Insurance Pricing Is Stabilized, But Beware of Other Challenges
July 6, 2015
This article originally published in Utility & Transportation Contractor, February 2015.
By Carl M. Bloomfield, AAI, Vice President
For all the challenges of doing business as a contractor in the current regulatory and economic environment, there has been one area that has been generally favorable to contractors – obtaining competitively priced insurance coverage that offers broad protection. However, despite somewhat stable pricing in the market, exclusive of New York, there are still some challenges to be aware of.
Workers Compensation Costs
The cost of Workers Compensation insurance remains one area where there is consistent pricing pressure. Almost everyone is aware of increasing health care costs and this has a direct impact on your Workers Compensation insurance. In addition, an aging workforce and a higher dependence on prescription drugs are causing systematic cost increases. Insurance companies have been trying to dig out of the hole that was left during the Great Recession where written premiums were at their lowest levels in over a decade, which resulted in some of the highest loss ratios on record.
At one point during the Great Recession, for every $1.00 written in premium, the insurance industry was spending almost $1.20 in claims, administrative and operating costs. By applying consistent rate pressure for several years, at the end of 2013 the industry was only spending about $1.01 for every $1.00 collected in premiums. That is a remarkable turnaround, but unfortunately it was achieved on the backs of policyholders who paid higher rates. And despite the improved results, we are continuing to see insurance companies take a much harder stance on Policy Audits and Class Codes. Insurance companies, along with the State Workers Compensation Bureaus, have been much more diligent in making sure payrolls are assigned to the correct Class Codes. This has caused some insureds to experience a significant increase in Workers Compensation costs retroactively, which has not been contemplated in their bid pricing. Workers Compensation insurance is going to remain a challenge for years to come.
Unfavorable Case Law
Courts across the country continue to challenge liability coverage provided for construction risks. Some cases are at odds with the traditional understanding of how policies are interpreted and how coverage is provided. Various jurisdictions seemingly have a different viewpoint on how an occurrence is defined and how the primary versus excess limits apply. By messing with the definition of an occurrence, the courts have turned on its head what we would traditionally expect a General Liability policy to cover in the areas of Faulty Workmanship and Resulting Damage. In addition, state anti-indemnity statutes that limit the amount of contractual risk that can be transferred are being extended to also limit the additional insured coverage being required of subcontractors. This was described last year in a series called, “Contractual Risk Transfer.”
The resulting lack of clarity and understanding you might have with respect to the risks you may be assuming or transferring for any given project can impact your business. It is no longer only important to make sure your contracts are well-written and combined with broad liability coverage, but now it is equally important to understand the jurisdictions in which you are working and their interpretations of insurance policies.
Additional Insured Coverage
One of the standard insurance provisions in any contract is the requirement to add other parties as an Additional Insured. As discussed in the “Contractual Risk Transfer” series, Additional Insured endorsements have gone through a transition over the past several years. There are hundreds of different variations of Additional Insured endorsements in use, each with its own pitfalls. One of the specific growing concerns related to Additional Insured coverage are endorsements that require a direct contract requirement between the contractor and the Additional Insured in order for coverage to apply.
Oftentimes a contract between two parties also requires numerous other entities be included as Additional Insureds, such as various governmental entities, engineering firms, funding sources, etc. Additional Insured endorsements requiring a direct contract agreement between all the various parties named in a contract in order for coverage to apply present a significant obstacle for these various other entities to obtain the coverage they are expecting from the contractor. In the event these other parties are relying on this Additional Insured coverage and it is not there, the contractor can be faced with uninsured claims, breach of contract suits and a lost customer.
Horizontal versus Vertical Exhaustion
Many jurisdictions have weighed-in on how the various limits and insurance carriers will apply to a loss given the numerous parties typically involved in a construction project. Whether the limits must be applied vertically (beginning with the primary coverage and moving into excess coverage) or on a horizontal basis (all primary insurance available for all parties involved must be exhausted first before an excess policy will apply) can differ by jurisdiction. As a result, many contracts are including a requirement for the subcontractors to carry $2,000,000 per occurrence limit with a $4,000,000 aggregate limit on the general liability policies. This is especially the case in a jurisdiction like New York which looks for horizontal exhaustion of limits in excess policies. By requiring subcontractors to carry higher primary limits, this insulates the owner’s and general contractor’s primary policy limits in the event of a claim that horizontal exhausts. At a time when insurance companies are looking to restrict or tightly manage their exposures, many are seeking to get significant dollars for these additional primary limits.
This issue of horizontal versus vertical exhaustion is even causing some large general contractors and owners to dictate which Umbrella Liability insurance companies their subcontractors can do business with because of the particular position that insurance companies have regarding the exhaustion of limits during a claim scenario involving Additional Insureds. This can obviously present an issue if your Umbrella Liability insurance company is on one of the “forbidden lists,” because now you will have to go and get a project specific Excess policy. The former could make your bid uncompetitive compared to another contractor who does not have to go get that project specific Umbrella policy because their insurance is with an approved insurance company.
Employment Practices Liability
An area of exposure that probably doesn’t get a tremendous amount of attention in the contracting community is Employment Practices. Unfortunately, New Jersey is usually regarded as the second worst state in the country, only behind California, in terms of the legal regulatory environment and Employment Practice claim activity. This is causing many insurance companies to either pull out of the state completely or significantly increase both premiums and deductible levels. This is a problem that is not going away anytime soon and most contractors don’t have robust Human Resource Departments to adequately address Employment Practice issues.
Contractors and their insurance brokers should be aware of these potential insurance-related issues that are prevalent in today’s marketplace. This way you will be able to take a proactive approach to addressing these issues before it costs you a job or places an unnecessary financial burden on your business.
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