It’s a regular occurrence for contractors: You receive a request from another party (an owner, general contractor, lien holder, other contractor, or a government entity) to add them as an additional insured on your insurance policies. Whether that’s a good idea is up to you — but the party often makes it clear that if you want to do business you’ll need to add them as an additional insured.
However, it’s not necessarily a good idea to add this entity to all of your policies. For example, your Excess Liability coverages — such as those under Umbrella insurance — were probably bought specifically for your own protection in case of catastrophic loss. If an additional insured, who might be well within their rights, is added to your policies with protection up to your basic coverage limits, will they also be allowed to “piggyback” up to the full amount of your coverage?
We’d advise you not to set up any procedure that makes all of your coverage limits available automatically to any additional insured. Add them to the specific coverages and amounts that they request, but go no further. If in doubt, consult with your attorney about contractual requirements and possible gaps between what the entity is requesting in being added to your coverage and what your coverage will actually provide.
Once you’re certain what you’re being asked to do, and have decided that it’s in your best interest to meet this request, there’s one more action to take before adding the additional party to your coverages. Contact us to determine if your current coverage already meets the needed conditions, or what modifications (if any) might be required to do so.
Remember: Although we want to help you meet your needs, our focus always remains on protecting you, even if against unreasonable demands from other entities. We’re here to help.
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There will always be a risk that something will go awry during construction projects. When something does go wrong, the result is usually costly time delays and mild to devastating additional material, labor, and damage costs. As far as risk goes, most construction business owners view insurance as their first line of defense. Not that insurance isn’t an appropriate risk prevention tool, but it’s not always economically feasible or efficient to try and cover each and every possible risk with insurance. There are actually many risks that can be dealt with thorough the concepts of risk transfer, risk sharing, risk retention, risk control, risk prevention, and risk avoidance. Let’s look at some key points about each:
1. Transfer of Risk. There are parties, aside from your own insurance, to which you might transfer the risk. The two most common risk transfers are through being named as an insured person on an alternative insurance contract, and through express indemnification clauses. When you’re named on another party’s insurance, their coverage extends to you. If you’re a general contractor, for example, then you might require the electrical contractor to name you on their liability policy. As long as the other party’s insurance covers the loss, your portion of any loss would be paid by the other party’s insurance policy.
The second common method of transferring risk is through an express indemnification clause in a contract. This is also referred to as a hold harmless clause. There are three varying degrees of risk transfer. The type one indemnity clause, also called a broad form, states that the indemnitor (party that will be responsible for the loss) will hold the indemnitee (party that will be protected) harmless regardless of whether the loss was caused by the indemnitee. A type three clause, also called comparative fault, holds the indemnitor responsible for only the loss that they caused. The most common type of indemnification clause is the type two, also called the intermediate form. The indemnitor assumes all the risk unless the sole cause of the loss is fully attributable to the indemnitee. An example of a type two clause would be a general contractor agreeing to hold an owner harmless (regardless of whether the loss was partly caused by the owner) if the loss was caused in part or entirely by the contractor.
2. Risk Sharing. There are often opportunities to share the risk with the other parties involved with the construction project. The contract should have a clause that stipulates each of the involved parties would be liable for those losses caused by his/her actions or inaction.
3. Risk Retention. Whether they want to or not, all construction businesses are going to retain some of the more minor risks. It’s simply not monetarily feasible to cover every single risk with insurance. These minor retained risks, such as errors that cause a couple of days of redoing work, are funded from the operating budget. Insurance deductibles are another way that risk is retained. Just be sure that whatever risk is retained has a value and can be funded should a loss actually occur.
4. Risk Avoidance. Although risks are often tempting, such as a supplier offering a cheaper material, most risks are best avoided. If you suspect that the cheaper material could be defective, then it simply makes better sense for you to put the longevity and reputation of your business first and avoid the risk.
5. Risk Prevention. Risk prevention is a very broad topic with many elements, but the premise of the concept is taking action to avoid negative events from occurring in the first place. It’s usually very simple carelessness that causes accidents. So, risk prevention may include simple things like keeping passages free of debris and idle tools secure. Risk prevention should be an ongoing training program for employees, supervisors, and managers.
6. Risk Control. Like risk prevention, risk control is a very broad topic with many elements, but the premise of the concept is reducing the amount of loss incurred during a negative event. A good example would be posting emergency response phone numbers so that immediate help can be called during an accident. Risk control should also be an ongoing training program for employees, supervisors, and managers.
