Stretching Your Insurance Dollar, Part 1

If you gave more thought to buying your last pickup truck than you did to choosing your current business insurance policy, you’re not alone.

When it comes to materials, labor and tools of the trade, most builders are particular, seeking the highest quality possible within the limits of their budgets. That philosophy seldom extends to insurance, though, where the search often begins and ends with the least expensive policy available.

I realize you have allotted a set amount of money you’re willing to pay for insurance. And that’s fine, as long as you spend it wisely. Chances are you don’t need to spend more than you are already. In fact, you may even be able to enhance your protection for less than you’re paying now. It’s simply a matter of knowing what you’re buying, understanding what you really need and controlling the variables that influence your premiums.

Many builders purchase coverage for risks that they would do better to avoid. Some are taking jobs outside their normal scope of operations that have a disproportionate impact on their insurance costs. And some are paying too much for insurance simply because of the method in which they keep track of what work is being completed and by whom.

What’s more, a contractor’s insurance premiums may be impacted by incorrect experience modifiers, your so-called “mod.” When policies are purchased that use incorrect class codes, a normal level of losses may appear to be higher than average, resulting in inflated mods. And you’d be astonished by how simple clerical errors can dramatically affect a builder’s experience modification ratio.

In this first of two articles on stretching your insurance dollar, you’ll find tips regarding coverage selection. You’ll see how more isn’t necessarily better and how focus can really pay off. In part two, you’ll realize the importance of controlling losses and how a careful review of those losses can help you make cost-saving changes to your insurance program.

Rethinking What’s Required

When you purchase an insurance policy, you’re actually buying a package of coverages. Different parts of the policy protect against different potential events. However, depending on what you’re insuring, some of those coverages may not be necessary. And even if they are needed, it’s possible that you could be protected adequately with less coverage than you have typically purchased.

Making an effort to identify those areas where you are over-insured can trim your premiums and still leave you protected sufficiently. To begin, consider the following five areas:

Medical payments: If a non-employee is hurt at your worksite or traveling in one of your fleet vehicles, “med pay” coverage in your general liability and commercial auto insurance offers what essentially is a “goodwill” payment to the injured party. A couple of decades ago, most people would graciously accept a medical expense reimbursement and be on their way. In today’s lawsuit-happy society, though, people are less likely to forgive and forget, even if med pay works as intended.

One could reason that if you’re going to be sued anyway, what good is med pay? Cynical or not, it’s a fair question. But, even if you’re an optimist, it’s wise to consider your own loss experience and whether your potential med pay losses justify the cost of the coverage.

Uninsured motorist: If you’re driving your personal car and are injured in a crash with a motorist who is not insured, uninsured motorist (UM) coverage offers the financial protection that would have been provided by the other driver’s insurance company-if he’d been insured. It’s a worthwhile coverage in that scenario. But, for a business, UM might simply duplicate other coverages. Employees driving fleet vehicles, for example, already would be covered by workers’ compensation policies that offer unlimited medical benefits and supplemental income.

Physical damage: Depending on the age of a particular vehicle or the amount it’s been depreciated, insuring against physical damage (PhysDam) to your vehicles may not be critical. In fact, if there’s a loss, it’s possible that a claim payment could exceed the depreciated value of your vehicle, resulting in a taxable event. If you’re insuring a vehicle that literally isn’t worth insuring, it might be wise to drop the collision and comprehensive (other than collision) coverage.

Glass breakage: Ask yourself two questions:

• How often do you break windows in your vehicles?
• How much do they cost to replace?

Depending on your vehicle and the answer to the first query, you might decide this is a cost you could pay out of your own pocket. Many business owners don’t realize you can purchase comprehensive coverage without glass breakage-it’s called “fire, theft and combined additional coverages.” It’s an option that could lower your premium.

Umbrellas and limits: Business owners buy insurance for at least one of three reasons-it’s required by law; they’re contractually obligated; they simply like that warm, fuzzy feeling of being protected. In some instances, builders will buy the minimum coverage mandated. There are some, though, who raise their limits based on third-party advice or because of personal preference.

