Contractors Property/Inventory in Transit to the Job Site

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Does your policy cover goods or products/materials on their way to the jobsite?  Or, on the jobsite once delivered?

I get this question quite frequently as most contractors have product delivered to the jobsite directly from their supplier.  Most of the time, the materials are not installed in one day.  This could pose a problem if vandalism or theft would to occur when the jobsite is unattended.

There are two types of coverage’s or endorsements that are necessary to fill in the gaps in coverage that usually lacks (excluded) in the General Liability and Property forms for this scenario:

Property in Transit – This coverage is usually added by endorsement via commercial auto extension.  This protects the value of items (either yours or in your care, custody or control) up to the specified limit of coverage when they are being transported or delivered by you.  You can increase the amount of coverage as desired.  Rule of thumb:  Always insure the limit to be the most expensive items in transit at one time.

Ex.  If your limit of “Property in Transit” is $25k and you are picking up $50k of material, my suggestion would be to increase that amount to $50k.  In this situation, if you were in an accident and the material is damaged, your policy would only cover up to $25k.  You would be on the hook for the other $25k.

Installation Floater – Depending on the company form/insuring agreement, this coverage will insure against materials at the jobsite.  In some cases, this will also be inclusive of “Property in Transit” as long as the property being transported is yours.  This coverage is for material being installed at the job location.  It does not included equipment rented or tools stolen at the jobsite.

Ex.  Plumbing contractor has $15k of copper piping to be delivered at the jobsite for a commercial job.  The next day, the plumbing contractor goes to the jobsite to start the project, only to find that all the material (copper piping)  was stolen the night before.  If the contractor does not have this coverage endorsed to his/her policy, they would be responsible for the $15k.

A common misunderstanding is Business Personal Property.  If you have this coverage, it usually will not extend to outside the premises you are located at.  It might have an extension that allows property to be covered up to 100 ft. from the location, but that is very limited.

Lastly, always insure your items to limits you are comfortable self-insuring after.  Meaning, if you have an installation floater limit for $10k but you routinely have material of $25k at the jobsite, then you should be financially comfortable of bearing the risk of the difference of $10k- $25k = -$15k.  If $15k would hurt your business, ask your agent to increase the limit to $25k.  This will have a nominal increase in premium vs. not increasing the limit.

If you have any specific questions about how you may be affected by additional risks during transit to jobsites, please reach out here or call our office.

7 Easy Steps to Reduce Your Exposure to Losses and Lower Your Insurance Costs

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Running a business is tough stuff if you are like most of the small businesses that I insure.  My clients who have performed the following below have found: Reductions in their EMOD (experience modifier for workers compensation), less errors in the audit process resulting in time and money savings, cleaner loss ratios with the carrier leading to reduction in annual premium (credits) and more quality relationships with their sub-contractors.

  1. Certificates of Insurance – Always ask sub-contractors for proof of insurance naming your entity as additionally insured.  On the certificate of insurance provided, make sure coverage’s meet your requirements (same limits as your policy-see additional insured below).  It also helps to require vendors to provide an updated certificate of insurance for each job performed if you are not listed on the policy to receive a 30 day notice of cancellation.  This is more time consuming, but is a great risk control measure.  Large companies employ this practice.

  2. Verification – Request that the certificate of insurance comes directly emailed from their insurance agent.  I have seen many “fake” certificates of insurance provided to my clients that this is usually a way to mitigate that situation.  If you still question coverage, have the sub-contractor provide you with the policy.  Remember, this is about protecting your business not theirs.

  3. Hold Harmless Agreements – This should be common practice with all business owners.  If someone or an entity is providing a service on your behalf, they should be designated to indemnify you in case damages arise from their work.  Also, a written contract is usually required for coverage to exist.

  4. Payment – Do not pay the sub-contractor or anyone providing services to you until you have their certificate of insurance in hand (this clause should be provided in your written contract agreement).  You will find out that this will save you time and money later on.  Being proactive now and keeping up with the behavior will prevent future headaches.  Please keep in mind that you should always try to collect the insurance certificate before work is started.  If that is not possible, then employ the above practice.

  5. Loss Control –  Most commercial insurance companies provide the insured access to a loss prevention website that has all the tools necessary to have successful monthly loss control meetings.  If you have multiple employees, give the appropriate employee the title of Loss Control Manager.  Believe it or not, insurance companies find this as a successful business practice that reduces claims due to ownership of the position.

  6. Additional Insured Status – When collecting certificates of insurance make sure that you are being listed as an additional insured on the policy in the description box on the certificate.  If you want to protect yourself further, request to be specifically endorsed on the policy with respect to additional insured status.  If the client cancels his policy for any reason, you will be notified directly from the insurance company (Non-payment of premium, Non-renewal, etc.).

