Construction Risk Blog

The "Cost of Ownership" for Connecticut Construction Insurance Buyers

Measuring the “Cost of Ownership” of Construction Insurance

We have written posts about the Total Cost of Risk and I suspect many construction company owners don’t relate to that concept. So I’m going to try another angle.

Many of you make large capital equipment purchases throughout the year. Let’s use an Excavator as an example. In addition to the standard comparison items like:

Track length

Reach

Dig Depth

Lift Capacity

Operating Weight

 

 

You are also going to look at Cost of Ownership. This would include items such as:

Can I depend on this Mfr/Model to be free of expensive maintenance?

What are the annual operating expenses?

How strong is the warranty?

How about trade in value? Does this make/model hold it’s value?

What kind of downtime will I have for standard maintenance?

 

In other words, what does it cost to own this piece of contracting equipment?

Connecticut contractors need to look at insurance purchasing the same way. Just as in equipment, the premium does not reflect the total cost of ownership. Two pieces of equipment that have the same price tag could have very different costs of ownership.

What are the kinds of comparison points that you would look at when evaluating insurance?

First would be considerations of your Risk Advisor or Insurance Agent. You would compare:

Experience of the service team:

Breadth of capabilities (Safety consulting, Claim consulting, HR assistance, Bid spec review, Contract terms evaluation, etc.)

Willingness to receive performance-based compensation

Workers Comp Experience Mod Rate improvement plan

Problem solving abilities

 

Second would be the insurance carriers:

 

Which ones specialize in contractors of your type?

What specialized services do they have for contractors?

What is the average tenure of their claim reps?

Do they have a Preferred Provider Network that works for you?

Are their loss control reps construction specialists?

Are their in-house lawyers construction specialists?

These services are about two things: Preventing claims and minimizing the expenses of claims you have (The TRUE Cost of Risk). If one construction workers comp claim is mismanaged, it could not only cost you lots of time and money. It could cost you work. Every Connecticut contractor insurance buyer knows that an EMR of 1.0 or greater puts them in the “danger zone” of not only an increase in construction workers compensation premiums, but also in their ability to bid jobs for certain owners and general contractors.

What would the cost be to your construction company if you couldn’t bid or didn’t get $2M worth of work in the next three years? Will the broker/carrier combination you have just chosen based on a low bid be the best ones to prevent this from happening? Think of that carefully and be sure to pay as much attention to insurance buying as you do to equipment buying.

Five Ways to Prepare Your Construction Company for a Market Change

The workers compensation gurus at NCCI (National Council on Compensation Insurance) have declared a state of emergency. For the calendar year 2009, workers compensation had the largest single year deterioration in profitability in twenty-five years. Premium has declined an alarming 23% over the last two years alone. Combine that with a recessionary economy and negligible investment income and you have the “perfect storm”.

There are still only feint indications that there will be an immediate pricing correction to offset these losses. However, it isn’t too early for Connecticut contractors to prepare for what is certain to be a more punitive pricing environment in the near future.

When business insurance pricing is soft (as it has been since 2002) and underwriting standards are forgotten, every construction company gets a free ride. No matter how bad your losses are, there is always another underwriter standing in line ready to offer cheaper business insurance. Sad but true.

Change is near. Not today and maybe not tomorrow but definitely in the next 12 months. Workers Compensation and other forms of business insurance premiums are going to increase. Here are five things Connecticut contractors can do to be sure your workers compensation premiums (and overall business insurance) remain manageable:

1. Focus on Safety – All underwriters believe that past loss experience is a predictor of future loss experience. If you asked them the most important underwriting factor of all, safety would always be #1.
2. Focus on who you Hire – Most safety professionals believe that it is unsafe behavior which causes losses not unsafe conditions. Unemployment in construction is high and you have the ability to screen out those applicants who have a tendency to get hurt or who aren’t physically able to do the job. Find a Risk Advisor with the tools to assist you in this process.
3. Focus on Training – Everyone in your construction company needs to understand the financial impact of workers compensation claims.  Your construction company's success is their success, too. Be sure they understand it and are rewarded for it.
4. Focus on stability – Some construction companies make the mistake of changing business insurance companies too often. If your experience has been good, you’ll have some chits to cash in when the market turns. If your experience has been bad, the insurance carrier will want to stick with you to earn their losses back. Loyalty still means something. (Don't shop it around EVERY YEAR!!)
5. Focus on your Risk Profile – Imagine that you’re an underwriter of construction insurance. Your Risk Profile is everything that you would look at in a construction company to tell you whether or not that company is likely to have a loss in the future.  This is everything from loss experience, to how you conduct safety meetings, to the jobs you do and more. Creating the proper Risk Profile could take a year or more. Hire a Risk Advisor today to help you design and implement an improvement plan.