Often, higher limits are justified by the risk presented.  Still, it’s possible to go overboard. Does your risk or loss experience suggest that you really need more coverage than is required by law or contract? How much is your company likely to be sued for in a worst-case scenario? These are questions to discuss with your insurance advisor. When all is said and done, you might save money and still be covered adequately by lowering your policy limits.

Keep To Your Core

When underwriters evaluate the risk presented by your business, they will base your rates on the most hazardous work you do. This isn’t unusual in the world of insurance. If your hobby is flying experimental aircraft, for instance, you would notice that fewer life insurance companies would be willing to offer you coverage.You would also pay higher premiums. On a personal level, the difference in premiums probably wouldn’t cause you to give up flying. But for a business, an infrequent pursuit could have a huge impact on rates.

For instance, residential contractors have fewer companies willing to insure them, and those that do, may charge higher rates than commercial contractors. So, if you normally wire office buildings, but also do a few houses here and there, you would be underwritten as a residential contractor. By staying with commercial work exclusively, you could bring your insurance rates down.

Of course, consistency among your commercial jobs also is a factor. If you typically install windows in one- to two-story buildings, but sometimes tackle the occasional skyscraper, the riskier pursuit will drive your rates.

Also, be careful in how you market your company. If you build modest highway overpasses, but include a photo of the Golden Gate Bridge on your website, nobody would blame the underwriter for assuming that your jobs are more dangerous and complex than they actually are. At the very least, one could conclude that your aspiration is to build grander structures-an assumption that could make potential carriers unwilling to quote on your business.

Divide and Conquer

Construction is one of the few industries where workers’ salaries can be split among different categories for insurance rating purposes. For instance, a contractor can be a plumber in the morning and an electrician in the afternoon.  If that distinction is documented properly, it can save you money because the two jobs are classified differently. If it’s not recorded, the insurer will rate the work based on the higher classification.

Payroll is another area where accurate accounting can affect premiums. Underwriters determine workers’ comp premiums, for example, by the salaries paid to employees.  However, if you pay your employees higher than average salaries because of their special skills or experience, you may also be paying higher than average workers’ compensation premiums. In this case, you should check to see if a contractor classification adjustment program is available in your state. These programs may provide a credit that lowers your premium.

Overtime pay is another item with a potential impact on the amount you pay for workers’ comp coverage. The rates established for workers’ compensation are to be applied to the base wage paid to employees. If overtime or differential premium pay is offered to your employees, you will need to accurately track the different scales to be certain you are not over-reporting your employee’s pay.

If your company has separate divisions that charge expenses back to one another, it’s also critical to flag the internal charge-backs so that insurance rates reflect actual revenues. Otherwise, if you’ve “paid” another division for work performed and then collected money from a client for the same job, the revenues for the job could appear to be double what actually was earned. Thus, any coverage based on your business revenues would be inflated.

The best way to know if you’re paying more than necessary is to review documentation from your insurer’s audits at the end of the policy period. If you’re entitled to a large refund because your exposures were less than what was estimated when the policy was written, the remedy could be to change your estimates for the next year. You should also review your audit to be certain the correct exposures (payroll, sales, numbers of vehicles, etc.) were used and that the assigned classifications were correct. If you are confused by the classification names or need to determine if alternate classifications would be more appropriate, your agent or insurance auditor should be contacted.

Share the Risk

A final suggestion is to consider assuming “predictable” losses and use your insurance budget to protect you from unplanned and potentially catastrophic events.

Lost hammers, crushed cell phones and dented fenders are unfortunate. But, if you’re paying to insure such minor events, your insurer will charge you for those losses-plus the cost of issuing the policy, settling claims and assuming the risk that your losses might be more than expected. Ultimately, you probably could save money by raising your deductibles, ignoring the dents and paying for small tool and equipment losses out of your own pocket.

Construction Business Owner, July 2006