wsa construction risk management

Construction Risk ManagementPresented by Greg Schmidt, CPCU, ARMFor the WTBA Contractor-Engineer ConferenceJanuary 2009

In this presentation, we will review: • Risk Management Process• Commercial Insurance• Construction Contracts + Contractual

Liability• Safety Issues• Lowering Costs & Staying Pretty

Construction Risk Management

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Definition of Risk Management:

Risk Management

The process of planning, leading and controlling the resources and activities of an organization --

To fulfill its objectives cost effectively

To protect and grow corporate assets

To enhance shareholder value3

Process Defined:

Risk Management

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Identify Exposures to Loss:

Risk Management

• Property• Personnel• Net Income• Liability

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Risk Funding Techniques:

Risk Management

• Current Expensing• Unfunded Reserves• Funded Reserves• Borrowing• Captive Insurers• Commercial Insurance• Contractual Transfer for Risk Financing

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Definition of Commercial Insurance:

Commercial Insurance

A contract under which one party, the insurer, agrees - in exchange for the payment of a premium - to pay for specified losses the insured may suffer, up to specified amounts, under conditions specified in the insurance contract.

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Sample Insurance Portfolio for WTBA Members:


• Workers Compensation • General Liability• Automobile• Umbrella or Excess Liability• Professional Liability (Design Build,

Engineering Only• Property/ Contractor’s Equipment• Property/ Builder’s Risk• EPLI/D&O/RRP/OCP/Pollution

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Workers Compensation Coverage:

Workers Compensation Costs:Premium = Payroll x Rate x Experience Factor


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General Liability Coverages & Costs:


• Third Party Damages• Bodily Injury, Property Damage, Personal

Injury• Defense Expenses• Settlements, Awards

Premium = Payroll/ Sales x Rates x Experience

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Automobile Coverages & Costs:


Third Party Damages -

• Bodily Injury & Property Damage Liability• Hired and Non-Owned Liability• Medical Payments

First Party Damages -

• Uninsured and Underinsured Motorists• Comprehensive and Collision Coverages• Hired Physical Damage

Premium = Vehicle Type, Usage and Cost x Rates x Experience11

Umbrella or Excess Liability Coverages & Costs:


Third Party Damages –

Extends Limits Over Underlying:

• General Liability• Auto Liability• Employer’s Liability

Premium = Limits Selected and Underlying Premiums x Rates

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Professional Liability Coverages & Costs:


Third Party Damages –

• Professional Errors & Omissions• Defense Expenses• Settlements, Awards

Premium = Type of Professional/Sales/Limits x Rates x Experience

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Contractor’s Equipment Coverages & Costs:


First Party Coverage -• Mobile Equipment • At Shop• On Job-sites• In Transit• Hired, Borrowed and Rented• Crane Overload • Installation Floater Materials

Premium = Value of Equipment X Rates X Experience14

Builder’s Risk Coverages & Costs:


Premium = Cost of Construction x Rates

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• Experience (claim history) plays significant role in premium level

• Underwriters concerned with loss frequency issues

• Just as your workers compensation premium is adjusted via an experience rating factor, rates on other lines are debited (credited) according to claim history

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Marketplace Conditions: Repercussions for WTBA Members:

• Upward pressure on rates. The global recession will temper this pressure via lower demand

• Hard market and escalating rates are predicted to persist as new capital infusions into the industry are scarce due to frozen credit/capital markets*

• Expectations are that insurance-related costs will increase. In some cases, and on some lines, those increases will be significant.

• Stressed profit margins will face additional pressure

* Advisen, Dec. 20, 2008 17


Concerns/Opportunities for WTBA Members:• State budget issues

• Record projected deficit• Revenue shrinkage due to business conditions• Long-term infrastructure funding mechanisms

need re-vamping• Possible federal infrastructure stimulus bill

forthcoming with new administration• Depending on where dollars are distributed,

out-of-state competition likely to increase• With funding comes strings

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Federal-Level Funding Scenarios:• With funding comes strings

• Prequalification process and safety standards may be ramped up

• Workers compensation experience mod over 1.00 may disqualify your bid

• Some private owners require written procedures for pre-planning safety issues into each project

• OCIP safety requirements likely to become more stringent

• WisDOT use of OCIPs likely to become a matter of course on large “mega corridor” projects

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State of the Marketplace:• 2008 Cat losses increased 50% over 2007• Financial market meltdown has eroded insurers’

balance sheets• Reserve levels are being drawn down to pay for cat

losses and to write off investments. • Last month Towers Perrin estimated 15% of industry

reserves would disappear• Combined ratios (losses + expenses) are

deteriorating and the industry is losing money on its underwriting

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Definition:

Construction Contracts

Specify the legal responsibilities and obligations between the project Owner and the Contractors.

