“XYZ Grading and Excavation Company likes to get the job done on time: Dig now, patch the line, and ask questions later. It is currently dealing with its third insurance company in four years. The insurance companies have tried to address the problem by continually raising the deductible on the insured’s general liability policy, which started at $250 per occurrence and is now at $1,500 per occurrence. Rather than trying to fix the root cause of the problem, this customer relied on the competitiveness of the insurance marketplace to keep his premiums in check. It worked for a short time, but now XYZ is coping with a substantial increase in both the amount of its deductible and its overall premiums. Our company did not offer a quotation at their last renewal.” –Jon Jeschke, Bituminous Insurance Companies“If you don’t have a loss-control program, don’t count on getting insurance.” –David Sund, Insurance Concepts of San Antonio Inc.David Sund’s evaluation, as dramatic as it might sound, turns out to be solid advice in today’s hardening insurance market. “Out” are what one agent calls the “loosey goosey days,” when a contractor had little more to do than demonstrate a solid cash flow to qualify for reasonable insurance premiums. “In” is what the insurance industry calls “loss control.” Underwriters look at a good loss-control program as an indication of a company’s commitment to safety. And the better the safety program, the better the risk.“Anyone who’s got any sense today will have a good loss-control program,” states Doug Miller of Employers’ Risk and Insurance Management, a risk management consulting firm in Birmingham, AL. “A loss-control program pays for itself.” Miller offers the example of a municipality that found itself in an assigned risk plan as a result of a long history of workers’ compensation claims. “Our recommendation was that they hire a safety consultant. On the basis of hiring that consultant, they were able to move out of the assigned risk pool into a municipal workers’ compensation plan that saved them $100,000. If you can get the right person talking the language of the people on the job, you can get results.”Sund tells a similar story. “We used to have an account whose loss ratio was running somewhere around 300% to 400% a year. Nobody wanted to work with them. We got them together with our loss consultant and did a comprehensive loss-control program, then secured management’s commitment in writing that they would follow through on everything we developed. We even went so far as to help them put on a weekly safety meeting. Their loss ratio this last year was less than 50%.” A good rule of thumb is that a loss ratio of greater than 66% puts a company in the uninsurable category.“Insurance is a major cost that can be managed,” notes Jon Jeschke, vice president of underwriting and program manager of the land improvement contractors program at Bituminous Insurance Companies in Rock Island, IL. “It is also a major benefit to your company that can protect it from financial ruin.” And as any number of risk managers and loss-control consultants have pointed out and many contractors have learned for themselves, what a dirt contractor pays for insurance can affect how competitively he bids on a job.“It is not so much that a company becomes uninsurable, it’s that the cost of insurance may become prohibitive,” says Ted Christensen, product director for construction services in corporate loss control at Liberty Mutual Group in Boston, MA. “A company that has a very good safety record will typically pay 30% to 40% less than a company with a bad record. That’s a competitive edge that has to be taken into account.” The good news is that establishing and maintaining a good safety record is not rocket science. Underwriters are specific when they evaluate both prospective and existing clients, and there are corresponding steps that contractors can take to keep insurance costs in line. This is good news for small to medium-size companies that don’t have the option of increasing their deductibles as a way to decrease premium costs.What Underwriters Look For“There are three predominate factors in determining the eligibility and competitiveness of a dirt contractor in the insurance market,” points out Paul Fuller, program administrator for the National Society of Consulting Soil Scientists, the International Erosion Control Association, and the Soil and Water Conservation Society’s Liability Insurance Program at S.N. Potter Insurance Agency Inc. in Stockton, CA. “The first is the background and experience of the contractor. I want to establish that the company is not fly-by-night and it really can do what it says it can do. The company has to show the prospective insurance carrier that it’s been in business for a specified number of years, preferably at least five, and that it’s got the desire, background, and professional expertise to handle the jobs it’s currently undertaking. How does it do that? By establishing a length of time in business and establishing that both its management team and its employees are well qualified. My recommendation is to show backgrounds not only of the owners or partners of a business but also supervisors and any key employees. I want to see if there’s depth on the team, specifically with the supervisors.