To get the best rates and coverages for your contracting business you need to talk to and deal
with an expert on contractors insurance. Contractors insurance is a specialty business, the
nuances so technical that a generalist agent is simply not going to be able to offer the same
insight as a specialist.
I spend my day either talking to contractors or talking to our insurance companies about
contractors. I am very much in the game, I know all the rules, the ins and the outs, who is
best in the marketplace for a given type of contractor, what to expect and how to prevent problems
in an audit, etc.
My point is simply this, as a contractor you are going to have a lot of your money on the table
for your contractors insurance package. You should know the rules of the game from the inside.
You Are On The Front Line Dealing With Insurance
If you are a small contractor, you or your spouse are on the front line dealing with insurance.
If you are a mid-size contractor its either you or some lucky soul in your office that you
delegate this onerous task off to. If you are a large contractor chances are good that you have
a qualified person in your organization who is responsible for dealing with your insurance needs.
In all candor, it doesn't much matter what size your contracting operation is. The very nature
of your business means that you will be spending a meaningful percentage of your revenue on your
contractors insurance package.
Regardless of the size of your operation, the information in this report can help any contractor
do a better job of cutting your general liability costs.
Insider Tips to have ready before you start shopping
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Have a firm and quantifiable figure for your payroll for the next 12
months (your best estimate)
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Have the cost of sub-contractors for the next 12 months (your best
estimate)
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Know your gross sales for the next 12 months (your best estimate)
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Percentage of work subbed out for the next 12 months (best
estimate) - how much is attributable to licensed trades - plumbing,
electrical, etc?
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Number of employees, broken down by classification for the next 12
months
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If you have a website - know what's on it - does it accurately reflect
the true nature of your business?
Without this information you are wasting your time as you will not get the best and
most accurate quote.
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Be prepared to explain your operation in detail, many contractors find
it easier to have a prepared explanation which they can fax or email.
Your Website Can Cause Big Problems For You
As the economy has changed many contractors aren't carrying the amount of employees they once
did, and with the expansion of the Internet, many contractors now have websites. However,
these sites can cause significant problems for you.
By way of example, say you are an interior carpenter you do basements, kitchen and bath
renovations etc. This is a pretty straightforward exposure and most underwriters will be
comfortable with slot rating this - putting the risk in simple straightforward classification
and off you go. However, your website says you do "Roofing, ground up construction including
new house construction - no job too large or too small". The insurance company will have
someone go to Google your name, the business name, reverse index your address and check the
contractors Blue Book.
Simply put, make sure you and the insurance company are processing the same information. The
website example takes a simple risk and makes it far more complicated - and far more expensive.
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If you work on Condos, Townhouses, Tract Homes or apartments you should
be able to document what percentage these projects represent.
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Are you doing any work under a WRAP? If so, what percentage of your
work does this represent?
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Are you being ask to sign a contract or contracts? If you are looking
to respond to contractual demands to produce the proper insurance -
it seems logical and makes life easier for you and us to let us know
what those requirements are.
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Loss runs, Loss runs and more loss run requests. Most contractors call
our office and not only have never had a loss, they have never seen a
loss, and don't know anybody who has ever had one either. Unfortunately
the claim data year after year from insurance companies do not support
this sentiment. Somebody is having losses - there is an old statement
made popular by accountants and bean counters that suggest that people
lie but numbers don't.
As such, you have to be able to prove your pristine record - the better the loss runs, the better
the price you can get. A learned agent with virginal loss runs can dramatically impact your
contractor's insurance package pricing - No Question about it.
How Do Insurance Companies Determine My Rate?
There are a couple of different models that insurers use to determine the rates contractors pay.
Those rates are then combined with endorsements to get to a bottom line annualized premium.
One model which is becoming more prominent for companies writing small contractors is to base
the premium on a per man charge - there is an initial charge for the owner, and then additional
employees are categorized as either Full Time or Part Time - many carriers consider an employee
working less than 40 weeks per year as part time. This rating creates an opportunity for
contractors that have seasonal spikes and resulting dips - as the rate for a part-timer is always
less than the rate charged for a full-time employee.