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Issues:


• Indemnification Agreements (Huge)• Insurance Specifications• Insurance Compliance/Certificates of Insurance• Additional Insureds/Waivers of Subrogation• Builder’s Risk (Who is responsible)• Safety and Loss Control Programs (Discretion of

Owner)• OSHA Compliance

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Indemnification Agreements:


Broad Form – AVOID -

Pay any and all damages, costs, expenses - even for sole negligence of owner. Your insurance carrier would pay for claims caused by others.

Limited Form – ACCEPT –

Pay bodily injury and property damages to the extent of own negligence

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Insurance Specifications:


• Workers Compensation – Statutory Benefits• General Liability – limits specified in contract• Auto Liability – limits specified in contract• Umbrella/ XS Liability – limits specified in

contract• Professional Liability – limits specified in

contract• Builder’s Risk - $Project Cost, $Materials On-

site, Off-site and In Transit• Additional Insureds, Waivers of Subrogation• Certificates of Insurance

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Insurance Compliance/ Certificates of Insurance:Construction Contracts

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Additional Insureds:


• After payment of a claim, restricts an insurer’s right to collect from the responsible party

• Obligates an insurer to defend and possibly pay claims of another party

• AVOID – Primary Noncontributory Language. If it is included, add the phrase: “but limited to the operations conducted by the Named Insured.”

Waivers of Subrogation:

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Builder’s Risk:


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Safety Issues

• OSHA/MSHA Purpose• Establish minimum safe workplace standards• Conduct workplace inspections for compliance

• 29 CFR 1926 Standard applies to road construction operations• Table of Contents is nine pages long!

• 29 CFR 1910 applies to general construction• OSHA Partnership program agreements exceed

minimum safety standards• Bottom line – Safety issues demand your attention

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Safety Issues

Accident Pyramid

Lost Time Injury

First Aid Cases

Near Misses

At -Risk Behaviors

Severity

Frequency

AccidentPotential

Situations

Major Accident

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1

300

3,000

30,000

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Safety Issues

• A successful safety program focuses its efforts on the bottom of the pyramid

• Reducing at-risk behaviors and near misses will result in lower claim frequency and severity rates over time

• Establish a corporate climate of eliminating at-risk behaviors

• Develop internal protocol to allow for site/project specificity safety procedures

Lost Time Injury

First Aid Cases

Near Misses

At-Risk Behaviors

Severity

Frequency

AccidentPotential

Situations

Major Accident

301

300

3,000

30,000

Safety Issues

Critical components of a successful safety program:

• Top management support and commitment

• Foreman/Supervisor involvement and accountability

• Recognition/Reward for meeting and exceeding expectations

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Lowering Costs & Staying Pretty

Underwriters look for these account characteristics – • Solid financial position• Quality management• Contractual/Risk Transfer

controls• Auto/fleet controls

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Solid Financial Position:• Profitable • Willing to invest in safety, training and

equipment

Quality Management:• Reputation and work quality • Clear safety accountability structure

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Contractual/Risk Transfer Controls:• Qualified internal contract review prior to

execution• Applicable to both prime and subcontract

work

Auto/Fleet Controls:• Uniformly enforce of company policies• Be familiar with the doctrine of Negligent

Entrustment36

Lowering Costs and Staying Pretty

• Meaningful improvement is possible • Large, multi-state contractor – 3mm+

man hours without a lost-time injury• Marquette OCIP accumulated 2.25mm

man hours without a “major” injury• Implementation will help ensure your

firm is insurable regardless of market conditions

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• 90-120 days out from insurance program renewal date is too late to pay adequate attention to the program structure

• Average insurance costs for road construction accounts run between 1% to 2.5% of revenue

• Make it your goal to be better than average

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Questions and Comments

Thank you for your attendance and participation!

Greg SchmidtWSA Account ExecutivePhone: 715.847.7792Cell: 715.574.1519

Email: [email protected]

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wsa construction risk management

Documents

commercial insurance

insurance contract

workers compensation

sample insurance portfolio

workers compensation

premium levelunderwriters

party damagesbodily

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