“The second item is loss experience. I’m looking at the talk, which is the company’s qualifications, and I’m looking at the walk, which is its claim experience. If anything will reflect the type of quality that a dirt contractor is doing or is capable of doing, it’s a look at how many claims have been filed in the last five years. The more claims a company submits, the worse its premium rates. In fact, I recommend a contractor pay any claims under $2,000. Right now if a contractor has more than three claims a year, he’s probably going to be uninsurable. Underwriting standards are tightening and rates are going to rise, which poses a very big problem for accounts with a bad or mediocre claim history.”Last, Fuller looks at the type of work a company engages in. “A company that’s doing geotechnical work or work that involves large, significant projects will pay a higher premium than the solo practitioner or the dirt contractor who typically undertakes small to medium-size projects. The more complicated the work or the more complicated the project, the higher the likelihood of a claim and the higher the likelihood of rates going up. A good rule of thumb is to stick with what you know best and manage and emphasize safety and claim management; hire good people; and make sure that when you engage subs, you have tight requirements, specifically an indemnification agreement and an additional insured requirement where the subcontractor adds the dirt contractor as an extra insured on its liability policies.”Chicago, IL—based CNA, which insures more than 3,000 land improvement contractors countrywide and has extensive expertise in underwriting this class of business, evaluates each account on an individual basis, taking into consideration company underwriting criteria that include claims history, presence of a safety program, and financial stability. According to company representatives, past experience shows that land improvement contractors with favorable claims histories, strong safety programs including cooperation with company loss-control personnel, and strong financial standing typically make better insureds.To aid clients once they’re onboard, CNA provides responsive and knowledgeable claims-handling services through its Special Investigations Unit (SIU) and its staff counsel. The company’s claims staff is highly trained and experienced in identifying suspicious claims that might require investigation and coordinates its investigation with SIU fraud specialists who are among the industry leaders in detecting and fighting fraud. CNA also retains a staff of full-time attorneys to handle cases exclusively for its customers. Their experience includes workers’ compensation, auto, general liability, premises liability, and construction liability. In-house procedures are set up so the staff counsel organization works closely with CNA claims specialists for the quick resolution of legal disputes. The company also provides experienced loss-control professionals to help clients improve safety and save money by providing such tailored services as the Loss Control Program Audit and the Loss Control Service Needs Assessment. In the former program, a CNA loss-control consultant will audit a company’s safety program and make suggestions for improvement in the areas of employee selection and safety training, preventive maintenance, and emergency procedures. In the Loss Control Service Needs Assessment, a CNA loss-control consultant will thoroughly analyze an account’s service needs for the upcoming year and then design a program to meet the client’s needs, such as quarterly employee safety training. The consultant works very closely with the account to provide industry-leading loss-control services as deemed appropriate by the account and the consultant.At Bituminous Insurance Companies, where 50% of the business is contractor-related, the criteria by which underwriters evaluate a potential account (and keep an eye on those they already have) are similar to what Fuller describes. Underwriters look at a company’s previous premium and loss history, its employee selection criteria, the company’s financial condition, and particularly management’s commitment to safety. Bituminous employs its own loss-control consultants who look specifically at safety issues, such as whether or not there is sufficient initial and recurrent employee training, whether the company maintains effective employee oversight and uses solid documentation procedures, and whether there is good communication between management and field personnel. “The basic question our loss-control people try to quantify is management’s involvement and commitment to safety,” explains Jeschke. “If the owner/manager is actively involved in this aspect of his operation, the rest becomes much easier. A major component in this evaluation process is a physical meeting between the contractor and one of our loss-control consultants. The mission is twofold: Initially it helps us by providing the underwriters with a snapshot view of the contractor’s operations. It then becomes an aid in deriving premiums by independently quantifying the contractor’s management of risk potential as well as other measurements that characterize the operation, such as size, type of work performed, and quality of equipment.”Like Potter, Bituminous