An agency that's custom-built for contractors

CONSTRUCTION is one of the most common, yet most specialized, niches available to independent agents and brokers. Contractors are everywhere and are always a major part of the local economy. Yet they also have highly unusual coverage and service needs that “generalist” agencies usually are unable to meet.

At Vanner Insurance Agency, we've customized our approach to business to serve such accounts. This year, we will produce about $40 million in annualized insurance and surety bond premiums, and half of that business will come from our 150 to 200 contractor accounts. In this article, we will share some of our procedures for doing business in this niche.

Prospecting and marketing

We work with contractors and subcontractors of every description, from large general contractors and highway contractors to those that specialize in such trades as electrical or plumbing work. We do business primarily in western New York but also function as an MGA for a statewide construction program, which is administered by Compensation Risk Managers, LLC. , a program administrator out of Poughkeepsie, NY.

We prospect for new business mainly by following up on referrals from existing clients. When we're introduced to prospects via referrals from their peers, we usually gain immediate credibility. We also are active in numerous construction-oriented associations, including The Construction Exchange of Western New York, and state and local chapters of such organizations as The Construction Financial Management Association, Associated General Contractors, Associated Building Contractors, and The Society for Protective Coatings (which represents bridge painters and related contractors). We're also charter members of a grass-roots campaign in western New York to reform labor laws.

We advertise regularly in a local business newspaper, and about 30% of this advertising is targeted to contractors. All the aforementioned organizations have publications in which we advertise or to which we contribute articles. The groups also hold annual or semiannual events that we help sponsor.

Among other ways we prospect are by monitoring construction projects in the F.W. Dodge Reports and similar publications. We attend local bid lettings, where we may have an opportunity to introduce ourselves to contractors. We also learn of prospects by monitoring the results of bid lettings by such governmental organizations as the New York State Thruway Authority and the New York State Department of Transportation.

We “network” for prospects via interaction with local lawyers, accountants and bankers who also work with contractors. The local chapter of the Construction Financial Management Association is particularly useful for this purpose. The chapter's members include attorneys, controllers of large construction companies and CPAs who specialize in construction accounting. The group is a good source of prospects for contract surety bonds in particular.

We have a separate surety bond department, staffed with seven people. Arranging for bid, performance and payment bonds is an entire discipline unto itself and in many ways more like banking and the extension of credit than insurance. Our surety department works hand-in-glove with our insurance producers, however. Sometimes, creating a bonding program for a contractor enables us to eventually write insurance for it too–or vice versa.

Qualifying prospects

We qualify prospects both before and after meeting them. One thing we look for is evidence that a contractor will regard us as a valued adviser, not merely as a vendor. Therefore we are not interested in bidding for accounts or working with a contractor who has changed brokers five years in a row, simply for price. A contractor's reputation in the local community also is important. To check on it, we talk to local construction attorneys, bankers, suppliers, etc., as well as to our clients.

While we look for a track record of profitability, we're not afraid to engage a “distressed” case. For instance, we worked with several contractors in the past year whose banking relationships were strained because of problems that were no fault of their own. After we helped fix the problems and introduced the contractors to new banks, we had perfectly acceptable bonding candidates.

For example, a subcontractor might run into a cash-flow problem because the general contractor fails to pay it on a timely basis. If the subcontractor is then unable to pay dues and fringe benefits for its unionized workers, the unions may withdraw the subcontractor's labor, worsening the subcontractor's cash-flow problem and starting a downward spiral. In such a case, we would attempt to arrange for more timely payment from the general contractor. If the project were bonded, we might pursue a bond claim against the general contractor on the subcontractor's behalf. Typically, construction contracts call for a subcontractor to be paid as soon as a general contractor is paid. If the subcontractor isn't, we can make a claim against the general contractor's payment bond, which guarantees to the owner that all suppliers and subcontractors on a job will be paid and therefore not file liens or otherwise seek payment from the owner.

The first thing we do when we are given an opportunity to work with a qualified prospect is determine exactly what the construction company does and how it does it. We also look for a “point of pain,” an insurance or risk management problem that we can solve for the contractor. We don't necessarily expect to write the entire account at once. If we can “relieve the pain” by providing a particular line of coverage, that's how we start the relationship.

Before determining how a contractor should be insured, we consider how the business currently is covered. One error we often find is that a contractor has been given the wrong general liability or workers compensation classification code(s). The keys to detecting and correcting such errors are to determine what the contractor does on a daily basis and to dissect the payrolls.

For instance, a client we obtained last year had been classified under ISO's Commercial Lines Manual as purely a street and road contractor. The bulk of the contractor's work, however, was being performed on an airport runway construction project. We were able to persuade the general liability insurer to change the classification accordingly. From an exposure standpoint, that contractor was not putting people and machinery out on a highway, where they would be exposed to high-speed traffic. Rather, the contractor worked in a secluded area of an enclosed runway. By arranging for the proper classification, we were able to reduce the base rate of the contractor's general liability insurance by 30%.

Addressing coverage needs

Contractors have many of the same coverage needs as other business, including general and umbrella liability, workers compensation and commercial auto. But many also have needs for specialized coverages. Among those we address are the following.

Professional liability: Larger contractors in particular may engage in design/build work or otherwise have a professional liability exposure. One way we check for this risk is by asking whether a contractor has any licensed professionals–typically architects or engineers–on staff. For such contractors, we certainly recommend contractors professional liability policies. (Any employed professionals, of course, must have their own professional liability coverage.)

