IRMI Update—Issue #6
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
December 5, 2000
In This Issue
Colleague,
One of the questions posed to the industry panel at last month's IRMI Construction Risk Conference was, "Do you think the soft market caused insurance buyers to lose their focus
on safety and risk control?" Dan Fordice, vice president of Fordice Construction
Company and chair of the AGC's Risk Management committee, answered on behalf
of the construction industry with an emphatic, "No!" He explained that in 1985,
insurers blamed the price increases on contractors' inadequate attention to
safety. "We listened and that isn't the case now," he claimed.
I tend to agree with Dan, at least for the mid-size and large firms in the
construction industry. The cost of risk's major influence on profitability for
this industry gives a big incentive to implement safety programs. Perhaps as
important, risk control and safety have become major competitive issues in this
industry with more and more owners considering safety records in selecting contractors.
However, I suspect this may not be the case in many other industries. The
temptation to try to delegate risk management with a premium payment has been
strong during the last decade of cheap insurance and low deductibles and retentions.
Of course, those organizations that do not have well-established safety cultures
with proven track records will be the ones most challenged by this changing
marketplace. Perhaps this will prove out the old saying, "You can pay me now
or pay me [much more] later."
What do you think? Have corporations and public entities been paying adequate
attention to risk control? If not, will it hurt them now or later? What should
an organization do now if its risk control program is lacking? [To see what
readers had to say, go to IRMI Update #7.]
Have a great day!
Jack
Jack P. Gibson
President
IRMI
GL Subsidence or Earth Movement Exclusion Is Unacceptable! The construction defect fiasco in California led to the creation, by the specialty
insurers, of the subsidence exclusion for attachment to the commercial general
liability policies of homebuilders. Originally the exclusion applied only to
completed operations property damage and was limited to subsidence generally
caused by foundation failures. It has evolved into the contractor's worst nightmare.
Many companies have extended the subsidence exclusion into an "absolute earth
movement exclusion" including earthquake and are using it for all contractors.
Most no longer limit the exclusion to either the property damage or completed
operations hazard. One admitted regional insurer puts the exclusion on every
policy it issues. Since the exclusionary language is so broad, it would be strictly
interpreted against the finding of coverage. The courts in California have been
of no help in mitigating the negative effects. See Blackhawk
Corp. v Gotham Ins. Co., 54 Cal App 4th 1090.
This problem is no longer limited to California nor to specialty insurers.
A major national insurer specializing in contractors has recently added an absolute
subsidence exclusion for use in Arizona, Colorado, and Nevada. Insurers may
use this endorsement wherever market conditions allow.
Why the big concern for most contractors?
- No coverage for bodily injury arising out of a trench collapse on an
ongoing job
- Possible coverage problems arising out of equipment upset
- Any earthquake induced bodily injury or property damage is excluded
- Subcontractors may have this exclusion on their policies
What can you do to eliminate or mitigate the problem?
- Use a different insurer—even California has A-rated insurers with minimum
exclusions
- Request the exclusion be deleted—especially for premiums over $35K
- Obtain separate subsidence coverage where available
- Require your subs to disclose all exclusionary endorsements during bid
process
- Obtain a side letter from the insurer limiting the areas where the exclusion
applies
Large general contractors and public entities, such as Caltrans, are becoming
more and more sensitive to the use of exclusionary endorsements on policies
where they are named as additional insureds. There is a requirement on both
the Caltrans insurance specifications and the AGC of California standard form
subcontract that exclusionary endorsements be set forth in the insurance certificates.
By: Robert G. Mahan ESQ
Managing Member
Mahan Insurance
LLC
Carlsbad, CA & Mystic, CT
RGMahan@mahaninsurance.com
Suggest a Risk Tip. Future issues of IRMI Update will include more risk tips from our readers. Send
us a practical tip (less than 300 words) for identifying and managing risks,
buying insurance, managing claims, or filling gaps in insurance coverages. We'll
acknowledge your contribution as we did for Bob.
We add new Expert Commentary to IRMI.com every week. There are now 88 articles
on IRMI.com, and many more are in production. Below you'll find summaries of
some recent additions with links to the articles.
-
The Super Wrap-Up
Administrator—The job of the wrap-up administrator is a super-human
one. This article breaks down the myriad of wrap-up administrative responsibilities
by project phases, explaining what tasks are performed in each.
