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Buying Insurance
7 Deadly Sins
To Avoid When Buying
General Liability Insurance
This report was put together at the request of clients. We have been
talking about the 7 Deadly Sins for years. Ten years ago, this report
would not have been necessary, but times have changed. Ten years
ago you could bid on a job, complete the job and move on to the next
job. Lawsuits happened just to the next guy. Insurance policies were
simple and life was wonderful…General Liability insurance has changed
drastically in the last few years and now there are traps…not
intentional traps, but changes in the industry that you have to keep
abreast of, which brings us to the 7 Deadly Sins…
Sin #1
Choosing The Wrong Agent or Broker
As strange as this may seem, your biggest problem might be your
current insurance agent or broker. Not that he is not trying to do a
good job, but he does not handle the Construction Industry on a dayto-
day basis, he is out of touch with a marketplace that is changing
day to day. Keeping up with the Construction Industry is a full time
job.
If your broker is not Independent he may not have the tools available
to do a good job. Non-Independent agents must represent one
company only. He may not represent the best company for your
business.
Sin #2
Occurrence vs. Claims Made
Violating This Sin Can Wipe out Your Life’s Savings
Construction claims made policies became popular in the mid 1980’s
and have been around ever since. The promise of these policies were
lower rates, but at what long-term damage? In some instances there is
no cost savings. Claims made policies for a contractor are the worst
possible policy you can buy. Let me explain: Claims made policies allow
you to make a claim on you policy only during the policy year as the Contractors have claims down the road not in the same year as the project is built.
If you want to leave that company and go to another company you will
have to purchase additional insurance to cover you for the next 10
years…that right 10 years! Why?
Because the law allows customers to file a lawsuit for construction
problems up to 10 years after the project was completed.
An Example:
You build a new room addition, everything goes well and you and your
customer are very happy with the final outcome…4 years later your
customer calls you and says that the roof is leaking and water comes
into the house and ruined his new $25,000 grand piano. He expects
you to repair the roof, the drywall, wallpaper, carpets and, of course,
replace the grand piano…
A claims-made will not allow you to file a claim 4 years later unless you
stayed with the same company the whole time. If you intend to shop
other companies after the claims made policy expires you must make a
decision, since you cannot make a claim against a claims made policy
after the policy expires unless you buy extended liability coverage
called a “tail.” The tail coverage extends the period of time you can
report a claim.
If you decide not to buy the “tail” you will not be able to report a claim
against the claims made policy. And to make matters worse, some
companies do not offer the 10-year extension.
When your policy comes up for renewal with a claims-made policy you
must decide.
· Do I leave the company and pay the additional insurance for
coverage for the next 10-year period or go without?
· Do I stay with the same company? Their prices on the new year may
stay the same or go up sharply.
· Do I switch to another company who has a better rates and
coverage?
This limits the marketplace for you, and makes it harder to accept a
better bid from
another carrier. Claims made policies may work in other lines of
insurance, but for
contractors they are a disaster. Take time after reading this report to
look for your policy and see if your current policy is either an
occurrence form or claims made…
Sin #3
Insurance Company Rating
Insurance Companies are given a grade, just think about the
grades you received in high school or college. A,B,C,D,F.
Insurance Companies are given a financial report card by the
A.M. Best Company.
An Insurance company with less than an “A” rating can be a potential
problem for two reasons. 1. There is a risk of the company going out of
business and 2. If you work for the state, county or city, they will
usually not accept any company less than an “A” rating. Also, if you
hire on as a subcontractor most general contractors will not accept any
rating less than an “A”. With some state government offices and
general contractors not accepting your liability insurance, you will be
limited to the type of jobs you can accept. If you do not know your
Company Rating feel free to call my office at any time, we will be glad
to look it up for you.
Sin #4
Exclusions
First off lets get one thing clear…All policies have exclusions. You hear
terms like all
risk, special form, comprehensive, full coverage. Those phrases do not
mean there are no exclusions. In a contractors general liability policy
all the exclusions are listed on the (DEC) front page of the policy or on
the second page of the policy. The problem is that they are usually
listed by form number, not by name. In order to make sure you
understand the policy. Then read it carefully and see if that is a
problem for the kind of work that you do. If you see a form number on
the front of the policy but you cannot find that form in the policy, your
policy is NOT COMPLETE! Someone forgot to add that form to the
policy when the policy was put together. People make mistakes!
