Changing Coverage And Contract Issues
The dry period of construction and of insurance companies providing coverage for contractors has ended. The need for coverage and the interest in writing the coverage is strong. However, there are problems. Current construction contracts attempt to place more and more of the insurance burden on the contractor and its subcontractors, and the requirements are written throughout the contract.
Not everyone has welcomed the 2013 changes in the Insurance Services Office (ISO) Commercial General Liability (CGL) Coverage Forms. As a result, some contracts require using the prior editions of these coverage forms in place of the 2013 edition. Other contract concerns involve wrap-ups and the gaps they impose on subcontractors.
Any agent who works with contractors must be aware of these changing coverage and contract issues.
Cornerstones of Construction Business Success: Knowledge, Partnerships
Improve operations and serve clients well to "build" continuous success
By Dave Willis
Following some very difficult years, the construction business has regained its footing and many contractors are quite active. Robert Thomas, president of surety at The Hanover Insurance Group, says the recovery, which he describes as "gradual," has not been even across all segments. "Private work is providing the most opportunity," he points out. "Many public agencies still are exhibiting constrained financial resources and flexibility, and that's manifesting as tightened payment flows or delays."
"We are very busy right now with construction projects," says Ryan Grimes, ARM, CRIS, CISC, senior vice president of All Risks, Ltd. "As a wholesaler, we're seeing a lot of residential projects in major cities and in what are sometimes called the 'construction-defect' states out West." He expects new residential starts to be solid over the next six to nine months.
Apartment construction activity is strong. "The bulk of these projects, including high-rise apartment construction, occur in the larger metro areas," he explains. "We're seeing a lot of commercial-grade apartments in Florida and California, as well as Denver, New York and other major cities. We're also seeing a lot of condo, townhome and single-family home projects in the Sunbelt states."
Paul Butler, president of marine at The Hanover Insurance Group, points out that, while the construction business continues to expand year over year, it has not returned to the highs of the mid-2000s. "That being said," he notes, "we continue to see expansive growth in both the number and size of frame residential projects. We're starting to see more rapid growth in the commercial sector, too."
According to Tim Cappellett, vice president, sales and marketing, of Oryx Insurance Brokerage, the recent drop in oil prices has stalled a number of energy projects. More broadly, he notes, "Our agents are seeing increasing complexity in construction-related subcontractor agreements, with new language that appears to be drafted based on response to shortfalls in insurance coverage."
"In the heavy construction, or what we call 'heavy civil' arena, we're seeing a growing potential for public-private partnerships," explains Stephen Buonpane, ARM, vice president, underwriting, for ACE Construction Group. "Under these partnerships, also known as 'P3s,' public works projects such as highways, bridges and buildings are financed, designed, built, operated and maintained by private concessionaires. P3 contracts can range anywhere from 25 to 99 years, and the construction work is being performed by heavy civil contractors in jurisdictions where legislation allows them."
Even where P3 projects are not allowed, more complex arrangements exist. "Many states permit design-build projects, where engineering services and construction are part of the same contract," Buonpane notes. "Both P3s and design-build projects create a potential need for broadened professional liability coverage that addresses the design risk associated with a construction project, as well as any potential operations and maintenance risks over time."
Staffing, training and perpetuation are challenges for many contracting firms. "The big issue is finding and keeping quality foremen and superintendents," he notes. "Companies can live and die by how good their superintendents are. Many times they leave and start their own companies, sometimes taking several key employees with them."
The insurance market for contracting firms is strong. "From a marine insurance perspective," explains Butler, "we see the builders risk marketplace growing. There are no signs of it slowing down, as the economy improves and construction companies secure more building projects."
He says insurance carriers today are aggressively pursuing superior projects within this space. "We don't anticipate that changing at all over the next six to nine months," Butler comments. "The better companies are bringing their expertise and responsiveness to create a competitive advantage."
According to Cappellett, "For the most part, we have seen the marketplace for construction risks remain constant. Our agents report that they continue to face challenges finding coverage for difficult risks, such as those with work at heights and roofing and demolition exposures, while the trades continue to see favorable pricing."
Competition is strong for annual policies and project coverage for apartments, Grimes notes. "There are more players competing and pricing is very competitive, but stable," he explains. "On the for-sale side-the condos, townhomes and single-family homes-there are fewer players and markets. But again, rates are stable. The one exception is New York, where liability rates are very high."
Changes to ISO forms that came out in 2013 are presenting challenges for certain insureds. "We're getting some requests from contractors not to use the 2013 forms, but rather the older ones, because of their contracts and how they treat additional insureds," Buonpane explains.
Wording on wrap-ups could present another challenge. "The subcontractor's policy may exclude work performed on projects where a wrap-up exists," Buonpane says. "If the contractor comes back to the site after the wrap-up is complete, its current corporate policy may not respond, even if the wrap-up has expired."
