Anyone who has recently tried to purchase commercial insurance knows that rates have skyrocketed. The commercial insurance industry is in the midst of a "hard market," meaning that the traditional competition-based price cutting used by carriers to gain new business no longer exists. Instead, the focus is on raising rates to rebuild sagging profits.
For residential remodeling contractors, this means that general liability and workers' compensation rates might have doubled or even tripled.
Insurance also has become harder to find as major firms have discontinued writing insurance for contractors. "I know a lot of contractors who have received a letter from one insurance carrier canceling their insurance, because they are getting out of the home building industry as a whole," says Mike Carden, CGR, CEO of MUI Corp. in Birmingham, Ala. He's shopping around after Zurich canceled his general liability policy.
Other insurance companies have limited the size or type of coverage they offer, particularly for attached, multifamily and remodeling construction. And as public fear of mold has increased, construction defect lawsuits and litigation stemming from mold contamination are among the fastest-growing areas of tort litigation, with claims involving both personal injury and property damage. As a result, virtually all insurance companies have begun excluding mold from general liability coverage.
Given that most experts predict that rates will continue to rise, what can remodelers do to find affordable insurance?
Focus on loss control initiatives
Start by doing everything in your power to keep rates down. This starts with a focus on loss control initiatives. Keep your claims as low as possible by implementing effective safety and risk-management initiatives. These days, insurers look for the best and "cleanest" accounts, those with low loss histories.
When it comes to workers' comp, the best solution is to focus a great deal of time, attention and effort on reducing accidents, not just when rates are high, but at all times. "When workers' comp rates are low, a lot of employers let their safety programs go by the wayside," says Rebecca Shafer, a workers' compensation consulting attorney in Mansfield Center, Conn. "But when rates increase, it takes awhile to get a safety program started again." She says the best solution is to design and implement a comprehensive safety program and stay with it year after year, regardless of what workers' comp rates do.
"To reduce premiums, you need to have fewer claims and shorter claims," she continues. Look at where the most frequent and most expensive claims have been in terms of job category or injury type. Then design a program to target those high-cost areas.
Keith Trembley, owner of Keith Trembley Builder in Old Town, Maine, has designated one of his managers as a safety officer who, among other responsibilities, schedules regular safety classes for employees. Trembley notes that most insurance companies will help you set up a safety program and provide safety inspections, information, training and assistance.
Training, he adds, is equally important for obtaining the best liability rates.
"We've found the best way to keep our liability rates low is to not have any claims," says Rolando LaRosa, president of Royalty Homes & Remodelers in San Antonio. "At least try to keep claims as low as possible. In addition, make sure you use subcontractors who are licensed and who carry appropriate insurance."
Be ready to provide information - and lots of it Second, be prepared to provide a lot of information - information your agents or brokers might not have requested in the past. Insurers are requiring a lot more details about the businesses they consider insuring. "We filled out a 12-page report that we sent to insurance companies bidding on our insurance," Carden says. "They wanted to know everything except the number of children I had." The report included:
- how long MUI had been in business.
- company history.
- financial statements.
- how many subcontractors MUI used who were not covered by general liability.
- any subcontractor agreements in which MUI was named as a co-insured.
- the volume of work MUI did over the last three to five years.
- all ownership documents.
- number of employees.
- the type of work MUI does, especially challenging jobs such as deep excavating or four-story-plus additions.
Mold exclusions and the need for special coverage
Some companies are making a new specialty out of offering mold coverage. According to Rachel Jakubovitz, a senior vice president with the Nashville, Tenn., office of Willis, a New York-based insurance broker, these carriers want to know what you do if you have a water damage claim, how quickly you respond and more. "If they feel a contractor has a good maintenance and mold response plan, they are more likely to offer mold coverage," she says.
A risk-management plan should include documentation verifying the following regarding mold:
- Employees are trained in how to identify a potential mold problem.
