Contractors' Choice responds with broad coverage
plus hands-on risk management and loss control
By Elisabeth Boone, CPCU
Carole Fleischman, president of Managed Insurance Programs for Arrowhead General Insurance Agency, created the Contractors' Choice liability program.
Have you ever gone to a shoe store and asked to see your size in a style you find attractive, only to have the clerk return with a box and say, "I know you said 9 narrow, but all we have is 8 1/2 medium, so I thought you might like to try those"?
That's the kind of pretzel logic that drives most people mildly crazy. We'll willingly purchase any number of items off the shelf--light bulbs, carrots, stamps--but when it comes to buying shoes in the wrong size because that's all the store has to offer, we understandably draw the line.
If you're a general contractor, one thing you definitely don't want to buy off the shelf is liability insurance. You want to deal with an underwriter who understands your business, knows the exposures you face, and is committed to providing long-term solutions that promote stability and profitability.
That's just the kind of challenge that veteran underwriter Carole Fleischman eats for breakfast. As president of the Managed Insurance Programs Division of Arrowhead General Insurance Agency, Inc., she oversees the development, underwriting, and administration of national wholesale programs. Over the course of her career, Fleischman has tackled some tough classes of business and has posted an impressive record of successes. Those achievements clearly reflect her considerable underwriting skill, and they owe at least as much to her talent for the fine art of listening.
For years, Fleischman knew, contractors had been plagued by a lethal combination of mounting losses and resultant premium increases. "I knew the contractors market was suffering very badly from losses," she says. "I had worked with contractors before, and I felt there was a way this business could be written profitably and the contractors' costs, both direct and indirect, could be controlled. That prompted me to interview contractors so I could see what their needs and concerns were and what kind of cooperation I might get from them."
Carole Fleischman, president, and Donna House, senior vice president of Managed Insurance Programs, Arrowhead General Insurance Agency.
"Once contractors get into the program, they don't want to leave."
--Carole Fleischman
Over the next year, Fleischman interviewed 100 general contracting firms to identify the most pressing insurance needs of the building community. "Three major issues came to the forefront," she notes. "One was coverage, and attached to that was price; the second was risk management, and the third was claims handling. A lot of these contractors were generating receipts in the range of $50 million to $100 million; they weren't the giant contractors that have full-time risk managers, so they needed assistance."
Building the perfect program
Using the information she had gleaned from listening to contractors, Fleischman began to design the program that would become known as Contractors' Choice. "The first thing we did was put together the coverage," she explains. "We started with an ISO general liability occurrence form and modified it to meet contractors' needs. We also added employee benefits liability, as well as bodily injury and property damage for in-house architects and engineers. The result was a policy contractors could live with."
Contractors' Choice is a nationwide general liability program for both residential and commercial contractors, as well as wrap-ups and project work. The coverage is underwritten by an A XII Best-rated carrier. Minimum premiums are: general contractors, $50,000; project policies, $150,000; and wrap-ups, $250,000. Limits for general contractors are: $5 million each occurrence; $5 million general aggregate; 5 million products/
completed operations aggregate; and $5 million employee benefit liability. Limits for projects and wrap-ups are: $5 million each occurrence; $5 million aggregate; and $5 million products/completed operations aggregate. A workers compensation policy is offered in California through an A+ XIV Best-rated carrier; plans call for expansion into additional states.
As her next step, Fleischman engaged a law firm to assist her in drafting a sample contractual agreement that contained all the elements she thought were necessary to protect a general contractor for work done on its behalf. She then set to work developing standards for risk management. "I really had a lot of help from contractors in doing that," she says. "I put together a sample project book that gives contractors guidelines on what a project book should contain." Other elements of the project book are a supervisor's checklist for each of the various categories of construction a contractor does, a jobsite indemnity agreement, sample homeowners warranty policies, and evidence collection procedures. Fleischman also hired a vendor to design software that contractors can use to keep track of their additional insureds and the certificates of insurance from their subcontractors.
Loss control partners
For general contractors, whose exposures are so varied and so potentially costly, insurance is only part of the solution. If Contractors' Choice was to provide the comprehensive protection contractors need, Fleischman knew the program would have to incorporate a focused, disciplined, and consistent approach to risk management and loss control. "We interviewed several loss control firms to determine which one could do the best job of assisting our insureds in implementing the risk management program outlined in our standards," Fleischman says. "We hired Worksafe Group, and they put together a manual that refers to our standards and provides additional information our insureds need to manage their jobsites."
Based in Laguna Hills, California, Worksafe is a subsidiary of Mutual Risk Management, a Bermuda-based alternative risk financing entity. Worksafe employs a proactive risk control approach that focuses on the core causes behind losses, with the aim of making safety a profit center for clients. The firm has representatives in almost every state to handle loss control in the field, and the risk management effort is directed from the home office.
That makes Worksafe an ideal partner for Contractors' Choice participants, Fleischman says. "They call on each contractor at least three times a year and assist them where needed. They visit jobsites and put on seminars about quality control for the contractor and his subs."