The market will turn. It always does. Stay ahead of your competition by preparing for the inevitable.

Correlations between Contractor Insurance and BP

One in a Million. A phrase that has been mentioned many, if not hundreds of times since the Deep Water Horizon Oil Rig sank over two months ago in April 2010. It has been mentioned by numerous sources that BP has a reputation for being less than prudent with their risk management efforts. We saw the result of this in 2005 when their Texas City refinery exploded, killing 15 and injuring almost 200 more, and then again this year when the Deep Water Horizon Rig sank, killing 11 and injuring 17. The explosion notwithstanding, I'm still very curious why a company would dig a mile down into the ocean without any plan to stop it if it were to rupture. The reason is that this was a Black Swan event. An event that no one seriously anticipated, and an event that BP CEO Tony Hayward considered one in a million. He acknowledged that it was possible, but the chances were less that slim to none that it would happen during his tenure at BP, and therefore didn't see any reason to spend time or money on a plan to contend with a worst case scenario.

Let's change it around a little. Say you're a Connecticut construction company, shopping your insurance around. You send your agent out to 15 different insurance markets and have them come back with prices. Even if those 15 insurers did offer you pricing, no agency has the time or resources to be able to comprehensively compare 15 different insurance policies to each other. Especially the types of policies that are written for construction insurance. But that doesn't matter, because you got a good price and have never had a major claim and your agent takes you golfing sometimes. It's tough to compare a run of the mill Connecticut construction insurance policy with a fully self-insured entity like BP, but the correlations between haphazard risk management definitely exist.

In my time in this industry, I've spent a solid chunk of time talking to contractors about insurance. It is extremely rare that there is ever a discussion initiated by the contractor that revolves around buying the coverage to fully cover their risk for everything that could happen in their course of work. More often than not, these conversations center around buying just enough coverage to be able to bid on work, rather than buy anything that isn't explicitly required by an upstream contract. But what happens when one of your heavies crashes into a school bus because the operator was texting on their phone? Is a 2 million dollar umbrella going to be enough? What happens when you're working near water and you dump a barrel of hydraulic fluid into the local water table? Did you skimp on a pollution policy because you've never had a pollution claim before? These, and similar types of losses occur to contractors every year, and more often than not will not only exponentially jack up your insurance rates and make it very hard to secure insurance via standard markets, but they have the very realistic potential to put your company out of business. The company with your last name on the trucks. The company your great grandfather started with 2 pickups and a few shovels. Is it worth it to save a thousand dollars a year on your construction insurance?

I wonder if Tony Hayward is wondering if he ‘bought enough insurance'? His company has much deeper pockets than yours, and they've already paid two billion out. By the time business interruption claims start coming up, or a hurricane blows tarballs of oil a mile inland, they'll be reaching further and further into their pockets.

We know that money is extremely tight right now for Connecticut construction firms, and that a low price on insurance can make the difference between making payroll or not, but this buying on price alone mentality existed well before the economy went down the tubes. Instead of saving money, save your company. Protect it from every risk that could befall it. Even the black swan one in a million claim.

If you don't want your company to be the next BP, give Construction Risk Advisors a call. Their staff has over 100 years building and servicing bulletproof Connecticut Construction Insurance policies. We know what can happen, and we know how to help you prevent it through contractual risk transfer, as well as make sure you have the right coverage in place when it does.

Does Your Construction Risk Management Program Propel Your Company Forward?

