Insurance Reassurance

Remodelers are facing one of the most unforgiving insurance markets in years. Slammed by soaring premiums and multiplying exclusions, impenetrable contracts and fleeing providers, they're struggling to afford and hold onto good commercial policies that won't leave them high and dry on the rare occasions they actually need them.

But the worst may be over. “Insurance companies are more willing to write residential contractors now than they were two years ago,” says Frank Curotto, a broker with the Kreismann-Bayer Insurance Agency, St. Louis. “This doesn't mean they're clamoring for them, especially those that are subbing out most of their work.” Nor does it mean that insurance will ever be inexpensive or straightforward again, as new risks emerge and lawsuits proliferate.

Insurance is regulated by the states, and though the laws and issues vary widely, most states require that employers at least carry workers' compensation insurance. Many require liability insurance and other types of coverage as well.

Plenty of small remodeling companies operate without coverage, but at great risk. “You don't have to light the match to be considered negligent if there's a fire,” says Ed Timmerman, an independent broker with John T. Burns Insurance Agency, Newtonville, Mass. Stories of freak accidents that bring down otherwise strong remodelers are alarmingly common. In his own town a few years ago, a minor subcontractor “took a break from stripping paint, lit a cigarette, and burned down a church,” says Scott Simmonds, president of Insurance Consultants of Maine. The sub — brought in for a reported $1,500 worth of work — did $6 million in damage. “The smallest job can result in huge losses.”

Even if your clients have homeowners' insurance, and even if you have plenty of coverage for your home and personal vehicles, you as the general contractor are likely to be held liable if anything goes wrong on a job. Good insurance will cover the damage and your defense in the event of a lawsuit.

Insurance is cyclical, and its costs and coverage rise and fall based on a multitude of factors that are largely beyond your control. Recent losses related (but not limited) to mold and product-defect litigation, stock market volatility, and Mother Nature have compelled insurers to restrict or cease writing general liability and other types of coverage for many construction businesses, particularly in coastal regions.

Workers' compensation premiums have increased in most states as well, due to a general rise in claims. Real or fraudulent, injuries do happen in construction, and “contractors are one of the risks that nobody is comfortable with,” says Mark Kinsey, an independent broker with PKG Insurance, Doylestown, Pa. (Kinsey also administers a health insurance program through the National Association of the Remodeling Industry, NARI.)

The irrelevance factor — mold being largely a new construction issue, for instance — is a moot point. “In a crisis mode, the insurance industry walks away,” Simmonds says. “They're waiting for the dust to settle” from the recent losses.

“The most important part of the insurance transaction is the buyer's relationship with their agent,” Simmonds says. But liking the agent (or broker) personally isn't as critical as his or her knowledge of construction liability in your state, and his ability to clearly explain your risks, requirements, options, costs, and exclusions. “Just because someone can sell you a homeowners' or an auto policy doesn't mean they understand commercial insurance,” he notes.

Make your agent or broker advocate for you. Curotto “shops us around and will even argue with insurers,” says Pam Hagerty, office manager of Riggs Construction & Design, Kirkwood, Mo. Your agent can help you keep impeccable records and can physically walk their auditor through your office and your books. “You don't want the auditor in your office any longer than necessary,” Simmonds says.

Your agent or broker should also help you save money. Kinsey says that he usually saves his clients between 15% and 35%.

How do you find this person? Network. Call your friendly competitors. See if your local or state trade association has negotiated group insurance rates. Two places to begin are NARI (www.nari.org) and the National Association of Home Builders' Remodelors Council (www.nahb.org/remodelors). NARI chapters in Central Ohio and Oregon, for example, have workers' comp programs.

Independent brokers can bid your policies out to several insurers, including those offering hard-to-get coverage. “The key for me is having a great broker,” says Everett Collier, of Collier Ostrom Inc., San Francisco. “We've never had a liability claim in our 30-year history, but I can't remember how many times we've had to change,” Collier says, as providers have stopped writing liability policies in California.

