Construction Risk Blog

Construction Risk Advisors Solution to COI Administration (Part 3 of 3)

The job of an insurance agent/broker is to sell insurance policies on behalf of the insurance companies they represent. Even worse, 95% of them are generalists who are only partially dedicated to the construction industry. This means that if you are relying on them to help you with COI administration, don't hold your breath.

A specialized Risk Advisor, dedicated to the construction industry is a different animal. They are a pro-active service provider who understands COI administration in minute detail. If you were to engage one of them, this is the process they would help you implement:

• If you are an upstream party, they would work with you and your legal counsel to be sure you've transferred downstream as much risk as possible

• They would also help you keep your contract current with legal developments in your jurisdiction as well as insurance coverage enhancements and changes

• If you are a downstream party, they would either read or train someone on your staff to read the insurance specifications on every job you bid, and advise what to agree to as well as push-back on

• They would make sure that the coverage you have is adequate to comply with the types of contracts you are signing

If you are an upstream party, they would provide you with the "Perfect COI". This would be a sample COI you provide to all subcontractors and sub-subs to show them exactly how you want the COI to read along with any attachments required (additional insured endorsements, waiver of subrogation, copy of specialty coverage policy, etc.)

Lastly, they would teach someone at your construction firm the process of checking every Certificate of Insurance for as long as the downstream party is obligated to you. This is the final element without which all the others are meaningless. It is also the fourth and final "C" in the C4 process and the subject of my next post.

Why Do All Contractors Struggle with Certificates of Insurance? Part 2 of 3

You really don't want to hear this but I won't be of any use to you if I don't tell it straight. There are three reasons that COIs don't work well for the construction industry:

Ignorance
Laziness
Weak COI Administration

Ignorance - Every party to the COI is ignorant in one way or another.

The lawyers who draft the insurance language that goes in the job specifications and contract are ignorant about the nuances of insurance coverage and many times use antiquated or inappropriate language

Insurance underwriters think that their clients have perfect insurance administration systems

Insurance agents, who are often generalists, don't begin to understand the intricacies of the specific coverage forms required in construction contracts

Upstream owners and contractors don't understand what they should be looking for when they receive a COI

Downstream subs and sub-subs don't know really know if the COI they are sending upstream accurately reflects their true coverage or whether it's what the contract requires

Laziness -

All parties are lazy about changing a system they don't realize is broke.You,the contractor, can't be lazy any longer! Got it? This little piece of paper called a Certificate of Insurance (COI) can mean the difference between staying in business and shutting the doors. You have to figure out what it (the COI) means and how to administer them (all the COIs you send or receive) or be prepared to keep the $$ around to pay an uninsured claim.

Weak COI Administration - It's rare to find a contractor with a bulletproof system

In most construction firms, this amounts to nothing more than attaching whatever COI is provided (by a downstream party) to the appropriate contract and making sure that the coverage is renewed for as long as the job remains active. This doesn't cut it any more.

In the next post I'll describe the ideal COI administration system that a Risk Advisor would implement with you.

Read part 1 of our 3 part series on COIs

 

What the Hell is a Certificate of Insurance and Why Should I Care? Part 1 of 3

In its simplest form, a COI is a single sheet document that describes the insurance coverage of a contractor. It includes such details as the insurance carrier(s), policy term, limits of coverage, the agent providing the coverage, notice of cancellation provisions and other pertinent coverage details.

Unfortunately, insurance policies have become very complex documents and it is impossible to represent them properly on a single sheet of paper. (As I wrote that last sentence, I realized that maybe that's the problem. The COI form has not kept pace with the complexity of construction contracts.)

Maybe at this point you say, "Big Deal! I've been providing/receiving COIs forever and it hasn't hurt me yet." I'll promise you this. It will if you don't change and you should care because your business is at stake. Giving or receiving a bad COI is like the iceberg was to the Titanic. By the time the problem is spotted, the disaster (uncovered claim) has already occurred.

Here's what a COI won't tell you:

• Whether one or more of the insurance companies being used is financially unsound
• Almost 100% of the time, one or more parties are required to be added as Additional Insureds on one or more policies. In most cases, a COI won't tell you if the right Additional Insured endorsement has been used. There used to be one or two of these endorsements. Now there are dozens.
  
• If coverage is required to be kept in place for one or more years after project completion and you don't get a new COI every year, you won't know if the party providing the COI has maintained the required coverage.
  
