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PERSPECTIVES: Finding coverage certainty in ever-changing market

PERSPECTIVES: Finding coverage certainty in ever-changing market

RECOGNIZING THE DIVERSE INTERESTS that exist on a project is vital to managing a project's risk, especially since risk can be “owned” for years beyond the project's completion. But relying on historical means and methods is difficult when contract terms can change overnight in the wake of a judge's ruling or a legislature's vote. Tim McGinnis and David DeLaRue, senior vps in Willis Group Holding P.L.C.'s national construction practice in Dallas, address these concerns as they urge contractors to consider the various options available to them in the form of contractor-controlled insurance programs.

Most contractors working in today's complex legal environment appreciate the fact that while project risk may begin at mobilization, it does not end with completion. Contractors can “own” risk for 10 or more years beyond completion.

Whether the project is a small strip center or a large airport terminal, contractors are being forced to devote more attention to construction risk. The declining economy and potential for more claims arising from defective work have created an environment that demands a long-term risk management solution.

Relying on contractor certificates of insurance alone is dangerous. As each year passes, insurance terms and conditions can erode, requiring the risk manager to go beyond the certificate of insurance to actually review policies. Exposures covered by yesterday's policy form can be excluded by tomorrow's renewal. These realities challenge even the most experienced risk manager.

Additional challenges face the construction risk manager who has relied on historical means and methods. Courthouses and state legislatures have proven to be shaky foundations for risk management. A decision from the bench or vote from the House can weaken the contractor's contractual protections and put the company at greater risk.

Traditional insurance requirements, including additional insured status, have been the standard for a number of years as general contractors (and indeed owners) seek to align insurance in the event of a loss. Given the uncertainties of time, ever-changing policy forms and legal decisions, this approach can create concerns about the availability of insurance policies and limits, especially because once a project is completed, most risk managers do not track certificates post-completion for the full statute of repose.

Recognizing the diverse interests that exist on a project is vital to managing a project's risks. Under the conventional insurance approach, multiple contractors result in multiple insurers, each of which has different policy terms and conditions with the intention of protecting both their insured's and their own financial interest. Plaintiff attorneys thrive in the traditional environment of construction risk management, while contractor-defendants are often caught in the middle—resulting in project delays and additional costs.

The lack of certainty about the claim process has focused the construction industry's attention on longer-term solutions. One solution employed for a number of years is the controlled insurance program, which provides every contractor working on a job site uniform insurance coverage with one carrier. The most common coverages under CIPs are workers compensation and general liability (primary and excess/umbrella). The benefits are a reduced cost of risk via lower insurance expenses and lower claim costs. While CIPs have existed for more than 30 years, historically owners of the construction project sponsored the consolidated insurance program, called owner-controlled insurance programs. Yet many contractors and some insurance carriers have not always viewed OCIPs in a positive light and have expressed dissatisfaction with owners/sponsors who purchase inferior coverage or owners who focus on pricing only. Another significant issue with OCIPs has been the lack of investment and oversight of the claim and safety protocols.

Contractors, driven in part by dissatisfaction with owner-controlled programs and increasingly concerned about the quality and consistency of coverage that their subcontractors had in place, recognized the risk management value of this approach about a decade ago, kicking off an evolution of innovation in the industry that has led to the common contractor-controlled insurance programs we see today. Insurance carriers' appetites also have evolved, and contractors today have more options regarding CCIPs, i.e. large project-specific CCIPs, rolling CCIPs and general liability-only CCIPs. Consequently, contractors are building expertise within their risk management practices for managing CCIPs.

As contractors' comfort level with this approach increases, both single-project programs and “rolling” or multiple-project programs are gaining popularity. Rolling programs are designed to cover most, if not all, of the work done by the contractor. While not designed to replace the contractor's practice program, they do allow significant control of all the liabilities arising on projects, both from the general contractor and its subcontractors. This is critical, as it creates greater coverage certainty for all parties on the job vs. the traditional downward flow of liability approach with multiple insurance carriers and multiple policies involved over a number of years.

One of the biggest advantages of this approach is that a single insurance provider provides a uniform claim defense, which reduces the involvement of multiple carriers and related defense counsels. This efficiency focuses the insurance program on claim resolution rather than on the allocation of fault to the various defendants—creating delay and related costs.

The general contractor also gains efficiency by reducing the need to review contractor certificates of insurance and policies over many years. Certificate management, a major issue for contractors, is both costly and uncertain, given the fact that certificates do not amend coverage but only confirm it at the instant they are issued. They do not prove coverage or assure it will be in place at a future time when a loss may occur.

Austin Commercial Construction L.L.C. was an early pioneer of the rolling CCIP, and their boldness surprised the underwriting community. They did not go unchallenged: Carriers wrestled with the idea of making a long-term commitment to the contractor lacking specific information on the work planned. However, by working with the contractors and the insurance carrier, initial challenges were met with program design innovations that are now standard with most rolling CCIPs. For example, CCIP premium historically was based on payroll, but with the advent of rolling CCIP programs, premium is now based on construction values. After more than 10 years of managing a rolling CCIP, Austin and others have realized the financial and coverage benefits of the rolling CCIP.

Today, there is nothing uncommon about a CCIP. In fact, owners sometimes require contractors to consider the approach as part of their construction proposal, as they understand the benefits of fewer disputes and a more streamlined insurance claim process. A recent Willis survey revealed that many of the top 50 contractors in the U.S. (ranked by revenue size) have used this approach on a project-specific or rolling basis.

Interest in the CCIP is growing and, as exposures change, today's construction risk manager should certainly consider the benefits of managing risk with a CIP. Even with new project delivery approaches, such as integrated project delivery, CCIPs perform well to enhance the integrated approach by providing common and cohesive coverage for all the construction partners.

We believe the future is bright for CCIPs. Increased participation/sponsorship by contractors will continue to respond to the ever-changing conditions of the construction market. For sponsors of CCIPs, securing a program with the current favorable market conditions will lead to increased opportunities for revenue growth ahead of eventual rate firming.

Key considerations for potential CCIP sponsors

■ Clear picture of historic and future project pipeline, including projected geographies, estimated annual volume, average project size, average project term, average project value and method of securing business, i.e., hard bid or negotiated.

■ Pre-qualification of subcontractors. Underwriters will want to know the quality and reputations of the subcontractors you work with.

■ Demonstration of a quality safety program.

■ Commitment to invest and dedicate resources. A successful CCIP requires support from the entire organization, including risk management, project management, and sales.

■ Awareness and negotiation of the broadest terms and conditions available.

Tim McGinnis and David DeLaRue are senior vps in Willis Group Holdings P.L.C.'s national construction practice in Dallas. Mr. McGinnis can be contacted at Tim.McGinnis@ or 972-715-6263. Mr. DeLaRue can be contacted at or 972-715-6216.