IB Talk

[00:00:04] Narrator: Welcome to IB Talk, the leading podcast for the insurance industry across the United States, brought to you by Insurance Business. 

[00:00:13] Gia Snape: Welcome to IB Talk, I’m your host, Gia Snape, and today we're diving into the complex but essential world of construction insurance. From small contractors just starting out to massive infrastructure projects. Construction risks can take on many forms, and getting the right coverage is critical. Joining me today are four experts from Burns & Wilcox, who will share their insights on key aspects of construction insurance, from the fundamentals of securing that first policy, to advanced strategies for risk transfer and large-scale program placement. We'll hear from Sarah Daniel, John Heaner, Steve Bartell, and Denis Brady, each bringing deep experience in their area of specialization. We'll start with Sarah Daniel, who's here to talk about what small and emerging contractors should know when securing their first insurance policies. Sarah, thanks for being here. Many small or newer contractors are navigating insurance for the first time, and it can be a bit overwhelming. What are the most common mistakes new contractors make when purchasing their first commercial insurance policies? 

[00:01:25] Sarah Daniel: Yeah, Gia, thanks for having me. What we're seeing a lot now, especially with the emergence of technology, we are seeing a lot of the new contractors utilize online quoting portals without utilizing an agent or a broker. So they are inputting a lot of the information themselves. They don't really understand the importance of the information that they're putting in, and they definitely don't understand the product that they might have that comes out. We also see a lot of, obviously, nowadays, pricing is the number one driving factor for a lot of consumers. And when it comes to contractors, lowest price is typically not the best coverage, especially when you have contract requirements. So definitely watch for just going off of pricing alone. What you really want to look for—and again, to my first point, an agent can help guide—is an AM best rated company of an A. And a lot of those contracting requirements that they're going to get will require that. So that's step number one. We also see that it is very common, especially for the new venture contractors, that they've got a business plan. They're going out on their own. They don't understand the importance of estimating their exposures accurately. We definitely want to make sure that they're meeting with their agent to discuss getting a good read on their payroll and their sales and their sub costs. If you estimate too low, you could be looking at a higher audit at the end of your policy term. That would generate a large additional premium. If you estimate too high, you may likely sign up for an insurance policy that does not allow any return premium on something. If you were to not quite meet those revenues that you estimated, you may not be able to get a return premium in at audit time. 
[00:03:36] Gia Snape: Can you explain how restrictive policy forms might create coverage gaps, even if they come with lower premiums? 

[00:03:44] Sarah Daniel: Absolutely. First thing to look for typically is the lower limits. So a typical GL, CGL policy for a contractor, you're most likely going to need to carry at least a $1 million occurrence, $2 million aggregate policy. There are several other lower limit options that come with lower premiums, but that's usually the construction standard to start at a $1 million, $2 million limit. Also, additional insured forms are very common in an insurance contract. There are variations, different addition dates, different types. Those should be paid attention to of what you might need specifically. I would also look to make sure that you have products coverage. As a contractor, that's typically your number one exposure. And we do see contracting customers going out first purchasing what typically we call a premises liability coverage where products is not included. That's slip and fall, you know, on your own office premises. So look for products coverage. That includes ongoing and completed operations. We also suggest that you look for certain limitations, such as uninsured subcontracting, which I know one of our other speakers will deep dive into that later. Insured some contracting coverage, a classification limitation, which means any class code on your policy has to be listed to cover you for that certain trade. If you are a remodeler and you do several trades, that could be a very problematic form if they only list you as doing maybe painting or plumbing, but you do several others, you should pay attention to that also. 

[00:05:26] Gia Snape: And Sarah, what contractual obligations should small contractors be most mindful of when reviewing insurance requirements from project owners or GCs? 

[00:05:38] Sarah Daniel: I see a common issue is a lot of, I'm going to use these large residential developers as a good example. Here in Texas, we are expanding statewide. Those entities have one standard set of insurance requirement for a large, wide array of contractors. So, we typically see that come out, I'm going to use a painter as an example. He might get, he might be looking at his contracting requirements and he could be looking at high excess limit requirements, which would put, as I said earlier, you start with one mil, two mil limits. They also might be required to carry a 10 million excess limit. He might only be doing a small portion of a job or a 10 million excess limit. Doesn't really make sense in the construction world if you're doing a smaller job. So I call them kind of a one size fits all contracting requirement that these larger developers may come out with. And I suggest, again, work with your agent to challenge what maybe may not make sense to the work that you are doing. But also make sure in the contract requirements, it will lay out how long you have to keep that coverage in force. Typically, there could be a clause in there that says you have to keep coverage in force five years after project completion, something of that sort. So just because your work is done, you also have to keep that coverage in force for that piece of that timeline there.

