robintek

Coinsurance clauses are commonly found in a Builder’s Risk Completed Value policy. As one might deduce merely from the name, a coinsurance clause involves the policyholder becoming a co-insurer of the risk of loss with the insurer. In other words, certain conditions would result in the insurance company not paying the total amount of loss, thereby leaving the policyholder to bear the remainder of the loss amount. The insured and the insurer jointly assume the risk.

Those unfamiliar with such a clause are probably wondering why any policyholder would even consider a coinsurance clause. The benefit of buying an insurance policy with such a clause is that the policyholder will usually have relatively low premiums compared with similar policies that don’t contain a coinsurance clause. That said, anyone considering a coinsurance clause should understand what it entails and requires, so that they aren’t taken by surprise with penalties should a loss occur.

A typical coinsurance clause found in a Builder’s Risk Completed Value policy will say that the insurer will not pay more for any loss than the proportion that the limit of insurance bears to the value of the structure described in the declarations as of the structure’s date of completion. The way a coinsurance clause works with the policy limit is often a source of confusion for policyholders. Take a loss of $20,000 with a policy limit of $100,000 for instance.

It would superficially appear as though the insurer would be responsible for the total loss. However, once the coinsurance clause is figured into the equation, the insurer might not be responsible for paying the total loss amount. This will depend on the policyholder maintaining enough insurance to avoid the coinsurance penalty.

If the coinsurance is applied, it might look something like this: Still using the $100,000 policy and $20,000 worth of damage from above, the completed value of the project will be determined as $120,000 at the time of loss. The value of the $100,000 policy is only 80% of the $120,000 actual value of the project. So, the insurer is only responsible to pay $16,000, which is 80% of the $20,000 worth of damage.

Anytime the policyholder receives a lesser sum than what the full value of the claim is because of a shortfall between the completed value of the project and the policy limit, it’s termed a coinsurance penalty. The discrepancy between the two numbers can be the result of a number of mistakes made by the policyholder. Policyholders often make the mistake of failing to report when expected costs are surpassed.

Any increased completed value must be shown in the policy limit when costs overrun original figures. The best way to make sure the policy limit is updated is by keeping your insurance agent apprised to the overruns so that the appropriate changes can be made.

All too often a policyholder makes the mistake of setting their limit of insurance based on the amount of the construction loan for the structure. Most of the time, the completed value of the project is greater than the amount of the construction loan.

An example would be a significant portion of a building project being funded by cash, but not computing the cash amount when totaling the completed value. If the insurance is only for the financed amount, then the policyholder will suffer a coinsurance penalty for any losses.

Another common mistake occurs when the policyholder doesn’t include profit and overhead in the completed value. These are generally figured at 10% for each. If not accounted for, this can cause a substantial coinsurance penalty.

Sometimes, it’s what shouldn’t be included that could lead to problems. Land value, excavations, and underground work, for example, shouldn’t be included in the completed value. These aren’t covered losses on typical policy forms. So, the policyholder would just be paying additional costs for items that wouldn’t be covered during loss.

In construction and trade contracting, insurance and liability can be tricky. To what extent do you have to cover your own risks? To what extent can you expect the client to take full responsibility? Who pays out if one of your crew members is injured on the job? What if a third party takes a bump, neither a client nor a contractor?

Sometimes it’s fairly clear cut. For instance:

Third Party Injuries

If a third party is injured as a result of your construction work, if, say, a ladder falls on them or they cut themselves on a stray bandsaw or break an ankle tripping over a misplaced 2×4, then chances are you’re going to be held liable. This is where your contractor’s liability comes into play. A client may be able to press charges against you successfully if they are injured on the premises, but the chances of a client doing this are relatively slim as they are putting you in a position where you have to prove that they, not you, were negligent.

Injured Workers

In contracting, it’s generally a safe bet that an injured worker’s primary concern is drawing worker’s compensation until they’re able to hit the job site again. Employer’s liability will help to make sure that you are covered in any event involving an injured worker.

Injured Contractors

If you are working with contractors rather than fulltime employees, the issue is only as clear-cut as you make it: You need to make absolutely certain that you are not going to be held responsible for negligence. Worker’s compensation does not apply to temps and contractors, but you may still be held responsible if it is found that you, for instance, failed to brief your workers on the dangers, or if you provided them with tools and safety materials in poor condition. Essentially: If you do everything in your power to keep contractors from being injured, then it will be difficult for anyone to argue that an injury is owed to your negligence.

Although these situations are usually fairly clear-cut, that’s not always the case. Maintaining a safe worksite is of the utmost importance. Even your workers who have no interest in pursuing anything beyond worker’s compensation may have litigious friends and family telling them that they’re entitled to more. It’s easy to blow anything from a chipped hard hat to a slick floor out of proportion, so a relatively safe, uncluttered environment is the most important thing in managing liability.

