Ten years ago, this report would not have been necessary, but times have changed. Ten years ago you could bid a job, complete the job, and move on to the next job. Lawsuits happened but only to the other guy. Insurance policies were simple, and life was wonderful. General liability insurance has changed drastically in the last ten years and now there are traps. Not intentional traps, but changes in the industry that you have to keep abreast of, which brings us to the 7 Sins…
#1 CHOOSING THE WRONG AGENT OR BROKER
As strange as this may seem, your biggest problem might be your current insurance agent. Not that he or she is not trying to do a good job, but if they do not handle construction insurance on a day to day basis, they may be out of touch with an industry that is now changing day to day. Staying up to date with the Construction Industry is a full-time job. Likewise, if your agent is not an independent agent they may be missing the tools to do a good job, like representing multiple companies.
#2 OCCURRENCE VS. CLAIMS MADE
In the mid 1980’s the claims made polices for construction made their debut. While we rarely see them today they still exist. The promise of these policies were lower rates, but at what long-term damage? In some instances, there are no cost savings. Claims made policies for a contractor are the worst possible policy you can buy. Let me explain; Claims made policies allow you to make a claim on your policy only during the policy year they are in force. Contractors have claims down the road not in the same year as the project is built!
Claims made policies may work in other lines of insurance, but for Contractors they are a disaster. Take time after reading this report to look at your policy and see if your current policy is either an occurrence form or claims made.
#3 INSURANCE COMPANY RATING
Insurance Companies are given a grade just like when you were in school. A, B, C, D, and F. Insurance Companies are given a financial report card by the A.M. Best Company.
An Insurance company with less than an “A” and some “B” ratings can be a potential problem for two reasons:
- There is a risk of the company going out of business
- If you work for the state, county, or city, they will usually not accept any company less than an “A” and some “B” ratings.
Also, if you hire on as a subcontractor most General Contractors will not accept any rating less than an “A” or “B” rating. With some state government offices and General Contractors not accepting your liability insurance, you will be limited to the type of jobs you can accept. If you do not know your Company Rating give me a call.
First off, let’s get one thing clear…ALL POLICIES HAVE EXCLUSIONS. You hear the terms like “all risk”, “special form”, and “comprehensive”, “full coverage”. Those phrases do not mean that there are no exclusions on the policy. In a contractor’s general liability policy all the exclusions are listed on the first or second page of the policy.
The problem is that they are usually listed by form number, not by name. In order to make sure you understand the exclusions, look at the form numbers on the front page and go find that form (by number) in the policy. Then read it carefully and see if that is a problem for the kind of work that you do. If you see a form number on the front of the policy but you cannot find that form in the policy, your policy is NOT COMPLETE! Someone forgot to add that form to the policy when the policy was put together.
The exclusions are critical, when you get your insurance policy the first thing you should look at are the exclusions. For instance, if you are a Residential Contractor and your policy excludes Residential Work, (which many do) you have a big problem. The worst thing is that most people find out their exclusions when they have had a claim and they turn it in to their insurance company and the company informs them you have no coverage for this exclusion.
Here are a few key exclusions I have found in many policies; this list is by no means “all inclusive”. Look over this list and see what exclusion would apply to your operation.
- DESIGNATED WORK – Most General Liability policies automatically cover a business for just about any type of work that it engages in during the policy year. Let’s say a sub’s premium is based on the carpenter classification. Although, that’s what he does 90% of the time, he may do a little roofing, electrical, or plumbing work. Most policies will cover him for this other work, and if he does enough of it, they’ll just charge him accordingly for those classes of work at his year-end audit. If an underwriter didn’t want to cover his roofing or electrical work, he/she could use the designated work endorsement to exclude those classes.
- INDEPENDENT CONTRACTORS – Claims arising out of: The acts or omissions of independent contractors while working on behalf of any insured, or the negligent hiring or contracting, investigation, supervision, training, retention of any independent contractor for whom any insured is or ever was legally responsible and whose acts or omissions would be excluded.
- ROOFING – Some roofing exclusions are plain and simple. NO ROOFING. Some are not as strict. You must read the exclusion carefully.
- DEMOLITION – Plain and simple. No demolition!
- PROFESSIONAL LIABILITY – Claims arising out of the rendering of or failure to render any professional services by you or any engineer, architect or survey, or who is either employed by you or performing work on you behalf in such capacity. Professional services include preparing, approving, or failing to prepare or approve maps, shop drawings, opinions, reports, surveys, field orders, change orders or drawings; and supervisory, inspection, architectural or engineering activities
- SUBSIDENCE – Insurance does not apply to any liability arising out of landslide, mud flow, earth sinking, earth rising or earth shifting
- PRIOR ACTS – This is a very severe exclusion. This says that any work you did prior to the policy date is not covered. Unless your prior liability policy was written correctly this could be a death sentence on all prior work. 90% of all contractor claims occur after the work was completed.
#5 INSURABLE INTEREST & YOUR COMMERCIAL AUTO POLICY
If you have a commercial auto policy and have vehicles that are listed on the policy but not titled in the company name you have a problem. You might not even have coverage should a claim occur. Another major mistake I see all the time is a contractor who uses his truck in the business but insures it on a personal auto policy. I always hear “well, my agent knows about it,” or “they are listed for Business Use”. Unfortunately, the agent can’t force the insurance company to pay the claim if a policy is set up the wrong way. A real Commercial Auto Policy is the best way to protect yourself. I have ways to help my clients make sure they have all these things structured correctly.
This one is potentially a killer. There are policies that exclude coverage when the damage or injury is from an uninsured sub contractor. Or a sub contractor that does not list the general contractor as an Additonal Insured. While we always recommend that ALL sub contractors you sue be insured and ALL sub contractors you sue list you as an Additional Insured we know it doesn’t always happen. Don’t be that contractor that has this provision and then hires his best friend to do some work for him.
When you hire a subcontractor to do work for you, he must carry General Liability insurance and he must have the same limits of liability as you do. For example, if you have a General Liability insurance policy with a $1,000,000 limit, the subcontractor that you hired must also have the same limit.
Equally as bad is when your subcontractor does not carry General Liability Insurance and the company audits your books at the end of the policy term. If you do not have a Certificate of Insurance for the sub your general liability company will likely add it to your payroll and you will end up paying the premium for the subcontractor.
#7 CARRYING ADEQUATE LIMITS
This is one that I come across all too often. Most General Contractors and really anybody requiring “Certificates of Insurance” these days are going to require AT LEAST a $1,000,000 coverage on auto, and a $1,000,000 occurrence with a $2,000,000 aggregate on the General Liability. And this still might not be enough coverage for some companies. That’s why you can buy a policy called an Umbrella. Umbrellas can give the Commercial Auto Policy and the General Liability extra coverage, and usually are less expensive than you might think.
These are just seven of the many ways that contractors are leaving their companies unprotected. There are more.
And if you are not losing sleep over some of these issues, excuse my bluntness but maybe you should be. I can’t tell you how many times I have heard “it won’t happen to me.”
It’s up to you to make sure that if and when it does happen, you will be covered. Don’t roll the dice. Call us! 214-265-1221