[00:07:15] Gia Snape: And price can be a very important talking point for these clients. But what are your tips for agents and brokers who want to better educate small contractors on the long-term value of comprehensive coverage over short-term savings on their insurance policies? 

[00:07:33] Sarah Daniel: Yeah, absolutely. One thing we also see for that long-term versus short-term savings, you get into occurrence versus claims made coverage. Again, products is a driving factor for the contractors out there. So we encourage that the agents look at with their insureds. Having that products coverage that is key to when products like your project is completed. And again, if you get into a occurrence versus claims made situation, you want to make sure that you have coverage for after that product that you've done is completed. The project might be done. We see these claims develop usually in construction years after the projects are completed. So it's definitely I would suggest to make sure that you keep those coverages in place. Gaps in lapses in coverages could be problematic where you run into prior work exclusions. And again, age old saying you get what you pay for. Definitely make sure you're with an A-rated carrier for claims handling. Also, those larger developers, like I mentioned earlier, typically require you to have an A-rated carrier for, again, claims handling and all of those procedures. So, definitely keep an eye out for that. 

[00:08:53] Gia Snape: Some great insight, Sarah. And that leads us nicely into another critical area of managing construction risk, and that's working with subcontractors and ensuring proper risk transfer. John Heaner is here to break that topic down for us. John, you've worked extensively with contractors on structuring agreements and managing subcontractor exposures. Why is risk transfer such a critical component in construction contracts involving subcontractors? 

[00:09:22] John Heaner: Yeah. So the most important thing I think a lot of contractors need this as part of when they do work is mainly when it comes to insurance, it has to do with the pricing of their insurance policy. The better the risk transfer that's in place, typically the better price you're going to get. Because a lot of general contractors aren't self-performing the work, they're getting a reduced rate versus if they were self-performing the work themselves. So one of the main benefits is that on your insurance cost, you're getting a price reduction. The other thing is... It's important because we want the party that's directly involved to be held responsible if something were to go wrong. And then ultimately, it all also having a good risk transfer program in place can help your insurance acceptability to different carriers. 

[00:10:19] Gia Snape: What are the key elements every contractor should ensure are included in their subcontractor agreements to protect themselves? 

[00:10:28] John Heaner: So we always recommend contractors reach out to attorneys to help them. But there's two main areas in which insurance companies take a look at when they're considering acceptability and offering coverage to an insured. And that is the indemnification section and the insurance requirement section. The insurance requirement section is going to basically bullet point out the specific requirements that the owner or the general contractor is going to require the subcontractor to carry. For example, they're going to specifically list out the limits, $1 million, $2 million, $2 million specifically for products and completed operations. They're going to say they have to have additional insurance status with specific forms, waiver of subrogation. There's a multitude of things that are going to be included in the insurance department section that is going to be what carrier underwriter is going to look at to make sure that are in place. The other section would be the indemnification section. And this basically is going to be kind of the written agreement portion that carrier underwriter is going to look at that's going to say the contractor is going to hold harmless and indemnify above general contractor if something were to go wrong. Again, these... Two sections are probably the most important sections when it comes to insurance acceptability and ironclad risk transfer being in place. 

[00:12:07] Gia Snape: How should contractors verify that their subcontractors maintain proper and current insurance coverage? 

[00:12:15] John Heaner: Well, one of the things that we recommend all contractors do is to have a quality control program in place. And that can really just be one person, an assigned person who's responsible for collecting certificates of insurance from subcontractors, checking boxes to make sure that those subcontractors are carrying the limits that are required within the contract, listing our insured as an additional insured on the specific forms that are requested. There's also third parties that contractors can use to help do this for them. I believe they might be called compliance service type companies that will do this on behalf of the contractor, of course, for a fee. But there are certain things contractors can put in place, like a quality control program, in order to make sure that all of these elements are being satisfied by any of their subcontractors that they hire. 

[00:13:15] Gia Snape: And finally, John, how can brokers help their contractor clients strengthen risk transfer strategies, especially in today's construction environment? 

