Construction companies face risks that other organizations never have to consider, which makes obtaining the right insurance coverage one of the most complicated parts of running their business. Insurance market conditions can change frequently, adding to the challenge of staying adequately protected.
Smart Business spoke to Marty Purcell, CPCU, vice president with The Graham Company, to clarify some of the more prevalent coverage issues that contractors face.
How is the insurance market for contractors right now?
We’re in a ‘soft’ insurance market, which is good news for buyers of insurance, including contractors. Rates are down and there’s a lot of competition among insurance companies. However, there are also some pitfalls associated with the ’soft’ market. Sometimes new insurance carriers that aren’t familiar with and don’t typically write insurance for contractors start bidding for construction business. These same insurance carriers may decide to cancel or non-renew coverages they have written for contractors as soon as the market changes if they are not committed to maintaining a construction portfolio.
Regardless of the market, contractors need to make sure they are insured with the right insurance carrier that is in it for the long term. This means they understand construction and can provide broad coverage, competitive pricing as well as effective claims handling and loss control services.
What are some of the key coverage issues the industry is currently facing?
The construction industry is dealing with significant changes to additional insured and contractual liability coverage as well as exclusions for wrap-up programs and residential work.
When the market is ‘soft,’ sometimes construction companies may be tempted to look for immediate cost savings when purchasing insurance and might overlook potential coverage issues. No matter how much money you save in insurance premiums, it can cost a lot more money in the long run if you’re faced with uninsured losses or poor loss experience if the coverage is not structured correctly or claims handling is sloppy.
How often should contractors evaluate their insurance programs?
The program structure should be re-evaluated every year, but we usually recommend marketing the program extensively roughly every third year. Depending on market conditions, it might make sense to consider changing the amount of risk being assumed, such as increasing or decreasing deductibles. We usually caution against full-scale marketing every year, however, since insurance companies can become frustrated if they are continuously asked to provide a quote but they don’t write the business. A little bit of loyalty can go a long way.
Are some forms of coverage more challenging than others?
Wrap-ups or owner-controlled insurance programs are commonplace, and many contractors are getting involved with them on larger projects. The key consideration when working on wrap-ups is whether the insurance coverage provided to the contractor is sound. Oftentimes it is difficult for contractors to obtain accurate and complete information about the coverage being provided for them so that they can ensure that the combination of the wrap-up and their own insurance program provides adequate protection. We spend a significant amount of time reviewing these wrap-up programs for our construction clients. It’s almost like a jigsaw puzzle where all the pieces need to fit together in order for the contractor to be properly protected.
Another challenging issue for contractors is builders’ risk coverage. On a specific project, the builders’ risk may be provided by the owner of the project or the general contractor on behalf of all contractors working on the project. If this is the case, then it is important to make sure that the contract language and the builders’ risk coverage are written properly to insure adequate protection for the contractor on the project.
What else can contractors do to protect themselves?
Maintaining a strong risk management program with good safety and claims management policies and procedures in place, regardless of the market conditions, is always critical. With larger contractors, in many cases the contractor will be assuming a portion of its own risk in the form of a deductible on its insurance. If the contractor has large deductibles and poor losses, claims payments can quickly become the biggest component of the overall insurance program cost. Consequently, contractors need a strong safety program not one just sitting on the shelf, but one that is understood and implemented by all of their employees. Safety programs can help to eliminate many of the claims that might otherwise occur. On the flip side, when there are claims that do occur, having a good claims management program in place, including a broker that can assist you in managing the entire risk management process, helps to reduce the cost of claims and save money.
MARTY PURCELL, CPCU, is vice president with The Graham Company. Reach him at (215) 701-5202 or email@example.com.