How to Sort Out Professional Liability Insurance through Your Life and Health Agent
Professional liability insurance is a necessity if you are working in certain fields. Doctors, other medical professionals, lawyers and others need this protection against lawsuits. No matter how well you perform your professional duties, there is still a chance that you will be sued. Even unfounded suits require the expenditure of time and money that you can’t necessarily spare. As the incidence of lawsuits continues to increase, so does the need for liability insurance to protect your practice, even if the law does not mandate it for your particular profession. Liability insurance could save you a great deal of money and stress in the case of a wrongful suit against your business.
Depending on your insurance provider, you may be able to receive your professional liability insurance through your health and life insurance company. Ask your agent whether or not their company or one they are partnered with offers professional liability insurance. They will hopefully be able to help you find the plan best suited to your specific professional requirements. It’s important that you can find an agent who’s knowledgeable about your field and understands your particular needs. These needs will vary by profession and situation, so it’s good to get to know your insurance agent well.
Don’t be afraid to shop around for an agent who will offer a good combination of advice and affordable rates if your current health and life insurance agent can’t provide what you’re looking for. You may also be able to find companies that will offer life, health, and professional liability insurance plans through professional associations to which you belong. Small businesses can benefit from carrying liability coverage in case of accidents on the premises. Businesses who intend to put on a short-term event can sometimes acquire temporary liability insurance to protect them for that span of time, even if they don’t normally operate in a fashion that requires insurance.
If you are able to get your professional liability insurance through your existing provider, your agent may be able to cut your costs by offering a package or umbrella deal. These deals may not exist with every provider and will vary. Members of specific organizations may find that those organizations have specific insurance providers which are willing to offer them a good deal on their professional liability insurance as well as other types of insurance. Contact any professional organizations you may be a part of to research this possibility.
One of the advantages to working with your existing health and life insurance agent to get professional liability insurance is that they will already know you. Working with a familiar face can simplify the sometimes stressful process of finding the right plan. Also, an agent who already knows you can more easily identify your particular needs. Depending on the company you already receive your health and life insurance from, you may be able to acquire professional liability insurance through them more simply than you would be able to get it from somewhere else.
Construction Safety in the Modern World - Your Responsibility as a Client
To begin with it’s perhaps worth looking at what the CDM regulations are and put simply they have been introduced to ensure construction projects are safe to build, use and be maintained whilst delivery good value to the client. As well as this they have also been put into place to ensure through good health and safety planning projects are well managed and problems and unexpected costs are kept to minimum levels.
For some this may seem like yet more regulation and unnecessary paperwork and processes but in reality the CMD 2007 regulations have been introduced to ensure construction and building work is done by competent people who work safely and efficiently.
When it comes to requirements of clients (or the person having the work carried out) the regulations don’t apply to domestic clients. A domestic client is defined as being someone who will or does live in the premises where the work is being carried out. The premises at which at work is being done must not also relate to any trade, business or other undertaking for the client to be deemed as domestic. So if you’re a non domestic client under the Construction (Design and Management) Regulations 2007 you have to:
1. Appoint the right people – trade associations are a great way to find designers and contractors who are competent, have sufficient resources and will carry out work safely.
2. Allow enough time for your project – failing to allow for adequate time for the design, planning and construction is likely to mean more chance of it being unsafe or of a poor quality.
3. Information is vital – to ensure your project runs smoothly you have to ensure that your construction team is told what you want, how you will use it as well as details of the site, structures and hazards as this will allow them to plan, budget and work to your exact requirements.
4. Communication and co-operation – injuries, overspending at a later stage and misunderstandings can all be kept to a minimum if you, your contractors and your designers communicate and co-operate as much as possible.
5. Management – having adequate and suitable management in place is vital for construction projects as they can be extremely complex due to the various types of contractors and tradesmen all working together. And as some of these contractors are involved in high-risk activities (for example, roofing contractors and scaffolding contractors) then it is important that management arrangements are in place to ensure all work done is safe and is completed in a timely manner. Clearly contractors like roofers and scaffolders will have their own ways of working and protection in the form of construction insurance, scaffolders insurance and contractors insurance but management of all parts of the project and checks should be done to ensure all parties are working with safety in mind.
6. On site Welfare facilities – you should ensure that workers on your site have been provided with adequate welfare facilities before work starts including any information needed for the health and safety file.
7. Workplace design – it is up to you to make sure your design team complies with the standards set out in the Workplace (Health, Safety and Welfare) Regulations 1992 if your project is for changes to an existing workplace (e.g. office or factory) or if the project is for a new workplace.
In addition to the above requirements as a client you also have to make sure you do the following for notifiable construction projects with the definition of notifiable construction work being that which lasts longer than 30 days or involves 500 person days of work.
