Rising costs are prompting general contractors, developers and owners with midsized projects to explore an insurance program that has controlled the cost of risk on much larger projects.
Consolidated insurance programs, or CIPs, create a single workers' compensation and general liability insurance program for construction projects. CIPs became an option for partners on midsized projects within the last few years, as inflation raised the cost of such projects high enough to reach the threshold needed for this approach, around $125 million in total construction costs.
Benefits of a CIP include cost savings and more consistent, broader and longer insurance coverage.
Before purchasing a CIP, the potential insureds and their brokers and agents should become familiar with a CIP's requirements. One consideration is the time needed to manage a CIP. Another is becoming comfortable with larger deductibles and collateral.
To decide if a CIP is the best insurance solution, answer two questions. First, are the advantages of CIPs greater than the cost of meeting the program's requirements? If so, is a CIP more efficient than the more traditional approach to insuring construction projects, where each subcontractor provides their own coverage?
By understanding the advantages and requirements of a CIP, and the process of comparing such programs with traditional insurance, partners on midsized projects will better be able to decide if a CIP is right for them.
A CIP can deliver savings by reducing job-site accidents and litigation through its focus on:
-- Safety. Safety drives a CIP, from selection of subcontractors to how they work. Dedicated safety resources craft a central safety program. They also monitor performance, rewarding those who follow the safety policies and correcting those who do not. This vigilance pays off: CIPs tend to have fewer workers' comp and general liability claims.
-- Claims management. Accidents happen at even the safest sites. The sooner a claim is reported, the more impact an insurer can have by quickly applying the right resources. So each CIP provides a single claims management process, detailing how a claim will be reported and managed, including how each subcontractor will return injured workers to work. As a result, CIPs typically have lower claim costs.
-- Legal teamwork. A CIP unites the legal interests of a project's partners. This can dramatically reduce costs by eliminating lawsuits between partners when an accident happens.
CIPs may also provide you with key coverage benefits, including consistency, breadth and length.
Everyone has the same coverage, limits and exclusions, so subcontractors can't lose their insurance in the middle of a project. This consistency can aid already tight deadlines and budgets.
Because insurers bidding on a CIP better understand the project, they may offer better coverage. A CIP also runs longer--beyond a project's completion--while traditional coverage likely ends earlier. Providing additional insurance protection also helps attract subcontractors, including historically disadvantaged contractors, to the project.
The requirements of a single insurance program, however, could potentially offset these advantages. These requisites include:
-- More time. While the insurance broker or agent takes the lead in analyzing the merits of a CIP and in administering the program, this approach requires a considerable amount of time.
-- Deductible. Nearly all CIPs involve large deductibles and retentions, with the policyholder typically responsible for the first $250,000 or more of claims. While this allows the insured to directly benefit from the CIP's performance, it can deter those more comfortable with guaranteed cost programs.
-- Collateral. The policyholder must post collateral or security equal to the estimated losses within the deductible or retention--a potential strain on finances.
-- Greater expertise. An insured and its insurance agent or broker must have a detailed understanding of insurance and risk management to even consider a CIP, let alone tailor one to the specific needs of a project.
-- Additional cost. With their dedicated safety resources, CIPs shift some of the costs otherwise borne by subcontractors to the general contractor, developer or owner.
MAKING THE DECISION
Potential policyholders and their partners next need to evaluate insurance and loss costs. This can be done by calculating the premiums for a CIP versus the traditional approach; factor in all experience modifications, dividends and other relevant items.
For loss costs, interested parties must compare the likely performance of the CIP's unified programs with those of each subcontractor's stand-alone coverage.
A host of nonfinancial issues also must be considered. Stakeholders need to decide how each approach might impact such factors as worker safety, the project's delivery time and each partners' reputation and capital. Comparing the performance of CIPs and traditional insurance in these three areas can help an insured and its agent or broker select the best insurance solution for a midsized project.
JACK PROBOLUS is CIP marketing director for Liberty Mutual for construction risks with annual premiums and equivalents greater than $1 million.
November 1, 2007
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