Seven Deadly Sins That
Cost Contractors Big Money
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7
DEADLY SINS TO AVOID WHEN BUYING GENERAL LIABILITY
COVERS CHOOSING A BROKER, OCCURENCE VS. CLAIMS
MADE POLICIES, INSURANCE CO. RATINGS, EXCLUSIONS,
CERTIFICATES, HIRING SUBCONTRACTORS, AND ADMITTED
VS. NON-ADMITTED COMPANIES.
" ...and
how you as a contractor can finally get the peace
of mind you deserve."
This
report was put together at the request of my clients.
I have been talking about the 7 Deadly Sins for
years. 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
just to the next 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
Deadly Sins...
#1:
CHOOSING THE WRONG AGENT OR BROKER
As strange as this may seem, your
biggest problem might be your current insurance
agent or broker. Not that he is not trying to do
a good job, but if he does not handle Construction
insurance on a day to day basis, he is out of touch
with a marketplace that is changing day to day.
Keeping up with the Construction Industry is a
full time job.
If your broker is not Independent
he may not have the tools Available to do a good
job. Non Independent
agents must represent one company only. He may
not represent the best company for your business.
#2: OCCURRENCE
VS. CLAIMS MADE
Violating this sin can wipe out your entire life's
savings!
Construction claims made policies became popular
in the mid 1980s and have been around ever
since. The promise of these policies were lower
rates, but at what long-term damage? In some instances
there is 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!
If you want to leave that company and go to another
company you will have to purchase additional insurance
to cover you for the next 10 years
thats
right 10 years! Why? Because the law allows customers
to file a lawsuit for construction problems up
to 10 years after the project was completed.
An example:
You build a new room addition, everything goes well and you and your customer
are very happy with the final outcome
4 years later your customer
calls you and says that the roof is leaking and water came in the house
and ruined his new $25,000 grand piano. He expects you to repair the
roof, the drywall, wallpaper, carpets and, of course, replace the grand
piano
A claims- made will not allow you to file a claim
4 years later unless you stayed with the same company
the whole time. If you intend to shop other companies
after the claims made policy expires you must make
a decision, since you cannot make a claim against
a claims made policy after the policy expires unless
you buy extended liability coverage called a "tail." The
tail coverage extends the period of time you can
report a claim.
If you decide not to buy the "tail" you
will not be able to report a claim against the
claims made policy. ? And to make matters worse,
some companies do not offer the 10-year extension.
When your policy comes up for renewal with a claims-
made policy you must decide.
- Do I leave the company and pay the
additonal insurance for coverage for the
next 10 year period or go without?
- Do I stay with the same company?
Their prices on the new year may stay the
same or go up sharply.
- Do I switch to another company who
has better rates and coverages?
This limits the marketplace for you, and makes
it harder to accept a better bid from another carrier.
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 for 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 think about the grades you received
in high school or college: A,B,C... Insurance
companies
are given a financial report card by the A.M. Best Company.
An Insurance company with less than an "A" rating
can be a potential problem for two reasons, 1.
There is a risk of the company going out of business
and 2. If you work for the state, county or city,
they will usually not accept any company less than
an "A" rating. Also if you hire on as
a subcontractor most general contractors will not
accept any rating less than an "A". 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 feel free to
call my office at any time, we will be glad to
look it up for you.
#4: EXCLUSIONS
"Insurance
companies give it to you in the big print,
and take it away in the small print."
First off lets get one thing clear
.. All
policies have exclusions. You hear terms
like all risk, special form, comprehensive,
full coverage. Those phrases do not
mean there are no exclusions. In a contractors
general liability policy all the exclusions are
listed on the (Dec) front page of the policy
or on the 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. People make mistakes!
The exclusions are critical, When you get a proposal
for insurance the first thing you should look at
are the exclusions. For instance, if you
are a concrete contractor and you do house pads,
if you have an exclusion for foundation work in
your policy you have a problem. The worse thing
is you will not find out about your problem until
you have a claim and it is denied, by then its
to late.
Here is a list of 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. This exclusion
could be nasty.
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. If
you use subs, this exclusion can be a
killer.
ASBESTOS
No coverage for exposures to asbestos,
asbestos fiber, or any material containing asbestos
or
asbestos products, including without limitation,
the costs of asbestos removal or damage in the
course of effecting such removal (Very common
exclusion).
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
your 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. For example, if you
make a structural change without the architect's
approval, there is no coverage. (Typical
exclusion)
CONSTRUCTION MANAGEMENT ERRORS
* See Professional
Liability
CONTRACTORS WARRANTY
This means that if you hire
subcontractors, you must get a certificate of
insurance from
them. If you do not, the amount of your contract
with the sub will be added to your payroll or
gross receipts and you will be charged. In other
words you will pay for the subs general liability.
Some companies use a stricter version of this.
They require the sub to have the same limits
of insurance as you do.
FORMALDEHYDE
Claims arising directly or indirectly
out of formaldehyde whether or not the formaldehyde
is airborne as a fiber or particle, contained
in a product, carried or transmitted on clothing
contained in or a part of: any building, building
material, insulation product or any component
part of any building.
X.C.U.
Explosion, collapse, and underground property
damage. Not a good exclusion for Grading, Excavation,
Sewer, Plumbing, Septic, and Fencing contractors
just to name a few.
CLAIMS IN PROGRESS
* See Prior Claims
KNOWN LOSSES
* See Prior Claims
ROOFING
Some roofing exclusions are plain and
simple. NO ROOFING. Some are not as strict. You
must
read the exclusion care-fully. Some roofing exclusions
say there is no coverage while the roof is under
construction or repair. For example: You tore
off a roof, and since the weather forecast called
for sunny skies, you decided there was no need
to cover the roof overnight. It rained. There
is no coverage. Read all exclusions carefully.