But an agent really knows the carrier and can more readily resolve problems, says Mark Leininger, who is both an agent and a broker to Collier Ostrom through NEK Insurance in Northern California.

Whichever route you take, make sure your carriers are “admitted” in your state. This means your state will intervene in policy disputes, and may guarantee coverage if the carrier fails. “You don't want to take on a big insurance agency in the courts,” Leininger says.

A key factor in your workers' comp costs is your “experience modification.” Your “mod,” explains Simmonds, “is the ratio of actual losses to expected losses. It's one place that you control the cost of your workers' compensation.”

Here's how your mod is calculated. Each year, your workers' comp carrier provides three years of your company's claims, or losses, to your state's workers' compensation rating bureau. (Thirteen states use their own rating systems. The rest use the National Council on Compensation Insurance, www.ncci.com.) A mod of 1.0 means your company's losses are the industry average. Lower losses will lower your mod; greater losses will increase it.

Then multiply your mod by your workers' comp premiums, which the state sets at rates per $100 of payroll, depending on the position's risks. “The experience mod can make or break a company,” Curotto says. For instance, if your mod is 1.2 and your competitor's is 0.8, your workers' comp rates could be many thousands of dollars more, depending on your payroll.

Meaningful safety programs are the best way to lower your mod and curb your workers' comp costs. “Safety programs that are lip service aren't going to do anything,” according to Simmonds. “The key is that the supervisors have to follow the rules. If the rules say to wear safety glasses on a jobsite, it's over the first time he walks on site without safety glasses.”

Designate a “safety officer” who isn't the owner, but is a senior employee whom employees trust and respect, Leininger advises. “Our safety officer interfaces once a year with our insurance agent,” says Mark Scott of Mark IV Construction, Bethesda, Md. “We get a letter — basically an ‘attaboy' —that says he inspected our site and didn't find any problems.”

A few years ago, Riggs Construction “had two back injuries with big payouts, and our experience mod was 1.3,” Hagerty says. To lower its mod, the company worked with its workers' comp provider to create a detailed safety program that includes meetings, a booklet, and periodic jobsite visits by the insurance company.

Few remodelers want to invite an insurer onto the jobsite, but, Curotto says, “if they can help you reduce your mod, you'll save a bunch of money.” And by following their advice, “you can compete better and keep your business running.”

Rewards-based programs tend to work best, Leininger says. Offer employees a bonus for each quarter the company is accident-free. See if your insurer will pitch in. Big Sky Construction, San Jose, Calif., recently received a $3,200 “safety incentive” check from its professional employer organization (PEO), which operates its workers' comp program. “I split it with the guys,” owner Jeff Winn says.

Another key factor in workers' comp costs is how you classify and track your employees. States assign classification codes to employees based on past loss experience for others doing similar work. Most use data from NCCI (see page 102). By accurately coding your employees and tracking the work they actually do, you may be able to significantly cut your workers' comp costs.

For instance, if a carpenter divides his time between second-story framing and interior trim work, your provider may let you classify him accordingly. “No insurance company will call the contractor a liar so long as it's documented and recorded,” Kinsey says. “It's a very cool way of saving tons of money.

Another option may be to classify by the job. In Missouri, for instance, workers' comp for carpenters and laborers ranges from $9.42 to $14.40 per $100 in payroll. “Interior trim work, small remodel jobs, and interior renovations are a much lower rate than additions, exterior framing, and more ‘dangerous' work” that is typically performed by home builders, notes Tom Riggs of Riggs Construction. His broker convinced the insurer to let Riggs classify by the job instead of by the man, slashing workers' comp expenses 25% in the first year.

Make sure that your classifications reflect your company's current focus. If you used to do mostly additions but you now specialize in kitchens, reclassifying could dramatically cut your workers' comp costs.