[00:13:25] John Heaner: So, this is where the legal and the insurance world kind of collide. We always recommend that contractors reach out to their lawyers to help draft proper, effective risk transfer subcontract agreements. And the reason being is because every state is different. Some states allow contractors to pass on sole negligence as long as there's some specific wording within the subcontract agreement, and some of them don't. There's different statutes of repose that each state has that also needs to be in consideration when writing subcontract agreements. But I'd say the best place that some contractors can start is through using an AIA subcontract agreement, which is from the American Institute of Architects. They publish kind of like an industry-wide acceptable subcontract agreement. I would not say that it is appropriate for every contractor because there are nuances per state, but it's a great place to start. And it's important that our insurance agents, brokers kind of refer contractors to lawyers who are seasoned and experienced in writing proper subcontract agreements for contractors. 

[00:14:43] Gia Snape: Absolutely. Thanks for those excellent points, John. And of course, risk management becomes even more complex when we talk about large construction fleets and excess liability. And that's where our next guest, Steve Bartell, comes in. Steve, fleet exposures are a growing challenge in today's market. Let's unpack how to navigate excess liability in that space. What unique challenges do large construction fleets present when it comes to placing excess liability coverage? 

[00:15:14] Steve Bartell: Hi, Gia. Thanks for having me on. Quite frankly, the biggest challenge right now is capacity. Back in the 2015s, 2012s, things in those years, a lot of admitted standard markets would hand out 10 million of lead umbrella capacity like candy. And in 2020, things started to change and adjust. Those admitted carriers started to cut capacity to five, twos, or even none at all. And then when you have to come to the E&S marketplace, say if you need a 10 million umbrella access, you're talking in potentially two, three, four carriers to help fill out that line if you have a large construction fleet. So that's by far the biggest challenge outside of just pricing rate, increases things along those lines. 

[00:15:59] Gia Snape: How have recent market conditions and claims trends impacted pricing or availability in excess casualty? 

[00:16:06] Steve Bartell: Yeah, I mean, the pricing just as a whole, auto has been the driver lately. GL pricing, roughly flat, 3-5% increases. Work comp has been depressed. You're seeing a lot of competition on that side. But for most sides of things, auto driving it 15% increases, 20% increases, which will impact your access liability. Again, cutting capacity from a five down to a two or none at all. If you have, say, like a tough bridged instruction type exposure or other heavy GL exposures, you combine that with auto and you're going to have potentially three, four carriers that are your players, and then you're sort of beholden to their pricing. The cost of claims in general has gone up as we've seen that through the last few years. Claims used to take 12 months. Now they're taking 18 months, two years, three years, and it's costing more money, which is driving pricing. So that's all resulting in tougher conditions for excess liability placements. 

[00:17:04] Gia Snape: Definitely those market conditions you described, Steve, are all driving up underwriting scrutiny. What factors do you think most influence how carriers evaluate large fleet exposures? 

[00:17:18] Steve Bartell: Yeah, I mean, the losses have a large impact. The makeup of your fleet. Let's say you have 50 units and 35 of them are heavier, extra heavy classes. That's going to shrink your marketplace down to again, in fold up carriers that want to play in the lead. Maybe there's some more opportunity, excess of five, if you can get a standard market to pick up those exposures. But the makeup of the fleet, how many do you have? 130, 250, a thousand? Where does that sort of leave you? The radius of operations matters. If it's more of a local fleet, you're driving on rural roads, that's more favorably viewed. But if you're driving on the interstate highways, there's more opportunities for accidents, which is going to influence your carriers on who's willing to ride it and, of course, pricing that comes along with that. 

[00:18:07] Gia Snape: Given these challenging conditions, then how can contractors and fleet managers work proactively to reduce losses and strengthen the risk profile before renewal? 

[00:18:19] Steve Bartell: Sure. Yeah. Some things that they can control is having a high quality safety manual. What's that going to have in there? It's going to have your driver criteria. Are you checking MVRs of your drivers on a fairly regular basis? What's your vehicle maintenance plans? How often and who is checking all the safety features on your vehicles? Then there's, of course, telematics that's become a lot more popular in the last few years. So that's going to give you driver cameras facing the driver, facing outward. So you have some better evidence in the event that there is a claim. And then, of course, ensure being mindful if they have like a safer score or like a CAB report. A lot of times that there's driver turnover, vehicle maintenance issues, those all reflect on those cab reports, those CAB reports. So if you start to have a yellow or red, you're going to be viewed more frownly by the insurance marketplace. So you need to be mindful of those and address them properly. And then, of course, if you do have losses or multiple losses, what are you doing to rectify that? Are those drivers still driving? Did you let them go? Did you put them in a non-driving situation? So being proactive if there's a loss or even if there's not a loss, it's going to help you in the marketplace and find incapacity and carry your partners. 