For these projects you also have to ensure that:
8. You appoint a CDM co-coordinator – although CDM 2007 doesn’t mean your Construction Design and Management co-coordinator has to supervise or monitor work on site you should appoint one before the initial design and preparation stage. Their role will range from helping you select competent designers and contractors to making sure the Health and Safety Executive is notified of your project.
9. You appoint a main contractor – a main or principle contractor will plan, co-ordinate and manage work on notifiable jobs whilst construction work is being done
10. You have health & safety plans – Work shouldn’t commence on site until the principal contractor has produced a construction phase health and safety plan that ensures that work will be carried out safety
11. You keep a health & safety file – the health & safety file should contain a record of health and safety information and should be given to your at the end of your project by the CDM co-coordinator. This file should be used in the future by anyone who is looking to maintain, repair or demolish the building.
Failure to comply with CDM 2007 from a clients’ point of view could result in construction work being stopped by HSE or your local authority. Likewise failure to take the necessary steps to ensure good health and safety procedures are in place could dramatically increase the chances of a dangerous or fatal incident occurring whilst your construction work is carried out. And in the most serious cases you could even find yourself open to prosecution.
Make sure your site is safe – you have a duty to do so.
This article was written by Mark Burdett, Marketing Manager of Northern Counties Insurance Brokers. Mark has over 17 years Marketing experience in the Financial Services industry and has worked on campaigns for companies including Norwich Union, Kia and Zurich.
Now based in Newcastle upon Tyne Mark is Marketing Manager for one of the UK’s Leading Insurance Brokers - Northern Counties Insurance Brokers.
Workers Compensation Insurance - Construction Contractors
Worker’s Compensation Insurance for construction-related framing contractors has always been expensive. Danny Harter, owner of DH Framing already knew that much because he faithfully carried this insurance in order to work in legal compliance with State insurance requirements. But what Danny wasn’t expecting – to be suddenly cancelled by his Worker’s Compensation Insurance carrier – happened in November, 2004 – all because “out of the blue,” his insurance carrier simply decided that his company was “too small” for their interest. Danny had two employees, including himself, and a weekly payroll between $1,500 and $2,000.00.
Danny was notified of his cancelled workers comp policy when the client he was busily working for one morning, came up to him and said, “You can’t work on this job – I’ve got a notice here that you don’t have valid Worker’s Comp Certificates with your insurance carrier anymore.” How embarrassing!
Danny obviously lost time on the job, and income. But he did what he needed to do, and immediately started contacting insurance carriers, trying to find someone who would not consider him “too small,” or otherwise, undesirable. After all, he was and still is a successful, hard-working small businessman. Shouldn’t someone be interested in writing his business?
To no avail, Danny could not find an insurance carrier that would underwrite his business. Fortunately, he contacted an insurance agent who just happened to know about the Worker’s Comp Co-Op. “Call these guys,” the insurance agent said. And Danny did. I picked up the phone and talked to Danny about his business, and what happened to him.
Within one week, Danny and his employee were not only back on the job with the client who had to stop his work – he also had payroll services and worker’s comp insurance coverage without those big deposits you have to put down with traditional insurance agents. So Danny saved not only saved his business. He saved additional, unnecessary hours – weeks – of downtime on the job, and those huge upfront fees.
Insurance for the Construction Industry - An Insiders Guide to Getting the Best Rates
Next to the cost of labor or materials, insurance premiums often represent the single largest business expense for a construction contractor. It only stands to reason then that successful contractors should seek to take advantage of all available means to minimize insurance costs. The good news is that there are many ways to effectively do so. Some methods are fairly simple, for example price shopping when looking for a policy. Others techniques, such as applying for credits and reviewing modifier rates are a bit more involved. In either case, most construction related businesses will find that the effort is well worth the reward in the end. When efficiently managed, even small contractors can realize a significant reduction in premiums. Here’s a few tips on how you can save money from an insurance professional that specializes in writing polices for the construction industry.
My first piece of advice is to always shop around for the best price and get several quotes from multiple agents. The difference in price between the lowest quote and the highest quote can be substantial. This is especially true of general liability, commercial auto and commercial property coverage. Shopping around also means shopping for the agent that is the best fit for you. Make sure you are using an agent that has experience writing insurance for the construction industry. As someone who specializes in working with construction clients, I can tell you that I might not be the best person to come to if you were looking at liability coverage for a doctors office or a property policy for a manufacturing plant. Construction insurance represents a specialized area of insurance. Just as lawyers or doctors specialize in a particular area of their trade, so do many insurance agents. Not all agents posses the specific industry knowledge that is required to get you the best rates or have access to carriers that offer the most favorable prices for construction businesses. The additional tips that I will give in the following paragraphs are important methods to controlling your insurance costs. With that in mind, don’t be afraid to test your potential agents knowledge of these concepts. Ask what advice he or she can give you on how to lower your rates. Ask for references from other construction clients that they work with and don’t be shy about calling those references. Lastly, make sure your agent knows that simply renewing the same policy every year is not sufficient. In many cases renewing the same policy is the best way to go, but not always. It is easy for an agent to get comfortable and stop working hard to earn your business. Don’t let that happen.
