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Special insurance safeguards
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Insurance policies offer certain provisions roofing contractors must understand
by Rick Ehlers
To keep pace with the
rapidly changing construction industry, traditional insurance products and services are being offered in new ways. Roofing contractors, regardless of the type of work they perform (i.e., low- vs. steep-slope), are among those affected by the changes.
Following are explanations of some new insurance products and services that are available.
Property protection
One important, if not fundamental, coverage affecting roofing contractors is property protection offered through either builder's risk insurance or installation floaters. The coverages are virtually the same, which raises the following question for a roofing contractor: "Which do I buy?"
Builder's risk coverage is intended to insure certain property exposures for a construction project's entirety as opposed to construction of a specific building component, such as a roof system. Builder's risk coverage generally lasts from the start of construction through final acceptance
of a project's completion. Generally, all materials, supplies, machinery, fixtures and equipment, including the insured's (e.g., roofing contractor's) property or property of others that will become part of a project, are covered by a typical builder's
risk policy. (The insured's property includes materials off-site in temporary storage and those items at a job site.)
Because builder's risk insurance
is known as a "named peril" type of coverage, the event causing losses
or damages must be beyond the
insured's control (e.g., losses resulting from fire, lightning, windstorm, riots, civil commotion) for the builder's risk policy to apply.
Perhaps the most important aspect regarding builder's risk insurance is that it does not cover defective construction or faulty workmanship. One important exception exists when faulty construction results in building collapse. In this instance, builder's risk coverage most likely will respond. Also, delay damages or losses occurring outside the policy term are not covered by a standard builder's risk insurance policy.
Unlike builder's risk coverage, an installation floater provides property coverage for a specifically described portion of construction. Roofing contractors should note that an installation floater's coverage expires with the completion of a specified
installation (e.g., a roof system). In most cases, an installation floater's terms, conditions and exclusions are similar to a builder's risk insurance policy.
As to the question of whether to buy builder's risk insurance or an
installation floater, when in doubt,
a roofing contractor should choose builder's risk because its coverage
is broader.
However, roofing contractors should consult their insurance representatives to determine the best method of coverage for their needs.
Project-management policy
A Project Management Protective
Liability (PMPL) policy evolved from the standard Owner's and Contractor's Protective (OCP) policy. Roofing contractors should note that there are several key differences
between the policies' coverages.
First, a PMPL policy includes
coverage for a design professional (e.g., architect, engineer) and construction manager as named insureds. Under an OCP policy, only a building owner and general contractor are protected. For a reroofing project, only an owner and prime roofing contractor would be covered.
Second, a PMPL policy includes vicarious liability protection not only for a building owner and general contractor, but also for a design professional and construction manager (if one is present). Vicarious liability is the liability to which a company is exposed by virtue of its presence or participation in a construction project. For example, a contractor may be named in a lawsuit alleging that, because of his knowledge and apparent position of authority, he should have acted to eliminate an obviously dangerous condition that gave rise to a plaintiff's injury. A PMPL policy provides added protection for named insureds when such claims are asserted.
Under an OCP policy, if a roofing contractor is a named insured in such a lawsuit, he or his insurance carrier would need to cross-claim against the other named insureds on the basis of their fault to fully protect the contractor's interests.
By naming all the potentially vicariously liable parties in the construction process, the need for cross-claiming is eliminated because
the PMPL policy would defend all named insureds equally. The liability associated with any direct responsibility for a harmful condition would fall under each entity's general or professional liability policy.
PMPL coverage is based on the named insured's vicarious liability arising from his general supervision activities, which include all activities except preparation of designs, drawings and specifications or taking control of the means and methods of the prime contractor's operations.
If the named insured is the prime contractor on a project, he cannot control the means and methods of
a subcontractor's operations. In this context, subcontractor refers to anyone who has a contract with the named contractor to perform a portion of the work at the site. In other words, a PMPL policy is not meant to cover the liability exposure associated with any named insured's direct contractual responsibilities at a job site.
Additional PMPL policy features include an expansion of who is a named insured, including individuals and their spouses (in the case of sole proprietorship); partnerships
or joint ventures; limited liability companies; and corporations—each of which must be named insureds on the PMPL policy's declarations page. New language also was created to cover design professionals and anyone acting in connection with General Supervision of the named contractor's operations.