That may not be a fair question because it assumes you have a risk management program. Most mid-sized construction companies don't have one. At least not a formal one. It's more likely that they just have a construction insurance program that is reviewed annually.

If you did have one, what would it look like? And if you'll forgive my boating analogy (I'm looking out the window at beautiful sunny skies and wish I was riding the waves right now), is your risk management program propelling you forward or keeping you anchored in place?

If you had a risk management program it would start with strategic objectives. Just like any strategic objective a construction company might have, you would then put a plan in place to achieve it. Let's start with the strategic objectives and consider what they might look like.

If this doesn't sound like your construction company, you're not alone. When I talk to prospective customers for the first time, almost none of them have any kind of risk management plan (most have never heard of such a thing). Why should risk management be any different than other critical areas subject to financial measurement? You are certainly going to measure the profitability of a job. You are certainly going to measure productivity on a job. Then why aren't you going to measure the Cost of Risk?

The answer is simple. You don't know how. No one has ever taught you or assisted you. And why is that? Because the people who should be focused on helping you don't know how to manage risk either. They manage insurance. You know them as your insurance agent. Once a year they focus on the "price" of your insurance. Unfortunately, this short term focus on insurance price can lead to a long term disaster on cost.

Back to my boating analogy. If your risk management program is propelling you forward, you are making continual progress at reducing your total cost of risk. Soon your costs will be lower than other construction companies and you will have a competitive advantage. If you're anchored in place, your smart competitors will soon be beating you.

If you'd like to implement a risk management plan and put your cost of risk on a downward trend forever, contact us to see how a Risk Advisor is different from an insurance agent.

If You Own a Construction Company, There’s a Bulls-Eye on Your Back

As I skimmed Saturday's Wall Street Journal, I saw a handsome couple featured in an ad for fractional jet ownership. The caption read, "Avantair allows us to be more productive and efficient as a law firm". My immediate thought was, "What kind of law firm uses a private jet?" I found the answer at their website.

They listed twelve settlements on their home page ranging from $350 million (United States record) all the way down to a measly $12 million. I guess that explains the jet as does the sub-header under their name, "Over $800 million in Verdicts and Recoveries". I believe that plaintiff's attorneys get 30-40% for their fee so on the conservative side that's $240 million. Not bad for a two person, husband and wife law firm!

You might think that your Connecticut construction company could never be exposed to the type of liability that would attract a law firm like this. Think again. Any business owner could go bankrupt tomorrow if they get on the wrong end of a lawsuit and lack the proper insurance coverage.

 

Here's a quick sampling of their settlements:

• $23.4 million against a drunk driver who killed three people. $13.5 million of the verdict was for punitive damages, uncovered by insurance. How certain are you that no one is ever drunk behind the wheel of one of your company vehicles?

• $25 million verdict for a man who fell while inspecting a building. Do you own any property? Could someone fall from a height of 12 feet? That's what happened here. (The verdict was in 1998. What would it be worth in 2010? $50 million?)

• $12 million for amputations due to electric shock

• In Miami-Dade County, Florida a jury awarded a 78-year-old woman and her husband $20.98 million for the injuries that she suffered in a car crash that left her on a ventilator for live. The plaintiff sued the driver and the driver's employer. The woman's attorneys successfully argued that the defendant driver was so distracted that he made no attempt to stop and slammed into the rear of the woman's car. After subpoenaing the employee driver's cell phone records they proved that he had been on the cell phone talking at the time. The case settled for $16.1 million five days after the verdict.

Connecticut construction company owners can't think they are immune from the liability described in the suits above. If you own property and you have employees and you own vehicles and equipment, you have the potential for a devastating lawsuit.

You need to change your buying criteria for insurance today. Contractors tend to go for the "fools gold" of cheap insurance. Don't you do that! You've worked hard to build your construction company. Get a good advisor and protect it with the right insurance coverage.

Finding a Chief Risk Officer for Your Connecticut Construction Firm

In my last post, I talked about finding the Hulk Hogan of insurance agents. To be more formal, you want a CRO or Chief Risk Officer. Since you probably don't have one on staff, you've got to find one and make him or her one of your Trusted Advisors.

