FEATURE ARTICLE, OCTOBER 2005

COMMERCIAL INSURANCE 101
Never underestimate the importance of securing protection for development projects.
John Maksimik

Maksimik

There are quite a few real estate/construction policies developer and contractors should be aware of including contractor general liability insurance, which provides coverage for bodily injury to workers and property damage claims during and after construction. It is possible for a system in the building such as the roof, exterior or plumbing to experience problems in workmanship or design. For this, most contractors will obtain a project warranty for a set period of time after the building's completion. Course of construction insurance will protect the materials, cost of labor and profit. Common perils warranting insurance are fire, lightning, collapse, wind, rain, theft, vandalism and flood. Earthquake insurance is also an option and may be purchased separately in most states.

Bonding insurance is a financial guarantee instrument mostly used to ensure that there will be enough funds available to complete the project should something go awry. State and local governments often require a completion bond to guarantee that all the sewers, sidewalks, parking lots and such are completed. A bank might require a completion bond to protect its security interest in a large-scale project. The developer will need to keep all audited financials current for the bonding company.

The guidelines for securing insurance for construction projects are more or less uniform. Obtaining commercial general liability insurance for construction of a commercial building starts with a resume, so have the work experience of the developer or contractor up to date. The insurance company underwriter will look more favorably on a person that has completed a similar project within the last few years. The developer will have to disclose a number of important factors, such as cost of the materials and labor, the prospective general contractor, expected start and completion dates, and whether or not direct labor will be hired or subcontracted.

The type of project — commercial or residential — will also dictate what insurance company will bid for the contract. In recent years, some carriers have dropped out of the residential single- and multifamily contractor insurance business. Construction defect litigation has been the leading reason for some carriers to opt out. In this case, you will most likely be talking to an independent insurance agency that can access many carriers for bidding the insurance.

Be forewarned, applying for your general liability or course of construction insurance will require quite a bit of paperwork. General information questions about your company and its owners or officers will be asked. Financial statements may be required in some instances. The paperwork will include carrier-specific questionnaires, and you may have to complete three to four questionnaires because many carriers will not underwrite from a generic supplemental questionnaire. The whole process may take 3 to 6 weeks to obtain the coverage needed at a reasonable price.

Rates for general liability on commercial or residential projects vary greatly by state and county. A wise consumer would request no less than three bids. It also wouldn't hurt to obtain a bid from a different agency across town or in the next city. Some insurance agencies will have different appointments with different insurance companies. The savings may be significant, so check the coverage terms closely. A price that is too good to be true may not be a bargain during the claims process.

Construction defect litigation has sobered the insurance and construction industries and has had a significant impact on pricing. More care, documentation and quality workmanship is demanded today compared to just a few years ago. The cost to defend and pay the claims has made the insurance costs rise steadily over the last decade. Some carriers no longer insure contractors. In some states, there are new, set procedures for complaint and restoration periods before a lawsuit can be filed. Because of this, we all foot the bill for litigation through higher prices on buildings and homes.

It's important to remember this: claims happen. One should discuss the procedure with an insurance professional before shopping for bids. All companies are different, but there may be a carrier that has a local claims office in town or there might be an independent adjuster. One call to the state insurance commissioner's office and you can check on the reputation of the carrier and its claims service. In most claims processes, the burden of proof is on you. Pictures, inventory records, purchase orders, cancelled checks and a signed statement of loss may all play an integral part in recouping losses.

Whether the building is leased or purchased has no significant cost difference on the insurance policy for developers. What will change a premium is what is being insured. Is it the building itself or just its contents and build outs?   Rental income, fences, landscaping, machinery systems and liability limits are also factors that can drive the premiums. Some leases require a tenant to insure the entire building, contents and large limits of liability while naming the owner as an additional insured and loss payee.

Whatever the project, the insurance purchaser should not wait until the last minute to procure a policy or plan. In most cases, it takes 3 to 6 weeks to complete all the questionnaires, obtain quotes and compare the value of each policy. You may want to hire a risk manager to help in the selection of your program. Ask if your agent has industry credentials such as Certified Insurance Councilor (CIC) or Certified Risk Manager (CRM). Conduct research on the proposed company and be sure to check your state insurance commissioner's office for any major complaints on the agency or carrier.

A certified risk manager, John Maksimik, works as a commercial insurance broker with Orgill/Singer® & Associates, Insurance & Investments, in Las Vegas.


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