Every general contractor needs builders risk, commercial general liability, and workers compensation coverages.
However, most contractors find that these are not enough. Agents must discover the numerous gaps in coverage that have developed over the years, examine the coverage forms and endorsements available to eliminate those gaps, and do everything necessary to complete the insurance program. Professional liability, pollution liability, cyberliability, wrap-ups, and soft costs are just some of the optional coverages to address.
IF YOU BUILD IT… ARE YOU COVERED?
Experts discuss contractors insurance, builders risk and wrap-ups plenty
By Dave Willis
As the economy continues to rebound, construction is on the rise. Agents and brokers who understand the exposures and coverages-and potential gaps-can benefit from the turnaround and grow their revenue.
It's important to take a holistic approach. "Often we see agents looking for one specific coverage because that's what the customer requested," says Steve Bristow, senior vice president of insurance operations at US Assure. "But it's important to get a full understanding of the contractor's entire operation. Housing market changes, for example, have led to general contractors becoming subcontractors. Market conditions have led contractors to expand across state lines, which may require a separate policy."
He advises agents and brokers to reach out to their program administrator or carrier for help. "Underwriters and service reps can help agents diagnose what's needed and what other risks and coverages should be addressed," Bristow notes.
Tom Murphy, RPLU, ASLI, vice president of Quaker Special Risk, points out that contractor loss exposures are becoming increasingly complex. "Construction companies confront increased and protracted litigation, skyrocketing settlements, ever-changing legal landscapes, and unique insurance requirements," he says. "Agents must be aware of marketplace limitations."
Some carriers use classification limitations, he adds, which can severely restrict coverage for contractors that start offering services not specifically scheduled on the policy. "Limitations on contractual coverage, exclusion of coverage for subcontractor injury, and total exclusions of work performed by underinsured subs are potential coverage gaps," he notes.
Geography also can play a role. "In New York, especially the five boroughs of New York City, exterior masonry and scaffolding contractors are challenging," explains Maureen Caviston, president of Partners Specialty Group. This is because of the state's onerous "scaffold law," which holds contractors and property owners 100% liable for any gravity-related accident in which they are at least partially at fault. "Outside New York, bridge, road and rail construction can be challenging umbrella placements," Caviston remarks.
She stresses the importance of understanding the insured's exposures and ensuring that proposed terms anticipate both current and future projects. "For example, choosing a lower premium with a height limitation can result in a gap if the insured takes a job involving height work," Caviston says.
"One coverage gap we've been filling for some contracting clients is electronic data liability," says Casey Evans, CIC, area vice president at RPS Atlanta. "Clients who require any sort of digging to perform their job may not have coverage if they're using unendorsed ISO GL policies written on post-2004 forms."
Potentially uncovered claims could arise, for example, if a contractor slices a fiberoptic Internet cable or other communication line while digging, Evans notes.
Relationships with underwriters are important. "Underwriters are well versed in the policy and can discuss coverage options specific to the project type," explains Ryan Schwartz, chief marketing officer, US Assure. "It's also good to connect with local chapters of the builders associations. They have risk management resources and are always looking for solutions for their members' challenges." He says agents who are looking to expand their contractor business can check building permits to see who's doing work in their communities.
Don't overlook professional liability exposures. "A popular construction delivery method used today is called design-build, where the contractor is responsible for both designing and building the project," explains Jeff Slivka, ARM, CRIS, executive vice president and chief operating officer of New Day Underwriting Managers. "This collaborative approach can reduce the likelihood of error and compress the building timeline."
But it also can increase the contractor's professional liability risk and is one of the reasons that Slivka says contractors need contractors professional liability (CPrL) insurance, which pays damages to third parties. He points out that coverage for first-party damages is becoming more prevalent within the CPrL product.
"First-party professional liability coverages can protect contractors against damages they incur from errors caused by design professionals they hire," he explains. "This coverage pays damages incurred by the contractor that exceed the design professional's professional liability limits."
Another important form of protection, he says, is rectification coverage, which essentially replaces the design professional's insurance and pays for costs to remedy a design error. "Agents need to understand the coverages, given the increased use of design-build projects," Slivka notes.
Tom Boudreau, vice president of construction insurance at The Hartford, encourages agents and brokers to pay close attention to wrap-up exclusions in traditional GL policies. "Many primary policies contain exclusions for any work at a specific job site that was performed under a wrap-up," he explains, "so it's important to educate clients and prospects about this potential gap."
He points out that some carriers offer wrap-up coverage as part of their primary policies for construction firms. "Additional coverage is also available by endorsement for certain operations outside of a wrap-up program," he adds.