It is very common for the insurance requirements in a construction contract to include a provision requiring the subcontractor to waive all rights against the owner and general contractor for recovery of damages to the extent these damages are covered by the sub’s workers’ compensation and general liability or commercial umbrella liability insurance.

Owners and general contractors insist on this provision because they want to protect themselves from being held liable for injuries to a subcontractor’s employee. Typically, the contractor giving the waiver asks its insurance company to attach a “waiver of subrogation endorsement” to its workers’ compensation policy.

The endorsement states that the insurance will company will not enforce its right to recover payments it makes to an injured worker from the person or organization listed on the endorsement. It applies only to the extent that the employer insured by the policy performs work under a written contract requiring the employer to obtain the insurance company’s waiver.

It does not directly or indirectly benefit anyone not listed on the endorsement. With this endorsement on the policy, the company cannot attempt to recover payments it made to an injured worker from the company listed on the endorsement, even if that company was responsible for the injury.

Consequently, the loss impacts the employer’s experience modification, probably increasing future premiums. In addition, the endorsement carries an additional premium for the employer, normally some percentage of the premium attributable to the job.

The endorsement and the waiver agreement in the contract do not bind the injured employee. He still has the ability to sue the owner and general contractor for his injuries. However, it is also common for construction contracts to require the subcontractor to defend and indemnify the owner and general contractor from any such suits.

Therefore, it is probable that the employer will have to pay an additional premium for the endorsement, pay higher future workers’ compensation premiums for the loss, and pay higher future liability insurance premiums because its policy will cover the other parties’ liability.

For example, assume the sub’s employee suffers serious injuries when tools and materials fall off a scaffold and strike him. He collects workers’ compensation benefits for his medical costs and lost wages. The sub’s workers’ compensation policy includes the waiver of subrogation endorsement, so the insurance company cannot recover any of its payments.

The worker sues the owner and general contractor for his pain and suffering. However, the contract requires the sub to cover the owner’s and general’s liability, so the sub’s liability insurance pays for the pain and suffering lawsuit. The sub’s insurance pays twice for the same injury to the same worker.

Owners and general contractors require waivers of subrogation for several reasons. Insurance consultants, brokers, and risk managers usually encourage them to require waivers. Waivers protect their liability insurance and reserve it for other claims. Because a waiver reduces potential liability losses, they become more attractive to liability insurance companies and probably pay lower premiums.

Also, subcontractors often do not resist these requirements because they feel they lack negotiating leverage and their insurance companies are usually willing to provide the endorsement.

A few states have curbed the use of waivers of subrogation in their workers’ compensation systems. At least four states have passed laws making the requirements unenforceable, and other states allow the employer to recover from the injured employee some of the proceeds of pain and suffering lawsuits.

In the majority of states that allow waivers, contractors should work with professional insurance agents experienced in providing construction insurance. They can suggest insurance companies that will offer the needed coverages at a reasonable cost and assist with contractual issues such as waivers of subrogation. Above all, contractors must read and understand their contracts so that their agreements do not become an ugly surprise after a loss.

If you rely on government contracts for your work, then you probably have some questions about the federal hiring freeze. Namely: Is it good or bad for contractors?

The answer: it remains to be seen, but probably not. It may well turn out to be a boon for contractors. Bridges still need to be built, and by freezing the hiring of salaried government employees, the government will be forced to find somebody to put the work in, and more often than not, that’s going to be contractors.

Furthermore, a lot of the work that we do in government contracting is not federal work, rather, we’re being hired by cities, by the state department and so on. We’re being paid on state funds to do state work, rather than being hired for federal work by the federal government. The federal government does pay for construction work as needed, of course, but most contractors are not waiting for these jobs. Most contractors are working locally, and being paid by local government.

Additionally, the executive order putting a freeze on federal hiring comes with a lot of exceptions. Just to name a few examples, the freeze does not apply to the post office, industry exchange programs, intelligence agencies, or seasonal employment. The list of exceptions is only getting longer every day, as these exceptions have been clarified over time.

Finally, while President Trump has issued a statement saying that government organizations shall not be permitted to use contractors to work around federal hiring freezes, this statement was issued in a memo, not in binding law.

At some point in the future, the federal hiring freeze may extend to contractors, but for the time being, it may actually be giving contractors greater bargaining power. A year ago, a government contractor was usually being pursued for one of two reasons: Either they possess specialized knowledge, training or abilities that the government is in need of, such as underwater welding, or they’re cheaper than paying a salaried, year-round government employee. Now, government contractors will be the first choice, over federal employees, for many jobs, creating more opportunities for contractors, and, in many instances, allowing contractors to command a higher rate of pay.

Whether or not you agree with President Trump’s attempt to curb government spending via the federal hiring freeze, the bottom line is that, at least for the time being, it’s nothing for government-contracted workers to worry about.