  7. Exclusions, Exclusions, Exclusions – All insurance in not created equal (not even close).  Companies have different appetites and classes of business they like to write.  In Arizona, a full or limited residential exclusion is commonly endorsed on the policy.  So, if you are a contractor that performs work on new residential or new multi-family homes (including apartments and condominiums and duplexes), have the sub-contractor provide you with the forms and endorsement pages on the declaration pages of their policy.  Remember, it is your due diligence as a business owner to make sure coverage is applicable to the scope of work performed.  Just because a certificate of insurance is provided does not mean coverage will apply. (other big exclusions to look out for: designated work exclusion, subsidence exclusion, prior work exclusion)

If you practice these Standard Operation Procedure methods above, you will find more peace of mind and eventually it will reflect in your bottom line.

If you have any questions or would like to explore how our agency could save your business money, reach out via our short contact form.

6 Best Practices to Reduce Potential Commercial Auto Losses for Your Business

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Poor Commercial Auto performance means increased rates in Arizona!

A trend that I am seeing throughout the marketplace in Arizona is the deteriorating commercial auto insurance sector (personal auto too). When I sit down with the marketing representatives for the insurance companies I represent, I keep on hearing the same song: “Commercial auto rates will continue to increase due to unprofitable results”. According to Fitch Ratings, Inc.(http://www.businessinsurance.com/article/00010101/NEWS06/912313666/Commercial-auto-puts-brakes-on-insurer-profits) “The commercial auto line continues to create a profit drag for U.S. property/casualty insurers,” on their U.S. Commercial Auto Insurance Market Update back in May 2017.

In the summary of commercial auto performance results, Fitch Ratings, Inc. states that the segment has produced an underwriting loss for six consecutive years in a row! This is also consistent with the results that I am seeing in Arizona. When insurance companies identify loss patterns, they tend to take action in the form of:

  •   Rate Increases- Increasing premium to offset future losses

  •   Stricter underwriting process

1. Reducing credits available to individual policy holders performance

2. Eliminating or reducing mono-line only auto accounts

3. Coverage closely scrutinized by the underwriter. Ex. “Any” auto vs. “Scheduled” autos.

In providing reference, take a look at the following:

In 2010 (just 8 years ago- 2010 model came out in ‘09) – The Invoice cost for a base F150 was $20,683 (http://www.jdpower.com/cars/Ford/F-150/2010)

In 2017 (2018 model) – The invoice cost for a base F150 is $26,011.

(http://www.jdpower.com/cars/Ford/F-150/2018)

In just 8 years, the price of the Ford F150 has increased by 32%.  Insurance companies are trying to catch up to this trend in balance with poor underwriting performance.  Some insurance companies have already followed suit with premium increases while others in the process.

The days of being able to get a premium of $1k in premium per vehicle (fleet) in Arizona are gone, at least for now.  I typically see premiums being rated without credits depending on the industry from $1,200 to $2,500 per vehicle (trade contractors, retail, manufacturing, etc.). This does not include transportation or delivery operations, which can range from $4.5k to $16k per vehicle. Some prospects/clients still expect to see commercial auto premiums at 2010 levels. Understanding the environment can help you to take proactive steps so your account will be a “premium or target” account to an underwriter.

Being a driver on a commercial auto account is a privilege and not a right. Tighter controls on the top side can be to your advantage.

What can you do as a business owner with commercial vehicles to reduce your risk and premium?

  1. MVR (Motor Vehicle Record) – Pull the Potential Employee’s Motor Vehicle Record before hiring (https://servicearizona.com/). Before hiring, have the potential employee provide a copy of his/her MVR. It costs $3 and provides a 3 year history.  Provide that MVR to your commercial insurance agent for review. This will save you time and money on the Human Resources side.

  2. Driver Awareness/Driver Safety Programs – Provide all drivers and employees a  safety awareness programs on a monthly basis. Reinforcement and consistency is the best recipe for success.  Also, a reward system for good driving results (minimal at fault losses) can be a motivator for employees to focus on the road.  You will find that reward system will far outweigh an increase in premium due to poor loss history.  Also, implement a distracted driver/cell phone policy!

  3. Vehicle Inspection – Inspect the vehicles that are provided to employees on a weekly basis. I am usually told from my clients that the best employees and less accident prone are those who keep their truck/car cleaned.  Basically, they show ownership of the vehicle.  I do not have numbers to support this claim, but this is what I hear from my clients on a consistent basis. Also, this is a commercial policy and should not be used for personal use. If a driver takes a vehicle home on a daily basis, make sure when they are not working or in the process of working, the vehicle is not used. This will limit your exposure significantly.

