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Mid-market contractors need to adjust general liability policies, as they expand into new areas

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Mid-market contractors need to adjust general liability policies, as they expand into new areas

U.S. middle-market contractors must clearly understand their general liability exposures as they face firming rates, tightening terms and conditions, and unfamiliar policy requirements.

The sluggish U.S. construction market has forced some middle-market contractors to pursue projects in new fields, exposing them to different policy requirements than before, industry experts say.

Geoffrey Smith, president and CEO of EllisDon Corp. in Toronto, grew the company from a middle-market firm doing under $1 billion in revenues in the early 2000s to $3 billion this year.

While the U.S. and Canadian economic pictures differ, EllisDon significantly broadened its work to include larger building projects, and public/private partnerships. It had to adjust its general liability insurance accordingly, Mr. Smith said.

“The scope of our professional activities has broadened dramatically. I foresee that it will continue to broaden, and certainly that's my goal,” Mr. Smith said. “Therefore, we've had to review and extend our professional liability and general liability coverages to cover that.”

“Clearly, as midsized contractors are working in new territories or on different types of projects, it can definitely lead to challenges that aren't covered by project margins,” said Edina, Minn.-based John Watras, vice president for middle-market construction for Zurich North America Commercial.

Mid-market contractors are evaluating their general liability coverage to make sure they have the correct coverage required by general contractors or project owners and for their own operations, Mr. Watras said.

Terms and conditions for commercial general liability policies are tightening, and rates also are increasing, said Craig Merten, national construction practice leader of Willis of Colorado Inc. in Denver, a unit of Willis Group Holdings P.L.C.

“We're seeing a 5% to 7% pure rate increase for a good, profitable business,” Mr. Merten said, noting that last year “we were out trying to negotiate flat renewals to keep accounts out of the marketplace.”

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With the downturn of the construction market, three to four years ago insurers provided middle-market contractors relief in terms of rates, said Chase Johnson, unit manager for Lockton Construction Services, a unit of Lockton Cos. L.L.C. in Kansas City, Mo.

“But obviously the construction market has not recovered to where it was five or six years ago. Yet carriers are looking for rate stabilization or rate firming now, when many of our clients are still needing relief from a cost standpoint,” he said, noting that contractors are not willing to risk branching out to new areas of work but nevertheless are bidding on more larger projects.

For those contractors with a negative loss history over the last few years, rate increases may be merited, and the market may not be available for them to seek alternatives should their incumbent carrier take a more hard-line approach, Mr. Johnson said.

Eric B. Smith, a managing director within Marsh Inc.'s national construction practice in Atlanta, said some contractors that were successful in segments that are now sluggish have had to explore other segments with more opportunity, such as residential, health care and energy, among others.

“With that comes different types of contract language, different obligations and different expectations on the part of those various project sponsors,” he said.

Middle-market contractors must have a clear understanding of the contract requirements and have discussions with their brokers and underwriters “to make sure that the program continues to match up squarely with that different risk profile that they may adopt through contractual angles,” Mr. Smith said.

Additionally, as project owners run into more issues involving environmental liability, construction defects and residential construction, they are implementing new strategies to handle those risks through nonstandard forms, nuanced contract language and insurance policy requirements, industry experts say.

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“Owners are just as risk-averse and wanting to transfer as much of that as possible given the economic conditions and their realizations of the increased exposures,” Lockton's Mr. Johnson said. “It's important for general contractors and subs, particularly in the middle-market space, to make sure that they are complying with those and transferring as much risk as they can through an insurance contract.”

Some of the requirements that are not in a standard commercial general liability form include requiring a specific additional-insured form with updated policy language, specifications of what exclusions are or are not on the policy, and increased limits.

With ample capacity and competition among insurers in the marketplace, mid-market contractors also can look for alternative ways to secure general liability coverages, such as purchasing project-specific wrap-up policies or increasing retentions, experts say.

While it can be costly, some project owners may be more comfortable or require wrap-up liability polices to ensure the general contractor and subcontractors are carrying the same adequate limits of insurance, said Brenda M. Giardetti, insurance manager at EllisDon in Mississauga, Ontario.

“Primarily on all of our projects, we buy project-specific, wrap-up liability policies, so it tends to transfer our risk away from our corporate liability policies and transfers it into a project-specific,” which tends to be what larger contractors are doing, she said.

“(Project owners) may have a better comfort level knowing that all of their subcontractors are carrying $10 million, $25 million worth of liability,” Ms. Giardetti said.

By reviewing the next fiscal year's potential bids on projects, middle-market contractors can determine the value of buying commercial general liability vs. wrap-up policies, she said.

Experts also say mid-market contractors need to be careful not to run into cash-flow issues with acceptance of additional retention, though it certainly is an option, and one Mr. Smith of EllisDon prefers.

“When it comes to the mid-level risk of loss on site — and that includes both surety and liability insurance — I actually like to take that on, because I find we manage it best when we have the risk,” he said.