With this rating plan, your company is given a primary rating classification - say carpentry
for instance, and then other classifications are added based on the particular job duties of the
employees. Generally, unless you pay the employee with 2 different checks for 2 different job
duty classifications - the higher rating classification will apply.
There are some inherent advantages to this plan in that 1) The final premium is based on body
count and not payroll or gross receipts while for many this is an inherent advantage it also
presents a problem for those contracting clients who have a high employee turnover. When getting
quotes on this plan do not count the clerical employees. The conversation should be something
along the lines of 1 owner in the carpentry classification, 2 Full Time employees - carpentry,
1 part time employee painting, 3 clerical employees - not included.
Another plan that you see for smaller contractors is to base your General Liability on Payroll.
In this rating plan, there is a flat payroll charge for the owner some companies use $17,000,
others $33,200 as the flat payroll exposure for the owner - the fact that the owner makes more
or less than this figure is immaterial.
After that, the payroll is assigned to the respective class codes. In this way, the more payroll
you have - the more work you have - the greater the insurance company's exposure.
When you are giving payroll figures, it is best to give the field employees payroll, broken down
by classification - do not include the owner, the support staff (clerical, sales, receptionist).
Here is where it can get messy. The owner, while not only the chief cook and bottle washer is
more than likely the highest paid employee.
So when you are looking for quotes you call and say that payroll is $725,000. That is your bottom
line figure - it makes sense and is logical. The longer you deal with insurance companies, you
will see that logic and insurance are not mutually exclusive. If you get a quote for $725,000 you
will be badly overpaying.
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Owners Payroll
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$100,000
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Field Employees
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$575,000
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Clerical
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$50,000
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TOTAL
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$725,000
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Minus
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Owner
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$83,000 (correct owner's payroll of $100,000 - $17,000)
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Clerical
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$50,000
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Actual Payroll
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$592,000
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Or 22% overcharged.
Also, remember that payroll is based on a 12 month period, if you have a project that is going
to last more than year say 18 months, you should pro-rate out your payroll for just the 12 months
or you will be overcharged.
Also, if part of your work is under a WRAP (OCIP), do not include that portion of work in your
payroll. In the scenario above, say $75,000 of the payroll was attributable to the WRAP. You
would have said that the correct payroll was $515,000.
In Pennsylvania, when the auditor comes in, you must be ready for him. As an agency we will give
you a proprietary audit package and will help you with the process.
In theory, the audit is done to "true up" against what your estimated exposure was versus the
actual payroll. Remember the auditor works for the insurance company and while given the
construction economy there have been more return premium audits it is still not the norm in the
last 23 years of what I have seen.
All Sales Are Not Created Equal
A sale is a sale when? When you invoice? When you are paid? In these trying economic times, you
may have your money out on the street for 60, 90, or 120+ days - that is the reality of the
marketplace. However, if you invoice it, when the insurance company auditor comes in he will
view that as a sale and include that in your gross receipts. Even though the money hasn't hit
your account.
The only way to correct this issue is to have the sales reflect what you have actually collected
during the policy period.
Here is an example: Your insurance policy expires on 12/31/2011. You guessed or estimated that
your sales for 2011 were going to be $750,000. It's November and you are already at $750,000.
You have change orders for an additional $75,000 and you know that you are NOT going to collect
the money in 2011. If you invoice these sales, you will pay premium on $825,000 (750,000 + 75,000).
If your book reflect the $750,000 you have collected - you have no issue at the audit.
Handling Subs
The percentage of sub costs to your overall exposure can make an absolutely huge difference in
your overall insurance costs. Every insurance company has a percentage of sub-contracted costs
that they are comfortable with - go over it and you have entered the world where they consider
you a General Contractor or G.C.
Every company has a different percentage for subs that they are comfortable with. For some it is
25% or less, some say 40% - but once you cross that threshold it is a bell that can be un-rung.
Here is how this can impact your premiums. Let's say for example that you are a carpenter who
subs out 10% and are a one man operation. A reasonable premium for a risk like this would be in
the range of $1000 -$1250 per year. However, if you sub out 30% and cross the company's guideline
of no more than 25% subbed out, your premiums will rise by several thousand dollars and you will
have much less ability to shop for competitive premiums as you are now in insurance world - a
General Contractor.
