Without a good risk management plan, a mistake on a construction project could prove very costly for your business.
Creating a solid risk management plan starts with honest communication with your insurance broker, says Dennis Ianovale, a vice president at ECBM Insurance Brokers and Consultants.
“The initial interview process is so important because the risk management plan is developed based on the exposures the broker uncovers during the interview process,” Ianovale says.
The contractor tells the broker what its exposures are, and it is the broker’s responsibility to custom design a plan that provides risk management for those exposures.
Smart Business spoke with Ianovale about how to protect your firm from the risks inherent with a construction project.
What are some of the major risks businesses face with construction projects?
Many insurance companies restrict coverage in a number of different avenues in regard to construction. It is not unusual to see exclusions for residential construction projects, professional liability and pollution liability.
It is also not unusual for a general contractor to make the subcontractor responsible for anything and everything that can happen on a job site. There are exclusions on every policy, whether it is general liability, workers’ compensation, automobile or umbrella policies.
If you read the indemnification agreements, those agreements are often broader than the subcontractor’s insurance coverage.
To protect yourself, work with a broker who will negotiate and protect your business from uncovered losses where possible. At the very least, you should be advised of what is excluded.
A broker must also review construction contracts to ascertain that your insurance coverage meets or exceeds the insurance requirements in the contracts.
How can a business determine its risks?
The initial interview with your broker is probably the most important part of the process. During that interview, the broker should spend time questioning the contractor about its operations, including what it does, how it does it, where it operates, etc. In addition, the broker should determine if the contractor acts as a general contractor or a subcontractor.
On contractors’ equipment policies, the broker should make sure that there are no exclusions for flood or earthquake (including subsidence), and amend the co-insurance clause.
You also want to make sure the broker provides rental reimbursement coverage. If a backhoe is stolen or damaged, you could rent a replacement so that you can continue your operations without a loss of income.
The key is to design the program correctly at the beginning and then monitor it to make sure that the proper coverages are in force as your business grows and changes.
How can past losses affect a business’s rates?
The premiums on all lines of coverage are affected by the past loss experience of the business. For instance, on the workers’ compensation policy, each employer is issued an annual experience modification factor based on its payroll and losses over a rolling three-year period.
This experience modification factor is applied against the annual standard premium. If actual losses during the rating period are lower than expected, the employer’s experience modification factor will be a credit (less than 1.00.) If the actual losses during the rating period were higher than the expected losses, the employer’s experience modification factor will be a debit (higher than 1.00.)
For example, consider the impact the experience modification factor will have on the annual premium paid by two contractors. Both contractors perform the same operation and have the same payroll.
Contractor A has losses 20 percent lower than the expected losses. His experience modification factor is .80 for the upcoming year. Assuming his annual standard premium is $100,000, Contractor A would be charged $80,000 in premium after applying his experience modification factor.
Contractor B has losses 20 percent higher than the expected losses. His experience modification factor is 1.20 for the upcoming year. Assuming his annual standard premium is $100,000, Contractor B would be charged $120,000 in premium after applying his experience modification factor.
In essence, Contractor B is paying 50 percent more than Contractor A for his workers’ compensation.
In addition, many large construction projects require the contractor to have a credit experience modification in order to even bid for work on the project.
How can a company monitor how well its insurance program is working?
Loss prevention is a key to risk management for construction. It is not unusual for a broker to bring in an outside safety consultant with a specialization in construction and have the consultant do an audit of the insured’s operation.
The consultant should provide nonbiased recommendations on what the contractor is doing well and areas that could be improved. Based on these recommendations, the broker should work with the contractor to develop long-term strategies with safety goals in mind.