By opening up two-way communication streams with their insurers, contractors can ward off major job-related problems before, during and post-project.
After years of managing the lows of the Great Recession, construction firms are now experiencing what Joe Riela called a “dam release” of projects that were on the shelf for two to four years. “Many of these projects were released at a very high frequency,” said Riela, regional vice president, East region, for Zurich’s construction group. The pace is both a blessing and a curse for firms, many of which reduced overhead to combat the effects of the recession.
Insufficient overhead, staffing, equipment, numbers of subcontractors and a myriad of other challenges are coming into play and creating a riskier environment for today’s construction firms. “From a financial standpoint, the cash flow implications of this rapid increase in work is top of mind,” said Riela. “It’s created a high degree of risk for our contractors — general contractors in particular.”
One way contractors can head off potential risk is by involving their insurance providers in projects early in the game and then keeping those insurers in the loop as those projects progress and complete. Zurich, for example, uses a comprehensive prequalification process that is tied to the firm’s Subguard® risk management solution. Using this process, risk engineers work closely with subcontractors to review fiscal year-end financial statements, interim financial statements and quarterly work-in-progress schedules. This prequalification process allows contractors to maintain close financial tabs on their subcontractors. “That degree of information flow has improved considerably,” said Riela, “but it still needs constant monitoring.”
KEEPING UP IN A FAST-PACED BUSINESS WORLD
In today’s fast-paced construction world, Riela advises contractors to err on the side of over-communication when working with insurance brokers and carriers. This is especially important when business plans change — whether by the degree of self-performance versus subcontracting they’ve been doing, geographic changes, change of state mix or even types of work (residential vs. commercial). “Based on contractor size, I always recommend a midyear review or stewardship meeting,” Riela said, “where all aspects of the insurance program, including the underwriting claims and risk engineering, are openly discussed. I think that’s critically important.”
With insurance being such a large component of contractors’ overhead, Riela is a firm believer in conducting financial reviews in concert with thorough discussions of work-in-progress schedules. “This is sometimes overlooked in the insurance process, but it’s a critical component for the underwriters to understand where the work is being performed,” Riela pointed out. “I do think that there is a direct correlation between financial performance of the jobs and safety.”
So how do customers react to such meetings? Riela said feedback typically depends on the company’s size. Those firms with $20 million or more in revenues, for example, generally feel that midyear reviews are beneficial. “What it boils down to is that no one likes surprises,” said Riela. “The more time our underwriters have to digest the information and, most importantly, understand the root cause of the change, the better the outcome for everyone involved.”
COVERING A BROAD SCOPE
One of the reasons Eric Cittadino, Zurich’s regional vice president, Midwest region, encourages contractors to keep him in the loop is due to the broad scope of those customers’ operations. Many contractors work on an “in trust state” basis within a single state, for example, while others are national in scope and manage jobs across the country. “When a company starts operating in a different marketplace and/or state,” said Cittadino, “it typically encounters a myriad of challenges in terms of base insurance rates that apply in any given state.”
Litigation and labor challenges also come into play when companies operate across state lines. For example, Cittadino said New York tends to be slightly more litigious than, say, Indiana. “As an insurance company, when we’re in the loop early, we can provide contractors with a much broader view of the type of risk that they may encounter,” said Cittadino. In terms of labor, general contractors lack knowledge of local labor force trends in their target markets. Insurance companies can provide both national views on potential labor litigation points and trends, said Cittadino, as well as insights for specific local markets (i.e., are there labor shortages?). “We can provide a broad overview of these and other labor-related issues to our customers or contractors as they get ready to start their jobs,” said Cittadino, “and then proactively manage that type of communication with our contractor-customers.”
Contractors that are working overseas face a different set of challenges when it comes to insurance, risk and litigation. Cittadino pointed to construction elements, tax implications and labor challenges as just three of the key areas where an insurance firm can help a contractor ward off issues and be more productive when working overseas. “We have a global construction underwriting division where dedicated underwriters provide insurance solutions to contractors for the specific countries where they are working,” said Cittadino. Insurance firms like Zurich not only provide a broad view of potential tax implications for foreign countries, but also possess the insurance and underwriting expertise that applies in most countries.
TRACKING THE TIGHT LABOR MARKET
It’s no secret that the U.S. labor market is tightening up — a trend that’s already obvious in some contracting segments and that is expected to continue for at least the next few years. After cutting back to offset the impact of the Recession, for example, construction firms — and those in many other industries — are now scrambling to ramp their employee bases back up to accommodate the expanded project flow. “We tend to find an ongoing issue with acquiring highquality talent, training individuals and giving them opportunities,” said Cittadino.
The fact that the 78 million baby boomers in the U.S. are on track to begin exiting the workplace over the next five to 10 years makes the labor shortage particularly tricky. Without an equally large generation of workers following in the boomers’ footsteps, filling out the workplace with qualified personnel will be a challenge. To overcome this hurdle, Cittadino said many contractors are developing talent internally by sending workers to trade schools, colleges and universities to earn their associate degrees, bachelor’s degrees and MBAs.
“There’s a lot going on with training, partnering with unions and taking other steps to help build out talent infrastructures within the construction industry,” said Cittadino. “Many contractors are developing talent that can work in a given state, on a certain project or projects or for a specific time period. Finally, they’re encouraging those employees to relocate as needed to ensure those workers can continue to meet the organization’s needs.”