“If you hire uninsured subs, just forget it,” Curotto says. If anything goes wrong, you as general contractor will take the hit, either through your own insurance or the courts.

Use written subcontractor agreements that explicitly state your insurance requirements, indemnify you for their mistakes, and require that their policies list your company as an additional insured. Always get documented proof of their current coverage, and keep it on file. Mark IV is “rigid about getting certificates of insurance from everybody we deal with,” Scott says. “Our absolute standard is: without an insurance certificate on file, you don't get paid.”

For sole proprietors and other very small subcontractors, remodelers frequently waive insurance requirements, often with the state's approval. At Mark IV, the rule is that “you either carry workman's comp or we take 20% out of your payment until all insurance liabilities are resolved,” Scott says.

But insurers “are starting to require that even sole prop subs have workers' comp on themselves,” Simmonds says. “Having an indemnification clause won't be enough. You're going to have fewer and fewer choices as insurers clamp down.” He adds that many workers' comp providers are also starting to require that owners have coverage on themselves, even if they rarely swing a hammer or climb a ladder.

Disability insurance provides your employees with a mechanism whereby they can be hurt and still work, Simmonds says. This beats the popular alternative of employees being injured over the weekend and holding out until Monday to file a workers' comp claim, so they can continue to get paid while recuperating.

“Insurers are firmly convinced that this is going on,” Simmonds says. He adds that disability insurance is affordable, at around $12 or so a week per employee. And it can deter employees from filing costly workers' comp claims and help attract stable employees.

Be sure that your clients have homeowners' insurance — but don't stop there. Riggs Construction spells out several insurance requirements, including having homeowners name Riggs “as an additional insured for work done and for building materials stored at the job-site, inside house or garage, continuing until the work is completed and paid in full.”

If the homeowner doesn't comply, Riggs buys a builder's risk policy and applies the cost to their contract. Kinsey says that builder's risk is a better way to mitigate liability than to write damage limitations into contracts.

With the release in January of the EPA's proposed new rule regarding lead paint work practices in residential construction, consider asking your clients who own older homes to have a lead abator certify that their home is lead-free. This “puts the onus where it belongs: on homeowners and inspectors,” Kinsey says.

Also consider what your clients might require of you. Many remodelers try to reduce their liability premiums by reducing their coverage. But Simmonds notes that more high-end homeowners now require remodelers to have a certain amount of coverage. “Reducing your coverage from $2 million to $1 million isn't going to cut your premium in half,” he says. “Ask what you're really saving.”

Limiting your work to remodeling only can significantly cut your insurance costs. “New construction seems to draw a greater degree of litigation,” Leininger says. He adds that new-home buyers often “expect perfection, but that's never the case,” whether the home is custom or part of a large subdivision.

Similarly, workers' comp coverage is generally much higher for work considered dangerous, such as roofing and commercial construction.

Your insurer may also proscribe the kind of work you can do, so be aware of any exclusions before entering into a contract with a homeowner.

Sexual harassment, age-related discrimination, and wrongful termination are typical of a new class of lawsuits that are coming from the Fortune 500 to small businesses, Leininger says. Awards sometimes reach the high six-figures, and are generally covered only by employment practices liability coverage. Policies range from $1,000 to $100,000 per year, Simmonds says, depending on the company's size, employment policies, and other factors.

Even seemingly minor offenses can get you in trouble. Lately, Simmonds notes, sexual harassment suits aren't so much of the sleep-with-me-and-get-a-raise variety “as having dirty pictures in the warehouse and downloading porn. And it isn't just male to female; it's female to male and male to male.”

Strong employment policies are your best defense. Make sure that your policies are up to date, spell them out in your employee manual, and enforce them judiciously. Above all, reduce turnover. “Any time you hire or fire somebody, you're leaving yourself open to a potential claim,” Simmonds says.

Anything that's used in the execution of your business — your garage or home office, your vehicles, your employees' vehicles — should be declared in your commercial coverage.