• Specialty coverages like pollution, professional and builders risk are all written on non-standard forms. A simple COI tells you nothing other than the limit. The limit is meaningless if the coverage is non-existent due to exclusions.
  
• Lastly, but maybe most importantly, nothing on the COI will tell you whether the coverage is in compliance with the contract specification. Only a trained human being can tell you that.

In my next post I'll describe the three reasons all contractors struggle with COIs.

Contractors Need to Check Certificates of Insurance or Else

Let's say you've done everything right. Let's say you've got all the coverage you need for upstream parties and your specifications to downstream parties spell out exactly what is required by of them. Most contractors think their job is over. All they have to do is keep a current COI on file (upstream or downstream) until project completion. Far from it but this is where the system breaks down. Most contractors have no one on their staff that is trained to "Check" a COI to be sure it matches the requirements in the contract.

What if the insurance carrier(s) is changed and the new one has financial problems?

What if limits are changed?

What if the Additional Insureds are left off the renewal policy?

What if specialty coverage is discontinued?

What if coverage has to be maintained for three years and you stop checking after job completion?

What if your sub didn't even read the spec and just gave you their standard COI? Would you even know?

What if you misread the spec (or your agent did) and you're providing the wrong coverage to an upstream party?

What if you change carriers and you don't realize that the new (and cheaper) coverage isn't as broad as what you had before?

There are lots of "What ifs"; any one of which could be disastrous to your business. So why does no one pay attention to this critical element? Because it takes discipline, consistency, education and training to manage COIs properly.

Most contractors think that all COIs are created equal. That as long as they have the COI they're all set. If something bad happens and the sub doesn't have the right coverage, you can sue them and recover. Maybe. For a serious uninsured claim, the sub won't have millions in their checking account even if you prove them wrong.

Building a process to make COI administration bulletproof does not have to be difficult or intimidating. A Risk Advisor can assist you, guide you or train you to execute flawlessly. Contact us today to learn more.

Closing Your Doors After 50 Years (Contract Compliance Part 2)

Continued from Yesterday...

Your back is against the wall. As The GC, you are clearly responsible for this school being shut down and now there is $6 to $10 million of damage and expense that you've got to pay. But wait. It was the sub who installed the windows who really caused the problem. You're off the hook after all. You get your contract administration people to bring you the sub's contract along with their Certificate of Insurance (COI). Relief is in sight.

You review the documents and you see that the COI shows that the sub carried pollution coverage. Whew! They also agreed to hold you harmless. There's light at the end of the tunnel. You pump up your chest and feel good that you're so smart to have the right procedures in place to transfer liability to others.

You ask your attorney to send a letter to the sub asking them to report the claim to their carrier and telling them you expect full indemnification just as they agreed to in the contract. You sub sends a letter back that provides these distressing facts:

• The COI being referenced reflected the sub's coverage at the time they completed their work. That was two years ago.

• They didn't know they had to maintain the pollution coverage. No other job required it so they non-renewed and saved $22,000 per year.

• This tough economy has hit them hard. The 40 man crew they carried on the school project is down to 5 and if they don't get a job soon, they'll be shutting down. They have no money and can't indemnify you the GC.

Certificates of Insurance can be your friend when managed properly. When managed sloppily, your company can sink as quickly as the Titanic.

If you had notified the sub at the end of the job that they had to maintain the pollution coverage for three years and then monitored them by getting a new COI each year, you might have had a chance at survival. Since they have no coverage, you have no coverage and you would come up a little short paying $6 to $10 million form your checkbook, you're out of business. Fifty years of hard work gone because you lacked a simple administrative procedure. A good Risk Advisor would have helped you fix this blind side before your company was forced out of business.

Can I Borrow $10 Million to Pay This Uncovered Insurance Claim? (Contract Compliance Part 1)

First, let's look at this subject if you're on the giving end i.e. providing a Certificate of Insurance (COI) to an upstream party. You think you've done everything right so far. You've read the contract and sent the appropriate provisions to your insurance agent for review. You've made changes to your coverage so you're in compliance. Now you provide a COI upstream and it's accepted (no one tells you there is a problem). You begin the job, start making money and life is good. Is there a black swan in your future? Let's pretend there is.

The job was a school renovation. You're a GC and your work was valued at $12 million. Two years after project completion, kids start getting sick. Toxic mold is discovered because new windows weren't installed properly. The school has to be shut down and $6 million in repair work performed. In addition, portable classrooms are brought onsite so school can continue. Big loss. Big problem for you.

