Grading and Excavation Contractor | Pitfalls And Bobby Traps

Comment On This

Create A Link
To This Article
On Your Website

When it comes to commercial insurance, knowledge is protection.

By Elizabeth Cutright

Finding the right balance between expense and exposure can be tricky, and having the right information can help you negotiate your way through the commercial insurance maze. Knowing what insurance you need, what protections you have, and what gaps to look out for can help cut costs while still providing adequate protection for your employees, your equipment, your reputation, and your bottom line.

Because insurance rates are based on a policyholder’s history of accidents and claims paid, safety and consistency are two important factors. Insurance rates are experience rated: The safer the company, the lower the rates and the more attractive the risk tends to be. Three basic insurance policies combine to protect all areas of construction employees, equipment, and projects: workers’ compensation, equipment/general liability insurance, and surety bonds. There are also ancillary policies specially designed to meet specific needs, including umbrella excess insurance, professional liability insurance, and environmental coverage. As the old adage goes, it’s better to be safe than sorry, and in this case being “safe” means getting all the coverage you can while still staying within your budget.

Protecting Your Employees
Workers’ compensation provides employees with medical coverage and some percentage of their lost wage when they are hurt on the job. Basically almost all states require workers’ compensation, most governed by a market-based approach that allows for maximum access to coverage. According to Rich Angevine from Liberty Mutual Insurance, “Many states provide an ‘insurance pool of last resort’ to help those companies who may have difficulty getting insurance coverage given their financial condition, history of workplace injuries, lack of experience, or other reason specified by each pool.

“What that generally means is that if you are an insurance company and you want to provide insurance to good risks you have to assume some of the bad risks in that state. It usually works on a market share basis. If you’re company A and you have 20% of the good risks in that state, then you have to assume 20% of the bad risks in that state through some state pool that’s typically run by the insurance commissioner in that state.”

Workers’ compensation insurance can be expensive. This is due, in large part, to worker classifications, which detail an employee’s purpose and duty on a construction site. Jeff Segall from CNA stresses, “Making sure you have the right classification can make a tremendous difference in the cost of the insurance.”

Determining exactly what an employee does onsite can be complicated. Segall describes the murky world of worker classifications using an excavation site as an example: “In excavation, which could be tied to, let’s say, utility work, there may be a tendency to classify them as utility contractors. Now, someone who does just the excavation has a much lower rate than somebody who does excavation and puts pipe on the ground. And so again, understanding the classifications that these might fall into and making sure the right one is selected can make a difference.”

For large construction projects, providing workers’ compensation insurance to everyone on the site can be a challenge. One way to overcome the obstacle of covering every employee is to provide a contractor-controlled insurance program (CCIP) or an owner-controlled insurance program (OCIP). These blanket policies, also known as “wrap-ups,” offer workers’ compensation coverage for all tradesmen and subcontractors on a particular site. During the bid process, an insurance portion is included in the overall cost. This allows the general contractor to acquire a master insurance certificate covering all workers on a site. These policies also provide the ability to require all subcontractors to buy into the safety rules, giving the general contractor or owner much greater control over the loss by establishing agreed-upon standards of conduct.

The subcontractor or tradesman working on a large project needs to educate himself on the pros and cons of the CCIP or OCIP protections. For one thing, the general contractor negotiates the insurance with an eye on balancing the bottom line with adequate protection for all involved. This helps simplify the process but may be a disadvantage to the smaller companies working on the project.

“It’s very important for your readers to know what they’re giving up when they turn off their insurance and rely on somebody else’s,” warns Segall. “There may be large deductibles; there might be a requirement to return their workers to light-duty work. They’ll be asked to provide credits, and they shouldn’t give too many credits to the owner or general contractor who’s providing the wrap-up.”

According to Segall, conflicting needs contribute to the disparity between the benefits and the detriments of wrap-up policies. What can be good for the owner or general contractor can adversely affect a tradesman or subcontractor.

“Since somebody else is negotiating the insurance, they might cut some corners,” explains Segall. “They might define things differently. For instance, they won’t provide any coverage off-premises. If you are involved with items that require heavy maintenance, the equipment taken off the job site to be worked on or the maintenance people coming on the job site to do the maintenance may or may not be included in the wrap-up, and you still need to have insurance for the people doing that work.”

Segall uses the example of CCIPs to reiterate that the most important things a policyholder can do to protect himself is to “carefully review the contract and the wrap-up agreement and have an insurance agent who knows enough to look at those things for you. Of course, the right insurance company can help their agents look out for those subjects.”