DEMOLITION
Plain and simple. No demolition!
SUBSIDENCE
Insurance does not apply to any liability
arising out of landslide, mud flow, earth sinking,
earth
rising or earth shifting.
LEAD
Claims arising out of the actual or alleged
presence or actual, alleged or threatened dispersal
of lead, lead particles or products containing
lead.
EARTH MOVEMENT
* See subsidence
MULTI UNIT RESIDENTIAL
Any work in connection
with the pre-construction, construction, post-construction,
reconstruction,
exterior remodeling or repairs of any multi-unit
residential building.
TOWN HOUSES
No town houses
EMPLOYMENT RELATED PRACTICES
Refusal to employ,
wrongful termination, coercion, demotion, evaluation,
reassignment, discipline,
defamation, harassment, humiliation, discrimination
or other employment-related practices, policies,
acts or omissions.
PRIOR CLAIMS
Claims that are in progress prior
to the commencement of this policy.
PESTICIDE, HERBICIDE AND FUNGICIDE EXCLUSION
Not
a good idea if you are a landscape contractor.
PRIOR ACTS
This is a very severe exclusion. This
says that any work you did prior to the policy
date is
not covered. For contractors this can be a death
sentence on all prior work. 90% of all contractor
claims occur after the work was completed.
EXTERIOR INSULATION AND FINISH SYSTEM
Exterior
insulation and finish system means the design,
manufacture, construction, fabrication,
preparation, installation, application, maintenance
or repair, including re-modeling, service, correction,
or replacement, of an exterior insulation and
finish system (commonly referred to as synthetic
stucco) or any part thereof, or any substantially
similar system or any part, including the application
or use of conditioners, primers, accessories,
flashing, coatings, caulking or sealants in connection
with such a system when performed by you.
POOL POP UP
The elevation of swimming pool due
to high water table.
FOUNDATION WORK
Claims arising our of foundation
work, including but not limited to the design,
specification,
inspection, construction, installation, repair,
replacement, improvement or reinforcement of
any foundation or any part of a foundation. Foundation
means the entire substructure below the first
floor or frame of a building, including but not
limited to any footings, footing beams, piers,
grade beams, pilings, pilings or supports upon
which the building rests.
If one of these exclusions, or
other exclusions in your policy are a problem for
you, one of three things happened.
- You did not tell your broker
that you do this kind of work.
- You did tell your broker and
he was not listening.
- Your broker does not have enough
knowledge about construction insurance.
#5: ACCEPTANCE
We touched upon this a little
when speaking of company ratings, but there are
many reasons why governments, general contractors
and more and more,
smart homeowners who will not accept just any certificate of insurance.
Certificates of
Insurance are not being accepted for
the following:
Additional
Insured Endorsement ( CG2018 11/85 )
when is an additional insured endorsement
not an Additional Insured Endorsement?
There are many kinds of Endorsements
with different language. The CG 2010
11/85 has become the Additional Insured
Endorsement of choice. Many general
contractors and others will not accept
any other certificate. You must be very
careful here, most companies now charge
for these certificates anywhere from
$100 - $1,000 each. If the costs of these
new certificates are not in your bid
youre losing money.
Primary
Endorsements along with the above
Additional Insured Endorsement, many
people are asking for primary endorsements,
99% of all insurance companies have an
additional charge for these as well,
mostly from $250- $1,000 each.
Waiver
of Subrogation Another endorsement
that has become popular. This is seen
more in Workers Comp but does come up
in General Liability. There is an additional
charge for this endorsement.
#6: SUBCONTRACTORS
This one is potentially a killer.
I have seen dozens of companies
go out of business on this subject alone
within the past 10 years. Its usually
your best friend or someone you were just
trying to help out. 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.
What happens if your sub does not carry
general liability? The problem arises when
your general liability company comes and
audits your books at the end of the year.
If you do not have a Certificate of Insurance
for the sub your general liability company
will add it to your payroll and You will
end up paying the general liability for
the sub contractor who did not buy it.
I can hear you now
Its
not fair
. fair or not,
its in the insurance contract.
Lets look at the insurance companys
side on this subject. If there is a problem
on the job, whom is the customer going
to sue? He is going to sue the subcontractor and the General Contractor. The insurance
company has no recourse against the subcontractor
and must defend the entire lawsuit, while
the subcontractor walks away. Now, I
do not expect you to have sympathy for
an insurance company, but, now you know
how it works. Now you know why
I call it the KILLER that poses
as a best friend. You feel sorry for
them And you pay the price.
#7: ADMITTED
VS. NON-ADMITTED COMPANIES
Admitted Companies are
companies that are licensed in the YOUR
State.
Each state sets aside a
pool of money. Everyone who buys
General Liability insurance in your state
is charged a percentage of his or her insurance
premiums to go into the pool. This pool of money is set aside to handle claims
by people in your State whose Insurance Company cannot pay their claims.
The pool will pay claims if there are no other companies to pay claims. If
there are other companies to pick up the claim, The pool will not share
in the claim.
Non-admitted companies do not contribute
to Your State pool.
If a Non-Admitted company
goes out of business, you have no recourse.
Non-admitted
companies are not
necessarily a bad deal. They fill
a gap in every state and provide
competition for the contractor
business. However
if you use a non-admitted company with a bad rating you might be asking
for trouble. The Department of Insurance in each state determines
that certain types of insurance are not
available from admitted insurers and has
placed these types of insurance on a list. |