Another important aspect of controlling insurance costs is to minimize claims. One of the most efficient ways to accomplish this is to implement a formal safety program. This actually has a dual effect in reducing costs. The first is to raise awareness of safety issues at your company and to involve employees in pro actively working to prevent injuries. Research conclusively shows businesses that maintain a safety program are statically much less likely to file an injury related claim. It is a fact that claims frequency and the dollar amount of claims you have filed are two of the largest factors used by insurance companies in calculating your rates. A good claims history can drastically decrease the price you pay, while a poor claims history can send your premiums through the roof. This is true of virtually all lines of insurance including workers’ compensation, liability, property and auto. A safety program also helps to reduce costs because many carriers offer an extra discount to businesses just for having one. Many workers’ compensation polices offer a safety dividend return that will return a percentage of your premium to you if you are able to complete the policy with little or no claims. This safety dividend can be quite substantial. One company that I work with offers upwards of 30% back on your policy if you go without claims. Discounts are available on auto polices for safety measures such as air bags, anti-lock brakes, having drivers with safe driving records and even for such items as establishing and maintaining a regular maintenance schedule for your vehicles. While not necessarily safety related, you can also receive auto insurance discounts for anti-theft devices such as alarms and gps tracking systems.
The last tip deals specifically with workers’ compensation. Your workers’ comp. policy is based on a percentage of annual gross payroll. Each job classification pays a different rate based on the risk associated with that particular class code. For example a roofer would pay a much higher rate than a plumber. In most cases the percentage of payroll charged for a particular job class is assigned and approved by the state in which you do business. California may charge a different rate for trim carpenters than Maryland, which may charge a different rate than Montana. Insurance carriers doing business in a state must base their fee for workers’ compensation coverage on the percentage that has been assigned by that state. There are however several ways to manipulate that percentage. I’ve already discussed one way, which is to maintain a good claims history. Another method is to take advantage of contractors insurance credits offered by many states. The credit amount varies by state and is not offered by all states. However, if you do qualify this is one of the most effective tools you have at your disposal to reduce workers’ compensation costs. In general terms, the contractors credit program offers a premium refund for construction industry employers who pay their workers an average wage that is above a certain bench mark amount. As an example, the minimum amount to be eligible in Florida is $10 per hour or higher. Employers in that state can receive a maximum credit amount of up to 25% of the total policy premium. In Missouri the credit starts when an employer pays an average wage of $16 or more and the maximum credit amount is up to 34.4% of the total policy premium. That can add up to thousands of dollars for even small contractors. The contractors credit is easy to apply for. In fact, your insurance carrier is required to provide you with the form needed to file. The form is just 1-2 pages long and is fairly simple to complete if you keep accurate payroll records for your business. Check with your agent for the specific details of your states contractors credit program.
There are several other techniques that you may have heard about with respect to reducing your insurance premiums. One is to raise your deductible to a higher amount. I am not going to recommend that here because there are more factors to consider when choosing a deductible than just price. For starters you need to make sure you have a deductible that you can afford to pay if it ever comes down to that. There are several other reasons that I am not recommending a higher deductible as a standard cost cutting tool, but the bottom line is that I don’t feel it is necessarily a good solution for everyone. Another cost saving measure you may have heard of is to become self insured. While this can certainly be extremely effective in reducing premiums, only very large employers can choose to self insure. I have not discussed this here simply because it does not apply to most construction businesses.
In closing, remember that while you will never be able to entirely eliminate insurance premiums as a cost of doing business, you can certainly reduce the financial burden that they have on your company. Shopping for the best price and the right agent, minimizing claims, emphasizing a safe workplace, taking advantage of safety dividend programs and applying for contractors credits are a few of the most effective methods at your disposal.
Why Opt For Construction Liability Insurance
Construction liability insurance alleviates any losses which may occur in a construction project. These usually include material damages, where the construction and erection works are being insured, but can also be extended to include construction machinery, equipment and installation, clearance of debris, etc.
