Are You Underinsured?

Sept. 1, 1999

Our insurance agency specializes in high-severity-exposure contractors; where risk is not in the potential frequency of claims, it’s in the potential size of claims. Grading and excavating contractors definitely fall in that class, notes Kevin Curley, president of KMC Insurance Services in Dallas, TX. “This will surprise the 80 percent of grading and contracting firms that are currently underinsured. Most firms don’t perceive the extremely infrequent but very real risks they face from cave-ins, hitting underground pipelines, or environmental accidents. Consider a recent claim of $75 million against an excavating contractor in Texas who hit a gas-pipe main. That’s how big their potential risk can run.”

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More Assets Mean More Exposure

Environmental risk is on the rise. “There is less and less new construction happening on virgin land,” notes Owen. “More development is redevelopment on brownfields, former commercial properties.where you won’t know all the former past uses. This is absolutely a trend in the construction industry and dramatically increases the chances you could hit a tank, a pipeline, an unknown contaminant.”

Predictably, a firm’s exposure to this type of risk also parallels business growth. “Logically, as your firm’s receipts grow, your incidental exposure commensurately increases,” observes Owen.

“More assets, more exposure,” concurs Michael Prokop, vice president of marketing for CNA Insurance, one of the top five commercial insurance carriers. He believes agents are important in matching coverage to exposure. “It is so critical for businesses and their agents to continually examine their insurance coverage. It’s scary how many firms out there have no coverage or are underinsured in today’s litigious culture.”

New Classes of Insurance Coverage

“The standard, ‘admitted’ market covers the normal needs of the grading and excavating contractors well. However, this standard market does not provide environmental risk coverage. Most contractors don’t realize the extent to which they have no coverage for pollution,” Owen points out. “We are classified as an ‘approved’ carrier. The difference between ‘admitted’ and ‘approved’ is often misunderstood. ‘Admitted’ means that they have been admitted to carry a class of insurance, their rate has been approved, and there is a state fund should that company goes belly up. ‘Approved’ means ‘approved as surplus and excess lines.’ Basically, approved is allowed to cover risks that admitteds won’t touch and will provide businesses with coverage options they wouldn’t have otherwise had. In fact, some firms play the system in order to be able to purchase our approved coverage. In some states you have to get three declinations before you can obtain approved. Without the options we offer, there would be some classes that would not be allowed to obtain coverage for these environmental hazards.”

“We at CNA,” says Prokop, “recognized that we had more exposure than our rates reflected. Most often the courts will side with the insured. We bought those claims, we didn’t collect the rates, but we got the loss! We modified the terms and conditions of our GL policies to reflect that, and now that coverage must be purchased. For example, an innovative coverage we provide covers for incidental rework and design modification. If an earthmoving contractor finds itself modifying specs in under 10 percent of its jobs, this coverage protects it against out-of-spec errors and omissions. Most earthmoving contractors think their GL will cover them in these cases. No longer.”

Get More for Your Insurance Dollars

Industry experts all emphasize the historically low rates now available. Says Slivka, “We have two factors at play. One, the industry has experienced less catastrophic loss than in the past, and two, the financial market is booming. Extremely high capacity, which continues to be available, is driving down rates.” This is a great time for earthmoving contractors to make sure they are getting the maximum coverage possible at the lowest possible prices. “I would rather retain an established account even if I have to discount it for the third or fourth time rather than replace that account with a new piece of business,” admits Curley. “Everyone’s fighting for market share. Contractors should take advantage of that.”

“We know that most contracting firms are underinsured,” repeats Prokop. “Owners and their agents are not examining value versus exposure. Employees are always going to be your number-one concern. Insurance should be number two. A good agent will regularly meet with you and review your coverages and needs. Some firms will bounce from one agency to another to get the lowest rates when staying with a strong agent and pushing for the best rates will get you farther. And it’s a buyers’ market right now. Rates are down 30 to 40 percent over the past four years. Overall, rates are adjusting and are now more in sync with true exposure. The key points to consider: (1) Does your agency know your class of business? What premium do they write for land-improvement contractors? One account for $30,000, or 20 for total premiums of $300,000? That’s a big difference. (2) Do they understand or take the time to understand your operations? Listen to how they talk with you. Listen for cues. Do they know the lingo? (3) Are they willing to provide references? If they aren’t, walk. All of this is extremely critical. Your agent is in control. He will ensure that you obtain the best possible coverage and limits. He shouldn’t be your agent just because he is your friend. It’s an ongoing relationship that is either going to save or cost you money in the long run.”

