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| This report was put together
at the request of my clients.
I 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 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 ten
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... |
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Choosing The
Wrong Agent or Broker
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| 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 if he does
not handle Construction insurance on a day to 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. |
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Occurrence vs.
Claims Made. |
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| Violating This Sin Can Wipe
Out Your Entire 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 your policy only during the policy year
they are in force. 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’s
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 came in 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.
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- Do I leave the company
and pay the additonal 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 better rates and coverages?
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| 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...
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| Update: 12/2003 |
When
I wrote this a few years ago I felt very strongly about this
subject, and I still do, but I have to admit times change.
I had no idea that the California marketplace for contractors would
change to radically.
I am not a great fan of Claims Made policies, but I have to admit,
they make sense under the right circumstances.
All Claims Made policies are not the same. I recently have seen some
Claims Made policies with a 10 year Tail. That means that you have
10 years after your policy expires, which is similar to an
occurrence policy. I have also seen Claims Made policies with 4
years tails….
But the driving force behind Claims Made policies is not always the
protection; the driving force could be affordability.
With Insurance costs skyrocketing in California, contractors are
taking more of the risk themselves and saving money by going to a
claims made policy. As one Custom Home Builder recently told me. “I
build as close to a perfect house as I can, if anything goes wrong,
I go out and fix it. The only reason I buy insurance is to satisfy
the bank”
I would have been shocked by this statement years ago, but now I am
not so sure.
If you are leaning this way, call me; let’s discuss the pros and
cons. |
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Insurance Company
Rating
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| 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.
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Exclusions
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| 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 first or second 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 exclusions, look at the form numbers
on the front page and go find that form (by number) in 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 at are
the exclusions. For instance, if you are a concrete contractor
and you do house pads, if you have an exclusion for foundation work
in your policy you have a problem. The worse thing is you will not
find out about your problem until you have a claim and it is denied,
by then its to 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 exclusion would apply to your operation.
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DESIGNATED WORK |
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Most general
liability policies automatically cover a business for just about
any type of work that it engages in during the policy year.
Let’s say a sub’s premium is based on the carpenter
classification. Although, that’s what he does 90% of the time,
he may do a little roofing, electrical, or plumbing work. Most
policies will cover him for this other work, and if he does
enough of it, they’ll just charge him accordingly for those
classes of work at his year end audit. If an underwriter didn’t
want to cover his roofing or electrical work, he/she could use
the designated work endorsement to exclude those classes.
This exclusion
could be nasty. |
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INDEPENDENT CONTRACTORS |
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Claims
arising out of: The acts or omissions of independent contractors
while working on behalf of any 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 can be
a killer. |
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ASBESTOS |
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No coverage
for exposures to asbestos, asbestos fiber, or any material
containing asbestos or asbestos products, including without
limitation, the costs of asbestos removal or damage in the
course of effecting such removal (Very common exclusion). |
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PROFESSIONAL LIABILITY |
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Claims
arising out of the rendering of or failure to render any
professional services by you or any engineer, architect or
survey, or who is either employed by you or performing work on
your behalf in such capacity. Professional services include
preparing, approving, or failing to prepare or approve maps,
shop drawings, opinions, reports, surveys, field orders, change
orders or drawings; and supervisory, inspection, architectural
or engineering activities. For example, if you make a
structural change without the architect's approval, there is no
coverage. (Typical exclusion) |
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CONSTRUCTION MANAGEMENT ERRORS |
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* See
Professional Liability |
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CONTRACTORS WARRANTY |
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This means
that if you hire subcontractors, you must get a certificate of
insurance from them. If you do not, the amount of your contract
with the sub will be added to your 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. |
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FORMALDEHYDE |
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Claims
arising directly or indirectly out of formaldehyde whether or
not the formaldehyde is airborne as a fiber or particle,
contained in a product, carried or transmitted on clothing
contained in or a part of: any building, building material,
insulation product or any component part of any building. |
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X.C.U. |
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Explosion,
collapse, and underground property damage. Not a good exclusion
for Grading, Excavation, Sewer, Plumbing, Septic, and Fencing
contractors just to name a few. |
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CLAIMS IN PROGRESS |
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* See Prior
Claims |
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KNOWN LOSSES |
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* See Prior
Claims |
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ROOFING |
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Some roofing
exclusions are plain and simple. NO ROOFING. Some are not as
strict. You must read the exclusion care-fully. Some roofing
exclusions say there is no coverage while the roof is under
construction or repair. For example: You tore off a roof, and
since the weather forecast called for sunny skies, you decided
there was no need to cover the roof overnight. It rained.