Protecting Your Equipment
A vital part of any construction project, heavy equipment often comes at a high price and unique insurance needs. Segall explains the trifecta of equipment, financing, and insurance as follows: “The first thing is to give insurance companies kind of a get-out-of-jail card, by saying a lot of financial institutions won’t lend money to buy something as expensive as their equipment unless they do have an insurance partner that helps share in the risk that something might happen or go wrong with that equipment.”

Financing can impact insurance decisions and vice versa. Both aspects are interrelated and can impact a contractor’s bottom line. When shopping for insurance, it is important to be aware of the needs of the financing company and the individual needs of the business and its employees. According to Segall, the primary things a financing company looks for in terms of commercial insurance are the policy limits, the relevant deductibles, and the perils or risks associated with the activities of the insured.

Explains Segall, “One of the first things we think about is what the financial company is requiring from the insurance standpoint. By that I mean a couple of things: They might designate how much insurance needs to be carried on that piece of equipment, and what kind of a deductible their borrower can have on that.”

According to Segall, while financing companies focus on insuring the risks associated with the loan itself, policyholders also need to look at the bigger picture. When insuring heavy equipment, Segall advises policyholders to think about how the equipment is valued and how the loss will be paid.

“We’ve got three different ways it can be valued,” explains Segall. “It can be valued at replacement costs—and that would be the cost to repair or replace with like kind of quality. We might insure at an actual cash value basis—which means we’re going to deduct depreciation, which of course the bank is probably comfortable with but your readers are not. And then there’s functional replacement costs—that really speaks to the fact that you might have a piece of equipment that can dig a trench by itself, but new equipment to replace that might have laser sighting. That’s an upgrade. And even if you can’t buy the same functional replacement that just digs holes, now you’re kind of forced into buying something greater and so you might need to adjust the value of that.”

In addition to equipment values, Segall advises that policyholders make themselves aware of the recourse available when a piece of equipment is down. According to Segall, an insurance company can offer rental reimbursement and/or loss of income.

If a backhoe or an excavation machine needs to be rented to replace the one that’s broken, for example, the insurance company will pay for the rental cost. There also may be lost income as a result of the inability to rent, replace, or repair the broken equipment.

“Let’s say it’s a very specific piece of equipment and there’s not a regular or ready rental facility to pick up that same equipment,” explains Segall. “They can’t do their job, so there’s lost income, so there could be an income replacement element they might be interested in.”

Ultimately policyholders need to be aware of the types of perils actually covered in a policy. Insurance companies have a great deal of discretion in developing what perils are covered by their policies. For example, a policy may list coverage for fire, theft, explosions, and falling objects. These types of coverage are known as “named perils.” A policy also may insure for a broad list of perils, or all risks. In this case, an insurance company would be required to cover everything that’s not specifically excluded in the policy itself.

Perils are job and site specific. For example, Segall talks about what may need to be protected at an excavation site: “In grading and excavating you may be working underground. A lot of insurance policies don’t cover that which is underground unless you specifically add that on. They are going to want to make sure they have an extension for that.”

Segall also points out that aboveground work has its own risks. “If they’re using cranes, they want to be careful that some policies will exclude damage to the crane that’s caused by lifting in excess of its rated capacity. The problem is when you’re moving stuff you may not know exactly what that weighs, and then you don’t really want an insurance company to come in and say, ‘Well, you know, we’re not going to cover it because it was in excess of the rated capacity.’”

Another issue of concern is the very real possibility that heavy equipment will, from time to time, come into contact with the general public. Insurance policies need to reflect that risk and supply adequate coverage.

In some cases, a general liability policy may offer enough protection, but policyholders need to be aware of some of the blind spots inherent in general liability coverage when it comes to vehicles. A commercial auto policy provides protection to drivers, vehicles, and equipment during transportation to and from a work site. While delivering an excavator to a site, for example, a commercial auto policy ensures that if an accident happens along the way, the equipment is adequately covered.

“Historically it’s been under general liability,” explains Segall. “But a couple of years back, there was a change in how insurance companies looked at this mobile equipment. In states where the contractor’s equipment was regulated by financial responsibility laws for motor vehicle laws, equipment would no longer be covered by the general liability policy.”

According to Segall, the ramifications of this change are significant. “Now, that equipment needs to be covered by the auto liability policy,” he says, “which is fine, as long as you remembered to schedule it on the auto liability policy. Unfortunately there’s a fair number of insurance agents that don’t specialize in working with contractors who may not have noticed that change, and that could leave some folks improperly covered from a liability standpoint: injuries or damages done through the operation of this equipment.”