looks at both frequency and severity of past claims. “The construction industry is a high-hazard industry and subject to severe losses,” observes Jeschke. “We recognize that this is the reason why contractors buy insurance in the first place. This means that one major loss doesn’t necessarily mean that our relationship with our insured will change. As long as the fundamentals of the business are sound, we are comfortable with paying that large loss. It is nonetheless true that multiple large losses are usually a sign of a breakdown in these fundamentals. A contractor who makes a practice of digging before he calls for a utility locate, for example, will end up with a number of small claims, as long as it’s a minor line he’s hitting. However, it only takes one fiber-optic cable, and this small problem becomes a big one, which is why it’s important to look at severity of loss as well.“While I’m sure bad luck has been used as a reason for rationalizing these events in the past, we have found that the more a contractor works toward hiring trained and qualified employees and providing them a safety-conscious environment, the luckier it gets.”Christensen describes loss control at Liberty Mutual as the eyes and the ears of the underwriters in the field. “The main thing we’re looking at is the scope of work,” he says. “Excavating is a very generic term, and there is a lot of variation in the trade. In particular, we want to know if there are any unusual hazardous operations that may be part of what a company does, as well as how big they are. We’re also trying to get a feel for how well a company is organized and how well it operates. Does it have set procedures in place, and how are these procedures implemented in the field? Does the company work within one state? Is it multistate, multinational?” Red flags typically include unusual or hazardous operations, such as working in the nuclear industry or on jobs that put personnel or equipment in contact with hazardous materials or hazardous wastes. “While this kind of work can be done safely,” says Christensen, “you have to be much more careful and methodical in what you do. We ask a company involved in this sort of thing for more details.” A prime consideration is the degree to which the company’s safety program is actually implemented. More than once Christensen has been presented with “a very nice book on file in an office somewhere,” but its procedures are never enforced in the field. He is much more likely to look favorably on a company that might not have anything written down, but everyone is doing what they are supposed to do. “We don’t sit in the main office and listen to what our contact has to say. We actually make job visits to see if what the main office says is being done is really being done.” (For an overview of what Liberty Mutual looks for when a representative of its loss-control department goes into the field, see the sidebar.)“There are companies out there that have a safety program just to satisfy OSHA,” states Christensen, “but that doesn’t satisfy us. The key to any safety program is top management support. If top management says, ‘Yes, we have a safety program,’ but they’re out there telling their superintendents and foremen, ‘production, production, production,’ that undermines the program. Top management has to present the program in such a way that there is a balance between the production issue and getting the job done safely. Whether they have a dedicated safety director or it’s the president doesn’t bother me. I’ve seen some mom-and-pop companies with nothing written down, and they have a super safety program just because it’s engrained with all the top management who share it with everybody below them and enforce it whenever they make job visits.“I’m amazed how many companies don’t have the time to do the job safely the first time, but they have time to come back and do something twice. In my mind safety and production are linked. If you do it safely, you’re also going to do it well. There’s also a workmanship issue involved here. Doing things right the first time will help a company improve its image.”
Jeschke agrees about the necessity for top-level commitment. “Managerial competence is the key to controlling and managing your insurance program. A sound contractor is also a good manager. Policies and procedures are in writing and adhered to. Just as a banker does not want to make a loan based on a business plan written on a napkin, an insurance company does not want to insure a contractor with his safety program so casually written. If the safety program is an integral part of the contractor’s overall operating plan, the more confidence in the company’s managerial competence this instills in the various stakeholders.”And what happens when a loss-control consultant identifies irregularities in a company’s operation? “Any glaring deficiencies will be feedback to the contractor in the form of recommendations for mitigating or eliminating the problem,” says Christensen. “The underwriters are going to want to know what the problem is and what we feel should be done to handle or control it.”Modifications, Modifications, ModificationsThe evaluation process is not as subjective as it might appear. “In managing costs, contractors have more options than they realize,” notes