But when does a roofing contractor need to buy a PMPL policy? A PMPL policy generally provides no coverage for specialty contractors
unless a roofing contractor is a prime contractor on a site (e.g., a reroofing operation). A roofing contractor would purchase a PMPL policy only when he is acting as a prime contractor and an owner desires the same level of protection from a roofing contractor as that required of a general contractor for a new construction project. If a roofing contractor
is a subcontractor on a new construction project, he would not need to purchase a PMPL policy.
Wrap-up insurance
Wrap-up coverages—also known as owner-controlled insurance programs, contractor-controlled insurance programs or builder-controlled insurance programs—are becoming increasingly popular as risk-management and cost-control programs. Wrap-ups have been prevalent for years in larger commercial (low-slope) projects where either a building owner or general contractor purchases insurance products and services for the entirety of a
construction process. More recently, large residential (steep-slope) contracting companies have discovered the benefits of this approach, as
well.
Under a wrap-up program, one
entity (e.g., building owner, general contractor) purchases one commercial general liability policy and one workers' compensation program for
all contractors involved with a construction project. A single premium charge, usually based on the payroll dedicated to a project by each contractor, is allocated to each contractor participant on a percentage basis. This also is true for general liability and workers' compensation.
Large projects offer better opportunities for insurance terms and costs. In fact, large commercial projects have enjoyed cost savings in the range of 1 percent to 3 percent of total project costs.
In addition to the savings that can be achieved by this approach, the coverage afforded under wrap-up programs often is superior to that available to a contractor who otherwise would purchase his own coverage on a smaller scale. Coverage under a wrap-up also is uniform to all contractors, and higher limits of insurance usually are available than would be if a contractor purchased his own program.
The scale of large projects offers considerable opportunities not only to reduce the purchase cost of insurance and leverage better coverage, but also to manage loss experience by implementing a unified loss-control and job-site safety program.
In addition, when one program covers all contractors on a project, the potential for conflict among
contractors significantly is reduced because the same liability instruments apply to all contractors, regardless of fault. This yields a reduced incentive or need to cross-claim against fellow contractors. More important, in the event of a loss, a unified defense on behalf
of all affected contractors can be
implemented.
However, some minor changes in business practices are required. For example, each contractor must carry individual commercial general liability coverage for any work performed at other projects.
In addition, a roofing contractor who participates in a wrap-up project and performs work on nonwrap-up projects must attach an exclusion to his individual policy for liability associated with a wrap-up. For instance, the payroll dedicated to a wrap-up project must be excluded from an individual policy through an exclusion endorsement. However, a roofing contractor also should expect a reduction in premium on his stand-alone policy for which some payroll had been diverted to a wrap-up project.
A roofing contractor and his insurance broker or agent must engage
in accurate payroll reporting to the wrap-up carrier and stand-alone policy carrier to achieve the benefits and cost reductions associated with wrap-up programs. The opportunity also exists for a roofing contractor to share in the overall cost savings that an owner or general contractor derives from a wrap-up project. More sophisticated projects include incentive programs for specialty contractors when good loss experience is maintained. For example, a portion of the cost savings can be dedicated to creating various incentives for top performance.
Before getting involved with a wrap-up project, a roofing contractor should consider the following: what coverage (i.e., wrap-up vs. stand-alone) applies; securing wrap-up
exclusions for stand-alone policies; accurate reporting of payroll to wrap-up and nonwrap-up projects; "fitting into" a wrap-up program's centralized control of job-site security and safety; claim handling; record keeping; and whether the wrap-up program includes incentives.
Summing it up
Many of the insurance products and services discussed focus on eliminating potential conflict among
contractors.
In the context of large commercial projects, the issues of consistent coverage, loss control, common defense and cost management all drive different types of risk-management arrangements, many of which have implications for roofing contractors. Keeping abreast of these new products will help roofing contractors make sure they receive the most
advantages from insurance
programs.
Rick Ehlers is senior vice president of CNA Commercial Insurance's Building Assurance Center of Excellence, Chicago, Ill.
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