Underinsured and At Risk

A recent national survey revealed that 60% of contractors with revenues between $25 million and $100 million have no environmental insurance, and 21% were not even aware that their commercial general-liability policy contains an "absolute pollution exclusion." Curley cites the factors that contribute to this underinsurance phenomenon. "First, most firms, particularly smaller firms, feel they are never going to have that kind of exposure. And if they have renewed year after year, never questioning their coverage, and their agent doesn't regularly review their options with them, it's easy to be complacent. The second factor is cost. Who needs another expense? But in today's 'soft' insurance market, excellent values are available. It's a great time to buy. Up your coverage and still reduce overall insurance costs. Finally, no one is required to have, for example, pollution coverage. But risk and policies have drastically changed over the past 10 years. In the 1980s, asbestos claims large enough to sink insurance companies appeared. To deal with it, pollution coverage was written out of general liability [GL] policies. Now firms should add this coverage to their existing GL or purchase stand-alone policies. Today there are probably 10 to 15 companies that specialize in covering these hazards. Eight years ago, few to none offered it. Now it's available at 75 percent of the cost it might have run you five years ago."

"Environmental liability doesn't discriminate," emphasizes Jeff Slivka, vice president of construction for ECS Underwriting in Exton, PA, one of the carriers specializing in liabilities associated with environmental exposures. "We spend a lot of time raising the level of awareness in the construction industry, changing the mindset about 'vicarious liability.' Kaiser Aluminum in California was a landmark case in which an excavating and grading contractor was held liable for unknowingly spreading previously contaminated soil. With increasing numbers of projects on brownfields or nonvirgin land driven by a 'return-to-cities' mentality, these issues are going to increase. Additionally, the nonpoint-source [NPDES] provisions of the Clean Water Act definitely are going to fuel third-party litigation. Many excavation and grading professionals are also street and road contractors. With NPDES, runoff complications can be devastating. For example, a strip-mall parking lot was constructed. After applying primer oil, the workers quit for the day. During the night, rain washed the oil into a nearby creek. The cost to remedy the problem was $100,000. Additionally, everyone is going to have to be cautious about turbidity problems, suspended soil, and other particles in waterways, or they are going to find themselves in an environmental mess. Today, attitudes are more freely expressed in lawsuits. It's not the '60s anymore."

"I've been doing environmental coverage for years," relates Thomas Owen, vice president of environmental underwriting for United Capitol Insurance Company, a subsidiary of Frontier Insurance Group, in Atlanta, GA. "We never used to write coverage for nonenvironmental classes of business. Now we do---lots of it. And earthmoving contractors represent the largest example of that. Unfortunately, neither agents nor insureds fully understand how little they are covered for environmental risk. The change in terms and conditions for pollution itself is not well understood. Is that coverage narrow or broad, excluded or included? Was it a sudden and accidental pollution event [72 hours] versus gradual, claim-made, or occurrence-made? Did the contractor aggravate an existing situation or create a new one? The Kaiser case forever changed the realities of vicarious liability. A nonenvironmental contractor---it happened to be an earthmoving contractor---didn't know the soil it was spreading around was contaminated. Since then, this class of insurance has been evolving. The language of terms and conditions is developing. And the prices have been coming down as insurance companies more clearly understand their true exposure in this area. For example, a $30-million pipeline contractor might have paid $50,000 for this type of coverage in the past. Today that same coverage runs $12,000."

Some firms deliberately opt to self-insure. "Their attitude, basically, is if something happens, 'Here are the keys,'" Slivka states. "They are prepared to go out of business if hit by a lawsuit of any magnitude. But if the goal is to build a company for the long term, even if it is a smaller family firm, proactive coverage is critical."

Owen agrees. "In this soft market, there really is no reason for someone not to have coverage. We have a product that runs only $1,500 per million in coverage. Without it, you're self-insuring. Even though you are protecting yourself against a very accidental, infrequent incident, any time you stick a blade into the ground, you are exposed."

More Assets Mean More Exposure

Environmental risk is on the rise. "There is less and less new construction happening on virgin land," notes Owen. "More development is redevelopment on brownfields, former commercial properties.where you won't know all the former past uses. This is absolutely a trend in the construction industry and dramatically increases the chances you could hit a tank, a pipeline, an unknown contaminant."

Predictably, a firm's exposure to this type of risk also parallels business growth. "Logically, as your firm's receipts grow, your incidental exposure commensurately increases," observes Owen.

"More assets, more exposure," concurs Michael Prokop, vice president of marketing for CNA Insurance, one of the top five commercial insurance carriers. He believes agents are important in matching coverage to exposure. "It is so critical for businesses and their agents to continually examine their insurance coverage. It's scary how many firms out there have no coverage or are underinsured in today's litigious culture."