Construction liability insurance has recently become a major concern of many Irish construction companies, not without reasons. The fatality rate in the Irish building industry is among the highest in Europe - for instance, in 2001, 28% of all workplace fatalities occurred in this particular sector. Even if occupational accidents do not result in death, however, injuries are often very serious, including blindness, amputations, head injuries, disfigurement. These can result from numerous site accidents, damaging persons as well as the construction works: explosions, equipment malfunctions, slips and falls, poor safety and quality standards, poor construction control. Construction liability can cover all these risks and thus solve many legal and occupational problems. It is therefore an easy and economical solution to a number of construction-related issues.
As more companies begin to realize the importance of construction liability insurance, their demands are growing as regards its coverage, indemnity, and specific terms. Like with other public liability insurances solutions, some companies now offer customized policies for construction liability insurance. Keystone Insurance (keystone.ie), for instance, has recently gained popularity for supplying insurance solutions from a selected range of Irish and UK insurers to the Irish construction industry and to multinational construction companies operating in Ireland.
The company provides the possibilities for companies to easily arrange their first-time construction liability insurance. Quotes are prepared within only a few hours, and cover details can be negotiated over the phone. If desired, the insurance policy may be paid by direct debits over as many as ten equal installments, to facilitate cash flow and company operations.
Keystone also offers construction insurance renewal for companies willing to ensure they get the best possible value for money by preparing quotations specifically designed to meet a company’s unique needs. If a construction company’s policy is close to renewal, but it is not happy with its current insurer, Keystone can negotiate renewal with both the existing provider of the construction liability insurance and alternative ones, in order to be able to offer the company the best possible option when renewal time comes.
The construction liability sector is certainly still to see a lot of development, as demand grows and companies require policies tailored to their operations and specific risks. This development has already started, as is evident from the services offered by Keystone Insurance, and will hopefully bring lots of benefit to constructors, their employees and customers alike.
Condos, ‘big digs,’ and other hazards of the building trades: the hardened insurance market hammered the construction industry and the building trades, leaving firms scrambling to find coverage and products insurers were once eager to sell. Because of the hardship, some firms may even leave the business
Most of us have read the newspaper articles about the toll medical malpractice claims and rising insurance costs are taking on the medical profession, and the strident attempts at tort reform being made by legislatures at the national and state levels to counteract the problem.
While architects and building contractors may not be packing up their offices and abandoning states or entire regions yet, the crisis in professional liability insurance in the building trades is reaching serious proportions according to some. That crisis may be leading some in the industry to reconsider their way of doing business.
hile many firms have realigned their risk management practices since the hard market of the ’80s, certain lines of business have always been more problematic for architects, engineers and general building contractors to get into. The problem is those projects, especially notoriously litigious condominium developments, are always the ones that seem to pick up as the economy heats up, and the hard market starts to turn.
At the same time, many of the insurers still in the industry have stopped offering some of the more advantageous products, such as project policies and wrap-up insurance, which sometimes made larger projects such as public works more enticing.
“The ‘Big Dig’ is one of the largest civil projects in the country, historically. No one’s ever come close to it,” says Michael Hicks, a principal with Domenech Hicks Krockmalnic in Boston. “Back in the 1950s, they built an elevated highway in Boston. Now they’ve demolished the elevated roadway and built a very expensive tunnel system instead, cutting across the harbor to connect the turnpike and the airport.”
The Big Dig is functioning and 95 percent complete, explains Hicks, whose firm worked on one of tunnels running under Boston Harbor. “We installed all the road services, lighting and signage. Our piece was finished relatively cleanly several years ago,” he says.
Other contractors weren’t so lucky, however, Hicks says. “One of the southbound tunnel sections is still not complete. Everybody would accept that such a project at the water’s edge is bound to uncover a lot of unanticipated conditions, but because it’s a public client, the Big Dig is so big it gets front page coverage in the largest periodical for the industry, the Engineering News Record, which comes out weekly. They hired a retired judge to oversee a cost-recovery project looking to recover over $200 million. There have already been some multimillion-dollar settlements reached with one of the parties,” he says.
Although Domenech Hicks was lucky to get out of the project unscathed, that didn’t stop the firm, with billings of $4 million or $5 million per year, from seeing their premiums double in February 2004.
Mike Herlihy, a risk manager with consultant firm Ames and Gough, agreed that rates have been increasing between 20 percent and 30 percent a year for two or three years, but says that the Big Dig is not the only reason. In fact, a global policy taken out on the Big Dig in 1993 may have mitigated its effects somewhat. But the policy would not affect claims made today, he says.
Singer says the unavailability of project policies was proving to be a real hardship for some. “Some insurers got into project policies early on, but the only ones I see now are school projects, where the owners are willing to foot the bill. They’re more expensive, and the experience in some markets was that they became a piggy-bank for the owner,” he says.
