Building Commercial Construction Business in a Soft Market

Soft Market Emphasizes Need for Education, Communication

It was the best of times, it was the worst of times.” Charles Dickens probably was not referring to the insurance industry’s soft market, when he wrote “A Tale of Two Cities,” but his words ring as true to his plot as they do to the current state of the construction insurance industry.

Yet while the soft market that the insurance industry is enduring has extended its impact to the construction industry, particularly commercial construction, it is the best of times for the client in terms of premiums.

The building market, like many other insurance markets, has suffered a number of changes in the past few years. The price to build residential structures has not softened, but demand is down. The housing market is suffering a slump that has not been seen in nearly 70 years, according to speakers at the recent Insurance Skills Center Contractors and Builders Conference held in Sacramento, Calif. As a result, a number of contractors are going out of business.

Because of that situation, many residential contractors have turned to commercial construction to soften the blow, bring in income and to keep their staff employed. The change comes at a price, however. Contractors that may very well have a great deal of experience in residential ventures are not necessarily experienced in commercial construction, conference speakers said. More importantly, that means many contractors and/or owners that switched from residential to commercial projects don’t understand the contractual differences that exist between residential and commercial building.

According to Marjorie Segale, ICS vice president and principal author of the curriculum for a Certified Insurance Specialist in Construction designation, “residential properties have a different kind of contract. As far as commercial construction is concerned, indemnity agreements are tougher; contracts are longer, particularly as far as subcontractors are concerned. This will put a bigger burden on agents and brokers to provide additional insured endorsements for the general contractor and the owner.”

Additionally, Segale said agents and brokers must be alert to if and when their contractor changes from residential to commercial, as their insurance requirements will change along with their ability to provide certain types of coverages.

It is important to recognize that the agent and broker can get the necessary changes, Segale said. For instance, she said, “many construction contracts, whether residential or commercial, require that the general contractor and owner be added to the subcontractors’ general liability coverage using the additional insured endorsement CG 20 10 11 85, which is not available for residential contractors but is available for commercial contractors. The agent or broker, when writing residential contractors insurance, may have placed the general liability coverage with a carrier that does not offer that particular edition, but, if their client moves into commercial construction, he or she needs to be aware that that endorsement is available through other markets for a commercial builder.”

There are some general liability carriers that place classification code restrictions in the GL policy for subcontractors. That means that there is an endorsement in the policy that states that they must perform only the services that are shown on the classification rate page. According to Segale, “If the subcontractor begins doing work to keep busy and make payroll in areas that are not shown on the classification page and a loss occurs, the subcontractor will have no coverage. The last thing that a general or sub-Contractor is going to do is pull out the classification page and review it. Therefore, they are left vulnerable.”

In addition, subcontractors may not have the same contractual protection for commercial projects they do for residential.

According to Robert Marshburn of CertifiedRiskManagers.com, “California, for example, limits the amount of builder’s or GC’s liability that can be transferred to the sub on residential projects, but these limitations do not apply to commercial construction. The subs can find themselves taking on more liability and may not have the correct coverage to insure it.”

If agents and brokers do not keep on top of their construction clients and coverage is placed incorrectly, it inevitably turns into a bad situation for the agent, broker and the client. The failure to keep up with the client could mean, for the agent and broker, the loss of that client. For the contractor, it could mean the loss of potential jobs, not getting paid for a job or an uncovered loss.

To turn the situation into a positive one, Marshburn and Segale advised it is the responsibility of the agent and broker to offer better coverage at a better price. The more informed agents or brokers remain to both their client and the marketplace, the greater their chance for client retention.

That benefits clients as well, as they get the best price possible and the best coverage available; the client wins twice, the duo said. Given the current state of the industry the agent or broker has more of an ability to shop coverage and get a much lower rate. However, if the agent or broker only shops for price, the customer only wins once.

In the weaker construction market, Marshburn and Segale also emphasized the importance of communication. Agents and brokers are no doubt busy trying to get new clients to get revenue, they said. But to retain the clients they have, agents and brokers must:

• keep themselves informed about the current marketplace; and
• keep themselves informed about their client.

That means agents and brokers need to be in touch with their customers and be aware of what kinds of changes their customers have made to their businesses. Regular communication can alleviate that problem.

The goal is to create a relationship with the client that benefits both the customer and the agent/broker, Segale advised.

“The trick here is that old adage: ‘you have to work smarter,'” she said. “You’re going to work harder, but you have to work smart. The more you educate the clients on what they’re supposed to do, the better off you’ll both be in the long-run. You must attempt to educate them on what they need to do.”

Staying educated, and keeping the client educated, are the keys to success, Segale added.

Topics Agencies Commercial Lines Pricing Trends Contractors Market Construction