Managing Insurance Costs in Today's Marketplace

Editor's Note: This is part one of a two-part article. To read part two, click here .

The construction industry has come to recognize the relationship between managing risk and return on investment.

Now considered a serious profit initiative, risk management in today's insurance market requires beyond-the-edge thinking if a contractor is to maintain a competitive advantage. The risk management technologies outlined here offer contractors the means to generate additional earnings while leveling out losses.

It is apparent that lean and fit organi­zations represent a platform for long-term survival. Yet, many contractors have also recognized the importance of imagination, vision, and competitive information if they are to succeed in a competitive market. In this respect, risk management has emerged as an additional source of creativity and vision that is enhancing the competitive edge of many contrac­tors despite the softness of the construc­tion insurance market. At last, managing risk has been transformed from a once-a-year insurance bidding frenzy with the local agent into a serious profit initiative, having the ability to boost returns, create equity, reduce costs and permanently change the way con­struction firms are managed.

This shift of recognizing and managing risk has occurred due to the construction industry's enlightened perspective on "risk" and its integration with the overall cost to fund losses. This cost is no longer viewed as an expense item but as an opportunity to make a reasonable return on risk dollars that are currently being consumed to protect and preserve the assets of the construction firm.

The risk management technology available today has long passed the traditional insurance policy buyer in favor of sophisticated construction firms that are astute enough to put each and every risk dollar to work for the compa­ny, generating additional earnings while leveling out the losses on bad projects. The following represents a few risk management technologies that need to be reinforced in a contractor's business.

Contract Documents

Allocating risk on construction projects continues to be an often-over­looked area in analyzing risk profiles for contractors. The effective use of hold harmless and indemnification agreements can reduce, and oftentimes manage, specific types of losses (par­ticularly "action-over" lawsuits) that would have been otherwise absorbed into the contractor's operations or insurance program. The following list provides some ideas for capitalizing on this technology:

1. A standard subcontract document and purchase order should be re­viewed for enforceability and insur­ability; this document should also be updated, when necessary, to incorpo­rate recent case law on indemnifica­tion wording. Traditionally, indemni­fication agreements have been classified into three types: Broad Form, Intermediate Form and Limited Form. Whatever form is chosen, this agreement should serve as the basis for distributing risk within projects.
2. This standard subcontract/purchase order should contain specific lan­guage with respect to types of poli­cies/coverages required, minimum limits of liability and endorsements that protect the interest of the con­struction entity seeking indemnity. For example:
   

• Additional Insured -adding the name of the general contractor to a subcontractor's general liability policy as an additional insured. Due to the new forms from ISO, this is becoming a more difficult issue with regard to completed operations, residential restrictions and indemnity agreements.
• Insurance Considered Primary -the liability program of the subcontractor or sub­-subcontractor shall be considered primary in the event of a loss.
• Cancellation Notice -usually as much as 60 days for cancella­tion and/or non-renewal is desired.
• Waiver of Subrogation -to avoid subrogation proceedings on losses by the subcontractor's insurer. It must be noted that these recom­mendations apply to all contractors.