BY ROBERT P. MADER
Of CONTRACTOR’s staff
PALM DESERT, CALIF. — It has gotten to the point where it’s tough for an insurance company to make money, and they’re going to take out their woes on mechanical contractors.
The insurance industry was already going down the road to losing money and the attacks of 9/11 simply added an exclamation point, said Gregory J. Mallon, vice president-construction for CNA Insurance. Mallon spoke at the annual convention here of the Mechanical Contractors Association of America. CNA has written $1.3 billion in construction insurance, he said.
Workers comp claims have risen by 6.8% a year, jury awards have almost tripled since 1994 and the tort system costs billions of dollars, Mallon said. The insurance industry also expects (at least actuarially) that it will have to pay for another cataclysmic attack similar to September 11. Investment yields have tanked. In addition, Mallon noted, all those big companies that failed like Enron, Quest and Worldcom all have outstanding insurance claims against them, yet they’ll never pay another nickel in premiums.
Insurance companies will raise rates to compensate, and Mallon had plenty of suggestions for contractors.
Expect increases to general liability rates of 15%-20%. There had been too many discounts and deals made to begin with, he said.
Auto insurance is a bigger money loser for insurance companies than workers comp, especially because of uninsured motorists. Expect increases of 30%-50%.
Workers comp rates will be increased by the maximum allowed by individual state laws.
Fortunately, environmental and management and professional liability rates will remain stable.
Forty-four states have allowed insurance companies to have mold exclusions and some carriers are exiting entire states, he noted.
In some cases, insurance may be hard to come by because re-insurers are leaving the market because they don’t think they’ll make money. That lack of capital restricts insurance capacity.
Many of Mallon suggestions for the contractors were non-insurance forms of cost control, such as drug testing and return-to-work programs after injuries.
Contractors should plan their risk management strategically, just like their long-range plan. Start the dialog with your insurance agent early, more than 90 days before it’s time for renewals. If you are going to change insurance carriers look at the financial security of the carrier; in these tough times some insurance companies have had their A.M. Best ratings downgraded. Examine your safety program on an annual basis.
Hire third parties to investigate drivers, he said, especially those under 25 and over 65. “Some people just should not have a company vehicle,” he said.
Contractors must have safety programs and aggressively enforce safety requirements.
Contractors must transfer their insurance costs to projects, he said.
“Be aggressive in costing your insurance to jobs. Make sure your estimators know how,” he said.
Try to identify risks during the bidding phase and absolutely do a site inspection before bidding.
After the bid is won, manage your assumption of risk by reading the contract and knowing what you just volunteered to “eat.” The hand-off is critical, Mallon said, because most field superintendents and project managers don’t understand the terms of the contract. Part of the PM’s compensation should include incentives and disincentives for risk management and safety, Mallon said.
Once on the job, insurance costs must be accounted for in change orders - it should be a line item on the change order forms.
“So many people in the field do not understand the impact of a change,” he said.
There should be change request forms right there in the trailer and the project manager has to give notice immediately. He emphasized to the contractors that they had to preserve their rights because if they give them up once, they’ve set a precedent. Any time you perform “volunteer “ work, you set a precedent.
If there’s an accident of the job, you must cooperate with your agent. Don’t let the project manager blow off the agent by saying he’s too busy. Mallon said he’s canceling people like that.
The PM must keep good documentation during the job because attorneys love documentation. After a job is done, amnesia sets in. Sometimes the party with the biggest pile of documentation wins the dispute, he said, and sometimes it comes down to the “better attorney” syndrome.
“Let’s go out and beat the hell out of an attorney today,” he joked. The real issue, he told the contractors, “is your people screwing up. Maybe a guy should get fired.”
He told the contractors to get back to basics: demand consistency from their people in each project, create and keep good documentation, communicate with the owner, understand the terms of the contract, and realize that there are some jobs you need to pass up.