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How to control your insurance costs

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For the medium-sized and smaller construction contractor — who usually has limited time, resources and staff — effectively managing insurance coverage and its associated costs can be a challenge.

Controlling insurance costs is a much wider concept than just shopping around for the best price or rates. In fact, experts point out that an overemphasis on price alone may cost you more money in the long run, because cheaper rates may mean less coverage.

The real key to controlling costs on your insurance is managing your business in a way that makes it attractive for insurers to offer you their best rates and coverage. That isn’t just advice for the big guys; controlling insurance costs means managing your operations tightly, no matter what the size of your business.

Here are some of the broader types of insurance you may need:

• Property insurance
• General liability
• Environmental liability
• Umbrella and excess liability insurance
• Builder’s risk
• Contractor’s equipment
• Contractor’s tools
• Automobile insurance
• Professional liability

Simon Fenn, president of Fenn & Fenn Insurance Practice Inc., Newmarket Ont., serves smaller construction contractors and offers some tips on coverage and costs.

Property insurance: “Most insurers will have a loss-control representative inspect your premises,” says Fenn. “They are there to help improve your protection. Insurers will make recommendations based on their loss-control inspections to improve your protection. This is aimed at reducing your exposure to loss — and ultimately your insurer’s exposure too — thereby keeping your rates under control.”

General liability coverage: Fenn advises, “The minimum scope of liability protection you need is outlined in the standard CCDC (Canadian Construction Documents Committee) contract forms. An explanation of these coverages is found under CCDC 21.”

Liability insurance: Fenn says that excess liability insurance may be very important. “Excess liability insurance is usually fairly inexpensive in relation to the primary insurance, depending on your operations and claims experience. If you buy higher limits of liability insurance, you are protecting the survival of your company against a major catastrophic liability claim that could otherwise put you out of business.”

Contractor’s equipment insurance: Fenn says that the “rating is calculated according to the value, age, condition and type of equipment, how and where it is used, exposure to theft and physical damage. Tracking devices installed on equipment and good security measures can assist in reducing the cost of this insurance coverage.” Contractors tools coverage: Fenn warns contractors to watch out for locked motorvehicle warranties. Many insurers impose these on tools as they are often left in the back of a pickup truck during a lunch break, for example, which is an invitation to theft. Fenn says the warranty voids the coverage if the equipment is not left under lock and key.

Dwayne Vanderhout, president, Mac Vanderhout Insurance Brokers Ltd., Burlington, Ont., says, “The cost of your insurance is based on many factors. The amount of, and frequency of, insurance claims made against you is a very important issue.” He notes that one way to reduce the number of claims made against your policy is to get certificates of insurance from your subcontractors, showing your firm as an additional insured with respect to job activities that you are performing together.

“If a claim is the result of the negligence of the subcontractor, then you can arrange to have his insurer respond to the situation. It is still wise to let your own insurer know of the situation, but they will not be paying out any funds until the subcontractor’s limit is used up. If your subcontractor cannot provide proof of insurance, send them to a broker who is interested in insuring people who don’t have a previous insurance history. We can assist these firms as long as they have prior work experience in the trade,”  Vanderhout says.
Vanderhout also advises that each insurer has a minimum premium that they charge and that it can vary significantly for small-contractor insurance policies. He suggests that there can be a significant price difference for similar coverage.

To reduce auto-insurance claims and surcharges due to bad driving records, Vanderhout suggests that contractors “tell potential candidates who might drive your vehicles that they have to bring a recent motor vehicle record (less than 60 days old) with them prior to interviewing them.” Statistically, people with speeding tickets are more likely to be involved in accidents. If the person has several speeding tickets, the surcharge could be over $500 per year per driver.

He also notes that insurance for vehicles used by contractors varies much more than regular private passenger rates and that it really pays to have your broker shop around because of these significant differences.

