Business Management: Covered or naked?

With the housing market sunk to its lowest level in decades, many paving, utility and earthmoving contractors are migrating away from residential jobs to other types of construction. And while you face plenty of challenges when going after a different type of business, perhaps the most important change you have to make when moving into new markets is to adjust your insurance profile.

If you already perform a mix of residential and commercial excavation or paving, you should have the necessary comprehensive general liability to cover commercial jobs. If you’ve had a 50/50 mix of residential to commercial work in the past and intend to change that to something like 20 percent residential/80 percent commercial, all you may need to do is call your insurance agent and inform him or her of the change.

This will likely increase your premiums, since commercial construction is riskier. But in case of an accident, injury or lawsuit, you don’t want to be caught out “naked” as the insurance industry calls it. The same holds true if you’re engaged in the comparatively low-risk residential landscape construction business and want to move into the bigger world of commercial jobs.

A lot of small contractors, however, do not have the necessary insurance, safety and risk management programs to tackle commercial work, says Steven Wu, senior vice president and national sales practice leader for construction and controlled insurance programs at Wachovia. Small construction companies and owner-operator types engaged primarily in residential site work can often get by with liability insurance that is more like a homeowner policy. Some of these firms also file IRS form 1099s on their workers and operators, effectively making them independent contractors. In some states they don’t even need workers comp.

None of this will fly on a commercial jobsite, Wu says. For a commercial job your insurance carrier (as well as the general contractor) will require the appropriate insurance policies, a vigorous safety program and worker’s comp and disallow use of the 1099s.

Liability limits, as a general rule, are also higher in commercial projects, often double what’s required for residential. The coverage minimums for residential are typically $500,000 for bodily injury due to accident, $500,000 for bodily injury due to disease and $500,000 for bodily injury for disease for each employee. Commercial general liability for contractors bumps those minimums up to $1 million each, and adds $2 million in general aggregate liability and $2 million for what the insurance industry calls “completed operations aggregate liability.” Even the liability limits for your trucks and vehicles are higher on a commercial job.

The completed operations coverage gives you protection in case someone is injured because of your work on a project after you’ve completed construction and the project is being put to its intended use. Requirements for completed operations coverage on commercial projects also extends to the “additional insureds” on your insurance policy – the insurance you take out to cover subcontractors who may be working with or for you on a larger project. By contrast on residential projects, once your work for the general contractor is finished, your liability ends.

“When you come to a commercial site, you have to bring those limits or you’re not going to work,” Wu says.

Be safe or be gone
Your safety record and safety education programs are likewise tied to your insurance profile and your ability to qualify for commercial jobs. “Commercial sites have a much higher safety standard than residential,” Wu says. In commercial work you’ll be expected to present a safety manual with a job hazard analysis (JHA) outlining all the potential hazards and what your plan is to avoid them.

Additionally, insurance premiums on commercial jobsites will vary depending on the applications and the risks created by other trades. Different types of concrete and steel work may change your rates, whether or not you’re directly involved in those applications. Many states require insurers to charge different premiums and require contractors to develop extensive safety training and practices for excavation work if the dig depth goes below 4 feet.

On a residential site, the grading and excavation contractor often works alone. He’s the first sub on the job and the first to leave. The remaining trades don’t show up until he’s gone. On a commercial site, earthmovers are often just one of many subs and tradespeople working simultaneously in close quarters. You may have to work around cranes, partially completed structures, chemical hazards, high-voltage electricity and underground utilities. Scheduling and material delivery differences further complicate the process. Keeping your workers and machines safe is critical to succeeding in this market and minimizing your insurance costs.

Wu, who has spent more than 25 years in the insurance and construction industries, says residential subcontractors, because of their inexperience, are a lot more likely to suffer from accidents and mistakes than seasoned commercial contractors when they first move into the commercial market. Even if you qualify for a job and get the proper insurance, the first 30 to 90 days are critical from a safety perspective, he says. “There are a lot of things that are going to be new and different and if the contractor doesn’t provide his crews with the proper safety training, they can get injured very quickly,” he says.

Any accident early on will likely raise premiums and may cost you future work. And general contractors on commercial sites have been known to levy fines on their subs for repeated safety violations, Wu says.

Wrap it up
A form of insurance you may encounter and want to participate in with large commercial projects is called a “wrap up.” A wrap up is a single collective insurance policy that the general contractor purchases for himself and all the subcontractors on a site, Wu says. Wrap ups are most often put together on a project-by-project basis, but there are “rolling” or multi-project wrap ups as well. They often include workers comp coverage as well as liability. Wrap ups are usually reserved for projects of $100 million or more.

Premiums are usually cost neutral for the sub-contractors participating in wrap-ups, but there are plenty of advantages. Wrap ups reduce the potential for litigation and disputes, improve the tracking of certificates of insurance. They assure uniformity of coverage and have the potential to reduce jobsite accidents by providing uniform safety and loss-control procedures.

Get started early
If you don’t have experience in the commercial markets but want to tap into those opportunities, give your insurance agent a call as soon as possible. If everything else is in order you should be able to get a certificate of insurance within 30 to 60 days, Wu says.

Bear in mind that your current insurer may not be in the business of providing liability coverage for commercial construction, and you may need to go to a larger or national firm with experience and policies specific to this type of work.

Also note that your bonding requirements will change. Not all residential work requires bonding, but commercial does and the bonding requirements are larger. “In commercial construction the contracts are larger and you’re going to have a higher bond line for the general contractors to consider you,” Wu says. The rates for your bonds will likely be higher as well, until you’ve established a track record and proven yourself as a competent and safe contractor in the commercial arena.