When negotiating insurance for heavy equipment, the choice to lease rather than buy equipment will affect the type of policy needed. “When you don’t own equipment, the insurance on it can be negotiated differently,” explains Segall. “It’s not uncommon for the companies leasing the equipment—and this includes even short-term rentals—to offer their own insurance. You can lease it with us, and we’ll insure it for you, and it will be a lot easier for you. Administratively it will be a lot easier. Anything that’s easy tends to be more expensive, so if someone offers that insurance, you’re better off negotiating the cost of the insurance yourself rather than relying on someone else to negotiate for you.”

Protecting Your Reputation and Special Needs
Along with your employees and your equipment, your reputation is a valuable company asset. Your past performance can determine whether or not you will be offered future opportunities. Although surety insurance is typically demand oriented, having this type of policy can protect you from “bad word of mouth” by guaranteeing that the job you signed up for gets completed on time and on budget. Large developers or governments most often require surety policies to insure certain performance. For example, if a contractor puts up a bid on a state or federal project, a performance contract will most likely be required.

“The surety bond guarantees completion of a project with a certain quality of workmanship,” explains Angevine. “If a construction company is unable to complete a project, with the surety policy the project owner has the right to file a claim enabling completion of the work at the original price.”

In addition to surety bonds, specialty policies exist. For example, a land developer may need to acquire a policy for a project in development. The financier of a housing subdivision may require protection for the uncompleted building from vandalism or fire. Because many contractors need to protect against additional exposures, many insurance policies contain umbrella excess, which can add an additional layer of protection above the general liability primary limit of 2 million, up to 25 million.

Protecting Your Bottom Line
When shopping for insurance, one can either go directly through a company or contact an independent agent. An independent agent typically represents several different insurance companies. In addition, many contractors obtain their insurance coverage through a broker and sign up for a loss-sensitive policy, meaning the policyholder is responsible for some of the losses incurred when an accident happens.

There is a direct correlation between cost and performance. A construction company with a good safety record will probably have a lower premium than a similar firm with a much poorer safety record.

Policyholders should look for an insurance carrier able to provide cost-effective loss control and claims-serving capability. When calculating loss control, engineers assess the nature of the safety guidelines and loss control procedure that a contractor has. The engineer’s analysis can focus on anything from whether hardhats are worn to how equipment is operated. If an insurance company has a good loss control division, that company is better able to assess the risk prior to creating a policy. In addition, an insurance company can work with the policyholder in a consultation capacity to ensure that losses and accidents are minimized. To many insurance companies, loss control is an integral piece of the policy puzzle.

Another significant piece of the insurance puzzle is claims handling. This aspect is particularly important because the policyholder will be paying uncovered costs out of pocket. A policyholder with a large deductible has a substantial interest in the claims process. As a result, policyholders should expect their insurance company to be involved early on, monitoring accident-related issues, managing medical payouts, and overseeing all other loss mitigation concerns.

“We pride ourselves on customizing the insurance for the needs of the people buying the insurance,” says Segall. “We like to work with professional insurance agents that can understand what the needs are of their clients, and then design the right package of coverage for them so that there’s no unexpected surprises if something bad should happen.”

A policyholder can hire an outside party to administer the claims-handling portion of insurance coverage. Hiring a third party can help cut down on insurance costs. Nevertheless, it is important to note that insurance companies design their departments to work in concert with the client. A variety of factors, including access and experience, allow loss control specialists employed by the insurance company to often provide a more cost-effective program for their client.

The Future of Your Protection
The fate of construction and heavy-equipment financing and insurance ultimately seems to depend on the future behavior of interest rates. For example, a larger contractor may start thinking about running captive programs, while a small contractor may begin to explore association-type captive scenarios. Additionally, increasing insolvency in the insurance market and tougher rules for government contracts will also play a role in the future of financing and insurance for heavy equipment and financing. Buying insurance from the lowest bidder may not enable a contractor to obtain a public works project or other federal or state project because of newer and more stringent insurance requirements. Ultimately, policyholders need to balance all of their needs with the demands of the insurance companies they are working with.

Policyholders “might be interested in not just getting insurance that the financing company is interested in,” says Segall, “but getting insurance they need.”

Elizabeth Cutright writes features for Forester Communications.

GEC - September/October 2006

Back To Table
Of Contents