Construction Insurance Bulletin

Installing ducts and showers in homes around the area, building additions to people’s homes, putting new toilets in, you’re probably not going to need a contractor’s bond. But, when you get those big-time jobs, the ones that make or break the business this year, when you start taking on new hires because you don’t have the manpower, when you’re doing swimming pools and whole new buildings, you’re gonna have to get bonded.

The Miller Act dictates that on any job budgeted at over $100,000, you’re going to have to supply a contractor’s bond. Now, this might not be your responsibility. If you’re sub-contracting for somebody else, you can let the head honcho who brought you onto the job worry about it. Otherwise, you need to get bonding in order to ensure that the job can be completed in a professional manner.

All of this being said, many clients may require bonded contractors on the job as a matter of preference. Getting bonded can make it easier to attain work for your firm even if you tend to focus on smaller and medium sized projects rather than six-figure constructions and installation.

Contract bonds are bonds that allow you to work on a particular job. Contract license bonds allow you to work in a certain area. You’ll need to check your local regulations to determine what you need in order to take a contract in addition to a contract bond. A bond differs from an insurance policy in that the firm signing the bond over to you is not covering the losses, damages or legal fees, rather, they are lending you the money to do so should something go wrong. You are expected to pay the surety back for any costs. It’s a line of credit rather than a form of insurance. Your insurance may wind up helping you to cover those costs, but any claims you make on your bond will eventually come out of your own pocket.

So what’s it going to cost you to get bonded? It’s really hard to guess. There are quite a few factors that weigh into the quote you’re going to get from a licensed surety bond provider. The good news is that the cost of getting bonded tends to correlate with the cost of the job. Making sure that your budget covers your own costs as well as the cost of getting bonded can help to ensure that you’re not scraping together your pennies to cover your end.

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.

Across the nation, utility lines, tunnels, and structures run under our feet, Each year, excavators strike approximately 700,000 of these underground lines, often triggering potentially fatal accident (from steam, gas, propane, or electricity). A single strike might easily cost a contractor hundreds of thousands, or millions, if the accident leads to an interruption of service that shuts down a factory, hospital, telecommunication lines– even a missile silo.

In most cases, insurance will not cover these losses. To deal with this threat, the Common Ground Alliance coordinates 811 –Call before You Dig, a nationwide phone and online system that contractors can use to notify local utilities so they can “mark out” their facilities before excavation of anything from to a sewer to a subway. These markouts are required under state law.
When you use the call 811.com system, bear in mind that:

• It doesn’t matter where you are – downtown, in the middle of a suburban street, or building a private home.

• Call even if you’re confident that you know where something is buried (for example, if you installed the line); many contractors dig up lines that have just put in.

• Instead of marking the area with wooden stakes – which are all too easy to drive through gas lines – use white paint or “feathers;” even the most shallow excavation can be hazardous.

Remember, failing to contact 811.com before every excavation violates the law – and leaves you wide open to huge liability losses. Don’t take a chance your odds of losing in the Underground Damage Casino! To learn more, just get in touch with the Construction Insurance Specialists at our agency.

Sometimes it’s better to get everyone to the job site in a van or bus rather than leave everyone to their own transport. Heck, for some laborers, the ride to work is the deal-breaking benefit that keeps them on your site instead of somebody else’s. By sharing a ride to work, you can make sure everyone’s there on time, at the same time, and you don’t have to worry about limited parking spots. It’s simply one less headache to deal with when you start your day.

There are essentially two reasonable arrangements you can make in order to get everyone on the job site via bus or van, both with their own upsides and downsides. It’s basically the choice between buying a vehicle, or paying a third party to do the driving for you.

• Buying a van or bus

Buying your own van or bus can be a major expense. Even if you buy used, you’re looking at repair and registration costs, and you’re going to need to look into private hire insurance in order to legally use the vehicle for certain business expenses. That being said, this may ultimately be the most cost-effective option if it’s in your budget. If this is a major project that’s going to take up to a year or longer, then having your own transport will almost certainly be cheaper than paying a third party to make the trip every single day, and it will definitely be cheaper than renting a vehicle for that long.

• Hiring a driving service

Hiring a driving service can be much cheaper in the short term, but whereas owning a vehicle starts expensive and becomes cheaper every day, hiring a driving service starts cheap and then the costs add up. This is ideal if you are handling a major project that will be completed in a short length of time, or if you’re not going to be taking a lot of large jobs in the future.