The exclusions are critical. When you get a proposal for insurance the
first thing you should look for are the exclusions. For instance, if you
are a concrete contractor and you do house pads, if you have exclusion
for foundation work in your policy you have a problem. The worse
thing is you will not find your problem until you have a claim and it is
denied, by then it is too late.
Here is a list of exclusions I have found in many policies, this list is by
no means “all
inclusive”. Look over this list and see what exclusions would apply to
your operation.
DESIGNATED WORK
Claims arising from any classification of class code listed on the
declaration page of this policy. For example: You are a roofing
contractor and you get a quote that is 50% less than all other quotes.
The policy comes in and your company is classified as a landscape
contractor. Any claims will be denied because you were not classed
correctly.
INDEPENDENT CONTRACTORS
Claims arising out of: the acts or omissions of independent while
working on behalf of an insured, or the
negligent hiring or contracting, investigation, supervision
training, retention of any independent contractor for whom
any insured is or ever was legally responsible and whose acts or
omissions would be excluded. If you use subs, this exclusion is a killer.
ASBESTOS
Not covered for exposures to asbestos, asbestos fiber, or any material
containing asbestos or asbestos products, including without limitation,
the cost of asbestos removal or damage in the cause of effecting such
removal.
PROFESSIONAL LIABILITY
Claims arising out of rendering of or failure to render any professional
services by you or any engineer, architect or
surveyor who is either employed by you to perform work
on your behalf in such a capacity. Professional services include:
the preparing, approving, or failing to prepare or approve. Maps, shop
drawings, opinions, reports, surveys, field reports, change order or
drawings: and Supervisory, inspection, architectural or engineering
activities, For example, if you make a structural change without the
architects approval, there is no coverage
CONTRACTORS WARRANTY
This means that if you hire sub contractors, you must get
a certificate of insurance from them. If you do not, the amountof the
contract with the sub will be added to the payroll or gross receipts and
you will be charged, In other words you will pay for the subs general
liability. Some companies use a stricter version of this. They require
the sub to have the same limits of insurance as you do.
X.C.U.
Explosion, collapse, and underground.
If one of these exclusions, or other exclusions in your policy are a
problem for you, one of three things happened.
1. You did not tell your broker that you do this kind of work.
2. You did tell your broker and he was not listening
3. Your broker does not have enough knowledge about construction
insurance.
In any case call your broker and explain the problem and get it solved
before a claim
occurs, if your broker can’t help you, find another broker.
Sin #5
Acceptance
We touched upon this a little when speaking of company
ratings, but there are many reasons why governments, general
contractors and more and more, smart homeowners who will
not accept just any certificate of insurance.
Certificates of insurance are not being accepted for the following:
· Additional Insured Endorsement (CG-2010) when is an additional
insured endorsement not an Additional Insured Endorsement? There
are many kinds of Endorsements with different language. The CG-2010
has become the Additional Insured Endorsement of choice. Many
general contractors will not accept any other certificate. You must be
very careful here, most companies now charge for these certificates
anywhere from $100-$1000 each. Ifthe costs of these certificates are not in you bid you’re losing money.
· Primary Endorsements-along with the above Additional Insured
Endorsement, many people are asking for primary endorsements, 99%
of all insurance companies have an additional charge for these as well,
mostly for $250-$1,000 each.
· Waiver of Subrogation – Another endorsement that has become
popular. This is seen more in Workers Comp but does not come up in
General Liability. There is an additional charge for this endorsement.
SIN #6
Subcontractors
This one is a potential killer
I have seen dozens of companies go out of business on this subject
alone within the past 10 years. It’s usually your best friend or someone
you were just trying to help out. When you hire a subcontractor to do
work for you, he must carry General Liability Insurance and he must
have the same limits of liability as you do. For example, if you have a
General Liability insurance policy with a $1,000,000 limit the
subcontractor that you hired must also have the same.