There is no coverage. Read all exclusions carefully. |
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DEMOLITION |
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Plain and
simple. No demolition! |
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SUBSIDENCE |
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Insurance
does not apply to any liability arising out of landslide, mud
flow, earth sinking, earth rising or earth shifting. |
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LEAD |
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Claims
arising out of the actual or alleged presence or actual, alleged
or threatened dispersal of lead, lead particles or products
containing lead. |
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EARTH MOVEMENT |
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* See
subsidence |
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NUCLEAR |
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Self
explanatory |
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MULTI UNIT RESIDENTIAL |
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Any work in
connection with the pre-construction, construction,
post-construction, reconstruction, exterior remodeling or
repairs of any multi-unit residential building. |
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CONDOS |
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No condos |
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TOWN HOUSES |
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No
town houses |
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APARTMENTS |
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No apartments |
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EMPLOYMENT RELATED PRACTICES |
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Refusal to
employ, wrongful termination, coercion, demotion, evaluation,
reassignment, discipline, defamation, harassment, humiliation,
discrimination or other employment-related practices, policies,
acts or omissions. |
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PRIOR CLAIMS |
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Claims that
are in progress prior to the commencement of this policy. |
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PESTICIDE, HERBICIDE AND FUNGICIDE EXCLUSION |
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Not a good
idea if you are a landscape contractor. |
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PRIOR ACTS |
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This is a
very severe exclusion. This says that any work you did prior to
the policy date is not covered. For contractors this can be a
death sentence on all prior work. 90% of all contractor claims
occur after the work was completed. |
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EXTERIOR INSULATION AND FINISH SYSTEM |
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Exterior
insulation and finish system means the design, manufacture,
construction, fabrication, preparation, installation,
application, maintenance or repair, including re-modeling,
service, correction, or replacement, of an exterior insulation
and finish system (commonly referred to as synthetic stucco) or
any part thereof, or any substantially similar system or any
part, including the application or use of conditioners, primers,
accessories, flashing, coatings, caulking or sealants in
connection with such a system when performed by you. |
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POOL POP UP |
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The elevation
of swimming pool due to high water table. |
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FOUNDATION WORK |
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Claims
arising our of foundation work, including but not limited to the
design, specification, inspection, construction, installation,
repair, replacement, improvement or reinforcement of any
foundation or any part of a foundation. Foundation means the
entire substructure below the first floor or frame of a
building, including but not limited to any footings, footing
beams, piers, grade beams, pilings, pilings or supports upon
which the building rests. |
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If one of these exclusions, or other exclusions in your policy are a
problem for you, one of three things happened.
- You did not tell your
broker that you do this kind of work.
- You did tell your broker
and he was not listening.
- 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, find another broker. By the way,
I'm available at 877.587.4999.
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Acceptance
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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 ( CG2018 11/85 ) when is an additional insured
endorsement not an Additional Insured Endorsement? There are many
kinds of Endorsements with different language. The CG 2010
11/85 has become the Additional Insured Endorsement of
choice. Many general contractors and others will not accept
any other certificate. You must be very careful here, most
companies now charge for these certificates anywhere from $100 -
$1,000 each. If the costs of these new certificates are not in
your bid you’re losing money.
Update: 12/2003
When I wrote this
report over 3 years ago, item #1 above was true, but times have
changed.
It’s not that #1 is not true anymore, it is, but insurance
companies that do business in California will not longer sell
the CG 2010 11 85 to anyone doing residential construction of
any kind. It still is available, on a limited basis to
contractors who do commercial work ONLY. If you do only 1%
residential you will not be able to purchase the CG 20 10 11 85.
And… it is not an option either. Offering to purchase the form
for an additional cost will still not do you any good. It is
just not available in California at this time for residential
contractors.
You can still get additional insured endorsements, but not the
CG 20 10 11 85.
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 from $250- $1,000 each.
Waiver of Subrogation – Another endorsement that has become
popular. This is seen more in Workers Comp but does come up in
General Liability. There is an additional charge for this
endorsement.
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Subcontractors |
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| This one
is potentially a 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 will
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 the 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.
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ADMITTED VS. NON ADMITTED
COMPANIES
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| Admitted
Companies are companies that are licensed in the State of California
and contribute to the California Insurance Guarantee Association (C.I.G.A.)
C.I.G.A is a pool of money set aside by the State of California.
Everyone who buys General Liability insurance in California is
charged a percentage of his or her insurance premiums to go into the
pool. This pool of money is set aside to handle claims by people in
the State whose Insurance Company cannot pay their claims. C.I.G.A.
will pay claims if there are no other companies to pay claims. If
there are other companies to pick up the claim, C.I.G.A. will not
share in the claim.
Non Admitted companies do not
contribute to the C.I.G.A. 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 California 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.
Update 12/2003
There are only 2-3 companies in California who are admitted
companies who will write a policy for a contractor. If you are a
very small contractor, there is a chance you can fit into one of
these companies.
Larger contractors, multi unit contractors, tract home contractors
will find it impossible to find an admitted carrier at the time of
this writing.
Our agency checks the availability of admitted carriers on a daily
basis.
The California Insurance Commissioner
has determined that certain types of insurance are not available
from admitted insurers and has placed these types of insurance on a
list. The California Department of Insurance has published a
list of Eligible Non Admitted Insurance Companies. Mr. Quakenbush,
California’s Insurance Commissioner stated "This list serves
as a reassurance to consumers that these companies have passed
muster with the Department of Insurance before making their products
available to Californians".
Following is the List of
Eligible Surplus Line Insurers (L.E.S.L.I.) which will
provide you with the names of non- admitted carriers approved of by
the California Department of Insurance. And please, be aware
of anyone offering you coverage with a non admitted carrier who is
not on the following list. If you are insured with a non
admitted company I urge you to go look at your policy and look for
the company on this list, If they are not there, you should
call your agent to find out why.
If you are reading this report on the
internet, the following LESLI list is current.
The list changes frequently. If this report was emailed or mailed to
you, go to our website at
www.meridianonline.com and click on the 7 Deadly Sins Report, at
our website, the list is automatically updated whenever there is a
change.
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Please click this link to see the LESLI list... |
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Thank
You for taking the time to read the 7 Deadly Sins Report.
You could be just minutes away from lowering your insurance costs. Take
the
first step and apply now for a cost-free, no-obligation quote within 24
hours in Remember, You can't save if you don't compare.
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