It's important to make sure that adequate builders risk coverage is in place before the project starts. "It's not uncommon for prospective homeowners to assume that contractors have coverage for the project or vice versa," explains Kellam Radford, senior vice president of Distinguished Programs. "An owner may know that the contractor is insured and infer that this coverage extends to the development of the property."
He encourages brokers to educate clients about the need for builders risk coverage, including theft, vandalism and specialty coverages like soft costs. "Clients, in turn, can have more informed conversations so the proper coverage is in place up front," Radford notes.
"Each phase of a project brings new exposures in the field or at the plant," Murphy explains. "Understanding nuances of the construction process and applicable coverages is key to a proper builders risk placement."
Offsite fabrication has taken on increased significance in the construction world, he adds. "Agents need to understand this and structure builders risk programs to address the main construction building site and the fabrication plant property exposures," he says.
For any builders risk project, says Sharon Primerano, chief underwriting officer for The Hartford's marine practice, agents and brokers should begin with a review of the construction contract to determine whether the contractor or the owner is responsible for purchasing the builders risk policy. "Other critical documents for completing the terms of the contract are the construction budget and construction schedule," she adds.
She points out that important additional coverage options are available under a builders risk policy. "For example, when a structure under construction must be repaired or rebuilt due to direct physical damage, the insured can incur expenses in addition to the cost of labor and materials," Primerano notes. "Many policies contain a 'delay' exclusion, which prohibits payment of many additional expenses related to a loss. Optional coverages can address many of these potential expenses."
Business income loss can have an impact. "A construction delay on an apartment complex with leases can bring loss of rents," Bristow explains. "On the residential side, a gap we overcame is what we call a change-order endorsement. Say three months into a project, the customer decides to install higher-valued items like granite countertops and hardwood floors instead of carpet." Ensuring that change orders like these are properly covered can prevent the homeowner from experiencing a setback in the total insured value should a loss arise.
Adds Dawn Perri, property broker at Partners Specialty Group, "In light of recent fires on large projects close to completion, the loss of rents or delay in the completion term must be adequate. For a multi-year project, coverage for one year's loss of rents/delay in completion may not be enough. Also, forms should be analyzed in the context of the insured's project. Don't necessarily accept standard forms at face value."
"Another item we sometimes see involves flood and earthquake," Bristow says. "These coverages are offered in builders risk programs but sometimes are overlooked."
Soft costs-indirect costs for items other than labor and materials necessary for construction-represent another challenge. Examples of soft costs include interest expense on construction loans, real estate taxes and assessments, and advertising and promotional expense.
"When a builders risk policy includes soft cost coverage, often the specific listed soft costs are covered," says Scott Foyer, national practice leader at Travelers Inland Marine. "Some policies allow for additional soft costs to be endorsed. If a soft cost was incurred but not listed on the policy-for example, insurance premiums-that may be a coverage gap."
Foyer says that, to avoid this potential gap, it's important to obtain a list of soft costs from the project owner to help identify any unlisted ones and add them to the policy.
According to Wes Robinson, national property president, RPS Atlanta, agents sometimes have a hard time pinning down soft versus hard costs. "For example, we receive submissions with furniture, fixtures, and equipment included in a soft cost allocation," he says. "They should be in the hard cost allocation." Hard costs typically generate a much lower rate than soft costs.
"When you think of hard costs, imagine what damage occurred, like bricks, metal, wood, and materials," Robinson explains. "For soft costs, imagine when damage occurred, like extra loan-carrying costs, refinance charges, and loss of income on the property that would have been generated if the loss hadn't occurred."
He says soft cost coverage can get tricky, depending on the type of project and whether multiple buildings are being constructed in phases-buildings that would have been completed and generating income before the true expiration date of the policy. "It's important to disclose to the underwriter all necessary underwriting information and craft the policy language accordingly," Robinson says.
"Another coverage to address is faulty workmanship, which can cover either ensuing damage only or ensuing damage and the faulty part," he adds. "Higher deductibles and premium charges apply, and this makes sense only on larger, more sophisticated projects."
Radford says estimated project length is another challenge. "Brokers and clients often assume that, because a project will only take a few weeks or a couple of months to complete, they'll only need, say, a three-month policy," he explains. "Projects routinely overrun the allotted time. Last year's winter weather led to significant project delays, but everyday factors-obtaining permits or contractor tardiness-do too."
Brokers also should understand the occupancy and vacancy provisions of their clients' builders risk policies. "These usually apply differently to standard property coverages," Radford explains. "While standard property coverage allows for occupancy, a builders risk policy may not."
