Combine Safety and Construction Liability Insurance to Protect Your Business

Swans are beautiful and snow white. Except once in a blue moon-or once in a black swan.

Nassim Nicholas Taleb’s 2007 book, The Black Swan: The Impact of the Highly Improbable, laid out his ideas. He pointed out that nobody had ever seen anything but a white swan-until, one day, someone saw a black swan. The lesson is that no matter how many times you’ve seen a white swan in the past, it doesn’t mean you won’t see a black swan in the future.

The captain of the Titanic had never been involved in a shipwreck before and didn’t expect one as captain of the mightiest ship to ever sail the seas. Then, out of the blue, came the iceberg. No one was prepared for this black swan. Having enough lifeboats would have saved the 1,517 who perished.

And you probably believe, with some justification, that you’re not at all like the captain of the Titanic. You know what the major risks are, and you’ve taken sound measures to reduce your risk and get proper insurance.

But are you sure you’re protected against a black swan event-a catastrophe that could cripple or destroy your business?

When most people look at insurance and risk management, they tend to see the pennies instead of the dollars. They tend to look at the small, predictable events, and are blind to the chance that a black swan may cross their path.

In 2001, a salesperson working for a building supply wholesaler was talking on his cell phone. He ran a stop sign and plowed into a car, severely injuring a seventy-eight-year-old passenger. She sued the wholesaler, and the jury ultimately awarded her $21 million. No one would have predicted that even a big wholesaler would be hit with such an enormous award.

It can take just a moment of distraction to cause a catastrophe that can wipe out a company built and sustained for generations. Such a catastrophe can either leave a business with an uninsured loss or result in such exorbitant insurance premiums that it can’t effectively compete for business.

Why do businesses buy insurance? The mechanism of insurance is based on transferring a known amount of money (the premium) in return for protection from unknown and unpredictable future events. No one would buy insurance if they didn’t face the risk of uncertain and catastrophic loss.

However, many construction business owners dismiss the kinds of risks they haven’t experienced in the past. They understand the need for insurance but may have insufficient or no coverage in areas they view highly unlikely to produce a loss. They buy ample coverage for predictable losses like workers’ compensation and automobile collision, when it’s the unpredictable losses, the black swans, that can destroy a business.

What kinds of unpredictable losses should you be concerned about? There is a negligible but real chance that a meteorite could land on your building, and vaporize it and everyone in it. But since there’s never been a proven meteorite fatality in human history, you don’t need to stay up nights worrying about one.

Other black swans are not a negligible threat. Taleb contends that as the world gets bigger, with more people and activity, the odds of being hit by a black swan increase.

And it’s not all random occurrence. There’s a well-heeled group that’s out to create more black swans. They advertise in the phone book and on the sides of busses and overpasses and billboards. Their organization spends millions on lobbyists who fight against any legislation that would hurt their business.

As you’ve probably guessed, we’re talking about America’s plaintiff’s lawyers. They’re smart, creative and persistent. They’re the ones who have the skill to transform a serious (but not highly unusual) accident into a company-killing catastrophe. Personal injury is a big business, and it’s probably your greatest risk.

There are several steps you can take to reduce the chance of a black swan.
First, promote a zero-accident culture. It can be done. Owners of medium-sized construction companies might be astonished to find out that some of the larger, safer construction companies go millions of man-hours without a lost-time accident. Education, training and a culture of belief that all accidents can be prevented are what it takes.

Employee wellness is also crucial. Various studies are proving that there’s a very strong connection between an employee’s wellness and how prone he or she might be to injury and accident. Unfortunately, many construction workers don’t take good care of their bodies, and the toll can add up with age.

A zero-accident culture and employee wellness have a two-fold benefit. First, they reduce the number of ordinary accidents. A safety-aware company is far less likely to have a fire at a jobsite. A fit employee who uses proper lifting techniques is less likely to throw out his or her back.

Furthermore, the same steps that drastically reduce routine mishaps also reduce the chances of a black swan. A company that has a near-messianic belief in safety-from CEO to the guys lugging rebar-is less likely to get swept up in a black swan event, like a severe personal injury or death that results in a mega-verdict.

You can reduce but not eliminate the odds of a black swan, and that’s why you need to thoroughly analyze your insurance program. You may have coverage gaps that leave you unprotected in the event of a black swan.

Take the case of a construction company we analyzed. We found that it had fifteen different legal entities, which is not uncommon for a subcontractor, developer or a general contractor. This company was a combination of all three. Five of those legal entities were covered by the primary liability insurance policy, but not the excess liability policy, so their coverage stopped at $1 million. Another five were covered by the excess liability policy, but not by the primary liability policy, so they all had a $1 million deductible. Five weren’t covered by either one.

That was the worst case we’ve ever encountered, but many other construction companies have dangerous coverage gaps. For instance, two contractors started new jobs that brought them into the arena of railroads, which requires specific actions relative to liability insurance. Contractors who work near railroads must always accept a transfer of risk from upstream parties relative to that railroad work, and they need to modify their insurance accordingly. These were both large, sophisticated middle-market contractors, but they had no coverage relative to the risk they’d accepted on a railroad job. They could have been thrown off every single job they were on, but more important, they were exposed to an uninsured loss-a black swan-that would have been catastrophic.

Besides making sure your coverage is seamless, you need enough liability insurance. Many people think $5 million is adequate. It isn’t. Today most construction companies need at least $10 million of liability coverage.

By combining better safety, a zero-accident culture and industrial-strength seamless insurance coverage, you can be prepared if the black swan visits your doorstep.

Construction Business Owner, June 2010