Claims: handle with care
The contractors Fleischman interviewed all emphasized the importance of top-notch claims handling, and she listened. "I think at least 50% of the profitability of this program is attributable to proper claims handling," she asserts. "We really need claims specialists and adjusters who are specialists in this particular class, because the defense costs can run rampant. That not only affects the loss ratio and the carrier, but it definitely affects the insured and how we rate their coverage in the future. One of the best ways to negate claims is to be sure they get appropriate attention immediately from people who can analyze the elements of the claim and determine what needs to be done."
Contractors' Choice liability claims are handled on behalf of the carrier by a staff of seven adjusters who are based in the San Diego headquarters of Arrowhead. Their unit is run by a lead litigation specialist, Amel Esposito. "The adjusters are very experienced and very dedicated," Fleischman says. "Once a month an underwriter from our office goes to San Diego and listens in while the adjusters discuss the larger cases and the issues they face in analyzing the coverage. That's a big benefit for us, because it helps us see what we need to do in the future to protect both the insured and the carrier. These meetings also are valuable for the adjusters, because they can ask us what our intention was in creating certain policy provisions or wording." Workers compensation claims are handled by Cunningham Lindsey.
The bar is high
For general contractors, whose insurance and risk management needs surely are among the most challenging in the insurance industry, the Contractors' Choice program must seem like the answer to prayer. Because loss prevention and control are at the heart of the program, however, it doesn't come cheap, and its standards are extremely high. "We don't try to be the cheapest player, but we're competitive with the market for those risks that are exceptional in their class and fit into this program," Fleischman says. "It's pretty hard to get into the program; our declination ratio is about 78%. Even during the soft market we didn't lower our standards, because we think we have an obligation not only to the carrier, but also to the contractors who are willing to expend the time and energy and money to keep the program healthy." The Contractors' Choice acceptance rate may be low, but its retention rate is quite the opposite. "We have a 96% retention rate, which is phenomenal," Fleischman observes. "I think the program is so hard to get into that, once contractors get in, they don't want to leave."
Critical to maintaining the program's high standards, Fleischman notes, is ongoing peer review. "We require the contractors who come into the program to hire the services of an independent professional review firm that is involved in nothing but contracting," she explains. "The reviews are conducted by individuals who have served as plaintiff's witnesses in construction defect cases. We consider this the ultimate loss control technique, because these people not only serve as another set of eyes, but they also look at things from the viewpoint of an adversary. They assist our insureds in controlling both direct and indirect costs in many different ways."
The peer reviewers examine architectural plans prior to construction, and then they view the models at the pre-wrap and post-wrap phases. They ensure that all work is being done according to code and according to the plans, and that any modifications needed for the next phase of construction are done at that time. "These people are invaluable as far as I'm concerned," Fleischman says. "We mandate this review for the residential contractors (about 70% of the Contractors' Choice book), and I think it makes a major difference. Obviously it helps the insurer control losses; it also assists the contractor by increasing repeat business, reducing warranty work, and attracting good subcontractors who know that peer review is being done."
Growing strong
In the five years since its inception in late 1996, the Contractors' Choice program has grown to volume of
$100 million. Owing to the program's exceedingly high standards, growth has been measured rather than rapid; that suits Fleischman just fine. "There's a tremendous amount of business out there--it's a huge industry--and I'm proud to say we get a lot of referrals from contractors who are in the program," she says. "I think the program has a very good name from a standards standpoint, and we're known for delivering what we promise. I want to give a lot of credit to our underwriting staff, because they put in the time and energy to help brokers and contractors understand the program and to put business on the books."
The loss ratio on Contractors' Choice now stands at just under 20%. As business develops, "We're hoping to write to a 47% permissible loss ratio overall, given the maturity of the book and the different statutes of limitations in various states," Fleischman explains. "The program has changed significantly since its inception. Originally many of the contractors we took on were written on an occurrence form and looking at their tail, so we knew they hadn't implemented the standards we required, and we understood we would sustain some losses from that right away. Now, as we review those accounts, we can see that they're no longer generating losses from past work." Including wrap-ups and project-specific policies, which Contractors' Choice began to offer in January 1998, Fleischman says, "We're very happy with the book we have, and we're eager to see how it develops."
Shape of the market
Even without the September 11 terrorist attacks, the hardening of the commercial market was affecting general contractors, Fleischman observes. "Carriers seem to be dropping out of the market all the time; in fact, the Lloyd's program has a moratorium on it now, and that was a major competitor. In the residential arena there are about three markets actively quoting, and I believe we're the only one that provides full-time risk management. In the commercial market some large stock companies have dropped out, and probably six or seven carriers are still active. Outside of that, capacity is really reduced, and limits are declining. Reinsurance capacity is contracting, and since September 11 reinsurers have found themselves in a serious quandary."
Despite that gloomy picture, Fleischman likes the outlook for Contractors' Choice. So much so, in fact, that her team is already on the drawing board with a new array of niche programs for markets as diverse as tribal Indians, nursing homes, and pet health. Using the Contractors' Choice model as a template, Fleischman thinks these new programs can be bright spots in a market that demands the very best an underwriter has to offer. *