Tough Insurance Market: What Can You Do?

YOU CAN’T PICK UP an industry publication these days without seeing headlines about the “insurance crisis.” Although some writers can legitimately be accused of over-reacting, in fact things are tough out there. Statistics that show insurers paying out $1.20 for every $1 taken in are not unusual. Insurance companies are in business to make money, not only for the benefit of their shareholders but also to keep state regulators and private rating services happy. They can make money in only two ways: increase revenue or lower costs.

On the revenue side, the stock market boom allowed many companies to make enough money to avoid the pain of significant rate increases, but those days are over. Rates are up and not likely to go back down for some time.

On the cost side, insurers can explore a lot of variables. One is to decide whether to stay in the business or sell out. If a company stays in, its analysis (and insurance companies are excellent number-crunchers) may lead it to conclude that certain lines of coverage (such as environmental, Directors & Officers) are not profitable enough to be continued.

Risk management can be further dissected by decisions to limit coverage to certain dollar sub-limits or require risk sharing among multiple insurers for the same account.

Finally, insurance underwriting can be tightened, requiring more historical data, more risk-avoidance procedures and more contract language review if a company is to be insured.

Few segments of the construction industry are more seriously affected by all this than plumbing and HVAC. I hear a lot of complaining from clients about what the insurers are doing to them. As much as it may feel good to vent, such complaints don’t do anything to help to solve the underlying problem. It is true that many of these insurer actions are beyond the control of vendors and contractors, but there still are steps you can take to improve the appearance of your company to a potential insurer:

Review the contract language you sign and that you require your suppliers and subs to sign. Insurers focus on several areas. One is indemnification. If you routinely require those from whom you buy to indemnify you in the event you are sued for something they did wrong, your insurer has another pocket to look to in the event there is a claim.

On the other side of this coin, if you routinely review and object to language in contracts that you sign that requires you to indemnify the other party for any damage other than what you have caused yourself, you can limit your insurer’s exposure. “Broad form,” “intermediate form” and “narrow form” clauses are floating out there today. You can’t always tell by the length of the clause or the specific words how they will be interpreted, so this is an area where it will pay to talk to your lawyer.

A second “hot button” for insurers is subrogation language. Subrogation is the right an insurer generally wants to be able to sue another guilty party if the insurer has to pay out on a claim. Frequently, owners and general contractors put “waiver of subrogation” clauses in contracts to prevent your insurer from coming back against them later. For a long time (and in a “soft” market) insurers accepted these waivers. Not anymore.

It is also crucial that you particularly review and can comply with the insurance requirements of contracts that you sign. Many owners continue to use “boilerplate” insurance language in contracts that demands coverage that are outdated, given the current market.

One option might be to offer what you can get and quote a price for the additional coverage (if available) or excluding it (if not). In some hard bid situations, this isn’t an option at all. In those situations, your insurer would be pretty unhappy to see that you signed contracts agreeing to provide insurance that you can’t get.

Make sure you get all required insurance coverage from your subs and suppliers. Just because you are “only” buying goods from another company doesn’t mean that you don’t need to make sure it has insurance. A mold claim alleging water damage because a product you installed failed could end up in your (and your insurer’s) lap rather than the lap of the negligent manufacturer if you haven’t insisted on being an additional insured on its liability policy.

This requirement goes beyond getting a contractual agreement to carry insurance or even the furnishing of a certificate of insurance. Certificates have been known to be forged. Even if totally legitimate, they do not disclose exclusions from policies or sub-limits for certain kinds of coverage. The only way to know for sure what coverage you can count on is to review the policy itself.

Document your safety and other company policies that set you apart from the pack. Insurers care about how you run your business. Safety incentive programs work — there is nothing like the peer pressure of knowing that everyone’s extra day off hinges on whether one worker is tied off to keep that macho man in line.

Record retention is equally important: The key to the defense of many claims turns on whether the company can show that it gave warnings and notices required before taking action. Conducting racial/ethnic/age/gender anti-harassment training and getting signed acknowledgments that all employees understand to whom to submit their complaints can go a long way to protecting the company later. Hazardous materials usage and spill response procedures are key to obtaining environmental insurance, and mold coverage follows suit.

Critically review the kind of work you do, and consider avoiding some types of work for the short term. It is said that some insurers are particularly averse to insuring condominium construction because so many different property owners can be affected by one mistake. Similarly, multifamily rental projects can lead to far more claims of personal injury, and thus the insurance market for this coverage is limited. Some states have laws that seem much more “plaintiff-friendly” and, if you have the option, you might choose to avoid working in them for now. Sharing all these decisions with your insurer can show it how seriously you share its risk-reduction goals.

Get the best insurance agent you can. And this does not mean just the one who gets you the best rates. Does the agency have risk management expertise that it can share with you? How many “markets” (insurers) does it do significant business with and have close relationships with? Are they the markets you need to reach for your particular line of work? Does it have staff to assist you in reviewing insurance certificates and policies you get from others, and in analyzing the insurance requirements you will have to meet on new jobs?

I hear people say that this “hard market” for insurance is just another passing phase, but until it does pass, it makes sense to take all the actions available to you to maximize your coverage and minimize your risk and cost. You can do many things to accomplish this, and the list above is just a starting point. Talk to lots of insurance professionals to hear more.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e-mail to [email protected].