What happens if your sub does not carry general liability? The problem
arises when your general liability company comes and audits your
books at the end of the year. If you do not have a Certificate of
Insurance for the sub your general liability company will add it to your
payroll and you end up paying the general liability for the sub
contractor who did not buy it.
I can hear you now…It’s not fair…fair or not, it’s in the insurance
contract. Let’s look at the insurance company’s side on this subject. If
there is a problem on the job, whom is the customer going to sue? He
is going to sue the subcontractor and General Contractor. The
insurance company has no recourse against the subcontractor and
must defend the entire lawsuit, while the subcontractor walks away.
Now, I do not expect you to have sympathy for an insurance company,
but, now you know how it works. Now you know why I call it the
KILLER that poses as a best friend. You feel sorry for them-And you
pay the price.
SIN #7
ADMITTED VS. NON ADMITTED COMPANIES
Admitted Companies are companies that are licensed in your State and
contributed to the Property & Casualty Security Fund (The Fund). The
fund is a pool of money set aside by the State. Most states have
programs where those who buy General Liability Insurance are charged
a percentage of his or her insurance premiums to go into a pool. This
pool of money is set aside to handle claims by people in the State
who’s Insurance Company cannot pay their claims. If there are other
companies to pick up the claim, The Fund will not share the claim.
Non-Admitted companies do not contribute to the Fund pool. If a Non-
Admitted company goes out of business you have no recourse…Non
Admitted companies are not necessarily a bad deal. They fill a gap in
your state and provide competition for the Contractor business.
However, if you use a Non Admitted company with a bad rating you
might be asking for trouble.
The State Insurance Commissioner of your state has determined that
certain types of insurance are not available from admitted insurers and
has placed these types of insurance.
If you have any questions please feel free to call me at 602-481-0161
Gary Hanson, CRIS
Professional Insurance Strategies, LLC
7575 E. Redfield Rd. Suite 235
Scottsdale, AZ 85260
602-481-0161 Phone
623-551-6716 Fax
ghanson@proinsgroup.com
To Avoid When Buying
General Liability Insurance
This report was put together at the request of clients. We have been
talking about the 7 Deadly Sins for years. Ten years ago, this report
would not have been necessary, but times have changed. Ten years
ago you could bid on a job, complete the job and move on to the next
job. Lawsuits happened just to the next guy. Insurance policies were
simple and life was wonderful…General Liability insurance has changed
drastically in the last few years and now there are traps…not
intentional traps, but changes in the industry that you have to keep
abreast of, which brings us to the 7 Deadly Sins…
Sin #1
Choosing The Wrong Agent or Broker
As strange as this may seem, your biggest problem might be your
current insurance agent or broker. Not that he is not trying to do a
good job, but he does not handle the Construction Industry on a dayto-
day basis, he is out of touch with a marketplace that is changing
day to day. Keeping up with the Construction Industry is a full time
job.
If your broker is not Independent he may not have the tools available
to do a good job. Non-Independent agents must represent one
company only. He may not represent the best company for your
business.
Sin #2
Occurrence vs. Claims Made
Violating This Sin Can Wipe out Your Life’s Savings
Construction claims made policies became popular in the mid 1980’s
and have been around ever since. The promise of these policies were
lower rates, but at what long-term damage? In some instances there is
no cost savings. Claims made policies for a contractor are the worst
possible policy you can buy. Let me explain: Claims made policies allow
you to make a claim on you policy only during the policy year as the Contractors have claims down the road not in the same year as the project is built.
If you want to leave that company and go to another company you will
have to purchase additional insurance to cover you for the next 10
years…that right 10 years! Why?
Because the law allows customers to file a lawsuit for construction
problems up to 10 years after the project was completed.
An Example:
You build a new room addition, everything goes well and you and your
customer are very happy with the final outcome…4 years later your
customer calls you and says that the roof is leaking and water comes
into the house and ruined his new $25,000 grand piano. He expects
you to repair the roof, the drywall, wallpaper, carpets and, of course,
replace the grand piano…
A claims-made will not allow you to file a claim 4 years later unless you
stayed with the same company the whole time. If you intend to shop
other companies after the claims made policy expires you must make a
decision, since you cannot make a claim against a claims made policy
after the policy expires unless you buy extended liability coverage
called a “tail.” The tail coverage extends the period of time you can
report a claim.