Project policies were useful because contractors could band together on projects where the risk was out of proportion to the fee.
Wrap-up policies, which are similar, include other coverage such as workers’ comp, difference in site conditions, and architect and engineer professional liability policies. “Zurich wrap-up policies even include a product called Sub-guard, which covers mechanics’ liens and works like a surety bond,” Singer says.
‘Gimme shelter’: construction and engineering firms are crying “gimme shelter” as they seek to manage their risks amid a lack of insurance capacity, tighter coverage restrictions and a storm of litigation in the housing market
While there is no shortage of demand for new homes in a hot housing market, construction and engineering firms are having a tough time finding shelter when it comes to obtaining insurance coverage for residential and mixed-use projects.
Affordable coverage for construction defects that can emerge years after a housing project is built has become a scarce commodity due to a surge in lawsuits and some adverse court rulings that have hit both insurers and general contractors.
For their part, the small group of insurers willing to provide coverage for “habitational” projects, which account for more than half of U.S. building activity, are laying down plenty of restrictions.
“The whole residential issue related to construction defect is huge, and it’s spreading,” says Mark Boyle, general manager of Turner Casualty & Surety, which manages insurance and surety programs for the nation’s leading general builder, Dallas-based Turner Corp.
“It was more localized as an ugly risk in California, but it has now dearly spread to Florida, Texas, Nevada and Washington state. That’s a big one that’s costing owners a lot of money,” says Boyle, who is based in New Jersey.
The problem is being driven by a wave of construction-defect lawsuits that has swept across the nation from California, says Karen Reutter, senior vice president in the national construction practice for brokers Willis Inc.
What we’ve seen, particularly in the last year and dearly in ‘05, is still angst and worry from the carriers and the underwriters around construction defect,” says Reutter, who is based in Minneapolis.
Insurers also have made it more difficult for subcontractors to extend their coverage to general contractors, cutting down on a traditional means of risk transfer in the industry, and forcing general contractors to develop alternative risk management strategies.
As building trends shifted toward condominium projects, however, a key California court ruling in the 1990s spawned a host of lawsuits in residential construction defect cases, often as pre-emptive moves by homeowners associations to keep the statute of limitations, or repose, from running out.
“It’s extremely common now for those associations to file suits even if it’s to toll the statute of repose,” Reutter says. “They’re all seared to death that if something does go wrong in seven years–the windows leak, or there’s a sound issue from floor to floor … they’re just afraid that the unit owners themselves will sue the [condominium] board.”
The California state court ruling involved a Los Angeles-area company, Montrose Chemical, which made DDT from 1947 until 1982 and was sued by the state and federal government for dumping chemical waste. The court ruled that because the dumping occurred over a period of time, all of the carriers that had insured Montrose over that period of time had a duty to defend the company as long as there was some potential that its claims for coverage might be valid.
That theory of continuous loss was soon extended to construction defect lawsuits, and had the effect of triggering all insurance policies in effect at any time from a project’s inception. On top of that, plaintiffs’ lawyers often went after every contractor and subcontractor that had worked on a project to trigger all of their insurance policies. The ruling and the lawsuits that followed led insurance carriers to put in place so-called “Montrose” exclusions to limit their exposures to losses from prior years.
The effect of the California ruling and lawsuits has spread to other states.
“Insurance legal trends and case law originate out of California … and that sets a precedent for other states,” Reutter says. “Carriers usually look to the West to see what’s coming, and that’s where this construction defect started. It’s national now: You can look at Texas; yon can look at Florida.”
The restrictions put in place to deal with states such as California affect the whole country because the limitations that carriers set on coverage are determined to a large extent by their reinsurers.
“From an insurance company standpoint, their restrictions are usually driven by the reinsurance treaties, which are national,” Reutter says.
While Montrose hit insurance companies, a 1997 Florida court ruling that involved defects in the construction of a school roof has had the effect of limiting coverage that general contractors can claim under general liability policies for work performed by subcontractors.
Liability Insurance Coverage for Construction Defect Claims
Lawsuits over defects in new construction are very common. That litigation in turn frequently gives rise to disputes regarding liability insurance coverage for the alleged defects. The following scenario is typical. A builder/developer undertakes to build a condominium or housing development. The builder enters into a contract with a general contractor, which in turn enters into contracts with subcontractors. Very frequently, these contracts provide that the contractor in its contract with the builder, and the subcontractors in their contracts with the general contractor, will indemnify, respectively, the builder and general contractor for liability in connection with the project. Further, they provide that the subcontractors will also see to it that the builder and general are added to their liability insurance policies as additional insureds. In addition, the contractor or subcontractors may purchase products that are incorporated into the structure. Thus, another group involved in construction projects are the suppliers of those products. This article does not focus on coverage for products liability claims, which is a separate subject in its own right.1
Then, after the project is built, the new homeowners discover what they contend are defects or deficiencies in the construction of the buildings or in the products supplied and incorporated. Frequently they also allege that the defects have caused damage to the property. Sometimes these claims include allegations of bodily injury, for example, when construction defects allow intrusion of rain water into the homes, resulting in bodily injury from exposure to mold growth. As a result, the underlying litigation may include claims for both property damage and bodily injury.