-
Copyright Infringement
Pitfalls in the Online Arena—There is a tendency to assume that
something acquired for free is public domain, particularly as respects material
on the Internet. This can be a very costly assumption. Discover the copyright
pitfalls and learn how to avoid them in this insightful article.
-
What Does an Additional
Insured Endorsement Cover (Part 2)—If your contract doesn't specify
what type of additional insured (AI) coverage is required, it is quite possible
that a very restrictive manuscript endorsement will be used. Learn about
manuscript AI endorsements, their pitfalls, and how courts have interpreted—and
refused to interpret—them.
Paul Day Receives Construction Risk Management Best
Practices 2000 Award. Paul Day of Cianbro Corporation has been honored
as the winner of the 2000 Construction Risk Management Best Practices Award.
Mr. Day was recognized for the design and implementation of a behavior based/continuous
improvement safety process at a complex and challenging bridge rehabilitation
project. Read more about this award and its winner.
The firming insurance market is causing resurgence in the use of retrospective
rating, large deductibles, self-insurance, captives, and other sophisticated
risk financing plans. With little need to use these vehicles in recent years,
many insurance and risk professionals have not kept their skills and knowledge
up to speed. IRMI offers three publications that can put your team back on the
alternative market fast track. Give your coworkers these tools to turn hard
market challenges into opportunities.
-
Risk Financing—This detailed
reference manual (1,500 pages) is a blueprint for evaluating, choosing,
and implementing the best risk financing options, from deductible programs
to captive insurers.
-
Captive Insurance
Company Reports—Every month CICR gives risk professionals insightful
tips for optimizing the performance of the insurance companies they own,
manage, or advise—from insuring benefits to analyzing the components of
a captive's expense ratio.
- Financing Risk
& Reinsurance—Monthly issues of FRR explore the leading edge of the
risk management and insurance industry with its coverage of risk securitization,
financial reinsurance, and enterprise risk management.
In last month's editorial, Jack expressed concern that the lack of hard market
experience, layoffs of middle management personnel, and reduced emphasis on
training and education would pose significant challenges for the industry if
the trend toward a hard market continues. The 30 readers who responded overwhelmingly
agreed. Below are excerpts from their e-mails. (See IRMI Update #5 to read last month's editorial.)
- Our company faces the challenge of asking our post-1986 marketing underwriters
to achieve rate increases through post-1986 producers who deal with post-1986
clients. Each party has been schooled in a buyer's market that applauded
"the deal" at the expense of sound business practices. We counsel, we lead,
and we educate our people.
—Underwriting Manager
- I find myself having to devote a disproportionate percentage of my time
to coaching and mentoring younger underwriters in the skills needed to pursue
pricing increases necessary to achieve profitable results. They tend to
react to producer requests for inadequate pricing or unnecessary coverage
extensions as though they were non-negotiable demands. One of the performance
standards I use to critique these people is how well they acquire the skills
AFTER being coached.
—Underwriting Manager
- I recently witnessed my son having to deliver for the first time in
his career a significant increase on a large client and it reminded me to
a minor extent of July 1984 and the stress and, quite frankly, embarrassment
and concern I experienced in delivering abrupt and enormous changes in prices
and availability to clients.
—Retail Agent
- People need to train themselves into becoming an expert in something.
That is the key to a long-term insurance career.
—Wholesale Broker
- Here is what I think insurance companies should do to prepare for the
"hard market":
- Top management should actively recruit experienced insurance people
to run an insurance company—preferably CPCUs.
- Bring underwriting back, and increase its importance. An insurance
company will not survive without proper underwriting.
- "Beef up" middle management, and develop realistic training budgets
to train and develop the line workers.
- Increase technical training with formal training programs for underwriters.
Special emphasis should be placed on negotiation skills.
- Management should strongly support insurance education through semester
courses and workshops. The importance of obtaining professional designations,
such as CPCU, should be emphasized.
—Retired Underwriter
- Companies should run the "boot camp" you describe for their agents so
they know precisely what is needed for a submission that allows an underwriter
to make a distinction between the good and not-so-good risks. Finally, agents
better prepare their not-so-good clients for the reality that the free ride
is over.
—Risk Manager
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