One of the industries hardest hit in the aftermath of September 11 is the insurance industry. It is estimated that the insurance claims associated with the events of September 11 will approach, if not exceed $45 billion, which, by anyone’s measure, is the largest insurance claims event in U.S. history. And the insurance industry will absorb another blow with the Enron collapse, as most of the major sureties are exposed, and the losses are estimated at $2.5. billion. All of this means higher insurance premiums for businesses in all sectors of the economy, as the insurance industry attempts to recapture these massive losses.
Over the course of the next year, contractors could see worker’s compensation insurance premiums increasing 30 to 40 percent, property insurance premiums doubling, and premiums for umbrella policies more than tripling. Unfortunately, even contractors with outstanding loss prevention programs and relatively clean claims histories will not be immune from the increases. Of course, these contractors will fare much better than those who may find themselves unable to secure adequate limits of coverage, if any coverage at all. IN short, it is important for a construction business to take steps that will minimize these increases and reduce the burden of insurance expenses as a whole.
Renew Policies Early. In the short term, it is extremely important to renew policies early. Insurance companies look favorably upon contractors who renew policies at least 90 days prior to their expiration. Conversely, contractors who wait until the last month to renew their policies may be perceived as distressed businesses and be penalized with larger premium increases.
Develop Insurance Specifications and Shop Package Policies. Of course, early renewal should not come at the expense of proper planning. Prior to renewing current policies, a contractor should examine past claims events and reexamine company goals. A contractor should then, with the assistance of an experienced insurance broker, determine which coverages are best suited to the future needs of the company. The contractor will then be in a position to consolidate coverages into package policies with a single insurer, which often yields lower premiums.
Although early renewal and negotiation of package policies may yield favorable results, the premium levels and policy limits will hinge in large part on the contractor’s claims history and payment record, two factors which are not easily influenced (at least favorably) in the short term. Thus, aside from shopping for the lowest premiums, a contractor may also need to examine ways to reduce insurance expenses as a whole. Several ways a contractor can reduce insurance expenses are described below.
Eliminate Overlapping Coverages. Examine the coverage offered by each policy of insurance with your broker, with an eye toward spotting areas of duplicate coverage which can be eliminated. While this process may seem tedious, keep in mind that this is just good business. Why pay for something twice?
Transfer Insurance Risks to Others. Whenever possible, the general contractor should require the subcontractors and owner to carry insurance which names the general contractor as an additional insured. The contractor can thus obtain greater coverage without paying additional premiums. Conversely, if a contractor is requested to name another party as an additional insured under its own insurance polices, the contractor should carefully examine whether the policy limits will still provide adequate coverage for potential claims. Additional insureds effectively dilute the coverage available under the policy by increasing the potentional for claims without a commensurate increase in policy limits.
Assume Acceptable Risks. This method involves examining current polices and coverages and making hard choices about which insurance is truly necessary. For example, property damage coverage for older pieces of equipment which are nearing obsolescence might be eliminated. A contractor might also consider eliminating certain endorsements to its CGL policy, especially endorsements tailored to specific types of work that the company no longer intends to pursue. In short, a contractor should make a top to bottom assessment of whether the insurance coverages under its current policies are narrowly tailored to fit the specific needs of the company — eliminating unnecessary and extravagant coverages. Alternatively, a contractor might consider increasing deductibles on certain coverages. This typically results in significant premium reductions. Of course, no one should fly without landing gear. There are certain basic coverages and policies that every contractor should maintain, including basic CGL and umbrella policies with adequate coverage limits. And the advice of qualified professional should precede the elimination of any coverages. It is important to keep in mind that although taking on additional risk might yield significant short-term savings, it may also have serious consequences for the long-term viability of the business.
Perform High Quality Work in a Safe Manner. The best way for a contractor to influence premiums and overall insurance expenses over the long haul is by performing high quality work in a safe manner. Meeting these two objectives requires careful planning, good day-to-day management, and learning form past mistakes. Thus, in the current environment of escalating insurance costs, it is more important than ever that contractors develop and implement effective loss prevention programs, keeping in mind that such programs seldom succeed without the strong advocacy of upper management and the right financial incentives for employees in the field.
Develop Long-Term Relationships with Reputable, Reliable Insurers. Finally, remember that the lowest premium is not always the best premium. When purchasing insurance, a contractor should always examine the financial stability of the insurer, the quality of service that the insurer provides, and the specific coverage language in the insured’s policy. While it is tempting to ignore these considerations in favor of short-term financial savings, it is best to build a long-term relationship with a reputable, reliable insurer.
About the Author: C. Clay Haden, Esq. is an attorney in the construction law practice of the law firm, Seyfarth Shaw, located in the Atlanta office at 1545 Peachtree Street, N.E., Suite 700, Atlanta, GA 30309; 404-885-1500; firstname.lastname@example.org.
ConstructionRisk.com Report, Vol. 4, No. 7 (Jul/Aug 2002)