The $6 to $10 million question is, "who is going to pay for this disaster?" The insurance specifications for this job required that you buy pollution insurance with mold coverage. The spec also required that you and all subs maintain this coverage for three years post-completion. Since you paid an extra $36,000 for this coverage, you know you did that. You notify your agent and breathe a sigh of relief when he says, "No Problem". The next morning your agent calls and asks if he can come and see you in person. You agree and panic at the same time.

You can tell by the look on your agent's face that your panic was justified. He informs you that your pollution coverage has a mold exclusion. Since your agent spent most of his time taking care of your bonds (he is a surety agent dabbling in insurance) he didn't pick it up.

How did this happen? You relied on a professional and were misinformed. But the upstream party accepted your COI, you say. Yes, but most of the time those responsible for contract management don't know any more about insurance coverage than you do. Most importantly, COIs can be very deceiving. Just because there was a pollution policy listed on the COI doesn't mean you are in compliance with the spec.

As a GC, you are also on the receiving end of a Certificate of Insurance in this claim example. Let's look at your problem there in the next post.

Construction Contract Disasters

One mistake many contractors make is projecting past experience into the future. They think because it has never happened to them before it won't happen at all. They think all contracts are created equal and it would be too time-consuming to negotiate insurance requirements on every one. If you adopt this attitude, sooner or later, a serious claim is going to bite you on the ass.

Remember the Titanic? It wasn't supposed to sink. Trillions of dollars of global wealth wasn't supposed to evaporate in October '08. The federal government wasn't supposed to take over GM. These are called "black swan" events in a book by the same name written in 2007. No matter how many times you've only seen white swans in the past doesn't mean you won't see a black swan in the future.

(Top Ten List from Black Swan)

Real Life Examples:

Contractor's employee was killed on a job and contractor held owner harmless. Employee's estate sued owner and contractor had to pay claim (third party over action), even though it was sole fault of the owner, because federal court overruled state court.

Contractor neglected to buy builder's risk on large project because owner didn't ask for evidence (certificate of insurance). Building burned with serious uninsured damage.

GC hired roofing contractor. Roofing contractor's employee fell off roof suffering severe injuries and becoming a quadriplegic. Injured employee sued GC for failure to maintain safe worksite. Because of a weak hold harmless between GC and roofer, GC gets stuck with the claim.

These contractors had never experienced claims of this type in the past. One of these claims is seven figures and two are eight figures(That's 10 MILLION+ !).

Could your company absorb an eight figure claim?

What would happen to your bonding capacity if you had to pay several million on an uninsured claim?

Would you lose lots of good work after that?

Would your reputation be hurt?

Would your surety even want to keep you as a client?

Answer these questions before you discount the importance of this topic. Without a good left tackle in the form of a Risk Advisor, your black swan is waiting around the next corner.

Contract Compliance for Dummies, Lesson 1: Contracts

No offense meant with the "for Dummies" title. I just happen to know that everyone, contractors, lawyers, insurance underwriters and risk managers, are dummies in one form or another when it comes to construction contracts. Collectively we've made a mess of these contracts but I think I can help you begin to sort it out.

The first step in my C4^TM process is Contract. As simple as this step sounds, it's often skipped or dangerous shortcuts are taken. You have to READ the contract or your Risk Advisor has to read the contract before you bid the job. That's right. Someone who understands the lingo needs to READ (I can't emphasize that enough) the contract and take appropriate action. Lots of jobs are being bid by contractors who have no idea what obligations they are signing on for. This is especially true right now when there is so little work and everyone is bidding like crazy.

There are three pieces to reading the contract:

1) All contractors are downstream parties to the contract. GCs or CMs to owners, Subs to GCs and Sub-subs to Subs. The first thing a downstream party needs to understand is what risks are being transferred to them. Are they reasonable? Can they be transferred to another party? Are they deal breakers? In other words, if you can't make them go away do you need to pass on the job?

2) If you have to buy additional insurance to comply with the contract, what is it going to cost? Is the coverage available and affordable? Can you get the upstream party to pay for it? Can you get a downstream party to pay for it?

3) If you are passing the same upstream requirements downstream to subs and sub-subs, are the requirements clear to them in your specs or pro-forma contract? Ignorance is not an excuse and will not hold up in court. If the downstream party doesn't comply and you do, you get stuck with the problem.

