Insuring Success
As construction contractors, the potential for damage and financial risk is high and having strong insurance coverage is non-negotiable. Unfortunately, the current economy is driving many contractors to cut back on coverage in order to conserve budget. While some of these cutbacks make sense on the front end, much of the coverage eliminated is crucial to protecting a contractor from substantial risk.
Insurance is complicated and it can be overwhelming. Most contractors rely heavily on the recommendations of their broker or agent because it can be difficult to understand what they are purchasing or the level of protection that coverage will provide in the event of a claim. Contractors need to know what insurance coverage is necessary to operate and what additional coverage is wise to purchase.
General Liability
General Liability is one coverage contractors carry universally because it is required for most public works contracts and it protects against the highest amount of risk to the contractor. Many contractors do not know the specifics to consider when purchasing General Liability and what exclusions to avoid. Outside of required coverage limits that can be discussed on a case-by-case basis with a broker, there are many variables that impact the protection a policy provides.
A basic element for construction contractors to be aware of is the difference between Occurrence General Liability and Claim-Made General Liability. Many small contractors have historically purchased Claim-Made General Liability because it is relatively inexpensive. When dealing with strict budgets, this option may appear to be a solid way to save money and maintain coverage, especially in tighter insurance markets. The problem with Claim-Made General Liability is that claims must be made within the year the damage originated and this can be challenging (if not impossible) with large, ongoing projects. The contractor who chooses a Claim-Made policy can be exposed to liability for any project with continuous triggers or the potential to have claims crop up outside of the Claim-Made annual time period.
Occurrence General Liability, on the other hand, provides coverage for the entirety of a project. This allows a contractor to place a claim related to the insured project at any point before, during or after the work is completed. For example, if a contractor is completing work on a sewer, paves over it and then five years later a pedestrian falls in that area, Occurrence General Liability will provide coverage for this claim. While Occurrence General Liability may be more expensive up front, it will provide far more extensive coverage, insuring against sizeable risks attached to a project.
A major component to review when procuring General Liability is what type of additional insured endorsement is being provided. There are two forms of additional insured coverage: Onsite coverage (commonly referred to as ongoing operations) and Products and Completed Operations. Many insurance carriers do not want to offer Broad Form Completed Operations coverage as this broad form policy has broad implications. The problem with a limited additional insured endorsement is that most public works contracts have Type One Indemnity, and one doesn’t want their insurance company passing on an obligation that the contractor is committed to uphold.
There are other absolutes a contractor must look for such as full subsidence coverage (in other words no subsidence exclusions), no action-over liability exclusions and no prior works exclusions. The final thing a contractor should consider when shopping for General Liability is the retention level.
Excess/Umbrella Liability
Closely related to General Liability is Excess or Umbrella Liability. Excess Liability supplies higher limits ranging on average from $10 million to $100 million in coverage and should be purchased in conjunction with General Liability coverage. Higher Excess Liability limits may also be attained, depending on the risk associated with a project. When buying Excess/Umbrella coverage, seek out the same attributes found in a strong General Liability policy.
Equipment and Auto Coverage
In addition to General Liability, other coverage generally carried by all contractors are Inland Marine Equipment and Automobile policies. When purchasing an auto policy for a contracting company, the buyer should consider the financial benefits of carrying physical damage or liability. If the company’s vehicles are paid off and are older or have a lower value, liability only can be a smart choice. Paying high premiums for a vehicle with low value is often times a waste of money because vehicles are depreciating assets. If the automobile(s) covered by the policy are either still being paid for or retain a high value, physical damage is important because it will compensate for the loss of a vehicle that might be difficult or expensive to replace.
When buying an automobile policy, double check to ensure the proper symbols are included in the policy. Many contractors have extensive fleets with lists of equipment and it is possible to miss a specialized piece of equipment or automobile. By providing a Symbol 1 auto policy, a contractor does not have to worry about scheduled automobiles with the exception of physical damage.
An Inland Marine Policy, or Equipment Floater, is required to cover this equipment due to its specialty purpose. While General Liability, Excess Liability and coverage for equipment make up the minimum coverage needed to protect the business, there are several options that contractors would be wise to consider carrying in their portfolio.
Cover Your Bases on the Jobsite
When it comes to the jobsite, Builders Risk and Pollution Liability are both important options that will guard against accidents and incidents that can easily occur in the building process.
Builders Risk is not required in all contracts, but Public Code 7105 generally requires earthquake and flood. Unfortunately, most brokers and many contractors are not aware of this code. Public Code 7105 holds public works contractors responsible for 5 percent earthquake and flood coverage. Builders Risk is the coverage that will ensure a contractor is prepared for this situation. Traditionally, earthquake and flood are not included in Builders Risk, but they are possible to obtain. A contractor purchasing this coverage should insist on finding Builders Risk that includes earthquake and flood due to the likelihood it might impact the contracts they have secured. Builders Risk also covers the contractor for things such as fire, theft and vandalism.
In addition to Builders Risk with 7105 earthquake and flood coverage, contractors should request a policy that includes Ingress-Egress coverage extensions. Ingress-Egress will provide financial coverage for a contract that is delayed due to the site being inaccessible for something such as forest fires. In the situation of a forest fire, equipment may not be harmed but work cannot be completed for six months and money is lost. Ingress-Egress will protect a contractor trying to recover losses for a delayed project in many cases. It is generally excluded from policies so ensure that your broker specifically requests this stipulation when shopping for Builders Risk insurance.
Pollution on the jobsite is another risk that construction contractors face. In the course of a job, contractors often use and transport different pollutants on and off site and the possibility of a spill, leak or explosion is strong. When it comes to these accidents, public agencies do not care what the causation is or who is at fault. The onsite contractor will be held responsible and required to immediately fix the situation. Whether the pollution comes from an employee tripping with a bucket, hitting an unmarked pipeline or backfilling a hole that had pollutants in it prior to the current job, the contractor will need to have coverage to pay for the damages. For this reason, Pollution Liability is a key coverage contractors should carry.
Be Prepared for Litigation
A major concern for commercial contractors should be protecting their company and assets in the case of a lawsuit. Another policy to consider is Employment Practices Liability and it provides coverage for allegations of sexual harassment, wrongful termination or wage-and-hour lawsuits. Currently, with the economy in a slump, many attorneys are pursuing wage-and-hour lawsuits due to the growing trend of overtime not being paid to employees willing to perform unpaid work to keep their jobs. Wage-and-hour lawsuits (like any lawsuit whether it is legitimate or not) can cost a sizeable amount. Even an upstanding contractor can easily be accused of wage-and-hour violations in the current climate, and those who are not prepared for the possibility leave themselves open to considerable risk.
Directors and Officers Liability is another coverage to contemplate purchasing, as it will protect the decision-makers of a company. Officers of a company can be sued by anyone for basically any infraction or questionable decision. For instance, during the 9/11 disaster, a port authority officer of New Jersey instructed people to re-enter one of the buildings, which then collapsed on those people. The port authority officer was sued for this decision. In a situation like this one, without Directors and Officers Liability, officers of the company are left unprotected from lawsuits pertaining to decisions made for the company.
As a whole, construction contractors face substantial operating risks due to the nature of their work. These risks can be controlled and planned for by understanding the insurance coverage available and what items are most important.
David Alvarado and Tim Rabbitt are managing principals of the Construction and Real Estate Practice Group for Edgewood Partners Insurance Center (EPIC). To learn more about EPIC, California’s fastest growing insurance brokerage, risk management and employee benefits consulting firm, visit www.edgewoodins.com.