If your employees ever use their own vehicles for lumber runs, for instance, make sure that your commercial auto or general liability policy covers hired and non-owned autos, Kinsey advises. For very little money, this simple declaration will pay for your company's defense if an accident occurs. If you don't have a commercial auto policy, add it to your general liability policy by endorsement.

Similarly, if you use your car for sales calls, either declare it on your commercial auto policy or add “business use” to your personal auto policy. If you work out of your home, Kinsey says it's “hugely critical” that both your homeowners' and your commercial carriers insure that location.

The language of insurers is notoriously obtuse, but don't gloss over the fine print only to learn too late about exclusions. “The absolute worst thing a contractor can do is to renew the policies as they are,” Kinsey says. Laws change and policies change, and failure to keep up can be costly.

Give yourself several months to review your coverage, and have your broker or agent walk through it with you. Inform him or her of any positive developments at your company, such as new safety programs, continuing education courses, or professional certifications, such as NARI's Certified Graduate Remodeler.

The more professionally your company presents itself to insurers, the more favorably they'll consider you.

Abandoning all hope of finding affordable insurance coverage? A growing number of remodelers are turning to risk retention groups (RRGs) and professional employer organizations (PEOs).

RRGs are self-insured, member-owned insurance companies often formed by trade and professional associations and underwritten by insurance companies. One of the biggest is Pro Builders Specialty, which specializes in residential remodeling and is licensed to write liability policies in every state but New York.

Several state and regional professional associations have endorsed Pro Builders Specialty, according to Sheri Clewett of FRO Insurance Brokers in Northern California. She recently helped the company develop a general liability program for California NARI chapters, based on NARI members' concerns with most commercial policies and the chapter's emphasis on professional programs that lower their risk factors. “RRGs have the flexibility to make price changes based on the performance of the group,” Clewett says (800.443.6566).

There's a “buyer beware” element to RRGs. Leininger says that RRGs typically offer less coverage than traditional insurers, and adds that their unregulated status means there's “no guarantee fund to take over if the group fails.”

Also, it pays to know who else is in an RRG. “The rates are predicated by the people in the group,” Kinsey says. “If you let some idiot in there and he blows the loss ratios, everybody suffers.” He also advises confirming that the RRG itself has errors and omissions coverage through the insurer that underwrites it.

PEOs are basically “HR departments for hire,” Simmonds explains. They handle payroll and other administrative functions, with their main insurance advantage being their group buying mechanism.

“A PEO that can convince an insurance carrier to provide discounts can help the members realize savings in workers' compensation and employee benefits,” he says.

Jeff Winn says that his PEO, Barrett Business Services, cuts Big Sky Construction's workers' comp costs and holds it accountable for safety. “They do safety checks every month, give us safety materials for tailgate meetings,” and have a safety incentive program.

A source of information on RRGs is the Risk Retention Reporter (www.rrr.com). To learn more about PEOs, visit the National Association of PEOs (www.napeo.org).

Agents and brokers quoted in this article:

Consult with your insurance broker for additional information on these and other common types of commercial insurance. More detailed explanations are also available at www.insurancebuzzer .com operated by Scott Simmonds of Insurance Consultants of Maine.

Workers' compensation: Provides medical care and compensation to injured workers on a no-fault basis. Required by law in most states.

General liability: Protects against negligence resulting in bodily injury or property damage.

Umbrella liability: Provides additional liability coverage beyond the general liability policy.

Builder's risk: Covers property while under construction. Protects against damage resulting from theft, fire, vandalism, wind, hail, and other accidental loss or damage to the property.

Inland marine: Covers goods in transit as well as jobsite equipment such as forklifts and bulldozers.

Errors and omissions/ professional liability: Covers economic loss resulting from errors or omissions during design or construction.

Employment practices liability: Covers legal action over employment relationships such as discrimination, wrongful termination, and harassment.