  4. Credit Report for the employee. For rating purposes, Arizona is a credit based model. With commercial auto insurance, insurance carriers will pull different credit scoring models such as Dunn & Bradstreet. A good credit score will get you better pricing. Generally speaking with credit based scoring model, a person with a better credit score will usually have fewer accidents. *Before implementing this practice, discuss this with your Human Resources manager and be sure not to violate Employment Practices Liability (i.e. Discrimination)

  5. Loss Prevention Resources – Most insurance companies are trying to get a grasp on this underperforming line of business. In doing so, they are providing resources to the insured to help mitigate losses. Some of these resources include a dedicated loss prevention website that has videos and white paper (best practices) to assist your business with your monthly meetings. Also, companies like Liberty Mutual are providing programs such as (15% credit if participating) driving telematics (GPS).  These devices are installed on the participating vehicles and you can view on your computer/screen where each vehicle is at any given time. Information such as hard braking, speeding, etc., is also obtained for your use.

  6. Random Drug Test Screening – This can be performed by an independent company and usually the company performs the gathering of information remotely or on the job site. This practice can reinforce the pool of candidates required to perform the job skills; skills that involve driving a vehicle.

Lastly, ask your insurance agent for assistance with some of these items or ideas.  We have access to libraries of loss control marketing slicks. These range from Vehicle Safety Programs, Driver Selection, Driving Tactic and Information, Self-Performance Evaluations and more.

If you have any questions about your current commercial auto policy or are looking for quotes on a new one, reach out to us here.

Commercial Insurance Audits – Yikes! I Paid My Policy In Full. Why Do I Owe More Money?

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We will discuss audits for General Liability (not Workers Compensation) and how to mitigate large additional premiums from the carrier.

Did you get a letter or invoice from your insurance carrier that stated you owed them additional premium due to the calculation of a Final Audit? You paid your policy every month and did not miss a payment, so how is this possible?

Most Commercial insurance premiums for General Liability are derived from the following: (not BOP’s- sq. footage or Auto Operations- # Class Employees)

General Liability: Rate X “Estimated” Yearly Payroll (1yr. from beginning of the policy effective date)

Or

                                   Rate X “Projected” Yearly Sales (1yr. from beginning or the policy effective date)

Or

                                 Rate X “Blend” Yearly Sales & Payroll (1yr. from beginning of the policy effective date)

Keep in mind that when a policy is written, the insurance company is covering all your exposure (except what is excluded) for that policy period. This means that the carrier is insuring your business whether it has $10,000 in payroll (sales) or $10,000,000 in payroll (sales). Since you (insured) cannot look into a crystal ball to get exact figures, the insurance carriers will price or rate based off estimated figures.

For example:

A plumbing contractor sits down with their agent before renewal. The agent asks the contractor what they expect their payroll for that contracting class to be for the upcoming term. The contractor (insured) provides the agent with a payroll figure of $250,000 (estimated) for the upcoming policy term.

At the end of the year, the plumbing contract had the best year of their business. They receive audit paperwork from the carrier or third party contracted out by the carrier to fill out and send back (3 types of audit requests – In person audit, paper/electronic self-performed audit or phone audit). They fill out the paperwork and input $500,000 payroll for the previous policy. Remember, the estimated payroll for that term was only $250,000. The audit is filled out and sent back to the carrier via mail.

In this situation, once the audit is complete, the insured will get a bill in the mail stating there is additional premium due (most likely double what was paid). Most insureds will have sticker shock and will usually question the audit to their agent.

Let’s think about this in terms of a home builder. You had a client put a 100% deposit down ($500k) on a house you are going to build for them. Along the way, the client added on many upgrades or in contractor lingo “change orders”. The upgrades cost you (builder) $100k. Once the house is completed, you would expect the other $100k of the payment as you used your materials, man power, resources, etc.. The insurance audit is doing the same thing. It is “realizing” the actual amount (completed home) vs. estimated amount (deposit). The difference would be what would be owe or returned back.

Ok, but I estimated my payroll correctly but I still owe a large additional premium (this section does not apply to premiums calculated by sales).

