Insurance rates of all kinds for construction contractors have blown through the roof.
As a contractor, it’s not your fault, but you’re still going to have to pay the new rates and you may find the scope and size of the work you can take on limited. You may also find your long-time insurance carrier swallowed up by a bigger fish and your policy canceled or the new company not nearly as construction friendly.
But you’re not completely helpless either. While rates for property and casualty insurance and surety bonds are expected to increase for at least another year or two, there are things you can do to help keep your insurance program from gnawing away at your profits. Here’s how.
1. Partner with a good agent and company
“You need somebody who is savvy in the construction business,” says Kevin Kilgore, senior associate at FMI, a construction consulting firm. A good agent will have a lot of clients in your line of work and will have the backing of an insurance company that can provide coverage for a variety of construction-specific risks. Ask for references from other contractors and talk to those contractors to make sure the agent is looking after their best interests.
You should also develop a close relationship with your insurance company, says Jody Wright, vice president at Lockton, an insurance broker that works with numerous construction clients. “Arrange to meet your underwriter and maybe their supervisor,” he says. “Your choice of insurance carriers is a big financial decision. Back when insurance wasn’t a big overhead item, nobody cared. Now that it is, you need to tell your story to these people and make sure they understand your company and speak your language.”
Also avoid the temptation to shop your business every year. It’s fine to reexamine your policies every two or three years, but you’re not likely to get good service if you’re constantly trolling for bargains.
2. Consider paying fees rather than commissions
While most insurance agents get a commission based on how much they sell, a trend that is starting to gain attention at some of the larger construction companies is to pay the agent a flat fee for his or her professional services.
“What that does is change the relationship,” Kilgore says. “The agent is no longer a commissioned sales person, but rather a professional services provider who is working on behalf of the individual contractor.” The difference can be compared to a stockbroker who is paid commissions on transactions only and one who is paid a flat fee to manage your investments for the long term.
3. Evaluate your mix of work
The boom in new home construction has also led to a boom in construction defect lawsuits and sitework contractors are being dragged into the fray. Even if they’re not at fault they have to hire lawyers to drag them back out.
“If you are doing strictly commercial, industrial or municipal work, the insurance companies perceive that as a lower risk business than residential,” Wright says. Residential liability problems used to be limited to California and a few battleground states, but they are spreading considerably. You need to evaluate your mix of work, measure the risk and confirm that your insurance company views it the same way you do.
“If you think it’s no big deal, but it causes your insurance agent to break out in hives, then it’s a big deal,” Wright says. “If you’re choosing between two jobs with equal money, one residential and the other commercial, I would argue that it is in your best interests to not take that residential job if you want to manage your exposures to loss and costs of insurance over time.”
4. Get serious about safety
This should be a no-brainer. “If you’re an insurance company and you have a choice between a contractor with an average safety program and one with an aggressive program, which one are you going to give the better price to?” says Wright. “Or which one might you pass on?”
With some insurance companies dumping construction clients because of the financial problems in the insurance industry, the question is more than academic. An average safety record that had been no big deal in the past could cause you to lose your insurance altogether in today’s tight-money environment.
Wright emphasizes that it’s not enough to slap together a quick safety program to get a better rate for this year. Rather you need to manage your safety program well and consistently over time, demonstrate that to your insurance carrier, and that will eventually lead to better rates. And as you accumulate a good safety record over time you’ll be in a better position to ask for reduced premium rates.
5. Invest in theft deterrents
As with safety, says Wright, it’s pretty easy for insurance companies to see which contractors care about theft prevention and which don’t. By some estimates more than $1 billion dollars in construction equipment is stolen every year. Insurance companies are so adamant about preventing these losses that some are partnering with manufacturers of theft deterrent devices.
The St. Paul Companies, one of the largest and longest-tenured construction underwriters in the United States, bought 5,000 LoJack systems in 2001 and made them available to construction industry customers at a discounted rate. In the two years since the program began the devices enabled law enforcement agencies to recover more than 50 pieces of stolen equipment. According to the company, its return on investment has totaled 107 percent and should increase over time.
Another theft deterrent the insurance industry likes is the National Equipment Register. This is a database of registered equipment that is set up and funded by a consortium of large insurance companies involved with the construction business. Contractor participants in the NER program put decals on their registered equipment, which warn potential thieves that the equipment is listed and identified in a database accessible to law enforcement agencies.
For more on theft deterrents see the “Resources, information and contacts” sidebar on page 58.
6. Look into CCIPs or OCIPs
Contractor Controlled Insurance Programs and Owner Controlled Insurance Programs are two program designs that share insurance coverage among all or almost all project participants. In these, the contractors, designers or owners of a big project design coverage and purchase their own policy. “Everyone working on those projects is insured under a master policy,” Wright says. “This allows the sponsor to buy insurance on a wholesale basis instead of retail.” And wholesale insurance pricing can save the participants as much as 1 to 1.5 percent of the total project cost.
You still need an underwriter to assess the risks. But if there are losses you don’t get dueling lawyers from different insurance companies driving up the costs in court. “One company, one adjuster,” Wright says.
These policies are sometimes called wrap ups. While older wrap ups were placed primarily to save money, many newer wrap ups have been created to provide broader insurance coverage for project subcontractors. Many subcontractors have found themselves unable to purchase insurance for residential work, for example, but may be able to rely on the wrap up coverage instead.
For a CCIP or OCIP to make economic sense, the project value should be around $80 million or more. Wright, however, says he’s seen some created for stand-alone residential projects as small as $12 million.
7. Hit the books
“Every contractor needs to just flat get smart about insurance,” says Kilgore. “Read all your policies from beginning to end. Dissect all your insurance costs. Manage your deductibles.”
Kilgore says that every company should have at least one person who is the insurance expert and go-to person. This may be the owner in small companies or the CFO in medium and large companies.
If you are willing to spend the time, there are plenty of sources you can tap into to further your knowledge.
8. Actively manage all claims and costs
When your business incurs a loss, it may be tempting to brush it off if it’s a loss the insurance company will reimburse you for. But unless you can demonstrate that you’re taking aggressive efforts to minimize the current loss and prevent the problem in the future you may find your rates going up or your coverage being canceled.
“Too often somebody will get hurt and use their worker’s comp and after a while the contractor loses track of the process and runs up huge costs,” Kilgore says. You want to work closely with injured employees and their doctors and get that person back to work, on light duty if necessary, as soon as possible. Likewise, when there are property losses, you want to take an active role in making certain that the damages are accurately accounted for and any repairs or restitution is fair and cost efficient.
9. Consider self-insuring some risks
There are a lot of things for which you absolutely must pay insurance. But carefully evaluate anything you might be able to justifiably self-insure, Kilgore says. The list of optional coverages includes professional liability, directors and officers coverage, fiduciary responsibilities and employment practices.
10. Get a good accountant
This is especially true and necessary for any contractor to get the best possible rates for surety bonds.
“Make sure you are working with an outside accounting firm that understands the construction business,” Wright says. “If you are using the guy who did your dad’s taxes or the bookkeeper down the street it’s going to make it a lot harder to get surety credit. Your financial statements have to be programmed in a language that surety underwriters understand, and revenue recognition and the production of an audited financial statement is unique in our industry.”