New Classes of Insurance Coverage

"The standard, 'admitted' market covers the normal needs of the grading and excavating contractors well. However, this standard market does not provide environmental risk coverage. Most contractors don't realize the extent to which they have no coverage for pollution," Owen points out. "We are classified as an 'approved' carrier. The difference between 'admitted' and 'approved' is often misunderstood. 'Admitted' means that they have been admitted to carry a class of insurance, their rate has been approved, and there is a state fund should that company goes belly up. 'Approved' means 'approved as surplus and excess lines.' Basically, approved is allowed to cover risks that admitteds won't touch and will provide businesses with coverage options they wouldn't have otherwise had. In fact, some firms play the system in order to be able to purchase our approved coverage. In some states you have to get three declinations before you can obtain approved. Without the options we offer, there would be some classes that would not be allowed to obtain coverage for these environmental hazards."

"We at CNA," says Prokop, "recognized that we had more exposure than our rates reflected. Most often the courts will side with the insured. We bought those claims, we didn't collect the rates, but we got the loss! We modified the terms and conditions of our GL policies to reflect that, and now that coverage must be purchased. For example, an innovative coverage we provide covers for incidental rework and design modification. If an earthmoving contractor finds itself modifying specs in under 10 percent of its jobs, this coverage protects it against out-of-spec errors and omissions. Most earthmoving contractors think their GL will cover them in these cases. No longer."

Get More for Your Insurance Dollars

Industry experts all emphasize the historically low rates now available. Says Slivka, "We have two factors at play. One, the industry has experienced less catastrophic loss than in the past, and two, the financial market is booming. Extremely high capacity, which continues to be available, is driving down rates." This is a great time for earthmoving contractors to make sure they are getting the maximum coverage possible at the lowest possible prices. "I would rather retain an established account even if I have to discount it for the third or fourth time rather than replace that account with a new piece of business," admits Curley. "Everyone's fighting for market share. Contractors should take advantage of that."

"We know that most contracting firms are underinsured," repeats Prokop. "Owners and their agents are not examining value versus exposure. Employees are always going to be your number-one concern. Insurance should be number two. A good agent will regularly meet with you and review your coverages and needs. Some firms will bounce from one agency to another to get the lowest rates when staying with a strong agent and pushing for the best rates will get you farther. And it's a buyers' market right now. Rates are down 30 to 40 percent over the past four years. Overall, rates are adjusting and are now more in sync with true exposure. The key points to consider: (1) Does your agency know your class of business? What premium do they write for land-improvement contractors? One account for $30,000, or 20 for total premiums of $300,000? That's a big difference. (2) Do they understand or take the time to understand your operations? Listen to how they talk with you. Listen for cues. Do they know the lingo? (3) Are they willing to provide references? If they aren't, walk. All of this is extremely critical. Your agent is in control. He will ensure that you obtain the best possible coverage and limits. He shouldn't be your agent just because he is your friend. It's an ongoing relationship that is either going to save or cost you money in the long run."

Many contracting firms in this class are smaller in size. That should not interfere with their ability to obtain the best possible rates. "Our latest research shows that there are approximately 900,000 contracting firms across the country," notes Slivka. "Of those, 800,000 employ one to three employees with less than a million in revenues. Seventy thousand gross $1 million to $10 million annually, 25,000 gross $50 million, and 5,000 average over $100 million." Prokop emphasizes, "Smaller firms are not immune to these risks. And with the right agency and the right agent, they can obtain competitive rates."

Saving Money: Safety First

"The insurance market has been great for buyers for several years. But it's starting to firm up in certain lines like workers' comp," notes Chester Lassel, senior external relations specialist with Liberty Mutual Insurance, one of the country's largest providers of workers' compensation insurance. "If your firm has a better-than-average safety record, your workers' comp rates might stay the same or drop slightly. But if your firm records worse-than-average losses, you should expect an increase. Management has to believe in running a safe operation. The best claim is no claim. This is an even bigger issue for the small operation. Losing an employee to injury causes real productivity issues for a company. In this tight labor market, finding a replacement who knows your business is tough. Recruiting, interviewing, hiring, and training a new employee if needed-all are indirect costs of a workers' comp claim."

Prequalification/Assurance Products

Not only are the environmental and workers' comp classes of insurance experiencing changes in today's soft market, but contract surety is adapting to the market pressures as well.

Jim Lambert, surety-bond program director with United Capitol Insurance Company in Atlanta, GA, speaks from many years of working with excavating contractors: "The market is soft and highly competitive, so some underwriting standards are being relaxed to maintain market share. For instance, waiving personal indemnity for highly qualified accounts is becoming more common. Five years ago it was rarely seen even for the strongest accounts." Firms planning on growing larger through municipal work need to add surety bonds to their insurance portfolio. Prequalification products are generally required by statue, in which case there are no exceptions. "These products are intended to protect taxpayers from losses generated by excessively low bids and contractors' business failures," shares Lambert. In order to obtain a surety bond, a firm must qualify in many areas. "Briefly, we look at four principal areas in the prequalification process: (1) proven equity and profits, (2) working capital, (3) work experience and managerial expertise, and (4) credit experience.