Coverage disputes arising out of these underlying claims and suits raise a number of issues. The type of policy most often involved in these claims is the commercial general liability (”CGL”) policy.2 This article focuses on the issues most typically associated with coverage for construction defect claims under CGL policies. They are the following:
(1) CGL policies cover bodily injury or property damage caused by an “occurrence.” An issue that often arises is whether faulty or defective construction constitutes an occurrence.
(2) CGL policies provide coverage for property damage that occurs during the policy period. Construction defect claims often involve questions of when the damage took place and therefore which policies may potentially have to respond. Thus, trigger of coverage can be an important issue in construction defect coverage disputes.
(3) A number of exclusions, including especially the “business risk” exclusions, give effect to the general purpose of CGL policies to provide coverage only for damage to property other than the insured’s work or product and to bar coverage for purely economic damages resulting from the insured’s breach of contract, or failure to perform the contract as specified. These “business risk” exclusions are an important part of any construction defect coverage analysis.
(4) Construction defect claims sometimes involve bodily injury claims arising from exposure to mold and allegedly toxic building materials. An issue that arises in coverage disputes is the applicability of the pollution exclusion to such claims.
(5) CGL policies impose a number of obligations on insureds as conditions to coverage. These include the obligation to give notice of claims and suits and to cooperate. In addition, the policies do not provide coverage for the insured’s voluntary payments or payments made prior to notice of the claim being given to the insurer.
(6) As noted above, construction contracts often require inclusion of the builder or general contractor as an additional insured to the other party’s CGL policy. The inclusion of a party as an additional insured in another party’s liability policy raises issues under the “other insurance” clauses of the parties’ policies.
(7) A related issue arises when an occurrence causes injury or damage during a number of years and, as a result, the court rules that the policies in effect throughout such period of time are triggered. This gives rise to issues of “allocation,” i.e., which policies will in fact be required to respond.
(8) An issue of potential significance in many cases is allocation of defense costs to covered and non-covered claims. When an insurer defends a suit under a reservation of rights and it later turns out that there was no coverage for some of the claims being defended, the insurer may have the right to be reimbursed for the cost of defending the non-covered claims.
In Champion International Corp. v. Continental Casualty Co.,” Champion sold vinylcovered paneling to numerous manufacturers of house boats, house trailers, motor homes and campers. Not long after installation, the panels began to split, causing damage to the vehicles in which they had been installed. Champion’s policies had a $5,000 per occurrence deductible. Continental Casualty argued that there were 1,400 separate occurrences corresponding to each of the damaged vehicles in which the panels had been installed. If this argument had been accepted, there would have been no coverage, as the cost of repair in each case was less than the $5,000 deductible. The court held that there was one occurrence, Champion’s delivery of the defective panels. As a result, there was insurance coverage in the amount of $1.1 million to be applied against Champion’s $1.6 million total loss.
On the other hand, in Maurice Pincoffs Co. v. St. Paul Fire & Marine Insurance Co.,38 the insured, Pincoffs, was a wholesaler of birdseed. It imported canary seed that was sold, in its original bags, to eight different dealers. The seed was contaminated with a chemical insecticide toxic to birds and many birds were killed. The owners of the poisoned birds made claims against the dealers who in turn made claims against Pincoffs. Pincoffs had two liability insurance policies. The primary policy had a single occurrence limit of $50,000 and an aggregate limit of $100,000. There was also an umbrella liability policy above that. The primary carrier, St. Paul, settled with claimants for a total of $50,000. There remained outstanding claims in excess of another $50,000. St. Paul took the position that its policy limits were exhausted, as there was only a single occurrence, based on the contamination of the seed. In contrast, the umbrella carrier took the position that there were multiple occurrences and that its policy did not take over until St. Paul had paid a total of $100,000. The court of appeals held that the number of occurrences should be determined by the insured’s action that gave rise to its liability. In this case, the court reasoned that it was the sale of the contaminated seed for which Pincoffs was liable. Pincoffs received the seed in a contaminated condition and did not itself contaminate the seed. Therefore, the court concluded that it was not the act of contaminating the seed that subjected Pincoffs to liability but rather its sale. According to the court of appeals, each of the eight sales made by Pincoffs to eight different dealers was a separate occurrence.
