Construction Risk Management

Presented by Greg Schmidt, CPCU, ARM For the WTBA Contractor-Engineer Conference January 2009

Construction Risk Management

In this presentation, we will review:

Risk Management Process
Commercial Insurance

Construction Contracts + Contractual

Liability

Safety Issues
Lowering Costs & Staying Pretty
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Risk Management

Definition of Risk Management:

The process of planning, leading and controlling the resources and activities of an organization --

To fulfill its objectives cost effectively

To protect and grow corporate assets To enhance shareholder value
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Risk Management

Process Defined:

Identify Exposures to Loss

Examine Feasibility of Alternative Techniques

Select the Apparent Best Technique

Implement the Chosen Techniques

Monitor and Improve the Risk Mgmt. Program

Risk Management

Identify Exposures to Loss:

Property Personnel Net Income Liability

Risk Management

Risk Funding Techniques:

Current Expensing Unfunded Reserves Funded Reserves Borrowing Captive Insurers Commercial Insurance Contractual Transfer for Risk Financing
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Commercial Insurance

Definition of Commercial Insurance:

A contract under which one party,

the insurer, agrees - in exchange for the payment of a premium - to pay for specified losses the insured may suffer, up to specified amounts, under conditions specified in the insurance contract.
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Commercial Insurance
Sample Insurance Portfolio for WTBA Members:
Workers Compensation General Liability Automobile Umbrella or Excess Liability Professional Liability (Design Build, Engineering Only Property/ Contractors Equipment Property/ Builders Risk EPLI/D&O/RRP/OCP/Pollution
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Commercial Insurance
Workers Compensation Coverage:

Medical Expenses

Lost Wages

Permanent Disability Payments

Death Benefits

Workers Compensation Costs: Premium = Payroll x Rate x Experience Factor

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Commercial Insurance
General Liability Coverages & Costs:
Third Party Damages Bodily Injury, Property Damage, Personal Injury Defense Expenses Settlements, Awards

Premium = Payroll/ Sales x Rates x Experience

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Commercial Insurance
Automobile Coverages & Costs:
Third Party Damages Bodily Injury & Property Damage Liability Hired and Non-Owned Liability Medical Payments First Party Damages Uninsured and Underinsured Motorists Comprehensive and Collision Coverages Hired Physical Damage Premium = Vehicle Type, Usage and Cost x Rates x Experience
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Commercial Insurance
Umbrella or Excess Liability Coverages & Costs:
Third Party Damages Extends Limits Over Underlying: General Liability Auto Liability Employers Liability
Premium = Limits Selected and Underlying Premiums x Rates
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Commercial Insurance
Professional Liability Coverages & Costs:
Third Party Damages Professional Errors & Omissions Defense Expenses Settlements, Awards

Premium = Type of Professional/Sales/Limits x Rates x Experience

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Commercial Insurance
Contractors Equipment Coverages & Costs:
First Party Coverage Mobile Equipment At Shop On Job-sites In Transit Hired, Borrowed and Rented Crane Overload Installation Floater Materials
Premium = Value of Equipment X Rates X Experience
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Commercial Insurance
Builders Risk Coverages & Costs:
Owners and Contractors Interests

Loss of Use

Structure Under Construction

Materials In Transit

Material Onsite

Premium = Cost of Construction x Rates

Materials Off-site

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Commercial Insurance
Experience (claim history) plays significant role in premium level Underwriters concerned with loss frequency issues Just as your workers compensation premium is adjusted via an experience rating factor, rates on other lines are debited (credited) according to claim history
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Commercial Insurance
Marketplace Conditions: Repercussions for WTBA Members: Upward pressure on rates. The global recession will temper this pressure via lower demand Hard market and escalating rates are predicted to persist as new capital infusions into the industry are scarce due to frozen credit/capital markets* Expectations are that insurance-related costs will increase. In some cases, and on some lines, those increases will be significant. Stressed profit margins will face additional pressure
* Advisen, Dec. 20, 2008 17

Commercial Insurance
Concerns/Opportunities for WTBA Members: State budget issues Record projected deficit Revenue shrinkage due to business conditions Long-term infrastructure funding mechanisms need re-vamping Possible federal infrastructure stimulus bill forthcoming with new administration Depending on where dollars are distributed, out-of-state competition likely to increase With funding comes strings
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Commercial Insurance
Federal-Level Funding Scenarios: With funding comes strings
Prequalification process and safety standards may be ramped up Workers compensation experience mod over 1.00 may disqualify your bid Some private owners require written procedures for pre-planning safety issues into each project OCIP safety requirements likely to become more stringent WisDOT use of OCIPs likely to become a matter of course on large mega corridor projects 19

Commercial Insurance
State of the Marketplace:
2008 Cat losses increased 50% over 2007 Financial market meltdown has eroded insurers balance sheets Reserve levels are being drawn down to pay for cat losses and to write off investments.
Last month Towers Perrin estimated 15% of industry reserves would disappear

Combined ratios (losses + expenses) are deteriorating and the industry is losing money on its underwriting
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Construction Contracts

Definition:
Specify the legal responsibilities and obligations between the project Owner and the Contractors.