Pollution insurance: We recommend pollution coverage on every proposal that goes out of this office. The form that recommended coverage takes varies by contractor. Customized programs, some including professional liability, are available for contractors that specialize in environmental remediation, removal of underground storage tanks or similar work. Products also are available for contractors who are more concerned about unanticipated pollution problems encountered on a job.

First-party insurance: Contractors buy a lot of third-party coverage to make other people happy, but they sometimes neglect to properly cover their own buildings and equipment. Coverage also may not be in place for leased or rented equipment, which can lead to a significant loss if a major piece of such equipment is damaged or stolen. Builders risk insurance is another overlooked first-party product. We've encountered contractors working on multimillion projects who thought the owners were insuring the projects during the course of construction, while the owners assumed the contractors were–and the contracts governing the projects were silent on the point.

Working with markets

When placing coverage for contractors, our job is to deliver comprehensive information to underwriters. We present the clients' strengths and also point out any weaknesses, as well as any plans we and the contractors have for correcting them. In addition to applications, we give underwriters complete narratives that include a detailed history of the business, the type of work they take on and backgrounds of the principals. We give underwriters five to seven years' worth of loss runs, as well as an analysis of those losses. For any large claims, we provide an explanation of how they occurred and what remedial action the contractor has taken to prevent recurrences. We also give underwriters copies of a contractor's subcontractor agreements and any other contract forms they use.

More than half of the carriers insuring contractors “pre-engineer” accounts before offering them quotes. They send out people to interview a construction company's ownership and management group. They also visit job sites, examine safety manuals and conduct a diligent review of financial statements. If a carrier detects signs of financial distress, it may well question a contractor's willingness or ability to invest in loss control. We inform our clients of these visits in advance, explain their importance and help them prepare for them.

Service that sells

An agency that caters to contractors must be prepared to provide an array of services. We provide 24-hour turnaround on anything a contractor might need, whether a certificate of insurance, a coverage or a bid bond. If a request comes in during the morning, it's usually fulfilled by the end of the day, unless there is a delay or problem that is beyond our control.

Contractual risk transfer is a key risk-management technique for contractors, particularly in their relationships with subcontractors. The objective is to ensure that the subcon- tractors will indemnify the contractors for any losses arising from the subcontractors' negligence. To that end, contractors obtain hold-harmless agreements from subcontractors as well as copies of endorsements giving them additional-insured status on subcontractors' liability insurance policies. We review these documents for our clients, as well as the subcontractors' certificates of insurance, which back them up.

In reviewing contractors' certificates and associated monitoring procedures, we almost always find errors. Some contractors fail to get certificates in the first place or to ensure they are updated. Sometimes contractors fail to recognize that a carrier listed on a certificate is not rated highly enough to meet the contractors' guidelines. They may overlook the fact that certain limits are not as high as requested–or even that certain coverages are absent. After pointing out such problems, we urge our clients to diligently monitor their certificates. You never know when something overlooked on a certificate will come back to haunt you. We also perform contract review services for our clients, while always advising them to also consult with their attorneys.

We review clients' workers compensation classifications and payrolls to ensure that experience modification factors are calculated accurately. Using specialized software, we also can project experience mods far in advance of those published by the New York State Workers Compensation Board. For contractors bidding on multiyear jobs, we can help them determine how their likely payrolls and classifications will affect their workers compensation costs for such projects.

In regard to loss-control services, we regard ourselves as facilitators. We don't have a loss-control department, per se. But we can either provide clients with loss-control services via their carriers or recommend outside sources. For example, we may advise a contractor with significant pollution exposures to contact Great Lakes Environmental, a firm that can provide comprehensive risk-mitigation services in the environmental field.

Contracting companies that have more than $20 million in annual sales generally have an individual responsible for safety. For smaller contractors that cannot afford to fund such a position, we offer help in a variety of ways. The contractors generally are quite open to our suggestions, realizing that anything we can do to help them reduce accidents is going to save them money at renewal. We've helped such contractors create programs aimed at preventing injuries from falls, trench collapses and other hazards. We've also arranged “tool box talks,” to instruct workers on safety procedures. For contractors that have a significant commercial auto exposure, we may obtain MVRs every six months to identify vehicle operators with problematic driving records.

We've helped contractors implement any number of safety incentive programs, using a variety of “carrots” and “sticks.” A worker cited for the third time for not wearing a hard hat on a job site could be subject to termination. On the other hand, an accident-free month might be rewarded with free hockey tickets, gift certificates or a pool of money to split among laborers. The incentives depend on what a contractor is willing to contribute. For large contractors or projects, we also have arranged to have carriers contribute prizes for loss-free performance.

A whole other world

This article has touched on only a few of the myriad issues in this niche. Contractors work in a “parallel universe” inhabited by lawyers, bankers, insurance companies, accountants, sureties, loss-control specialists and others who are familiar with this dimension's unique rules, customs, hazards and risk-management techniques. Agents and brokers entering this world must be prepared to thoroughly understand it too.

Thomas Vanner, William Quinn and Brad Hall are vice presidents of Vanner Insurance Agency, which was started in 1967 by Mr. Vanner's father. Tom Vanner joined the agency in 1990. About half of his production comes from selling insurance to contractors. Bill Quinn entered the insurance business in 1989 with a regional broker. He joined Vanner Insurance Agency as a partner in 2004. He works exclusively with contractor accounts. Brad Hall worked for the accounting firm Touche Ross & Co. (now Deloitte & Touche) for three years after graduating from college. He joined Vanner Insurance Agency in1988 as a bond consultant and became manager of the agency's bond department in 1992.