If you decide not to buy the “tail” you will not be able to report a claim
against the claims made policy. And to make matters worse, some
companies do not offer the 10-year extension.
When your policy comes up for renewal with a claims-made policy you
must decide.
· Do I leave the company and pay the additional insurance for
coverage for the next 10-year period or go without?
· Do I stay with the same company? Their prices on the new year may
stay the same or go up sharply.
· Do I switch to another company who has a better rates and
coverage?
This limits the marketplace for you, and makes it harder to accept a
better bid from
another carrier. Claims made policies may work in other lines of
insurance, but for
contractors they are a disaster. Take time after reading this report to
look for your policy and see if your current policy is either an
occurrence form or claims made…
Sin #3
Insurance Company Rating
Insurance Companies are given a grade, just think about the
grades you received in high school or college. A,B,C,D,F.
Insurance Companies are given a financial report card by the
A.M. Best Company.
An Insurance company with less than an “A” rating can be a potential
problem for two reasons. 1. There is a risk of the company going out of
business and 2. If you work for the state, county or city, they will
usually not accept any company less than an “A” rating. Also, if you
hire on as a subcontractor most general contractors will not accept any
rating less than an “A”. With some state government offices and
general contractors not accepting your liability insurance, you will be
limited to the type of jobs you can accept. If you do not know your
Company Rating feel free to call my office at any time, we will be glad
to look it up for you.
Sin #4
Exclusions
First off lets get one thing clear…All policies have exclusions. You hear
terms like all
risk, special form, comprehensive, full coverage. Those phrases do not
mean there are no exclusions. In a contractors general liability policy
all the exclusions are listed on the (DEC) front page of the policy or on
the second page of the policy. The problem is that they are usually
listed by form number, not by name. In order to make sure you
understand the policy. Then read it carefully and see if that is a
problem for the kind of work that you do. If you see a form number on
the front of the policy but you cannot find that form in the policy, your
policy is NOT COMPLETE! Someone forgot to add that form to the
policy when the policy was put together. People make mistakes!
The exclusions are critical. When you get a proposal for insurance the
first thing you should look for are the exclusions. For instance, if you
are a concrete contractor and you do house pads, if you have exclusion
for foundation work in your policy you have a problem. The worse
thing is you will not find your problem until you have a claim and it is
denied, by then it is too late.
Here is a list of exclusions I have found in many policies, this list is by
no means “all
inclusive”. Look over this list and see what exclusions would apply to
your operation.
DESIGNATED WORK
Claims arising from any classification of class code listed on the
declaration page of this policy. For example: You are a roofing
contractor and you get a quote that is 50% less than all other quotes.
The policy comes in and your company is classified as a landscape
contractor. Any claims will be denied because you were not classed
correctly.
INDEPENDENT CONTRACTORS
Claims arising out of: the acts or omissions of independent while
working on behalf of an insured, or the
negligent hiring or contracting, investigation, supervision
training, retention of any independent contractor for whom
any insured is or ever was legally responsible and whose acts or
omissions would be excluded. If you use subs, this exclusion is a killer.
ASBESTOS
Not covered for exposures to asbestos, asbestos fiber, or any material
containing asbestos or asbestos products, including without limitation,
the cost of asbestos removal or damage in the cause of effecting such
removal.
PROFESSIONAL LIABILITY
Claims arising out of rendering of or failure to render any professional
services by you or any engineer, architect or
surveyor who is either employed by you to perform work
on your behalf in such a capacity. Professional services include:
the preparing, approving, or failing to prepare or approve. Maps, shop
drawings, opinions, reports, surveys, field reports, change order or
drawings: and Supervisory, inspection, architectural or engineering
activities, For example, if you make a structural change without the
architects approval, there is no coverage
CONTRACTORS WARRANTY
This means that if you hire sub contractors, you must get
a certificate of insurance from them. If you do not, the amountof the
contract with the sub will be added to the payroll or gross receipts and
you will be charged, In other words you will pay for the subs general
liability. Some companies use a stricter version of this. They require
the sub to have the same limits of insurance as you do.