"Contractors are among the most optimistic people in the world, and earthmoving contractors operate with the slimmest of possible margins. It's a balancing act. For instance, new and better equipment will move more earth and allow you to perform larger municipal contracts, but you have to contend with higher fixed debt and retain qualified employees to run it efficiently. The potential for costly environmental impact also increases with the size of the project."

Lambert continues, "From a surety standpoint, the same optimism that keeps contractors in the business can be their Achilles' heel. Larger jobs can be seductive but can exponentially complicate the factors that need to be managed to successfully complete the project. I have seen firms 'robbing Peter to pay Paul' and operating on such slim margins that they eliminate any potential to turn a profit. That doesn't make good business sense."

Lambert cites approaches that can help contractors successfully grow into the surety-bond field: "First, they should stay abreast of political and industry changes, including new equipment. Second, it's critical to align yourself with a CPA who understands the construction industry. An accountant who counsels you the same way he advises his manufacturing clients might be doing you a disservice. You have to show a history of turning profits in order to qualify for surety bonds. It can hurt to show an overfunded 401K plan or a large commitment to new equipment in order to qualify for a tax break. Financial liquidity and the ability to run a sound, profitable business are needed for surety-bond qualification. Third, align yourself with a bank that has experience in the construction field. It might be there for you when a nonconstruction lender might not, as it understands the true risks associated with your line of business."

Getting the Best Value for Your Insurance Dollar

Seventy-five percent of earthmoving firm are probably overpaying in today's environment. Contractors should make sure they are getting the best value for their insurance investment.

1. Never forget: If you don't ask, they aren't going to give it to you.

• Ask for multiyear policies. They allow you to lock-in low rates for 19 months to two years.
• Make sure you work with agents and carriers who want to write your class of business.
• Do they have a solid number of land improvement contractors with whom they work?
• Do they offer a range of products that are specific to your needs?
• Do they regularly touch base with you to review your coverage and exposure?
• Do they offer references?

  If not, go elsewhere!

2. Buy pollution coverage---stand-alone or rolled into coverage with general liability. The rates have never been better. It's a tremendous value given the increasing risks in today's industry environment.

---Kevin M. Carle, president of KMC Insurance Services, Dallas, TX

Insurance Menu for Today's World

Overall, beyond the current trends affecting insurance for the excavating and grading industry, experts agree that all firms, no matter what their size, should regularly review their coverage. "Many firms are so busy that they aren't making the time to review their current coverage. That is a critical first step. Really, they should be reviewing their coverage annually. Whatever you do, resist the temptation to buy a policy without fully considering the company behind the policy. And don't buy a policy simply because it's the least expensive one available. Unfortunately, it's easy to fall prey to these temptations," counsels Prokop, echoing the universal advice of his industry peers.

Insurance coverage falls into two broad categories: commercial and specialized. The latter is where excavating and grading professionals need to look closely. Many of these offerings used to be covered a decade ago by the terms and conditions language of GL and other standard policies, but not anymore.

Exposures You Might Not Have Considered

Operational Exposures:

• Excavation through and spreading of unknown previously contaminated soil
• Impacting underground utility lines and other underground structures (and associated business interruption exposure)
• Disturbing naturally occurring asbestos
• Release of oils/fuels as a result of vandalism
• Spills of chemicals and fuels (e.g., mobile refueling tanks) brought onto the site
• Lubricants, oils, and other fuels from field equipment
• Impacting groundwater from drilling and excavation work (e.g., dewatering operations)
• Impacting surface water or wetlands from excavation work (e.g., excessive silting)

Owned Premise Exposure:

• Leaking underground/aboveground storage tanks
• Residual contamination from minor spills of oils, fuel, lubricants, etc. and poor housekeeping
• Surface contamination from fuels and lubricants stored improperly (without secondary containment)
• Improper disposal of waste materials
• Unidentified preexisting contaminant from past owners of the premises

Transportation Exposure:

• Inadvertent transport and subsequent disposal of unknown contaminated soil
• Spills of asphaltic cement during transport
• Resulting pollution from collision with various structures (e.g., pole-mounted transformers, aboveground tanks)
• Fuel/oil spills from vandalism

Disposal Expenses:

• Inappropriate disposal of products
• Misdelivery of unidentified contaminated fill
• Retroactive liability under Superfund for past disposal practices (e.g., construction debris in a landfill that is now on the Superfund list)

---From ECS Underwriting, Exton, PA

The Best Claim Is No Claim

From workers' comp to environmental hazards, "the best claim is no claim." "Let's put things into perspective," suggests Slivka. "Insurance is not always the best tool to manage risk. Although insurance might restore a contractor's financial position, it will not restore what every contractor works so hard to develop and protect---reputation. There are many controls that contractors can incorporate into their overall risk-management program [that can reduce risk on all fronts]."

Purchase adequate insurance. Make sure that the professionals who support you---your insurance agent, your CPA, your bank---are well acquainted with the special needs of the excavating and grading industry. Run your firm so risk is reduced. Doing all three just makes good business sense.