Jeschke. On an overall basis, base or manual rates are determined by the loss experience of all contractors everywhere, which is then broken down at the state level, followed by breakdown to the specific Standard Industrial Code and corresponding General Liability and Workers Compensation class codes, as well as automobile rates, so that final rates are deviations of these base rates. Theoretically the base or manual rate is what the “average” risk of a specific class would expect to pay. An “above-average” risk of a specific class would expect to pay more, and a “below-average” risk would expect to pay less. These variations, which are adjusted up and down as a function of a company’s claim history, reflect the fact that underwriters file with the respective state insurance departments the percentages their premiums are allowed to vary from their starting base rate. A base rate for general liability of $10 per $1,000 of payroll, for example, would translate to a $100,000 base or manual premium of $1,000, but the actual premium could vary if, say, there was 25% allowable deviation from base, from $0.75 per $1,000 to $1.25 per $1,000 of payroll. Add a few zeroes, and you can see how significant this might be. Workers’ comp premiums are also adjusted in accordance with the Experience Modification Rate (EMR), which looks at the last five years of a company’s workers’ compensation experience (the first three years of the five actually, as the current year is thrown out because all the numbers are not in and the year previous to that because claims may still be made), including the number of claims and their frequency and severity. These data are run through a formula developed at the state level and used to modify the insurer’s base rate based on an individual company’s claims history. Based on his experience as an agent, Sund thinks contractors are beginning to become more aware of such factors as the EMR and to take such information more seriously. “Here in Texas, everything’s based on modifiers, which are based on loss ratios, so that a guy with a frequency problem has a higher modifier than a guy who has had that one big loss. Almost every owner understands this now–that it’s the small losses that build into the EMR, and they are monitoring it better. A .50 modifier looks a lot better than a 1.0 when it comes to determining rates.” It is also important to note that everyone we spoke with indicated that a bad claims history in one area is likely to affect premiums in others.Once You’re InsuredJust because a contractor has passed initial muster and signed on the dotted line doesn’t mean he’s off the hook when it comes to safety. Such companies as Bituminous and Liberty Mutual, which have in-house loss-control departments, continually evaluate their insureds and in fact also offer the services of their loss-control consultants to their clients on a regular basis. Christensen explains, “At Liberty Mutual, our risk-control consultants and our claims department actively work with our insureds to prevent claims before they happen and to manage the claim process if and when a claim occurs. The most valuable tool we use to accomplish these tasks is an open line of communication. Standard procedure is to assign one risk-control consultant to handle all of a company’s risk-control needs and one claims adjuster. We have a tracking system in place to monitor how often we see customers, and we visit them at other than crisis times to make sure we understand what they expect from us and answer any questions they may have.” Jeschke describes a similar program in place at Bituminous. “If we are successful in adding the contractor as a customer, we then utilize our loss-control professionals to assist the contractor in reducing his exposure to loss. This is a service we provide to as many customers as possible.” Sund describes the program Bituminous put together for the Earthmoving Contractors Association of Texas, which is an organization of small to medium-size dirt contractors, many of whom work primarily on rural jobs. “From an association standpoint, the reason we decided to go with Bituminous is (1) they built a good insurance program costwise as well as coveragewise and (2) their loss-control people visit even the small accounts, which is unusual, and work with the owner and come up with suggestions about how they can improve their operation. Most of our members can’t afford to hire a consultant to do this. In all cases, Bituminous sends its loss-control guy out on a quarterly basis.