X.C.U.
Explosion, collapse, and underground.
If one of these exclusions, or other exclusions in your policy are a
problem for you, one of three things happened.
1. You did not tell your broker that you do this kind of work.
2. You did tell your broker and he was not listening
3. Your broker does not have enough knowledge about construction
insurance.
In any case call your broker and explain the problem and get it solved
before a claim
occurs, if your broker can’t help you, find another broker.
Sin #5
Acceptance
We touched upon this a little when speaking of company
ratings, but there are many reasons why governments, general
contractors and more and more, smart homeowners who will
not accept just any certificate of insurance.
Certificates of insurance are not being accepted for the following:
· Additional Insured Endorsement (CG-2010) when is an additional
insured endorsement not an Additional Insured Endorsement? There
are many kinds of Endorsements with different language. The CG-2010
has become the Additional Insured Endorsement of choice. Many
general contractors will not accept any other certificate. You must be
very careful here, most companies now charge for these certificates
anywhere from $100-$1000 each. Ifthe costs of these certificates are not in you bid you’re losing money.
· Primary Endorsements-along with the above Additional Insured
Endorsement, many people are asking for primary endorsements, 99%
of all insurance companies have an additional charge for these as well,
mostly for $250-$1,000 each.
· Waiver of Subrogation – Another endorsement that has become
popular. This is seen more in Workers Comp but does not come up in
General Liability. There is an additional charge for this endorsement.
SIN #6
Subcontractors
This one is a potential killer
I have seen dozens of companies go out of business on this subject
alone within the past 10 years. It’s usually your best friend or someone
you were just trying to help out. When you hire a subcontractor to do
work for you, he must carry General Liability Insurance and he must
have the same limits of liability as you do. For example, if you have a
General Liability insurance policy with a $1,000,000 limit the
subcontractor that you hired must also have the same.
What happens if your sub does not carry general liability? The problem
arises when your general liability company comes and audits your
books at the end of the year. If you do not have a Certificate of
Insurance for the sub your general liability company will add it to your
payroll and you end up paying the general liability for the sub
contractor who did not buy it.
I can hear you now…It’s not fair…fair or not, it’s in the insurance
contract. Let’s look at the insurance company’s side on this subject. If
there is a problem on the job, whom is the customer going to sue? He
is going to sue the subcontractor and General Contractor. The
insurance company has no recourse against the subcontractor and
must defend the entire lawsuit, while the subcontractor walks away.
Now, I do not expect you to have sympathy for an insurance company,
but, now you know how it works. Now you know why I call it the
KILLER that poses as a best friend. You feel sorry for them-And you
pay the price.
SIN #7
ADMITTED VS. NON ADMITTED COMPANIES
Admitted Companies are companies that are licensed in your State and
contributed to the Property & Casualty Security Fund (The Fund). The
fund is a pool of money set aside by the State. Most states have
programs where those who buy General Liability Insurance are charged
a percentage of his or her insurance premiums to go into a pool. This
pool of money is set aside to handle claims by people in the State
who’s Insurance Company cannot pay their claims. If there are other
companies to pick up the claim, The Fund will not share the claim.
Non-Admitted companies do not contribute to the Fund pool. If a Non-
Admitted company goes out of business you have no recourse…Non
Admitted companies are not necessarily a bad deal. They fill a gap in
your state and provide competition for the Contractor business.
However, if you use a Non Admitted company with a bad rating you
might be asking for trouble.
The State Insurance Commissioner of your state has determined that
certain types of insurance are not available from admitted insurers and
has placed these types of insurance.
If you have any questions please feel free to call me at 602-481-0161
Gary Hanson, CRIS
Professional Insurance Strategies, LLC
7575 E. Redfield Rd. Suite 235
Scottsdale, AZ 85260
602-481-0161 Phone
623-551-6716 Fax
ghanson@proinsgroup.com
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