Later on I'll be providing a more in-depth checklist to assist with this process and make it foolproof for you. In my next post we'll look at what can go wrong if the Contract phase of the C4^TM process goes wrong.

Navy SEALs Use C4 and So Should Every Contractor

What does this have to do with how contractors manage risk? As I've said earlier, I want to make this insurance and risk stuff easy to remember. C4 the explosive destroys everything. C4^TM, the contract compliance process, is what you need so your business isn't destroyed. I know that is a reverse analogy, one C4 destroys and the other protects but I just want you to remember my C4^TM and here's what it is:

1. Contract

2. Compliance

3. Certificate of Insurance

4. Check

There it is. Four simple steps. Not too complex. Easy to remember. No insurance mumbo jumbo. Just four easy words to remember.

 

Not so fast. There is a lot of process embedded in those words. Each one is a critical element. Leave out any one of them and the whole thing falls apart. If that happens, you're the one left with all the risk.

In the next four posts I'll dig deeper into each one of these elements. Then you'll know how to work with your Risk Advisor to build your own process. This blind side will be protected and you can move on to others where your Left Tackle may be missing.

This video shows just how little C4 can cause a huge damage to a structure, and begs the question of how much C4 are you ignoring when you sign construction contracts?

 

 

 

Contractors Risk Everything Without a Left Tackle

In an earlier post I talked about Lawrence Taylor's impact on football strategy. LT's aggressive attacks on the quarterback dramatically increased the importance of the Left Tackle position. Since the quarterback is the most valuable asset on the team, the Left Tackle became equally valuable as the position protecting the QB's blind side.

Contractors have literally hundreds of blind sides. Over the course of the next few months I'll be detailing them here. I want to start today with what I think is one of the most important yet overlooked blind sides to most contractors. Contractors are called contractors for a reason. They sign contracts to build things. Risk is transferred in those contracts and that's when it can get ugly.

One of my goals in this blog is to simplify some of the concepts related to risk so that contractors are more conscious of them. Here's a formula I want you to memorize:

RT = LT

Translated, that means Effective Risk Transfer = Your Most Important Left Tackle

When you sign a contract, you have upstream obligations and most of you hire some subs and create downstream obligations. The complexity of contracts today and their insurance requirements turn this into a minefield. Once risk starts to get transferred, it's anybody's guess who will get left holding the bag in this high risk game of musical chairs.

When it comes to contracts, an experience and well-trained Risk Advisor is the Left Tackle you need to have on your team. You need a specialist who is reading construction contracts every day. Someone who understands the legal as well as insurance aspects of construction agreements. Over the next several posts I will discuss a process that your company needs to follow on every contract.

Safety Research Reduces Risk for All of Us

Safety Research Reduces Risk for All of Us

The Insurance Institute for Highway Safety (IIHS), a non-profit research organization funded by auto insurance companies, has long been a leader in promoting highway safety. As we stop to give thinks on this holiday, let's thank them for the hundreds of thousands of lives they have saved.

IIHS was established 50 years ago and at that time there were 36,000 highway fatalities annually. Fast forward to 2008 where there are now three times as many licensed drivers, four times as many cars and ten times as many miles driven than in 1960 and the number of highway fatalities has actually gone down to 34,017. If you do the math, it means that 500,000 lives have been saved. Fifty years ago five people were killed per-100-million vehicle miles. That number is now 1.36, a reduction of 75%.

 

 

 

 

 

 

 

 

 

 

 

 

The insurance industry has had a public relations problem forever. Too few people understand the positive impact the insurance industry has on society today. In addition to IIHS there is also the Institute for Business and Home Safety. This is another organization funded by insurance companies to promote business and home safety. They are currently building a $40 million research and training facility designed to identify and promate effective methods of property loss reduction and prevention. This research will improve construction methods and materials, improve building codes and ultimately prevent losses that disrupt the lives of millions of homes and businesses.

More directly, insurance companies help businesses (contractors in particular), in the area of occupational safety and health. Workers comp insurers are the primary source of loss prevention expertise for U.S. businesses. In the early part of the 20th century, a manufacturing worker had a 25% chance of being injured on the job. Now it is 5%. Insurers along with OSHA have played a pivotal role in this achievement.

As we give thanks to an industry that is often taken for granted, we must also remember that it is our friends and neighbors who are employed by these companies. They are the ones who live in the trenches every day working hard to save lives and property and to help return injured workers to their jobs as quickly as possible. Without these skillful professionals, our lives would be diminished and our businesses less valuable.