The construction industry is facing tough times as land remains undeveloped and unfinished buildings and homes dot the national landscape. The excess and surplus lines market, which has been home to the construction contracting industry for many years, has recently seen an exodus of business back to the standard market as carriers strive for more rate-adequate risks.

This year, both the standard and surplus lines sides of the industry will devour what little is left of the policyholder's rate adequacy by reducing contractor premiums. In addition, homeowners are realizing that it's more cost effective to remodel or refurbish than it is to build new, particularly with the current economy. Most general contractors are adjusting by shifting their primary business function to remodeling, rehabilitation and HVAC contracting.

The current challenge for both agents and contractors is how to turn this business shift into new opportunities. With a multitude of coverages available, most contractors focus only on the minimum insurance requirements needed to conduct business. This is the time for contractors to go beyond the basic insurance requirements and broaden their coverage--in most cases, without significantly increasing their premiums. As the insured's representative, it's the agent's responsibility to promote the "nice-to-have" coverages that were previously an afterthought due to the high premiums.

Workers' compensation and general liability

 

The biggest premium expenses for contractors are usually workers' compensation and general liability. Because workers' comp costs and coverage are often entirely determined entirely by state regulators, contractors can only hope that the state they are working in will see rate relief rather than rate increases. However, some carriers still have rate flexibility and can reward the best contractors with additional credits or preferred tiered rates as a way to lower pricing against the competition. Shrewd agents who want to increase their workers' compensation writings should seek out carriers with the lowest rates for the types of contractors they most often write. This gives the agent a lead in competing for business in this softening market. Using carriers with fast and efficient claims handling also will keep down claim and premium costs for the contractors they represent.

General liability, which is far less regulated than workers' comp, is an area where contractors are seeing reduced insurance rates and the potential for expanded coverages. For example, agents can offer their contractor clients more legal liability coverage to protect them if they are pulled into legitimate or frivolous lawsuits--an exposure that increases as economic times worsen.

Some carriers report seeing deeper rate cuts in the general liability lines than the industry has seen in years. Broadening coverages that were once all but impossible to get are now appearing on proposals with increased regularity. Some of these include blanketed coverage for additional insureds with primary and non-contributory language required and blanketed waivers of subrogation where required by contract. Not only are insurers offering these coverages, but it's questionable as to whether they are calculating any corresponding premium charge for them.

Insurers are also offering per-project aggregates for very little additional premium. These are significant enhancements for contractors instead of the usual window-dressing throw-ins the industry occasionally offers. These coverages are important to the contractor who is competing against other contractors for work that is bid out. Having these enhancements makes contractors appear more desirable to the project owners who do the hiring.

Auto

 

Like workers' comp, auto liability coverage is often heavily regulated, leaving less room for carriers to offer meaningful enhancements. However, auto physical damage covering loss to the vehicles themselves is not as regulated and is an area where carriers can squeeze out lower premium levels for agents and their insureds. There are now signs that auto physical damage rates are coming down in many areas of the country. This spells good news for contractors, some of whom have significant fleet sizes, where even a 10 percent rate cut can translate into thousands of dollars. Lower deductibles with no cost increase are one way to lower overall cost for contractors. When talking with contractors, agents should be sure to discuss the contractor's fleet size.

Inland marine

 

While not necessarily representing the lion's share of premium costs for most contractors, inland marine coverages and costs can be significant. Contractors equipment, installation floaters and transit coverage are just some of the typical types of insurance a contractor may need. These coverages are some of the least regulated and give carriers far more latitude to offer lower rates and deductibles.

On a large equipment schedule, even a 10 percent rate cut may yield large premium cuts in the contractor's policy. Take as an example a $2 million equipment schedule that was charged a rate of $2.50 per $100 last year. This year, the rate is reduced by 10 percent to $2.25; the contractor's premium is reduced for the same policy by $5,000, allowing the contractor to redirect the savings to projects that will benefit the contractor's overall business operations.

Installation floaters can be a large part of the contractor's insurance portfolio and another area where soft market pricing benefits the owner. A $0.50 rate cut on a contractor's renewal that does $10 million in annual gross sales will save the contractor $5,000.

Owners and contractors protective liability (OCP)

 

This often misunderstood and underutilized coverage provides the project owner (i.e., the homeowner) with unencumbered limits of coverage. In simplified terms, the contractor purchases OCP on behalf of the project owner, who is protected from any third-party claims arising from the work the contractor is doing. Project owners still have peripheral liability because they are responsible for hiring the contractor. Contractors that can provide OCP coverage to the project owner set themselves apart from the competition. It's important that contractors understand this need and can explain it to their homeowner client. If not, the agent should discuss it with the homeowner on the client's behalf.

Managing the MGA relationship

 

Agents should work with highly qualified and professional wholesale brokers and managing general agents. A good MGA and wholesaler can bring agents more markets they may not be able to assemble independently. A qualified MGA and wholesaler can also provide more capacity and options for their clients and assist in placing special contract classes and special contractor coverage such as OCP.

With the right MGA, agents can offer their clients more coverage options than if they worked within the confines of their existing appointed markets. Indeed, most carriers are very particular about the types of contracting risks they will entertain and pursue, and having more options will better serve both the agent and the contractor.

Another advantage of working with an MGA is the capacity they bring to agents for clients who must have more liability limits. This is particularly important for higher-limit umbrella coverage required by the project owner or construction manager.

Situations where extra coverage would be required include major commercial construction projects and contractors working on large residential home building projects. The wholesaler and MGA command many markets that can layer limits as high as a client needs, and this requirement is usually well beyond what local markets can offer agents.

Although this will no doubt be a challenging year for contractors, it is reassuring for them to know that agents can work with them as the insurance industry continues to ride out this soft market. Contractors who buy insurance in large sums should enjoy the rate relief and coverage enhancements while they last.

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