Construction companies constantly seek insurance solutions that can provide material financial impact, limit their contractual exposures and provide coverage enhancements. The following are four strategic solutions which can provide substantial financial protection for construction companies.
Experience Modification Review
Workers' compensation experience modification rates (EMR) are complex formulas, but understanding how they are calculated can go a long way in helping a company keep workers' compensation (WC) costs in check. By performing the same evaluation of the experience modifier as a regulator, your insurance broker can determine calculation accuracy and forecast future financial impact on a premium. Inaccurate EMR calculations are typically the result of errors in payroll amounts, improperly recorded WC job classifications, incorrect claim reserves and open claims that should be closed. For example, a mechanical contractor was having difficulty qualifying for new projects because of a 1.16 EMR. Many of the company's payrolls that were incurred under wrap-up programs had not been reported to the National Council on Compensation Insurance (NCCI). The contractor's open claims were excessive and needed to be negotiated down with the carrier. The correct payrolls and claims were reported to the NCCI, which resulted in the EMR being reduced to .94. This enabled the firm to bid on and win several contracts worth more than $15 million. The contractor realized a premium savings of $264,000 over a three-year period.
Social Engineering Exposures
Social engineering techniques are increasingly used to induce employees to break normal security procedures, leading to a rise in cybersecurity incidents and resulting financial exposures. According to a recent cyber-risk survey, 48 percent of large companies and 32 percent of companies of all sizes have experienced 25 or more social engineering attacks in the past two years. Thirty percent of all victims of social engineering cite an average per incident cost of more than $100,000. It is important to look for a solution that offers a wide range of coverage enhancements to fit the challenges of a construction business.
When a laptop belonging to an executive of a West Coast-based company was stolen, management feared criminals would gain access to sensitive customer data. The potential breach required that roughly 18,000 customers spread across 22 states be notified and have their credit monitored. The business was able to immediately notify affected customers and provide credit monitoring for a year. Because the insurance program had been designed for and was flexible to the evolving nature of cyberthreats, the firm did not sustain any significant income loss.
Alignment of Policy Coverage to Contractual Exposures
In the construction world, liabilities are often transferred contractually. Typically, the contracts require the company that assumes liability to provide specific insurance coverage and limits. As such, a contract and policy coverage review is a critical part in ensuring that the contractor's insurance program's terms and conditions meet their contractual obligations. Contractual compliance risks can create large losses, so be sure to work with an insurance brokerage firm that has proven experience in the construction industry to ensure the contractual obligations and coverage expectations measure up. Additionally, they should be able to negotiate additional insured endorsements with the broadest language possible and the applicable additional insured endorsements in order to meet contractual requirements. There are 36 ISO additional insured endorsements currently in the market. Properly aligning the policy coverage to contractual exposures helps prevent breach of contract issues.
Completed Operations Coverage
Businesses are often contractually required to indemnify owners and/or general contractors during and after construction operations. However, many general liability policies limit coverage for general contractors and subcontractors to the ongoing construction period. Failure to provide coverage for the contractual obligation could put the contractor in breach of contract or cause them to be uninsured for the assumption of liability in the contract. It is important to negotiate separate additional insured endorsements to cover completed operations protect against liability post-project completion, as well as amend the definition of occurrence wording to include construction defect.
It is also important to review contracts to ensure that liabilities assumed are appropriately addressed. Work with a broker that is able to acquire the appropriate endorsements. For example, a plumbing contractor needed to obtain coverage for a claim that was tendered five years after the project's completion. The claim involved a hot water pipe that broke and burned a tenant in the building. The tenant sued the building owner, who sought coverage under the plumber's general liability policy. The plumber had been contractually required to provide this coverage to the owner. Fortunately, the policy was structured to provide completed operations coverage, so the plumber was not exposed to any damages resulting from the lawsuit.
These four solutions should be considered when evaluating potential insurance programs. When designed properly, they can provide significant financial protection and protect a company's bottom line.