It essentially comes down to whether or not owning a vehicle is going to pay for itself in the long run. If transporting large crews to and from the job site is going to be an everyday task for you, then certainly, owning a van or bus is going to more than pay for itself within a year or two. If you tend to work with smaller crews on most jobs, then you need to make sure that your budget includes transportation costs.

Construction projects involve significant financial risk for the contractors and subcontractors who must pay workers and purchase materials. To help protect themselves against these financial losses, builders have a number of insurance options. Two of the most widely used coverages are Builders Risk and Installation Floaters. The choice you make depends on the nature of each job.

Builders Risk insurance pays for damage to materials or partially completed work due to accidents, fires, weather damage, material defects, and incorrect installation or workmanship. This coverage ensures that the time and money that the builder has invested in the project aren’t lost when the costs of repairing, repurchasing or reconstructing add up and diminish profits.

Installation Floaters cover specific items that a contractor is planning to install. For example, a roofer might buy a policy to pay for the cost of roofing supplies, both during transit and while stored at the work site. An Installation Floater covers either all risks or specific sources of losses for moveable property (materials or equipment) specifically named in the policy.

Because of its more narrow coverage, an Installation Floater generally costs less than a Builders Risk policy. However, it leaves the builder more vulnerable to losses that aren’t covered. This coverage would be appropriate for a contractor performing a specific installation task, or a subcontractor who takes on limited risk to perform a specific duty for a contractor as part of a larger project.

As Construction insurance professionals, we’d be happy to recommend the type of coverage best suited to protect you against losses on each job. Just give us a call at any time.

Maybe it’s never happened to you, maybe you’re just too careful to ever let it happen, but it’s something we all worry about, isn’t it? You’re carrying some drywall into your client’s home to patch up their wall, and you knock over a two hundred dollar trophy case, or you track something all over their beautiful Persian rug, or you slip and the drywall goes crashing through their sliding glass door.

Even if you’re not working in homes where people live, you worry about a stray 2×4 breaking a neighbor’s window, or maybe someone pops a tire on a busted hurricane tie one of your guys left laying around in a driveway or something.

Being a self-employed tradesman means that if something goes wrong, you eat the costs. You don’t have an employer whose insurance will cover anything that happens, you have clients, and if something goes wrong, they’re probably going to be the ones asking for a payout.

Having a solid tradesman’s liability policy in place can not only ensure that you are covered in case something goes wrong, it can also take the edge off, bringing you peace of mind so that you can be at ease while you work, knowing that everything is taken care of, and nothing short of extreme negligence is going to put you on the hook for repairs and replacements that you cannot afford.

The only question is when to buy your policy. The answer to that is simple: If you’re waiting until you have a job to go to before you buy your insurance, then you’re waiting too long.

When putting in a bid for a gig, the tradesman charging twice as much will always win the job over the tradesman who doesn’t have a good tradesman’s liability policy in place. If you don’t currently have any work lined up, it may feel like you’re spending money on a “maybe,” but it’s better to think of it as an investment into your next job. Even if you’re not in the least concerned over any damages you might do while on the job site, your client might not have the same level of confidence in your abilities. You don’t want to pay for damages out of pocket, and your clients don’t want to risk choosing between suing a self-employed contractor or eating the costs themselves. You might never need to cash in on your liability policy, but you’ll secure a lot more work if you have it.

Although business management and performance are the major factors that will determine which contractors survive the downturn in construction, the size of the contractor also comes into play. As a rule, project owners are more likely to continue with larger developments because of their greater value, higher investment, and longer lead time. Smaller projects are easier to cancel, which makes smaller and midsize contractors (with work backlogs between $5 million and $100 million) more vulnerable to cancellation.

If you’re experiencing losses on a project, your first step should be to deal with overhead, liquidity, problems, and ongoing business concern. It’s also essential to communicate any problems to your insurance agent and surety company immediately! Because the surety has a strong financial interest in preventing you from default on your bond, it will leverage its relationship with the bond underwriter to help you work through these difficulties and reach a mutually acceptable solution that will keep you on the job.

However, a contractor withholding critical information about a problem situation from a surety would lead to a far different result. Concern about the contractor’s deteriorating financial condition – which makes it a riskier bonding candidate – might make the surety restrict its future capacity, leading it to make the contractor either bid on only smaller projects that pose less risk to the underwriter or postpone bidding on all projects until the business can clean up its balance sheet.

If you have any questions about working with your surety, please feel free to get in touch with the Bond professionals at our agency.