March 27, 2003

How to defuse skyrocketing insurance costs

  • Contractors need to re-evaluate their insurance coverage
    Bush, Cotton & Scott


    By now, all insurance buyers have likely experienced the effects of the hard insurance market.

    Nowhere has the impact of the difficult market conditions hit harder than the construction industry. At a minimum, this has meant higher insurance premiums — and in many cases, restrictions or exclusions of coverage.

    The reasons for the rate increases are many, and include:

    • Years of under pricing by insurance companies, magnified by the economic slowdown, have resulted in insurers looking for more premium dollars for risk assumed.

    • Increasing legal and medical costs.

    • Catastrophic losses incurred by the insurance industry in recent years.

    • Explosion of construction defect claims.

    For contractors, these price increases have been amplified by the fact that they are occurring at a time when acquiring work is extremely difficult due to competition and availability of work, and individual project and company profit margins are generally shrinking.

    While business owners have always been cost conscious, contractors are seeing these premium increases and are looking to their insurance agent for advice about how to control this expense.

    Reducing insurance costs starts with the insurance renewal process. Contractors should work with their insurance agent in preparing an accurate and complete underwriting submission. In addition, be ready to provide any information requested, including a written description of current and past operations, project list, detail of past or current insurance claims, and loss control steps implemented to prevent potential losses to you — and the insurance company.

    This process should be started early, and as part of this preparation, discuss and understand your options and expectations for renewal pricing.

    For construction companies, the majority of insurance costs typically results from two lines of insurance — commercial general liability and business auto. Therefore, I will highlight some of the areas where cost savings may be found for these coverages.

    General liability

    Payroll classifications and reporting. It is important to ensure that your operations are classified for rating in the manner that best represents your business operations. Many class codes have similarities in their descriptions and contemplated scope of operations, yet rating is often different for each class.

    When calculating payrolls for rating, make sure to exclude clerical, office and truck driver payrolls. Also, understand and apply statutory payroll reporting rules, both for field personnel as well as executive officers. For example, executive officer payroll is limited in the state of Washington to $17,800.

  • Establish a formal safety and loss control program. This is a must — a successful program will result in savings both in the short and long term.

  • A strict adherence to contractual risk transfer using the hold harmless/indemnity provision in your subcontracts, and requiring verifiable insurance from your independent contractors. A thorough review is too exhaustive for the purposes of this article; however, there are some fundamental things to note.

    Hold harmless/indemnity provision: Indemnity provisions vary greatly, and these clauses have been the subject of substantial litigation.

    If you have not done so already, have your attorney review your hold harmless clause for its scope and enforceability. Are all independent contractors required to sign the subcontract, including the hold harmless clause, before starting work? Does the hold harmless agreement contain a waiver of immunity under RCW Title 51?

    Subcontractor insurance requirements: It is imperative to obtain certificates of insurance for all subcontractors working for you — prior to allowing them on the job site. Your subcontract agreement should contain a section detailing all independent contractor insurance requirements, mandating both the types and limits of insurance.

    At a minimum, subcontractors should carry liability limits equal to your own, and you should be named as an additional insured on their policy. A copy of the additional insured endorsement should also be included with the certificate of insurance, as each company has their own form.

    You should also insist that the coverage afforded you as an additional insured be primary and non-contributory to any insurance carried by you. In today’s insurance environment, other considerations include the financial strength of the subcontractor’s insurance carrier, and noting any major policy exclusions that would limit coverage for specific operations.

    Finally, a certificate-monitoring program should be implemented to ensure that coverage remains in force throughout the contract term for all subcontractors.

    Business auto

    Self-insure collision coverage for some or all vehicles. As vehicles get older and have significantly depreciated in value, the premium for collision plus the deductible may not be justifiable for the lower valued auto. In addition, for companies with large auto fleets, the cost savings for carrying collision coverage relative to total exposure may make it attractive to self-insure collision, though it is still advisable to carry this coverage on highly valued vehicles such as heavy trucks.

  • Consider specified causes of loss coverage rather than comprehensive coverage. Specified causes of loss coverage insures against most of the serious perils, including fire, theft and vandalism. However, it is important to consider that coverage for some losses, such as windshield breakage, may be sacrificed.

  • Drop medical payments coverage. It is recommended to review this with your insurance agent prior to making any decision to eliminate coverage.

    Insurance companies are still coming to grips with the under pricing of the 1990s, and the cost drivers of the 2000s. Restoring rate adequacy will take some time, and the economic, legal and social environment will likely continue to work against a return to lower, or even stabilized insurance pricing.

    While price increases will be difficult to avoid, options do exist to minimize the effect of the difficult insurance market. Contractors should use the risk transfer tools available to them, and consider retaining risk if it makes sense financially to do so.

    Finally, consider your representation, and your agent’s knowledge of and access to the solutions available in the insurance market. Now more than ever, it is imperative that you are working with an agent that not only understands the insurance business, but the construction industry as well.

    Andy Prill is an account executive at Bush, Cotton & Scott LLC, a specialist in construction surety bonding and insurance services. Prill can be reached at (425) 489-4500, or by e-mail at

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