Below are possible reasons why your policy actual amounts differ from the estimated amounts:

  1. Did you collect certificates of insurance (COI’s) from each vendor or sub-contractor that did business with your company? If not, their exposure would be covered under your General Liability policy. RE: Increased payroll.
  2. Did you use “casual” labor? If so, was that amount calculated into your estimated payroll amount for the policy term? If not, that exposure will be captured at audit. RE: Increased payroll.
  3. Employee misclassification. Very similar to Workers Compensation, if job codes are not split via time card or if a worker provides multiple trades that is not broken apart (job costing), the auditor is going to classify the worker into the highest exposure General Liability class code.
  4. Non-Compliance of Audit. Most carriers have a built in provision/endorsement that states if audit are not completed in a specific manner of time, the company reserves the right to impose an estimated audit. I have seen companies use 25% increase in the exposure up to 50% increase. So, if you ignore the correspondence from the carrier to perform an audit, this will likely be the result. Keep in mind, you are not off the hook for the audit. If the audit is not completed, a Notice of Intent to Cancel (NOIC) will be triggered. If completed, the estimated audit will be backed out and replaced with the actual audit filled out by the insured.

If this is a familiar situation and you would like to prevent this from happening to you and your company, below are a couple of recommendations:

This might sound easy, but the best way to mitigate large audits is to sit down with your agent six months into the term, and again two month prior (renewal process) to the end of the term. The last thing my clients want is a bill in the mail that they were not expecting from an insurance audit.

At the six month term, I usually have the insured provide me with payroll information, sub-contractor information (total cost + certificates of insurance for each) and gross sales information. We identify whether or not the insured is tracking toward the estimated amount of payroll on the policy (if payroll is the exposure for General Liability) or if that amount is over/under stated.

The last recommendation would be to strongly suggest you complete the audit on time.  If someone else like an accountant or office manager handles the audit, provide them with a completion date and follow up. Should you have questions performing the audit, contact your agent.  Or, if you need more time to complete the audit, contact the auditor listed on the correspondence from the carrier. Do not wait until the company sends a 2nd or 3rd or Final request to complete. If you complete it the first time, you will save yourself time and money!

If you would rather have an agent that can keep you informed with risk management expertise, please reach out to us for a free quote or consultation here.

Workers Comp – Subcontractor or Employee?

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Arizona Workers Compensation – The Dichotomy: Subcontractor or Employee?

I get many questions with regards to a specific workers compensation question: “Why do we have to cover a 1099 contractor?” So I decided to bring some clarity to the issue. Please keep in mind, there are exceptions to every rule. This is a general response to this question.

If you are a business and employ one person in the State of Arizona, you are required to have a workers compensation policy. Two of the many misconceptions I hear is “We do not have employees, just sub-contractors” or “We hire sole proprietors that are owner only and they are not required to carry workers compensation per Arizona law”. While that sounds great, in most cases, those two examples usually fail the “sub-contractor” test.

My rule of thumb to insureds is as follows: “If your sub-contractor does not have a workers compensation policy, you will be providing coverage for him under your policy”.  And more often than not, that sub-contractor exposure will be caught at audit and additional premium will be owed.

You are probably thinking, what about “hold harmless agreements” and “signed workers compensation” exclusion forms. I usually answer this question by stating that I am not a lawyer, but with my experience, those agreements are about as good as the paper they are written on as they usually fail “true” sub-contractor/employee tests. Meaning, they usually do not stand up in court or litigation which is why insurance will not accept them. Just because you 1099 for accounting purposes does not mean they are a “true” sub-contractor.

Who do you think is going to pick up a medical/indemnity claim when one of the subcontractors/sole proprietors gets hurt on a job you hired him for? The answer is most likely you and your policy! Best case scenario, your insurance company will get pulled into litigation and will have to defend.

Back in 2014, FedEx ran into this same situation in California: Article here.

Ask yourself the following questions to determine if the person is truly considered an employee or not:

  • Do you have managerial control over the subject? (i.e. what time to be where)

  • Does the subject carry General Liability and Workers Compensation?

  • Who’s tools and transportation does the subject use? If yours, does he lease them from you for fair market value?

  • Does the subject wear uniforms that bear his company’s name?

*Please note, these are only a few questions that determine eligibility. Other resources include Arizona Revised Statutes: https://goo.gl/YwVUJ7

and The Industrial Commission of Arizona: https://www.azica.gov/claims-division

To protect yourself from future claims and possible large audits, you must remember “If you cannot provide, you abide”. If the subcontractor cannot provide a certificate of insurance (GL & WC), you will most likely be subject to paying insurance for their exposure.

Lastly, if they are a “true” sole proprietor and they fit the test, make sure they file the Sole Proprietor/Independent Contractor Statement off the Industrial Commission of Arizona’s website (send to your carrier/agent for processing). But, please remember that form is only good if they meet conditions for an independent contractor.

If you have any questions, you can email me at steven.s@allinsgrp.com, call me at 602-271-9171, or leave a message for me to follow up on here.