[00:19:37] Gia Snape: Thanks, Steve. Now, to wrap things up, let's shift gears to large-scale construction projects and explore how wrap-up programs can bring all of these elements together. For that, we turn to Denis Brady. Denis, wrap-ups are a powerful tool in large construction risk management, but they can be complex to design and administer. Let's break down what brokers and clients should know. For those less familiar, can you briefly explain how wrap-up programs like OCIP and CCIP work? 

[00:20:09] Denis Brady: Wrap-up insurance policies are project-specific policies that provide coverage for most or all parties working on a construction project, including the owner, general contractor, and subcontractor. Prior to the wrap-up concept, each party, contractors, and subcontractors had to purchase their own separate policies, which could prove problematic, especially on large, complex projects. How they work is instead of each contractor carrying separate policies, one wrap-up policy covers all participants. Everyone on the job has the same coverage, terms, and limits, and the coverage applies for the life of the project and can include completed operations coverage after construction ends. So you don't have to worry about renewing policies year after year after year. There's two types, two basic types of policies. There's the OCIP or Owner Controlled Insurance Program. And in that case, the project owner purchases and manages the insurance. And the second is referred to as a CCIP, an acronym for Contractor Controlled Insurance Program, where the general contractor, construction manager, purchases and manages the insurance. 

[00:21:27] Gia Snape: What are the key advantages and potential pitfalls of implementing a wrap-up on a large construction project? 

[00:21:35] Denis Brady: One being cost savings. Instead of everyone purchasing their own primary policy and excess policy, you have one policy. A biggie is uniform coverage. All contractors share the same limits, terms, and conditions. And this minimizes gaps, overlaps, or disputes on who's covered for what. Uh if you have a bunch of subcontracts out there, and every one of them has different terms and conditions, it could lead to questions, issues, and concerns. If a problem does arise, a claim should arise. And, you know, probably the biggest is that the wrap-up can include post-construction coverage, which protects all parties, not only through the end of the project, but afterwards through the statute of limitations. So as I mentioned earlier, you don't have to worry about every contractor, every subcontractor involved in the project continually renewing their policies for two years to 10 years. As far as pitfalls, they can be pretty complex and an administrative nightmare. Most carriers require a wrap-up administrator, a third party, be part of this to make sure that every subcontractor is enrolled, that payroll tracking reporting requirements are adhered to, and that nothing slips through the cracks should something pop up. Another big pitfall or challenge is that these can be very expensive, and premium is pretty substantial, and most of it has to be paid up front. And in some cases, it's 100% earned. 

[00:23:11] Gia Snape: How should project owners or GCs determine whether a wrap-up is the right fit for their project? 

[00:23:17] Denis Brady: I would say the three biggest considerations are the size of the project. I mean, typically wraps are written on projects that are $50 million and up. They also have to take a look at the type of project and the complexity of it. An example, if it's a residential project with condos and townhomes, having 20 different subcontractors out there with all different terms and conditions could cause issues down the road. So in a project like that, you'd want to consider wrapping it. The number of subs involved, another consideration. And lastly, anything over a year should consider putting inside of a wrap. If it's an 18-month or two-year or three-year or four-year project, it should be considered to be put in a wrap. 

[00:24:10] Gia Snape: And what advice would you give brokers who are looking to navigate or propose a wrap-up solution for the first time? 

[00:24:17] Denis Brady: It's really critical that you work with a wholesaler that has experience in this and knows the marketplace. It's a small but complex marketplace, especially on the excess side. When you're building out towers of 50 million or 100 million, there's a lot of different players and the market is very fluid. And players that have wanted to take a lead position now want an excess position or players that want an excess position now want a lead position. Players that were putting up 10 or 15 or 25 million now only want to put up 10 and rates are constantly in play. So in addition to what I mentioned earlier about the administration of the program, you really need to be working with someone that's in the marketplace and has a relationship with the companies and knows what's going on. 

[00:25:09] Gia Snape: Today, we learned that success in construction depends on understanding your risks and building the right insurance partnerships. Thank you to all our guests, Sarah Daniel, John Heaner, Steve Bartell, and Denis Brady for sharing their expertise and helping us unpack the many layers of construction insurance. If you'd like to learn more about Burns & Wilcox or connect with today's experts, please visit burnsandwilcox.com. Thanks for listening to IB Talk. Don't forget to subscribe for more insights from leaders across the insurance industry. 

[00:25:45] Narrator: Thank you for tuning in to IB Talk. You can listen to the latest episodes on Apple, Spotify, Amazon, and all major listening channels. Just search for IB Talk.