Construction risk management has become a field unto itself. There is probably no more complicated area of insurance than insurance for contractors. The best practitioners are all specialists. It has become impossible to dabble in construction insurance. It's a full time job and you need the best.

It's a down economy, bid lists are long and all that "stimulus" money must have ended up in someone else's checkbook. So I'm not suggesting that you create a new position in your company just for insurance. I am suggesting that you outsource the risk management function to someone who has the skills and training to be your CRO. That is definitely not your typical insurance agent, mainly trained to sell you insurance policies.

Why is this so important? Think about the way you manage risk now. If you're like most of your peers, you've given "insurance buying" responsibilities to either someone on your finance staff or someone in the HR function. Even though their responsibility is limited to managing your insurance, they haven't even been trained to do that much less be your internal CRO. Do you really think that having a part time, overworked insurance buyer with no formal training is the best way to protect your business from catastrophic loss? I didn't think so.

You're probably thinking that you are paying your insurance agent to protect your business. Think again. First of all, most of them lack any level of training beyond what they learned to get a license. That's not very much when you consider half the curriculum was dedicated to homeowners and auto insurance and you can take the training in a week. If you want to see a deer in the headlights, ask your insurance agent if he is your CRO?

Insurance protects the most valuable asset you own, your business. And you need more than just insurance in today's world. You need a full complement of risk management services and a talented team of people who can execute a plan to mitigate and manage the risks faced by your business. Cheap insurance managed part time or a crack risk management team looking out for you like a bodyguard.

You decide.

7 Ways to Prepare Your Construction Firm for the Hard Market

I know. We are still in a recession and you're more worried about getting your next job than you are about how to survive a hardening insurance market. However, chances are highly likely that the construction market will still be depressed when insurance prices spike. Here are seven steps you can take to be sure your company doesn't get hammered when the market turns:

1) Have a safety culture firmly in place and supported by senior management. This is what every underwriter looks at first. Even if you have had a rough patch with significant losses, insurance underwriters will be willing to hear your story if you are sincerely committed to focusing on safety and working with them to turn it around.

2) Understand your contracts, both upstream and downstream. Insurance companies don't want clients who get left holding the bag, particularly if it's due to sloppy language in a contract. It's important that you transfer as much risk as you can and not accept risk that isn't covered by insurance.

3) Make sure your website accurately represents what your company does. Don't brag about jobs that may look alarming to an underwriter.  Like that one time your Rigging Company trailered a space shuttle!

4) Do brag on your website about safety awards your company has received as well as your commitment to a safe workplace.

5) Commit to a return-to-work program for all injured employees. Insurance underwriters want to know that workers comp claims will be minimized.

6) Develop a Risk Management Philosophy that you can articulate. Insurance underwriters want to know that you aren't just out to buy cheap insurance. They want to know you care about preventing and minimizing losses. Here's ours

7) Work with your broker or Risk Advisor to write a three year plan to improve your company in all areas of risk management. This will truly blow the underwriters away.

This may sound like a lot of work and it probably is if you attempt it by yourself. Test drive our services or hire us as your Risk Advisor and we'll have you looking like a shiny new penny to the underwriters. Your premium may still go up but you'll be on the low side and beating your competitors when the construction market improves.  If you want to avoid the market swings of the insurance industry entirely, we have a great solution for that too. And here is a special report about 'How the Smartest Contractors Pay the Least for Insurance'.

The End is Near...

Anyone who has been buying commercial insurance for more than ten years knows that it is a cyclical business. Although the cycles aren't always the same, we usually have a sharp turn upward (the 9/11/01 catastrophe was the last time) followed by 5 to 10 years of softening prices. Since the softening started sometime in '03, we are now in the 8th year of a soft market. Insurance pricing usually gets craziest toward the end of a cycle and I'm just back from the insane asylum with late-breaking news.

But first for some context. I need to tell this story but I can't name names. However, I can say that the world of insurance agents & brokers is separated into two groups. The first group is comprised of organizations like mine; local and/or regional businesses that live in the community, go to rotary and serve their neighbors and friends. The second category is commonly referred to as the "national brokers". They are national or international in the scope of their operations and focus on large national/multi-national companies like themselves. From time to time, the national brokers go local and that's where my story gets interesting.