Increasing health insurance costs and the decline in insurance coverage
The 1990s were a decade of relative prosperity, yet the percentage of Americans without health insurance coverage rose over 17 percent between 1990 and 1998. This decline generally reflects a drop in the rates of employer-sponsored coverage, a trend that began in the late 1970s (Farber and Levy 2000). The drop in coverage has raised concern among policy makers in light of a variety of studies that highlight the difficulty that the uninsured have in accessing care, and their resulting poorer outcomes (Institute of Medicine 2002; Serafini and Stone 2002). Designing policies that will effectively address this problem requires understanding why coverage rates have fallen and anticipating how coverage will change in the future. Despite a relatively large literature investigating the determinants of insurance coverage, relatively few studies use multivariate techniques to examine factors contributing to the decline in coverage over time. These studies show that increased reliance on part-time workers (Fronstin and Snider 1996), industry shifts (Long and Rogers 1995), a combination of labor market factors (Kronick and Gilmer 1999; Glied and Stabile 2000; Glied and Jack 2003), or crowdout (Curler and Gruber 1996a, b; Currie and Yelowitz 1999; Blumberg, Dubay, and Norton 2000) only partially explain the decline in employer-provided insurance.
An alternative explanation is that coverage has dropped because the cost of insurance has risen. In contrast to substantial media coverage linking rising premiums to declining coverage rates, empirical evidence quantifying the relationship between premiums and coverage is limited. The studies that use multivariate techniques to examine the relationship between health care costs and coverage rates find support for the view that increasing costs decrease coverage (Fronstin and Snider 1996; Kronick and Gilmer 1999; Curler 2002; Glied and Jack 2003). Kronick and Gilmer (1999) rely on national measures of health care costs, relative to income, and generate most of the variance in the cost to income ratio from variation in income, not health care costs. Fronstin and Snider (1996) analyze state-level data from 1988 to 1992 and include only one cost proxy, the price of a hospital day. Cutler (2002) uses national-level data on employee contributions. Glied and Jack (2003) use state-level Medicare per capita spending excluding home health, adjusted by the ratio of private spending per enrollee to Medicare spending per enrollee. Thus these studies do not directly measure the effects of rising premiums on coverage, nor do they attempt to adjust for potential reverse causality that arises because declining coverage may lead to higher premiums. Further, existing studies typically focus on employer-sponsored coverage, which, although important, does not give a full picture of the effects of rising premiums on coverage because some individuals may substitute public for private coverage. Finally, these studies typically do not devote substantial attention to controlling for potential confounding explanations for the decline in coverage such as the expansion in Medicaid or changing tax policy.
This paper explores the relationship between health care premiums and coverage rates. It takes advantage of wide geographic variation in changes in premiums and coverage rates. Thus the variation in premiums that we use is broader than that used in existing literature and less likely to be confounded with other secular trends. In contrast to existing work, we also use instrumental variable (IV) techniques to address the potential for reverse causality between rising costs and coverage rates. The IV techniques also adjust for potential measurement error in our premium data.
We focus on coverage from any source, which gives a more complete picture of coverage because some individuals may switch from private to public coverage. We also focus only on the ultimate coverage decision, without attempting to explain the detailed set of decisions such as employer offer or employee take-up, which lead to coverage. Finally, we control for a wide range of factors associated with alternative explanations of coverage declines. We thus quantify the link between rising health insurance premiums and rates of insurance coverage, addressing limitations of the existing literature.
We include the following demographic variables for each individual and the head of their HIU: age, gender, race/ethnicity, education, marital status, industry, occupation, full/part-time work status, government versus private employer, and firm size. We also include indicators of whether there are no workers or more than one worker in the HIU; interactions of being a spouse or a child in a family with multiple workers; binary variables for the income decile the HIU falls into, calculated separately for singles and married people, and interactions of income decile and marital status of the HIU head. We include interaction terms between these variables and a binary variable capturing observations in the later period to allow for the possibility that their effect changes over time.
Several metropolitan area-level demographic factors are included based on CPS data. These capture market-level effects and competing explanations for the decline in coverage. The MSA-level covariates include the share of the population that is foreign born, the share of the population in the metropolitan area that is nonwhite, the share that is elderly, average HIU income, and the share of women that are working. We also include the local unemployment rate, which is from BLS data available on the Area Resource File (ARF). Unless otherwise indicated, we do not interact the MSA-level or policy covariates with a time period dummy.
