WE ALL KNOW that insurance costs are based, in part, on the claims history of the insured. Risk can never be avoided entirely in construction, and there is always some chance that a loss will occur on a project. Nevertheless, a contractor can still do a lot to reduce its risk exposure and lower its costs. Contractors that avoid claims pay less for insurance, while companies with a laundry list of losses pay more.
Part of avoiding claims is safety training and good work procedures, but part is also paying attention to what terms you agree to in contracts and purchase orders. By reading, reviewing and changing contract terms, contractors can reduce, and in some cases eliminate, some of the insured risks on a project.
Contract terms must be viewed as a risk transfer device instead of a 20-page collection of boilerplate. Contractors need to take the time to understand all the contract terms and appreciate the impact of what seem to be small differences in contract forms on the risk they are asking their insurers to cover. If contractors do this, they can take advantage of contract terms to minimize — and in some cases eliminate — otherwise insured risks on a project and help to lower their own insurance rates, and obtain coverages that other contractors can’t even get.
Insurers are becoming more involved in the contracts that their insureds are using. Recently, one of my clients forwarded to me a letter he had received from his insurer, asking many questions about his subcontract form. Clearly the insurer wanted to make sure that the contractor was passing on risk to others as much as possible. Focus was on the insurance provided by the subcontractors and the indemnification rights afforded to the contractor (and to the insurer via subrogation).
The difficulty in finding comprehensive and affordable insurance gives contractors a reason to take the process of renewing insurance very seriously and to be prepared to provide information to underwriters that may help. The following is a list of seven steps that contractors can take (with the help of their agent) to tip the scales in their favor. These steps can create a favorable impression of the company in the eyes of the underwriters who make the insurance decisions and arm the contractor with information to make the best possible decision on insurance coverage options.
1. Begin the renewal process early, three to four months before the anniversary date.
Waiting too long and ending up having to do something about your coverage at the last minute is the worst possible situation. This is especially true in light of the risk that your present insurer could decide not to renew or offer it at a huge rate increase. Shopping for options early hedges against these risks and gives you the opportunity to educate potential insurers about your company and its claims history (or lack thereof).
2. Document your safety and loss control program so that you can provide this information to underwriters.
If you have a quality program with a history of success, put it on the table for insurers to see.
3. Develop a strategy for dealing with policy exclusions, such as mold or terrorism, including looking to secondary markets for such coverage.
Buying a “plain vanilla” CGL policy that excludes certain coverages may give you the flexibility to add specialty coverages for mold or other excluded risks from secondary market insurers on a project-specific basis — but make sure you buy all coverage required by the contracts you sign!
4. Carefully review the financial position of the insurance companies you are considering and that your subs are using. Not all companies are created equal — especially right now. Plenty of information is available for you and your agent to evaluate the financial health of various insurers.
5. Be diligent about requiring insurance from your subs and obtaining proof of that insurance before the subs start work. Being able to demonstrate your company’s commitment to making certain that it is buying insurance to pay to solve its own problems and not those of its subs can go a long way toward protecting your company and allaying the fears of potential insurers.
6. Use your contract to deflect and minimize as much risk as possible.
The contract issues I have discussed in past columns about indemnity provisions, attorney’s fees, warranties, etc., are a good starting point for analyzing how you can reduce risk. Remember that not all these suggestions may make sense for your company. An airtight contract is no good if your sub or supplier won’t sign it. This is an especially difficult problem with broad form indemnification clauses.
7. Take the opportunity, if possible, to meet with the underwriters of potential insurers. A face-to-face meeting can do more than financial statements, safety programs and other documents in conveying your company’s commitment to risk management, its financial position and your business plan.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e-mail to [email protected].