As a contractor, your overall business approach or attitude to managing your insurance costs is critical, and in this regard, David Bowcott, senior vice president, Construction Services Division, Aon Reed Stenhouse Inc., Toronto says, “the overall idea is to minimize risk or prevent risks from coming to fruition,” Bowcott says, and to achieve this he recommends a “best practices” approach for construction contractor operations. He also stresses the importance of good communications between contractors and their insurers. “A lot of small guys are not familiar enough with the best-practices approach,” Bowcott says.

“Best practices is the key and all aspects must be in place in order to get the best pricing on insurance,” Bowcott says. “You also have to be a good communicator of your practices to insurers. If you communicate how you are managing risk and using best practices, it will result in getting the best terms. In addition you must accurately represent to the insurance industry the type of work you do or claims could be denied”

Insurers can be a good resource on best practices and can provide useful insights. A good broker will help the contractor to implement and communicate the contractor’s best practices process to the insurance market to get the best terms. “Best practices reduce your risk profile, resulting in better terms and conditions. Construction contractors need to leverage the knowledge of the insurance industry to become better contractors regarding risk management.” Bowcott says.

As an example of property insurance, Bowcott says that best practices for that line of coverage could include a safety program, theft precautions and fleet management, such as having regular maintenance checks.

Due diligence
In the same vein, Eric Lee, senior director of industry practices, Canadian Construction Association, says that “Contractors should recognize that if they do their ‘due diligence’ in presenting full details of insurance requirements to insurance underwriters, they are more likely to obtain preferential pricing for full insurance coverage that addresses all the risks associated with a project.”
Lee also advises contractors to be aware of conditions, exclusions and warranties: “Contractors should seek advice from professionals to identify and understand the impact of conditions, emerging exclusions and insurance warranties that are likely to apply to the project in question.”

Insurance experts stress the importance of choosing an insurance broker with detailed experience in the construction industry and a thorough knowledge of the industry’s practices as well as familiarity with the needs of construction contractors. This includes checking to ensure that the broker actually has construction contractor clients.

Brokers should also have a good reputation in the construction industry and be able to provide references. The broker should also have a good understanding of CCDC documents and the coverage needed. Choosing an effective broker can help significantly in being properly covered and in controlling overall insurance costs.

Insurance strategies
Many construction contractors have taken effective steps to control their insurance costs.

Steve Cruikshank, president of Cruickshank Construction, Kingston, Ont., offers the following ideas:

• Have a good safety program and document it. Take remedial action regarding any accidents or claims. This could mean that somebody might have to take a course to learn better how to avoid problems.

• Keep your deductibles high. When you are not making as many claims on the insurance company for the smaller stuff, your rates will stay lower.

• Hire a consultant to help out on your insurance. “The consultant prepared some documents to let our insurer know that we have done our homework regarding risk management.” A consultant can help in documenting processes, addressing any concerns that could cause trouble.

Terry Willms, general manager, Georgian Aggregates and Construction, Collingwood, Ont., and current president of the Ontario Road Builders’ Association, says, “The fewer claims, the better. We case manage each claim situation versus the deductible, and decide whether we will cover it ourselves. We also have well-documented health-and-safety programs, a factor which the insurance companies like.”

In addition, his company has a documented  environmental program.

“We have an ‘earth-first’ approach, which involves regular meetings. We also have annual goals to improve our environmental efforts. It shows the insurance company that we care about this issue,” Willms says. The firm also has a project- administration program, including video tapes of all sites, which can prove that sites are safe.

“We take advantage of risk-review programs offered by the insurance companies. They review your site and will document those areas of risk you can improve. Lower risk equals lower rates. Overall, it’s a good idea for contractors to document all their programs, such as having a maintenance regimen for equipment,” Willms says.

Regan Cox, president of Cox Construction Ltd., Guelph, Ont., offers some tips, based on his firm’s practices:

• Establish a good safety policy with enforcement.
• Have an incentive program to reward safe driving of on-highway vehicles.
• Review driving records before hiring.
• Re-educate employees about the consequences of exposure when there is an accident with any construction vehicle. Increase the amount of your deductibles, by which you — in effect — self-insure the first portion.

By Dennismellersh, 2006

Published with permission of On-Site Magazine


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