Experienced adjuster offers insight for agents and brokers who serve contractors and other construction professionals
As the construction recovery continues to unfold, contractors are taking on more work. More projects mean more insurance policies—including more builders risk policies. But they also mean more claims.
Tom Tiernan, senior executive general adjuster for Engle Martin & Associates, works with contractors all the time, and because of that he’s able to observe trends in the claims arena. One loss trend that continues to plague contractors is the theft of copper. “On large projects, for instance, copper pipes and wire often are installed early, before any finishes are installed,” he explains. “Contractors continue to see a high number of thefts involving that type of property, which can be converted to cash easily and quickly.”
Another trend he’s seen involves weather—cold weather, to be exact. “We seem to be seeing more freeze-related losses than we used to see,” he observes. “That’s always been an issue, of course, but it seems to be more common recently than it had been in the past.”
Miscommunication or lack of communication is probably a key driver of claims. “It’s not unheard of for there to be crossed wires between the general contractor and a subcontractor,” Tiernan comments. “For example, the subcontractor might assume that the contractor will tell or ask them to shut the water off or drain the lines in a sprinkler or plumbing system when a cold front is coming. They’re thinking, ‘It’s the contractor’s job; they’ll tell us if they want it done.’
“And the contractor just figures the sub did it. And the general contractor is probably thinking the subcontractor should know to do this because if they don’t do it we’re probably going to end up with some bad news because a freeze occurred and the pipe burst.
“You’d be surprised at how many times I’ve seen such assumptions from one party to the other,” he adds. “Poor communication leads to losses, and both parties are embarrassed if it happens. The subcontractor says, ‘I wish I had done it.’ The contractor says, ‘I wish I had told them.’ ”
Among the trends Tiernan has observed is an increase in the volume of soft-cost claims being presented. “Regardless of the time it takes to finish repairs after a covered loss, we’re seeing soft-cost claims being presented on a much more consistent basis,” he says. He points out that the insured’s primary focus used to be to get the repairs done quickly and make sure the claim payment covered the cost of materials and labor.
“Now, whether the covered loss results in a two-week period of restoration or whether it takes four months to complete the work, soft costs are being included,” Tiernan notes. “And it’s true with relatively small losses as well as larger ones.”
Soft-cost claims are being presented for losses like business income and contractors general condition. “Items they’re looking to have covered could include construction loan interest, perhaps lost rental income, and other expenses,” he says. “Sometimes the request is relatively simple; in other situations it’s much more in depth.”
Tiernan says increased familiarity with policies may be driving the shift. “It could be a greater awareness that the coverage is there,” he notes. “If a CFO or risk manager is involved with the project, he or she could be more attuned to the policy details than the project manager, whose primary concern is getting repairs completed.”
Another trend—one that’s perhaps not directly loss-related but that affects how claims are handled—has to do with multiple policies. “It’s more of a coverage trend,” Tiernan says. “I’m running into more scenarios where multiple policies are at play. The owner or contractor will have a builders risk policy, but when a loss occurs, you discover that the subcontractor is carrying an installation floater.”
What happens, he suspects, is that the subcontractor—and/or the agent or broker who is writing the subcontractor’s insurance—may not be fully aware of what coverage is needed and what’s provided elsewhere. “There’s probably a feeling that more is better,” Tiernan remarks. “Actually, more is not necessarily better.”
Typically, he says, when a builders risk policy includes subcontractors as additional insureds, there’s no need for an installation floater because the interest is already covered. “Having duplicate coverage can drive up costs,” he explains. “That not only affects the contractor and the subcontractors, but it is reflected in the overall project cost.”
He also says duplicate insurance can make the adjustment process more complicated than it has to be. “When one carrier has the builders risk policy and another writes an installation floater, you can run into situations where each carrier’s adjuster is pointing at the other, saying, ‘Your insurance applies,’” Tiernan notes. “Sorting it out takes time, which increases frustration, which obviously is never a good thing, and it also can serve to drive up soft costs.”
Agents can help construction industry prospects and clients respond to trends. “When they’re prospecting or arranging coverage, agents need to understand what’s required,” Tiernan asserts. “First and foremost is understanding the difference between a builders risk policy and a traditional commercial property policy. Coverages and exclusions differ, and it’s important to know what those differences are.”
When working with contractors and subs, agents need to address what’s covered in the builders risk policy. “If the subcontractor is a named insured in the builders risk policy, for instance, they don’t need the installation floater,” he explains. “The duplicate insurance doesn’t help. It just drives the subcontractor’s costs up; they pass along that cost to the general contractor, who passes it along to the owner.”
Coverage concerns go beyond duplication. “Agents and brokers need to understand the construction contract,” Tiernan notes. “That spells out the insurance specifications, and it’s important to carefully compare the coverage that’s being provided with what the contract calls for. The agent can learn who and what are to be covered, what happens in the event of loss, and what waivers of subrogation to include.”
The advice comes with a warning. “While a lot of construction contracts include similar language, they’re certainly not a boilerplate,” he explains. slightly, depending on the job or location or people. But never assume that if you’ve seen one contract, you’ve seen them all.”
Agents and brokers also can help clients prevent or reduce losses. “For theft concerns, encourage project managers or owners to have appropriate security in place,” Tiernan advises. “This could include anything from fencing or on-site cameras to periodic property security visits or an overnight presence. I’ve seen more contractors making use of various security tools lately.” Such measures can not only help reduce possible theft, but allow for early detection of a pipe break caused by freezing.
He cites a recent claim he worked on in Minnesota. “It was a construction project that did not have manned security, but they did have cameras in place,” he explains. “One night a theft and vandalism incident occurred. They captured the incident on camera, and that allowed them to catch the perpetrators. It was very effective.”
Tiernan points out that it’s important to understand all project-related risks and how to mitigate them. He also notes that the level of security can change as the project proceeds. “For example, the needs will change as you get closer to completion,” he notes. “When materials are being delivered and stored on site, for instance, there may be a greater likelihood of theft than there would be once the building is fully enclosed, door locks are in place, and electrical power is on.”
Once a loss occurs, agency staff can serve customers in other ways. “First, they should make sure the claim gets reported in a timely manner,” Tiernan says. “By understanding what the policy covers and working with the insurance company from the start, the agent lets the project manager focus on the project and do what needs to be done to keep it moving forward.”
Of course, if mitigation is needed, the agency must address that issue. “They don’t have to wait for the adjuster to arrive to get things moving,” he notes. “For example, if there’s a water loss, go ahead and hire a mitigation company. If there’s a collapse or collapse in process or another unsafe situation, go ahead and rectify that. Agents actually do a good job at this; most of the time, when we get a claim, things are moving well by the time I get there.”
Tiernan also stresses the importance of engaging with adjusters. “I like communicating with agents and brokers about the process in general and what’s going on with the specific claim,” he says. “It ensures that we’re all on the same page, and it provides information to the agent that he or she can share with the insured.”
Agents can play yet another role when talking with insureds. “The agent can be a good advocate for an adjuster,” Tiernan explains. “A claim can be stressful—maybe even traumatic—for the insured. While we adjusters make every attempt to help insureds understand we’re there to help, it carries more weight if the agent reinforces the message because the insured already knows and trusts the agent. I don’t think I can overemphasize how such advocacy on behalf of the adjuster can put the insured at ease.”
By Dave Willis, CPIA