According to Zach Marino, marketing and sales specialist at Distinguished Programs, "Knowledge gaps also exist around remodeling construction project exposures, which fall into the category of betterments and improvements on an existing structure. Look for coverage for materials stored on the premises, materials in transit, and soft costs."
Marino says an endorsement for the existing structure can satisfy a variety of remodeling projects, decrease the workload for the agent, and limit his or her E&O exposure.
"Wrap-ups, and especially GL-only wrap-ups, are becoming the preferred method of risk transfer for all jobs over $25 million in construction cost," explains Evans. "A well-designed wrap-up should provide better coverage than an owner, general contractor and subcontractors would have on their own."
Also, he adds, it should be no more expensive than if everyone bought his or her own policy. "Ideally, agents looking for a GL-only wrap-up should find a wholesale broker specializing in this niche and discuss the project opportunities at least three or four months before construction starts," Evans notes. "Such a broker can help guide agents and their clients through the E&S marketplace, provide pre-underwriting ballpark pricing indications, and ask pertinent underwriting questions before an underwriter even sees a submission."
Boudreau says agents and brokers should be aware that not all wrap-ups are created equal. "Each has its own challenges and nuances," he explains. "Wrap-ups can be written for a specific project or on a rolling program basis, and can include general liability, workers compensation or both." He recommends that agents ask about upcoming client projects to determine whether they're candidates for wrap-up insurance.
He also explains that wrap-up programs may be written for a contractor, an owner or a combination. "A wrap-up insurance program is a cost-effective way to ensure consistent coverage and a coordinated safety program for all contractors involved in a project," Boudreau comments.
Because coverage offerings vary from carrier to carrier, he encourages agents to be familiar with different carriers' coverage forms. "Some coverages may be negotiable," he says.
Boudreau adds, "Back-office wrap-up requirements can be fairly intensive. If a broker isn't ready to make the investment necessary to properly administer a wrap-up, outside firms can handle that on a broker's behalf."
Murphy says his firm is seeing more insureds interested in rolling project-specific coverage. "General contractors and owners with a spread of similar commercial projects over several states find this 'rolling' approach to be more economical and easier to administer than several project policies," he explains.
"Within the project-specific space, we have seen increased interest in purchasing pollution liability coverage and professional liability coverage for the real estate owner/developer," he adds.
Slivka adds, "Everybody is focused on commercial general liability and workers comp. Many forget about the contractors pollution and professional liability. They think those are part of the wrap-up when they really aren't.
"The simplest question to ask," Slivka says, "is, 'Do all your wrap-ups include professional or pollution liability?' The answer probably will be 'I don't know.' " He says that by asking this question of prospective clients, agents and brokers can help drive a wedge and attract new business.
Murphy encourages retail agents to concentrate their marketing efforts with premier wrap-up and project-specific carriers and wholesalers. "Whether modeling a rolling program or a stand-alone program, be sure to align yourself with a partner with experience and insight to negotiate and place your owner- or contractor-controlled wrap-up in a way that lends stability to the overall financial picture of the project or projects," he says.
Job-site safety and claims handling also are paramount to the success of a project-specific placement or wrap-up policy. "Agents should work with a carrier to help construction clients develop and implement highly successful safety and loss control programs that reach throughout the project's entire contractor population," Murphy notes.
Rick Gray, ARM, national director of business development for Engle Martin & Associates, recommends getting what's called engineered procurement construction wrap-up coverage. "This also covers the design contractor," he explains. "We just had a claim at a 27-story condo where a design flaw in an eight-story parking deck forced water into the building. The designer wasn't included in the wrap-up. He had his own coverage, but that's not always adequate to cover the exposure."
He stresses the importance of addressing all additional insureds. "Subs, tradesmen and artisans often are covered," he notes, "but design contractors are sometimes overlooked."
He points out that agents and brokers who do construction every day usually get things right. "Those who do this occasionally struggle the most," Gray says. "They should rely on a wholesaler or underwriter to really understand the product. IRMI (Insurance and Risk Management Institute) is another great learning resource. They offer education on everything from general construction to workers comp, wrap-up, builders risk and even advertising injury."
Caviston advises agents and brokers to make sure the contractor is covered for the duration of the project, including the punch-list process and full extended completed operations. "Also," she adds, "be certain that contractors are covered for off-site operations. Ideally the excess limits in the contractor's practice policy provide excess wrap-up coverage should the wrap-up limits be exhausted."
Gray concludes, "Agents need to be proactive in protecting their clients. It's important to read the contractor's contracts and make sure the insurance contract aligns with them." That's good advice for any part of a construction practice's insurance program.
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.