- Employees who encounter mold stop work immediately.
- If mold is discovered, you suggest that the clients solve the problem on their own before you begin work. Another option is to build a relationship with an experienced environmental firm to call in when you find mold of any significant size at a new job site.
- A warranty is offered.
- Contract language specifies exactly what your liability insurance will and won’t cover.
- When you do work where water damage has the potential to exist, emphasize to the customer to call you immediately if there are any water problems after you leave.
- If the customer calls to report a problem, response is immediate. Mold can begin growing within 24 hours.
- If the customer claims the problem is your fault, even if you don’t believe it is, adopt a cooperative approach. It is less expensive to repair something you didn’t cause than to have to deal with a lawsuit later because of an angry disagreement.
"Our recommendation is to try to prevent mold problems before they begin," says Jakubovitz. "Any time a customer calls to report a water damage claim, respond immediately. Even if you think it's bogus, get out there right away and take a look. If there is water leaking, determine the cause. Then repair the cause. Once you eliminate the source of the moisture, mold can't grow. A lot of our clients have taken this approach, and it works well. They repair the water damage problem so quickly that there isn't even any time for mold to grow."
In addition to Royalty Homes & Remodelers, LaRosa has a company called Advanced Environmental Services that specializes in mold testing and abatement. He says that neither his workers' comp nor his liability rates increased as a result of getting into mold. However, he has a separate pollution coverage policy that he has used for asbestos work in the past and now also uses for mold work coverage.
"We are certified, but a lot of companies are not," he says. "There have been problems with some contractors who end up causing more problems because of cross-contamination."
Trembley also has capitalized on the mold situation. "We specialize in insurance restoration, and we recently had one of our people certified in mold remediation by the Institute of Inspection, Cleaning and Restoration, because we are starting to see a lot more of these claims up here," he says. "In fact, we have been able to land some very sizable jobs in the last few months as a result of this certification."
However, since taking on this kind of work, Trembley has had to review his insurance policies to make sure he has coverage for the work he is doing. "If your current policy excludes mold, you may need to look around for another company that specializes in mold coverage, then add this policy," he says.
Other points to consider
Third, negotiate contracts for no longer than a year. In fact, with prices being as unstable as they are, you probably would be hard-pressed to find an insurer that would want to offer a contract longer than a year anyway.
Finally, consider higher retentions. It often makes sense to retain more risk when the cost of insurance increases and insure more risk when the cost of insurance decreases in order to optimize the cost of risk. In other words, it might be a good idea to consider raising deductibles in this current market.
If the rising rates are still putting insurance out of your reach, there are alternatives. According to Andrew Cory, president of Cory & Associates in Lombard, Ill., an alternative risk product is any insurance-based product whereby a good deal of the risk is assumed by someone other than a traditional insurance company. For small companies, a professional association probably will be the best source of such a product because the pooling of resources allows for much higher deductibles and lower fees.
The Home Builders Association of Alabama offers a self-insurers fund that can help members with workers' comp and general liability insurance. "My rates are about $24,000 a year," says Carden. "However, I got $12,000 back this year as a result of having a good record for the last six years. Two years ago I got a $22,000 rebate. For me, by having a good safety record, I can pretty much end up in a 'wash' situation with workers' comp rates."
Others take more novel approaches to addressing the issue. "Most small contractors can't afford workers' comp insurance," LaRosa says. "However, to be part of larger commercial projects, you have to have coverage." He has addressed this problem by leasing his employees to an employee services company.
"I pay them a monthly fee, and this provides me with workers who are covered by their workers' comp insurance, which they get at an attractive rate because of the size of their company," LaRosa says.
Above all, "when shopping for insurance for your business, don't accept just anything," Carden says. "There are a lot of new packages coming out that you need to review. Do your homework before you buy any policy."
William Atkinson has been a full-time freelance business writer for 26 years, specializing in human resources, employee relations, health/safety and risk management.