers and online banking, it’s a policy worth taking the time to evaluate and procure the coverage.
Just because your construction project is not located in a flood plain doesn’t mean that you are not at risk for flood damage. This year in Minnesota, there were record rainfalls within hours that created flood-like conditions at jobsites. Jobsites where foundations were in place, were washed out. Materials ready to be put in place were washed away or damaged by rising waters. Builders risk policies typically exclude the peril of flood so check to make sure that your builders risk policy covers the peril of flood. You can often add the coverage with a sublimit for a nominal cost.
Contractors Equipment Coverage
Contractors will often have to lease or rent equipment for various jobs. There is a special coverage within the Contractors Equipment Coverage found within the Inland Marine policy for leased equipment. Oftentimes the limit found within this section is outdated, based upon equipment values from 10 years ago. Today’s modern equipment such as cranes or some forms of drilling equipment may have values reaching north of $500,000. Make sure you policy is up-to-date with what types of equipment you might be renting.
Contractors at times will borrow equipment from others, oftentimes without a written contract or paperwork. The equipment is borrowed and an agreement is reached on the amount if any that might be paid.
Check your Contractors Equipment policy to make sure you have coverage for when you borrow equipment from others as your general liability policy will not cover you for damage to equipment not owned by you that is in your care, custody and control. Also, the business that loans the equipment may not have coverage under its own contractors equipment policy because of the exclusion of equipment rented or loaned to others. Make sure to check your policy to determine if you have coverage for equipment that you borrow from others and for equipment that you might lend to others.
Umbrella & Excess Coverage
Contractors carry umbrella and excess insurance to provide higher limits for losses that may be incurred above their primary general liability, auto and employers liability policies. The amount of umbrella insurance to purchase is often debated, as some feel that purchasing higher limits only opens your company up to higher claim demands. I would suggest that you evaluate your company’s retained earnings and determine if spending the money to purchase limits appropriate to protect your net worth is your long-term strategy.
When purchasing an umbrella, it’s important to establish per project aggregate limits. You want to structure your umbrella policy to have limits available for all of your projects so that in the event that you have one large claim, you have limits available for other projects throughout the year.
To illustrate, suppose a drilling subcontractor works on 30 projects in the course of a policy year. Each subcontract requires the subcontractor to hold the general contractor harmless for liabilities it incurs as a result of the sub’s work on the project and to add the general contractor as an additional insured to the sub’s liability policy. Further assume each of the contracts requires the subcontractor to carry a minimum of $1 million of general liability insurance. While this subcontractor can comply with all subcontracts’ insurance requirements by purchasing a policy with a $1 million each occurrence and general aggregate limit, this may represent an inadequate amount of protection, given that $1 million is the most the policy will pay for all claims arising out of all the subcontractor’s projects. If the subcontractor’s negligence results in one large claim during the policy period, it may have no (or very little) coverage left for claims arising out of the other 29 projects, yet its obligation to indemnify the other 29 project owners remains. A better strategy might be to either purchase a higher general aggregate limit (e.g., $2 million or $5 million).
General Liability Coverage
General liability coverage is in place to cover property damage and bodily injury to others as the result of an occurrence that takes place during the policy year. Liability insurance is probably the most discussed and litigated coverage for the construction community. Having proper general liability insurance with the appropriate coverage is essential for your risk management program to be successful.
Over the years, insurance companies have attempted to limit or restrict coverage offered under their respective general liability forms. Endorsements taking away additional insured coverage for completed operations and for defective work of subcontractors is becoming more prevalent. It is important that you and your agent take the time to evaluate additional insured endorsements that come in from the subcontractors that you may hire. Simply looking at certificates of insurance from subcontractors is not enough, as they will not indicate if the subcontractor has an endorsement taking away coverage once the job has ended.
Rob C. Dahlin is vice president-construction practice at Cobb Strecker Dunphy & Zimmerman Inc.