I am not telling you to lie, I am telling you not to wing it and guess, blindly pulling a number
out of your hat will do nothing but cause problems. Early on, I told you, it's the Boy Scouts
motto - be prepared. Know your numbers going into the process.
Geographic or Zone Rating
Not much you can do about this one. Many insurance companies have different rates for different
parts of the state, generally the more populated the area - the higher the rate will be. This
directly relates back to the insurance company's loss experience in that particular area.
Minimum Premium & Minimum Earned Premium
Your will see contractor's insurance policies many times written with either a minimum premium (MP)
or minimum earned premium. Minimum premium is just what the name states - the lowest price that an
insurance company will accept for a particular class of business. Let's say that the company tells
the agent or broker - the minimum premium is $5000. If you agree to those terms on Monday, and
cancel on Tuesday your policy cost you $5000.
However, let's say that your agent tells you that the minimum premium is $5000 and you agree and
tell him that your sales are $75,000. If you come in under the $75,000 in sales you don't get any
money back, but if you go over you will owe. But the problem is really that your agent bought
the policy for you under the wrong terms.
He should have worked backwards - what is the minimum premium - say $5000. Now what is the sales
associated with that minimum premium. By mentioning a number first, your agent set the bar and
backed you into a corner that you didn't have to be in. The reason - he or she was probably a
generalist and not a contractor insurance agent.
Additional Insured Endorsements
Contractors are frequently required by contract to add various parties to their general liability
policies as additional insured. For example, project owners typically require additional insured
status from GC's, and GC's pass along the love and require Additional Insured status from the subs.
Additional insureds have the rights of the an insured, including the right to defense from the
insurer and the right to file a claim directly against the policy.
There are a number of ways to insure this either with a specific Additional Insured Endorsement or
a Blanket Additional Insured Endorsement. The broadest coverage you can get is from a form on your
policy CG 2010. You should have it or have a good explanation as to why you don't.
A note on this in order. Be careful what you sign, and who you give Additional Insured status to.
Years ago we insured a painter - he paid us premium of less than $700 for the year, he got a job
painting rooms inside a hotel. Good gig for him. However, the contract he signed made him legally
responsible for any and all liability that happened at the hotel during the entire time he was there
painting. This clearly was a nightmare.
Have Your Ducks In Order
Virtually every insurance company is going to do an inspection after the sale. The reason - you
have them on the hook for a lot of money - millions of dollars or more is possible. The things
that they are going to want to make sure line up are:
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They want to confirm the information on the application as being correct
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They want to make sure the risk they thought they were getting is in actuality the risk
they are getting.
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They want to see what projects you are working on
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They want to check your payroll, sales and sub information and percentage of subs
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They will check your website
More on websites - I realize that many contractor sites are template type sites. If you are a
carpenter - don't say you are a roofer. If you don't do Demolition - don't say you do. If you
do, you better make sure the company underwriter is okay with it. Lest, as soon as they view your
website, you will be getting a notice of cancellation. As sure as night following day.
Let's Make A Deal
Are there ways to cut your insurance premiums? Absolutely - this is more so in today's marketplace
than in recent memory. Many companies will give the agent up to 25% or more discretion to alter
the priced as needed - without even picking up the phone. Here size matters - as premiums
increase - underwriters have much more flexibility when it comes to credits and deviated premiums.
Another credit that many don't take advantage of - a package or multi line credit. Many insurance
companies will give you an automatic credit for having your General Liability with the same company
as your Commercial Auto Insurance.
It's no different than when we were dating or more aptly in my case trying to date - you never know the
underwriter might say Yes to a policy credit.
In Closing
Insuring contractors is not like other types of insurance - it is a self-contained specialty.
If an agent tells you something different - find another agent. Plain and simple.
The very nature of what you do is for more hazardous and complex than many agents will admit to.
Here ignorance is anything but bliss.
As a contractor everything you have is on the line backed by your insurance program. You and
your agent have to get it right.
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