GET YOUR INSURERS IN ON THE GROUND FLOOR
When contractors involve their insurance companies in upcoming projects early enough, the odds that those projects will be completed in a safe, risk-free manner increase exponentially. “One of the key tenets we look at is a firm’s risk management process or the safety culture that’s instilled within the construction company itself,” said Cittadino. This is important because many times risk managers get promoted, move to different positions or firms. Keeping your insurance carrier apprised of these changes, Cittadino advised, is important in terms of ensuring that the given contractor’s risk management program will be maintained for the long term.
“What companies are doing from a safety and cultural perspective — and the type of resources they are providing to that given endeavor — is critical for us in terms of how we assess our pricing, coverages and the program structure that we offer,” said Cittadino. “So keeping your insurance company in the loop around those elements is extremely critical.” When asked whether contractors understand this imperative, Cittadino said top-tier companies that are national in scope tend to be the first to comply. “Those with solid reputations and good credibility in the marketplace,” he said, “usually proactively manage this aspect of their businesses and keep us informed — rather than having us push things forward.”
In some cases, Cittadino said larger, national contractors approach Zurich for guidance, help with current programs, support in handling lawsuits and assistance from their insurance provider’s risk engineering group. By taking this proactive step, these contractors essentially hold themselves out as firms that are aggressive about “setting up risk management programs and strong corporate cultures with an insurance company’s assistance — not the other way around,” Cittadino said.
COMBATING COMPLEX CHALLENGES WITH GOOD COMMUNICATION
Construction firms face a number of complex and unique challenges on a daily basis. According to Cittadino, one major obstacle right now is construction defect. A construction defect is a deficiency in the design or construction of a building or structure resulting from a failure to design or construct in a reasonably workmanlike manner and/or in accordance with a buyer’s reasonable expectation. Multifamily housing is one particularly complex area for potential construction defects right now, according to Cittadino, who said a number of related class action lawsuits have either been filed or settled in the last few years.
“There’s been increased demand for new apartment buildings over the last few years, typically on a single-ownership basis,” said Cittadino. The problems tend to enter the picture when those apartment buildings — particularly in higher-profile cities — are converted into condominiums (i.e., the owner sells out all units to multiple individuals on a condo basis). When that happens, the potential for litigation increases exponentially from a construction defect perspective.
“Multiple litigants can come into play at that point,” said Cittadino, who added that insurance carriers are currently working out the details of how to manage this growing issue, underwrite such projects, analyze the potential exposures and price their coverage accordingly. “We’re looking at the type of program structures we need to offer to make sure that we’re mutually engaged (i.e., both insurance firm and contractor) in terms of addressing this issue,” Cittadino said.
But construction defects aren’t the only potential risk area that contractors can mitigate through close contact and relationships with their insurers. According to Cittadino, financial risk is another prevailing obstacle in today’s business environment. To offset this challenge, he said Zurich carefully analyzes loss-sensitive customers for potential credit risks. “We want to understand the financial viability of a given contractor,” he said, “to get an idea of its financial health and viability. Then we try to maximize the flexibility of the coverage and renewal process for those that are financially strong.”
THE LINES ARE OPEN
Without a solid line of communication between a contractor and its insurance provider, everything from quality control to safety to financial wherewithal can suffer. “If we’re not getting that clear pipeline of communication, there is a direct correlation to how we underwrite the given risk,” said Cittadino. “The lack of underwriting information gives us a sense to pause. We then have to really think about how we’re going to offer up a renewal, whether we need higher rates or whether we need to improve or enhance the deductible levels on a given account, for example.”
Those issues can be resolved or avoided completely through more transparent conversations between the contractor and the provider. When those talks occur, Cittadino said insurance firms gain a better understanding of potential risk areas and can develop optimal insurance solutions to address those issues. “That’s really the key, because the lack of transparency has a significant impact in terms of how we offer up our insurance programs,” he said. “We’d like to have that transparency and consistent dialogue take place between our firm and our customers in order to help respond to existing or future challenges that they may have.”
“Verbal communications extend to the contractor’s safety culture,” said Cittadino, “and help insurance companies provide risk engineering to support that culture and enhance the contractor’s financial health. By assessing the key challenges around specific projects, the issues associated with loss-sensitive products, and the type of payment schedule flexibility that is available, Zurich can serve as a key thought collaborator for contractors from a risk management perspective.”
Riela concurred and said contractors that are moving into new geographical markets should be particularly aware of the need for good and early communication with their insurance providers. “There is a big difference between operating in New Jersey, Connecticut or Pennsylvania versus New York. If that’s not communicated upfront, and if we wind up in a reactive position, it could have drastic impacts on not only the premium, but also the program structure (the use of deductibles and self-insured retentions [SIRs], for example).”
In many cases, those open lines of communication flow in two directions. When developing Subguard®, for example, Zurich listened to the needs of its customers and pinpointed problem areas where it could be doing more to help. “If we understand the problem, we can try to find a creative solution for it,” said Riela. “Whether we’re coming up with a creative way of approaching coverage on an existing product or developing a new product, we’re constantly thinking of our customers and their needs during the process.”
Communication is the backbone of good working relationships in most every arena. Open and continual communication between the contractor and the insurer will mean better results for all. The experiences of both firms can be brought to bear upon the immediate and anticipated needs of the participants.
Eric Cittadino is a regional vice president, Midwest region, with Zurich. He may be reached at 847.413.5784 or via email at email@example.com. Joe Riela is a regional vice president, East region, with Zurich. He may be reached at 617.570.8818 or via email at firstname.lastname@example.org.