In a one week period this month, I witnessed two of the largest international insurance brokers acting as irresponsibly as a first year trainee. They proposed an annual program of insurance to substantial mid-sized companies (paying $300,000 to $500,000 per year for insurance) on a single sheet of paper. Both were at a significant discount to market and neither broker provided any information about what they were covering and services being provided. Just a one page premium summary.

It gets better. One of these clients has over $10M in outstanding claim reserves. That is probably more than all the reserves of all the companies in my whole office.

No responsible business owner should ever, ever, ever base their insurance buying decision solely on price. Would you buy a car without driving it? Would you buy a computer if you didn't know the specs of what's inside? Would you buy a TV without looking at the picture and checking the resolution of the picture? No one would base these buying decisions solely on price. Yet, successful business people will buy the one product which secures their economic livelihood and they will base the decision on price alone.

When sellers and buyers of insurance begin to act irrationally, the cycle is nearing its end. The national brokers can't grow but are publically owned and responsible to their stockholders. Most insurance companies are the same. They'll do anything to put another dollar on the books.

Sometime in the next 12 to 18 months profits will collapse, insurance company bankruptcies will be front page news and the cycle will turn. Will you be ready? My next post will explore ways to prepare for the coming hard market.

"Preventing Losses" article published in Building & Construction Northeast

Preventing Losses
Written by Robert Phelan

Can pro football offer lessons about how to run your construction business? Well, some of the challenges you face are much like those that face Coach Bill Belichick of the Patriots or Coach Tom Coughlin of the Giants.

Like them, you have to protect your "blind side." Failing to do so can bring big losses on a football field and in your business.

In his book "The Blind Side," author Michael Lewis reveals how football strategy has changed over the past 25 years.

One player in particular spurred change. Lawrence Taylor - the legendary "LT" - was right linebacker and a feared defenseman who typically made quarterbacks shake in their cleats.

Taylor always said his mission was to "destroy" the quarterback - which he nearly did when he once broke two bones in Joe Theismann's leg in a famous Redskins game.

Most quarterbacks are right-handed, so their blind side is their left. When they turn their heads to follow their right arm, they can't see what's coming at them from the other side. If it happens to be Lawrence Taylor fast approaching, they need the best protection they can possibly have in the left tackle position.

Because of Taylor, the left tackle position on the offensive line suddenly be­came one of the most important positions on the team.

Meanwhile, Bill Walsh, coach of the San Francisco 49ers, built an offensive strategy based on short passes. Joe Montana and his successor, Steve Young, moved the ball down the field and won three Super Bowl championships with this new strategy. The key element was the ability of the left tackle - the best player on the offensive line - to protect the quarterback's blind side.

What's the lesson for your business? It's one that affects you every day when you bid on jobs and try to fulfill contracts you already have. You have to know that you have a blind side that contains all those risks that can potentially destroy your business. These risks that exist in our world today are bigger and more complex than ever before.

As a business owner, do you ever go to sleep at night staring up at the ceiling, wondering what's going to get through your "offensive line?" There's a world out there full of Lawrence Taylors ready to destroy your business. As you look out at your construction operations, you may see heavy equipment, workers exposed to extreme and stressful work environments, and fleets of automobiles and trucks on the highway every day, which are vulnerable to weather conditions and other drivers who are not paying attention. All of those things look like accidents waiting to happen.

In 2001, a salesperson working for a building supply wholesaler was talking on his cell phone while driving a pickup truck. He ran a stop sign and plowed into a vehicle, injuring a 78-year-old passenger. She sued the wholesaler, a large multistate company, and the jury ultimately awarded her $21 million. The company was insured, but it had much less than $21 million worth of liability insurance.

This is a frightening number for any company to see because probably all of
us have gotten distracted while driving. It just takes one moment and a catastrophe could wipe out a company built and sustained for generations.

Last year, a job site crew for one of my clients had just finished a safety meeting when the foreman, who was sitting in a loader and wasn't paying attention, dropped a bucket on another worker's leg. If it weren't for the quick response and medical attention he received, this worker probably would have lost his leg. It would have been a multimillion-dollar loss instead of a relatively quick recovery.