“Furthermore, and even more interesting, Bituminous requires its underwriters to visit the account at least once a year, so the underwriter himself is getting firsthand knowledge of exactly what the account does, and oftentimes he also picks up on things. We are in our third year in this relationship, and I think our loss ratio is going to be less than 40%, which is somewhat of a change from previously because our members are more aware now and they spend more time at it. Bituminous’ loss-control people have put on seminars at our annual meetings. They’ve supplied contractors with safety material, so they’re out there constantly reminding these folks. And if you bring this type of information to the contractors’ attention, they remember. When procedures are lacking, it’s partly that they don’t know what’s required of them and it’s partly that they forget about it in the process of doing business. One advantage we have here is that we have the principals out at the job site every day. They are always very aware of the safety factors, and they tell their workers to do it right.” Sund’s agency also employs its own loss-control consultant whose primary job is to work with agency clients to build a good written loss-control program for their individual operations.And If You Fall Off the Wagon…What happens if, after a period in which you had previously established a good claims record, you find yourself with a series of bad claim years? The bad news is that your rates will go up. The good news is that they need not remain high permanently. “The most common situation is that a company stretches beyond what it can handle,” observes Christensen. “The economy is booming, and they want to grow, and they grow too fast for their resources. Suddenly they don’t check the backgrounds of the people they’re hiring so carefully; they don’t know their work habits, but they’re giving these people managerial jobs. Or maybe they’ve added a lot of used equipment, and it’s not quite up to their usual standards. Or maybe they get into an unusual job or they have a fatality or multiple serious injuries. That’s going to haunt them for probably three or four years.”“If a company has developed a pattern of loss frequency or severity,” says Fuller, “insurance may become unavailable or, if it’s available, it may be cost-prohibitive, and this could very well drive a company out of business. It takes awhile for a company to become uninsurable, what the industry calls a ‘distressed risk.’ It doesn’t happen from one catastrophic event. A good rule of thumb is if an insured has a loss ratio over 66% of its annual premium, it will be classified as a distressed account–a distinct disadvantage in the tightening market where the carriers who are making coverage available will be much more selective and contractors with high loss ratios will be the first to get either nonrenewal notices or substantial rate increases.”If a contractor takes a good look at the situation and discovers, for example, that the problem was an employee or a group of employees and replaces these individuals, Fuller believes it is possible for it to resurrect itself. “You have to prove that they are a better risk, and the only way to do that is by filing fewer claims. Typically it will take three years of good claim experience to see a significant reduction, and what I would suggest a company in this situation do is hire a risk consultant to perform a thorough review of its operation and a thorough report on what happened and the steps that have been taken to prevent those claims from reoccurring–or at the very least mitigate the possibility of a reoccurrence. The next step is to identify a professional agent specializing in dirt contractors who can accurately and correctly explain the nature of your company’s application to an underwriter and the steps taken to address the problems that previously occurred. With a good agent, with a good profitable book, an insurance company might very well take the bet and charge more but provide the insurance.” Contractors might want to consult their agent for a referral to a reputable risk management or loss-control consultant. Professional associations are also a source of referrals, and information is available on the Internet. Insist on references and review a solid company profile before making a decision.“A company can become difficult to insure,” says Jeschke. “I won’t say uninsurable, because in our current marketplace, some insurer will entertain writing the risk if the premium is high enough. As with most management problems, the key to preventing a crisis from happening is early recognition. Active managerial involvement, along with the ability to rely on professional partners–especially your agent–is key. There is also the option of taking on more of the risk yourself by increasing your deductible, which effectively allows your insurance to be reserved for serious loss problems when they occur. Probably the most common area we see where this option is not utilized is in the Inland Marine Contractors Equipment Schedule. It is common that a contractor will think nothing of having a $500 physical-damage deductible on his $30,000 pickup, but will still have a $100 deductible on his new dozer. This is not logical and can easily be changed to save the contractor money on his insurance costs.”If you have a good loss-control program in place and you’re exercising it, you’re still going have losses. If there were no losses, there would be no reason for insurance, but the days when you could control your premium by moving from one company to another are over. If you don’t take the necessary steps and show an active interest in safety–that you’re really trying–insurance might not be available.“If you approach the process in the light that you’re going to fool somebody, sooner or later you’re going to get burned,” remarks Fuller. “Better to come in with a good, middle-of-the-road approach of doing your best to prevent claims and purchasing an insurance policy that adequately protects you. Use a good agent, and choose a company that’s reputable.”