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Hurricane Sandy, tornadoes, flood — all of these disasters affected construction firms during the past year. Some companies took direct hits, while others suffered from massive service demands, and shortages of help and supplies.
Although your business might never face such massive “destruction and distress,” other events –everything from IT failure to vandalism — could trigger a crisis.
Whether it’s a catastrophe or a stressful disruption, the best way to prepare for any potential disaster is to develop a catastrophe plan in advance. This plan should allow your staff to mobilize the right resources quickly in the right order so you can get up and running with as many contingencies as possible accounted for in advance.
How do you go about developing a plan? What’s the process? Who should you include? How often should you review and update it? An effective plan should involve a “business resumption team” with managers from these areas:
- Information technology
- Communications, both internal and external
- Moves and relocations
- Services and logistics
- Salvage and security
- Customer service
Before a crisis erupts, the team will determine what activities to follow, assign responsibilities for these tasks, and provide the resources and information needed. When compiled and organized, these activities, responsibilities, resources, and information make up the disaster plan.
Don’t wait for a crisis to uncover the gaps in your preparations. Get started now on creating and/or updating your plan.
Feel free to give us a call so we can offer our advice and recommendations. Insurance might not solve all your crisis planning problems, but it can provide a solid foundation.
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Although business management and performance are the major factors that will determine which contractors survive the downturn in construction, the size of the contractor also comes into play. As a rule, project owners are more likely to continue with larger developments because of their greater value, higher investment, and longer lead time. Smaller projects are easier to cancel, which makes smaller and midsize contractors (with work backlogs between $5 million and $100 million) more vulnerable to cancellation.
If you’re experiencing losses on a project, your first step should be to deal with overhead, liquidity, problems, and ongoing business concern. It’s also essential to communicate any problems to your insurance agent and surety company immediately! Because the surety has a strong financial interest in preventing you from default on your bond, it will leverage its relationship with the bond underwriter to help you work through these difficulties and reach a mutually acceptable solution that will keep you on the job.
However, a contractor withholding critical information about a problem situation from a surety would lead to a far different result. Concern about the contractor’s deteriorating financial condition – which makes it a riskier bonding candidate – might make the surety restrict its future capacity, leading it to make the contractor either bid on only smaller projects that pose less risk to the underwriter or postpone bidding on all projects until the business can clean up its balance sheet.
If you have any questions about working with your surety, please feel free to get in touch with the Bond professionals at our agency
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Can you believe that winter is here already? Time flies. Always has, always will. However, as risk managers, we think that you should slow down for a moment and ask yourself if your risk-protection program has kept pace with the changing times.
Just as your business needs might have changed significantly since your last review, so have the methods of protecting you from risk of loss. New policies have been created, new techniques in risk management developed, and new exposures arisen.
Consider these questions:
- Is your current risk protection program as up-to-date as it needs to be to meet your business needs today?
- What if your business were unable to operate due to extensive damage?
- How much income would you lose during the time it takes to open the doors again?
- Or would your choice be to reopen as quickly as possible at another location? Bear in mind that the “hurry up” expense of making the move, installing the necessary equipment, and notifying your clients would prove a painful unplanned burden.
Let’s schedule a time for a review. Our professional staff stands ready to work with you. Regardless of your firm’s situation, it’s important to get a comprehensive risk review of your business as it is today, not as it was years ago.
Call us. We’re here to help.
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Natural disasters can do significant damage to construction firms. Some suffer direct hits, while others endure massive service demands and shortages of help and supplies.
Although you might escape massive destruction and distress, what other events might cause your company to suffer a crisis? IT failure? Burglary or vandalism? Professional liability? Fire? Loss of market?
Whether disaster strikes as a catastrophic or stressful disruption, the best way to prepare for them is crisis management. Now is the time to develop a plan that will allow you and your staff to mobilize the right resources in the right order quickly to get you up and running as smoothly as possible.
How do you develop such a plan? What’s the process? Who should you include? How often should you review and update it?
We can help by providing risk management advice and recommendations, together with materials and resources tailored to your needs and exposures. Although insurance might not solve all your post-crisis problems, it can certainly provide a solid foundation for your planning should the worst happen.
Don’t wait for a crisis to uncover the gaps in your current preparations. Start now.
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