Henry Ford once said that his customers could order his Model T cars in whatever color the customer wanted, as long as it was black! For many years, the relationship between contractors and their insurance company seemed to be mired in the same mentality.
Many insurance companies are justifiably proud of their insurance contracts and ancillary services. They have spent quite a bit of time developing their product, obtaining internal and regulatory approvals and may even have had quite a bit of claims experience to help test whether the underwriting intent was well expressed or interpreted.
However, today, contractors and trade contractors don’t have “Model T” needs anymore. Surviving the current economic cycle has meant adaptation to new business models, new project delivery methods and above all else, the need to innovate in order to stay in business.
Many current insurance programs have not kept up with the evolution of contracting. In residential building, for example, homebuilders are often subject to “right to repair laws” with mandatory alternative dispute resolutions to encourage early resolution of claims (a worthy insurance industry goal), yet their insurance policies require a formal “suit” in order to trigger coverage.
Builders have express liability for as much as 10 years, yet their insurance policies are still based on traditional “occurrence” ISO language that leaves it to interpretation and implication to find cover after the end of the policy term. Most recently, residential builders have started building on other entity’s property as a merchant builder or joint venture partners, thus reducing the size of each project. This makes the recent trend towards higher self insured retentions hard to swallow.
On the commercial side, the insurance industry put a lot of energy and development time into creating consolidated insurance programs (OCIP/CCIP) based upon the theory that aggregating insurance coverage into one policy for a complicated project would result in economic savings and efficient claims/safety programs for all concerned. However, with the number of mega projects going down and workers’ compensation insurance rates stabilizing, the call for CIP’s has gone down dramatically.
The impulse of many in the insurance industry has been to wring hands and lament the horrible construction market; with very little resources being spent on new insurance product development for this market.
Meanwhile, according to the U.S. Census Bureau, construction spending is estimated to approach $800 billion in 2011 and approximately 450,000 new homes will be built during this year. This is nowhere near the pre-economic turmoil levels, but still is quite a bit of activity.
Commercial contractors are delivering projects in flexible ways. Contractors are engaged in a higher volume of smaller projects, some in states where workers’ compensation is not a concern or due to monopolistic control, not a possibility. Stand alone projects are perhaps too small for traditional OCIP or CCIP structures and the cost of procuring insurance, with smaller carriers with inconsistent terms and conditions adds to the administrative burdens at the very time where administrative overhead is under cost pressure.
In addition to the new structures of construction projects, there is still the possibility, seen now in the energy and certain public works sector, that alternative project financing, such as public private partnerships or design build will finally see the volume increase long predicted by many. The traditional OCIP/CCIP models have a difficult time with these structures since professional liability and operating liability are not usually covered by these policy forms.
Insurance Product Evolution
So, what does it take for the insurance product to keep up with the evolution of the 2012 construction industry? Staying current requires the harnessing of intellectual capital, excellent communication and technical knowledge; all geared to seeking alignment between the risk appetite of both the carrier and the contractor. This provides opportunity for the carrier, contractor and broker community to seek risk allocations that are both fair, predictable and yes, even transparent.
Residential insurance products need to be flexible to allow builders to survive and understand their cost of risk when seeking new financial partners. Clear parameters regarding allocation of business risk vs. insured risk need to be set forth in the contract, in plain, but industry specific language. Neither builders nor carriers should purposely allow ambiguous language so as to employ legions of coverage counsel all seeking to impose their creative interpretations of what each side meant. Clear language is not difficult if the groundwork of properly allocating risk is fully developed.
Commercial construction products need to be reconfigured. Smaller, more creatively financed projects need to be insured and long-term construction defect exposure must be dealt with, since it is just as much of a commercial issue as it is in residential. Insurance should not be a profit center for contractors and insurance carriers should not hide behind fortuitous court interpretations to evade the risk that they agreed to take.
There is a great deal of insurance talent in the industry. There are carriers, brokers, managing general agencies and contractors who are not satisfied with the status quo and know that insurance should not drive the way that contractors do business. Insurance and contracting should be aligned and the ability to do so is all around us, if we have the courage to think in more colors than Henry Ford’s original offering.