Another sobering example occurred when a bridge contractor had an employee working in an elevator shaft. He was their most experienced and safest em­ployee. It was the end of his shift, and he thought to himself, "I just need to do one more task, take one more minute." He stretched himself beyond the safe zone and fell 30 or 40 feet down the elevator shaft, landing on his back and his legs, breaking the femurs in both legs. He would have been killed if there hadn't been loose pieces of plywood stacked in the bottom.

Everything you've worked for can vanish in a moment. It would only take one multimillion-dollar catastrophe to either leave your business with an uninsured loss or stuck with such exorbitant insurance premiums that you can't really compete anymore.

Force yourself to ask this question, "If one of our workers was involved in an automobile accident where someone was seriously hurt because the worker was texting on a cell phone, could I afford a $21 million jury verdict?"

When you have a serious accident, your workers' comp experience mod rate will soar. This is a number that compares your claims experience to other contractors of your type. If your mod rate is say, 2.0, your premiums will be twice as ex­pensive as average. A high mod rate can put your construction company on the edge of viability.

So, who - or what - is your "left tackle?" Here are a couple real-life ideas:

First, it's an unremitting, 24/7 effort on safety. Hazards never sleep. Safety can't ever take a break, either. You have to create a safe culture. Some of the biggest companies, notably Turner Construction, have done an exemplary job with safety, striving to get as close as possible to zero losses. Small- and middle-market construction companies can do the same thing - and they must.
Second, it's having enough of the right kind of insurance, which becomes more affordable over time as you rack up an outstanding safety record year after year.

These two ideas alone could provide you with a measure of safety equal to a left tackle holding back Lawrence Taylor. It's a blind side you simply must patch up.

Robert Phelan is CEO of Construction Risk Advisors in Torrington, Conn.

Link to the article on Building & Construction Northeast's site

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When Buying Cheap Insurance Leads to Disaster

Bad insurance decisions can sometimes have catastrophic consequences for construction companies. In most cases, cheap insurance is the culprit.

We came across a very successful third generation company with a large, loyal client base. But they had an insurance problem. Typical workers comp claims for one year usually totaled $50 - $100,000. Now they had a year with $1M in claims, ten times the average. Their EMR (Experience Mod Rate) had spiked to 1.24 costing them an extra $100,000 per year.

How does that happen? Two things had gone wrong. They chose an insurance company selling cheap insurance. They chose an insurance agent who provided no services to help them with their problems.

When we arrived on the scene (Risk Advisors to the rescue), their workers comp was Code Blue. We needed to prime the paddles and get the patient stabilized. When a company of this size has a million in claims in one year it isn't just bad luck. They had been buying cheap insurance from insurance agents for too long and it finally caught up with them.

How does a Risk Advisor approach this challenge differently than an insurance agent? An insurance agent has no tools in the toolbox other than insurance products. Unfortunately, this wasn't an insurance product solution. A Risk Advisor has a wide range of services and when the patient has no pulse, you need to diagnose quickly and then begin treatment. Here's what we did:

• Explained to management the financial consequences of a high EMR (they were stuck with that bad year for three years at an extra cost of $100,000 per year). They had to take immediate action because another bad year in the formula would compound the problem

• Obtained management's buy-in to invest in safety

• Provided customized safety training to all employees at all locations to create a safe culture throughout the company

• Trained middle management to understand the importance of a RTW (Return to Work) program. They needed to understand both the financial consequences as well as the importance of a quick recovery for the injured worker

• Worked with the HR department to manage all open claims for prior years (If you read my last post, this is another important distinction between a Risk Advisor and an insurance agent. Insurance agents don't service policies they didn't sell. A Risk Advisor does whatever it takes to solve the problem)

• Intervened with prior carrier (the one with the cheap insurance) to make them manage their claims properly so our client wasn't unduly penalized in their EMR.

Fortunately, this story has a happy ending. The patient was resuscitated before it was too late. They suffered for three years but their EMR is about to drop 40 points and return to normal. They're going to save $100,000 per year going forward AND provide a much safer workplace for their valued employees.