Many contracting firms in this class are smaller in size. That should not interfere with their ability to obtain the best possible rates. “Our latest research shows that there are approximately 900,000 contracting firms across the country,” notes Slivka. “Of those, 800,000 employ one to three employees with less than a million in revenues. Seventy thousand gross $1 million to $10 million annually, 25,000 gross $50 million, and 5,000 average over $100 million.” Prokop emphasizes, “Smaller firms are not immune to these risks. And with the right agency and the right agent, they can obtain competitive rates.”

Saving Money: Safety First

“The insurance market has been great for buyers for several years. But it’s starting to firm up in certain lines like workers’ comp,” notes Chester Lassel, senior external relations specialist with Liberty Mutual Insurance, one of the country’s largest providers of workers’ compensation insurance. “If your firm has a better-than-average safety record, your workers’ comp rates might stay the same or drop slightly. But if your firm records worse-than-average losses, you should expect an increase. Management has to believe in running a safe operation. The best claim is no claim. This is an even bigger issue for the small operation. Losing an employee to injury causes real productivity issues for a company. In this tight labor market, finding a replacement who knows your business is tough. Recruiting, interviewing, hiring, and training a new employee if needed-all are indirect costs of a workers’ comp claim.”

Prequalification/Assurance Products

Not only are the environmental and workers’ comp classes of insurance experiencing changes in today’s soft market, but contract surety is adapting to the market pressures as well.

Jim Lambert, surety-bond program director with United Capitol Insurance Company in Atlanta, GA, speaks from many years of working with excavating contractors: “The market is soft and highly competitive, so some underwriting standards are being relaxed to maintain market share. For instance, waiving personal indemnity for highly qualified accounts is becoming more common. Five years ago it was rarely seen even for the strongest accounts.” Firms planning on growing larger through municipal work need to add surety bonds to their insurance portfolio. Prequalification products are generally required by statue, in which case there are no exceptions. “These products are intended to protect taxpayers from losses generated by excessively low bids and contractors’ business failures,” shares Lambert. In order to obtain a surety bond, a firm must qualify in many areas. “Briefly, we look at four principal areas in the prequalification process: (1) proven equity and profits, (2) working capital, (3) work experience and managerial expertise, and (4) credit experience.

“Contractors are among the most optimistic people in the world, and earthmoving contractors operate with the slimmest of possible margins. It’s a balancing act. For instance, new and better equipment will move more earth and allow you to perform larger municipal contracts, but you have to contend with higher fixed debt and retain qualified employees to run it efficiently. The potential for costly environmental impact also increases with the size of the project.”

Lambert continues, “From a surety standpoint, the same optimism that keeps contractors in the business can be their Achilles’ heel. Larger jobs can be seductive but can exponentially complicate the factors that need to be managed to successfully complete the project. I have seen firms ‘robbing Peter to pay Paul’ and operating on such slim margins that they eliminate any potential to turn a profit. That doesn’t make good business sense.”

Lambert cites approaches that can help contractors successfully grow into the surety-bond field: “First, they should stay abreast of political and industry changes, including new equipment. Second, it’s critical to align yourself with a CPA who understands the construction industry. An accountant who counsels you the same way he advises his manufacturing clients might be doing you a disservice. You have to show a history of turning profits in order to qualify for surety bonds. It can hurt to show an overfunded 401K plan or a large commitment to new equipment in order to qualify for a tax break. Financial liquidity and the ability to run a sound, profitable business are needed for surety-bond qualification. Third, align yourself with a bank that has experience in the construction field. It might be there for you when a nonconstruction lender might not, as it understands the true risks associated with your line of business.”

Insurance Menu for Today’s World

Overall, beyond the current trends affecting insurance for the excavating and grading industry, experts agree that all firms, no matter what their size, should regularly review their coverage. “Many firms are so busy that they aren’t making the time to review their current coverage. That is a critical first step. Really, they should be reviewing their coverage annually. Whatever you do, resist the temptation to buy a policy without fully considering the company behind the policy. And don’t buy a policy simply because it’s the least expensive one available. Unfortunately, it’s easy to fall prey to these temptations,” counsels Prokop, echoing the universal advice of his industry peers.

Insurance coverage falls into two broad categories: commercial and specialized. The latter is where excavating and grading professionals need to look closely. Many of these offerings used to be covered a decade ago by the terms and conditions language of GL and other standard policies, but not anymore.

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The Best Claim Is No Claim

From workers’ comp to environmental hazards, “the best claim is no claim.” “Let’s put things into perspective,” suggests Slivka. “Insurance is not always the best tool to manage risk. Although insurance might restore a contractor’s financial position, it will not restore what every contractor works so hard to develop and protect—reputation. There are many controls that contractors can incorporate into their overall risk-management program [that can reduce risk on all fronts].”

Purchase adequate insurance. Make sure that the professionals who support you—your insurance agent, your CPA, your bank—are well acquainted with the special needs of the excavating and grading industry. Run your firm so risk is reduced. Doing all three just makes good business sense.