According to Butler, the best agents in the construction market have aligned themselves with carriers that are true specialists and can help them provide excellent coverage at competitive terms along with sharing their expertise with their construction customers. "They understand the value of having an experienced, specialized carrier in the market that understands the unique risks and exposures, and strives to provide the most comprehensive coverages," he explains.
"Construction business owners increasingly rely on their agent or broker to provide strategic guidance in their insurance buying decisions," Thomas points out. "Agents who want to win in this arena would be wise to provide quality advocacy and share with customers their knowledge about local conditions. In addition, knowing which carriers are best suited to provide stability and consistent contractor support is crucial."
Cappellett says agents and brokers should encourage clients to make use of company-provided training. "Many firms offer in-house training along with coverage," he explains, noting that his company provides construction-specific training at no cost to its customers. He also recommends that agents help clients with perpetuation and staff development. "You don't want customers to lose key employees to what they view as greener pastures," he notes.
He also suggests that agents take time to review and understand client contracts. "Additional insurance requirements are increasingly being embedded in subcontractor agreements, and they're not listed in the insurance requirements section of the contract," Cappellett notes. "Customers depend on their agent or broker to be aware of these intricacies and make sure they are properly covered."
Buonpane concurs. "It's important for brokers and agents to understand whom their contractor customers are doing business with, whom they may do business with, what the various contracts require, and whether the contractor's partners or subcontractors have adequate insurance," he says. "The issue around the additional insured form wording and potential limitations has a broad impact. Brokers have access to contracts that could impact coverage and ultimately claim payouts down the road, and they need to understand what those contracts say."
He encourages similar diligence with wrap-ups. "Because owners and general contractors take on liabilities for all contractors, it's important to know what insurance those contractors have," he explains. "We as an industry aren't asking enough questions around that."
The same holds true for P3 and design-build scenarios. "It's especially important to know the contractor's activities and partnerships, and make sure coverage addresses them," Buonpane notes. "All too often, contracts can be overlooked in the submission and underwriting process, and they're an extremely critical part of how coverage may or may not apply. It's a really important focus area."
Agents and brokers can help minimize construction firms' risks by developing specialists within their organization who have a deep understanding of the construction business, says Butler. "This lets them tailor insurance programs to fit each client's needs. Furthermore, carriers that are committed to the construction market will offer specialized loss control and underwriting units that agents can leverage to help construction firms improve their operations."
Cappellett encourages agents to connect with a dedicated carrier to ensure that their client is getting the best service possible. "Build strong relationships within the carrier at the underwriting, claims, loss control/risk management and audit levels," he advises. "Each has different nuances and must be nurtured. Problems can be avoided if relationships exist, and the work required to develop them will prevent turbulence and could organically reduce risk and improve client operations."
Buonpane points out that some client firms fail to follow through on risk management strategies. "Often we see very well-written safety programs that lack execution in the field," he remarks. "Insurance pricing and program structure depend on historical experience, so it's important to make sure resources are available and used to get the best possible safety results. It's a very high-hazard, high-risk industry, and safety plays an extremely important role."
"Showing contractors their premium and loss ratio history is very important, and this is something good retailers do consistently," adds Grimes. "Address loss history and be very clear about the relationship between losses and rates. Also, talk about the roles quality control and loss prevention can play going forward. Being up-front with clients about how underwriters look at their accounts can help improve the program and strengthen the agent-insured partnership."
Thomas recommends that agents perform services that contractors can't or don't necessarily do themselves. "This includes contract reviews, facilitating introductions to other contractors who may be future partners, and locating other service providers such as lawyers, accountants and bankers," he notes. "These agents are really becoming a part of the business ecosystem for these contractors and helping their business."
Building ongoing success
Education and strong partnerships are foundational to long-term agent and broker success in the construction market. "It's important for agents and brokers to commit to ongoing education and training to elevate their knowledge and capabilities and to proactively engage to educate and support their customers," says Thomas. "This allows them to solidify their image as an industry expert who can problem solve and be effective for their clients."
Butler recommends developing a network of specialized experts both internally and externally. "This includes a team within the agency who knows the construction marketplace," he explains. "But it's also about developing a network of carrier partners that have proven themselves as experts in the construction market and can offer a breadth of coverages and services to this sector-everything from surety bonds to marine coverages to middle-market capabilities."
"It's important to be in tune with projects clients are bidding on-especially as contractors consider expanding the scope of what they do," Grimes notes. "Make sure coverage is there for this potential work and that no exclusions apply. Too often, agents and contractors look at where they are now but don't address growth and what jobs they might take on as a result."
Grimes adds, "Create solid contractor-agent-wholesaler-carrier partnerships. It's a dynamic marketplace, and there will be changes over time. Having the right team made up of people who are committed to the business will make a huge difference."
Cappellett sums up agent and broker success like this: "Become a subject matter expert and continually build your network of construction relationships."
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.