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Construction Contracts

Issues:
Indemnification Agreements (Huge) Insurance Specifications Insurance Compliance/Certificates of Insurance Additional Insureds/Waivers of Subrogation Builders Risk (Who is responsible) Safety and Loss Control Programs (Discretion of Owner) OSHA Compliance

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Construction Contracts
Indemnification Agreements:
Broad Form AVOID Pay any and all damages, costs, expenses - even for sole negligence of owner. Your insurance carrier would pay for claims caused by others.

Limited Form ACCEPT

Pay bodily injury and property damages to the extent of own negligence
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Construction Contracts
Insurance Specifications:

Workers Compensation Statutory Benefits General Liability limits specified in contract Auto Liability limits specified in contract Umbrella/ XS Liability limits specified in contract Professional Liability limits specified in contract Builders Risk - $Project Cost, $Materials Onsite, Off-site and In Transit Additional Insureds, Waivers of Subrogation Certificates of Insurance
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Construction Contracts
Insurance Compliance/ Certificates of Insurance:

Watch Out for Sole Proprietors

Seek to Avoid Losses of Others

Can be Charged Additional Premium for Uninsured Subcontractors

Often Project Managers Responsibility

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Construction Contracts
Additional Insureds:

Obligates an insurer to defend and possibly

pay claims of another party AVOID Primary Noncontributory Language. If it is included, add the phrase: but limited to the operations conducted by the Named Insured.

Waivers of Subrogation:

After payment of a claim, restricts an insurers

right to collect from the responsible party
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Construction Contracts

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Construction Contracts

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Construction Contracts
Builders Risk:

Contract Should Specify Who Purchases Coverage Owner or Contractor?

Named Insured Should Include Both The Owner, Contractor and Subcontractors

Contract Should Specify Who Pays the Deductible?

Add Loss of Use & Testing Coverages

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Safety Issues
OSHA/MSHA Purpose Establish minimum safe workplace standards Conduct workplace inspections for compliance 29 CFR 1926 Standard applies to road construction operations Table of Contents is nine pages long! 29 CFR 1910 applies to general construction OSHA Partnership program agreements exceed minimum safety standards Bottom line Safety issues demand your attention
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Safety Issues
Accident Pyramid

Severity
Frequency
Accident Potential Situations

1 30

Major Accident

Lost Time Injury

First Aid Cases Near Misses At - Risk Behaviors

300
3,000 30,000

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Safety Issues
A successful safety program focuses its efforts on the bottom of the pyramid Reducing at-risk behaviors and near misses will result in lower claim frequency and severity rates over time Establish a corporate climate of eliminating at-risk behaviors Develop internal protocol to allow for site/project specificity safety procedures
Severity 1
Major Accident

30

Lost Time Injury First Aid Cases Near Misses At-Risk Behaviors

Frequency

300

Accident Potential Situations

3,000 30,000

Safety Issues

Critical components of a successful safety program: Top management support and commitment Foreman/Supervisor involvement and accountability Recognition/Reward for meeting and exceeding expectations
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Lowering Costs & Staying Pretty

Underwriters look for these account characteristics

Solid financial position Quality management Contractual/Risk Transfer controls Auto/fleet controls
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Lowering Costs & Staying Pretty

Solid Financial Position: Profitable Willing to invest in safety, training and equipment
Quality Management: Reputation and work quality Clear safety accountability structure

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Lowering Costs & Staying Pretty

Contractual/Risk Transfer Controls: Qualified internal contract review prior to execution Applicable to both prime and subcontract work Auto/Fleet Controls: Uniformly enforce of company policies Be familiar with the doctrine of Negligent Entrustment
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Lowering Costs and Staying Pretty

Meaningful improvement is possible

Large, multi-state contractor 3mm+ man hours without a lost-time injury Marquette OCIP accumulated 2.25mm man hours without a major injury

Implementation will help ensure your firm is insurable regardless of market conditions
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Lowering Costs & Staying Pretty

90-120 days out from insurance program renewal date is too late to pay adequate attention to the program structure Average insurance costs for road construction accounts run between 1% to 2.5% of revenue Make it your goal to be better than average
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Questions and Comments

Thank you for your attendance and participation!

Greg Schmidt WSA Account Executive Phone: 715.847.7792 Cell: 715.574.1519 Gregory.Schmidt@WausauSA.com

Email:

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