This year's 20th annual Construction Risk Conference of the International Risk Management Institute, Inc. (IRMI), was held in Atlanta and offered attendees, numbering in excess of 1,000, just about any topic one could possibly imagine having to do with construction, insurance, and risk management.
Attendees, during this four-day conference, learned that the price of insurance for the construction industry is tightening up, for the most part, and that for some exposures, coverage may no longer be available.
Some insurance company representatives, for example, are saying that, although there is a growing demand for certain broad additional insured endorsements for use with commercial general liability policies, they are not going to continue filling those requests.
One such endorsement being earmarked for removal from use, according to some underwriters, is Additional Insured--Owners, Lessees or Contractors--Scheduled Person or Organization, CG 20 10 (11-85). This particular endorsement was replaced by ISO in 1993, because it not only covers the additional insured for its sole fault, but also includes coverage for liability arising out of completed operations.
Not all insurers are removing this endorsement from use. In fact, some underwriters at this conference have been quoted as saying they are and will continue to provide this endorsement on a blanket basis for a rate ranging from 3% to 5% of the CGL premium and without a minimum.
According to some underwriters attending this conference, another coverage that is likely to be available for the smaller contractors is what is known as broad form property damage including completed operations coverage.
Current liability policies provide coverage for damage to work performed on behalf of the insured by exception to exclusions (j) and (l) of the standard ISO Commercial General Liability policy. However, conference attendees learned that an exclusionary endorsement will be necessary, and that should serve as a red flag warning.
Workers compensation
Speculation about where the workers compensation insurance market is heading was clarified by James R. Nau, general manager, residual markets division of the National Council on Compensation Insurance. He said that workers compensation results, not unexpectedly, are poor, but that the poor performance is caused by a different set of factors than was the case in the late 1980s and early 1990s.
Those were "very painful years," he explained. Rate relief and benefit reforms were big issues, in part because rates were highly regulated, he said. Workers compensation rating eventually went to a loss-cost system, which was a different basis.
With this new system, insurers then added their expenses and margin for profit to this loss-cost system thereby enabling insurers "to freely price their product through competition," Nau explained.
Price competition is the driving force, he said. Currently, competition is being driven in part by excess capacity, big deviations from loss-costs filed by the NCCI, dividend plans, and safety incentive programs. Insurers are becoming more selective, he added.
Nau told the attendees that 20 states are within the residual market jurisdiction of the NCCI. With insurers becoming more selective in the regular market for workers compensation, the residual market is growing, he said.
For example, he said, the premium assigned to the residual markets in those 20 states was $60.9 million in 1999. So far in 2000, the premiums are $121.9 million. Another way of looking at it is that there has been a 21% increase in applications to the residual market and a 100% increase in premiums, he said.
Nau stated that larger accounts are experiencing more difficulty obtaining workers compensation insurance in the regular market with each passing quarter. For the first three quarters of 2000, there were 27,900 residual risk applications within the 20 states. The combined loss ratio for residual risks in 1999 was 134% as opposed to a combined ratio of 95% in 1993. "This is very troublesome," he said.
Design-build work
With design-build being one of the fastest growing construction delivery systems, IRMI always manages to have one or two seminars on this concept, and this year's conference was no exception.
Design-build was explained as a system where one entity, a general contracting firm for example, performs both the design and construction work. This compares to the traditional system where an owner hires an architect to draw up the plans and hires a general contractor to get the project constructed.
"Design-build is all about cheaper, faster," David H. Collins, managing director at Marsh USA, explained in his session on contractors as design-builders.
Although this system is as old as the pyramids, there are only a few applicable cases to analyze the nature of problems, said Michael C. Loulakis, an attorney with Wickwire Gavin, Vienna, Virginia.
The current state of design-build liability, Loulakis explained, reveals that owners are experiencing reduced claims; design-builders have significant potential (but little actual) liability; and design professionals are facing greater exposure.
What puts pressure on the design-build team, he said, is single-point responsibility, i.e., the team is responsible. This single-point responsibility is not present in the traditional construction system that uses, for example, an architect/engineer, general contractor, construction manager or subcontractors.
Under single-point responsibility, the project owner has to go to only a single source for answers to problems, said J. William Earnstrom, an attorney with Earnstrom and Dreste in Rochester, New York. However, in light of the unique risks the design-build system presents, he told the attendees that a family of standard documents should be used, such as those available from the Associated General Contractors or Design-Build Institute.
Other topics
Other topics addressed at this conference included:
* Putting a value on a builders risk loss. While physical loss may be only a fraction of the total value of the claim, lost revenues from delay in opening, increased financing costs, or extra expenses are just some of the "soft cost" coverages that need to be considered.
* Completed operations risks. The risk of claims following completion often are more troublesome than the risk of loss during construction, and many contractors do not fully understand the key elements of this risk and kindred points to consider.
* Building a better wrap-up. With owner-controlled and contractor-controlled wrap-up programs growing by leaps and bounds, the question still persists whether these concepts can achieve their stated objectives, yet overcom the owner and contractor relationship as adversaries.
* CGL issues and developments. Although a commercial general liability policy is said to be the cornerstone of a contractor's insurance program, some of the basic coverages still are often misunderstood. Especially troublesome and explored in this all-day session were: contractual liability coverage, coverage for construction defects, and additional insured issues. *
The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is a committee member of the International Insurance Section of the Society of CPCU, on the Examination Committee of the American Institute for CPCU, and an active member of the Society of Risk Management Consultants.