Two of the important potential explanations for declining coverage that have been explored in the literature are rising Medicaid eligibility and falling tax subsidies. We control for these explanations using the approaches followed by studies focusing on these explanations. Specifically, we generate measures of the generosity of Medicaid coverage of children following the approach of Cutler and Gruber (1996a), using information from the Intergovernmental Health Policy Project (1988, 1990, 1991) and the National Governors’ Association (1990, 1999). They measure Medicaid eligibility by the fraction of HIU health spending eligible for Medicaid, based on family composition, which captures the role of Medicaid eligibility in the context of family health insurance decisions. This is calculated by applying state regulations to CPS data to assess generosity at the state level and adding controls for the fraction of family health spending attributable to each child age.
Building a haven: capacity is down and prices are up on insurance for construction companies, but these companies’ ability and inclination to shoulder more of their own risk is also up. They hammer out difficulties with wrap-ups and construction defect liability with single-parent and group captives
Demand for construction captives began to increase with the advent of the hard insurance market cycle in early 2000. Escalating premiums, lack of viable capacity and affordable coverage for potential construction defect, and diminished coverage opportunity drove many well-capitalized firms to enter into captive arrangements. Because many large risks were already accustomed to higher risk retentions, the idea of greater control offered by a captive was a natural next step.
A protracted soft market throughout the ’90s meant that construction risks enjoyed very broad coverage at very competitive prices from a number of different carriers. As losses in this sector began to proliferate, the underwriting appetite for such risk either became much more restrictive or vanished altogether.
In order to cope with a changing insurance market, risk managers sought alternatives. They had been aware of alternative risk-financing structures throughout the soft market. The dramatic nature of the onset of restrictive underwriting led many to review captive structures as an alternative to traditional methods to mitigate escalating costs and to manage risk that had otherwise been transferred to an insurance carrier.
As pricing and coverage terms become more restrictive, firms look to alternative sources to maintain a competitive cost of risk structure. This may include larger retentions or other means of financing, including captives. The rationale for utilization varies among sectors and design.
For contractors of all types, there are many reasons captives provide a more attractive choice. One potential driver, the drop in the housing market, has not affected the overall construction industry as negatively as it could have due to the balance among housing, commercial building and infrastructure as part of the overall gross domestic product.
Construction companies like captives for the vehicles’ ability to smooth out the opportunity for latent losses. As less income is derived from new housing starts, knowing that dollars have been set aside for future loss becomes more important.
An interesting effect of captives is that, once any group takes the steps to invest in a captive, they typically remain engaged for the long run. This is because captives are a very desirable adjunct to an industry that relies so heavily on cash flow as a key component to its ability to compete.
Coinciding with the capacity shortage and high prices for tough-to-place construction coverages is a change in how the construction industry manages its individual businesses. Today, many construction firms have a desire and willingness to manage and shoulder more of the risk burden that might otherwise rest with brokerage firms and the insurance carriers. This means that the firms employ professionals with advanced degrees in accounting, law and business as part of a well-rounded risk management team.
As in other industries, traditionally only the large risks have the amount of capital and corporate structure necessary to maximize the advantage of single-parent captive insurance vehicles. Group captives and rent-a-captive facilities, however, give midsize construction companies access to this insurance option.
WHY CAPTIVES FOR CONSTRUCTION?
Wrap-up programs, construction defect liability insurance, and premium and coverage stability all are specific examples of the problems facing contractors and owners/developers and explain why creating a captive might be a good alternative for the industry.
General contractors and owners/developers use captives for wrap-up programs due to the lack of availability of subcontractor coverages or limits in the standard market. Using a captive on a wrap-up program can facilitate control over the program for the owner or general contractor, and can foster the ability to set final premiums up front and have the captive take on the underwriting profit or loss.
Residential construction defect liability coverage, especially in certain West Coast states, has been another difficult coverage to place. If contractors have been able to get the coverage at all, it has rarely been at a reasonable premium as compared with policy limits. This is due to the extremely poor, and to some extent uncontrollable, loss experience in the insurance industry overall. Construction defect is a latent exposure where property damage claims might not be known, reported and paid until many years after work is completed. Contractors have looked to alternatives, including captives, to obtain insurance coverage and limits needed and to fund for the risk over time.
The catastrophic nature of losses and the six- to 10-year tail associated with construction defect has forced contractors to struggle with how to protect themselves against these claims. Some states have implemented legislation to help ensure contractors have a right to repair damage before a liability claim can be made.
Also, many contractors have implemented in-house procedures to ensure appropriate quality control. Companies that believe their experience will be better than the pricing offered in the traditional marketplace might lock to assume this risk in a captive and reap the investment income over time until potentially paid out for loss.