Target Market Series: Contractors

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.— from a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

Copyright © 2008 by

THE NATIONAL UNDERWRITER COMPANY

P.O. Box 14367

Cincinnati, Ohio 45250-0367

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the publisher.

Includes copyrighted material of Insurance Services Office, Inc., with its permission.

This product includes information which is proprietary to Insurance Services Office, Inc. ISO does not guarantee the accuracy or timeliness of the ISO information provided. ISO shall not be liable for any loss or damage of any kind and howsoever caused resulting from your use of the ISO information.

International Standard Book Number: 978-0-87218-746-7

Library of Congress Control Number: 2008927288

Printed in the United States of America

Table of Contents

Chapter 1: Building Trade Contractors

Chapter 2: Building Trade Sic Classifications

Chapter 3: Market Profile

Chapter 4: Insurance And Surety Markets

Chapter 5: Underwriting Concerns

Chapter 6: Coverage Considerations

Chapter 7: Noninsurance Considerations

Chapter 8: Common Artisan Contractor Terms

Chapter 9: Standard and Manuscript Endorsements

Chapter 10: Building Trade Contractors Coverage Checklist

Chapter 11: Insurance Problem Issues for Building Trade Contractors

About the Author

Kim Smith, CPCU, ARM

AMS Services, Bothell, WA

Kim Smith began his insurance career in 1976 after graduating Summa Cum Laude from Washington State University. For the next ten years he held positions as a commercial producer, agency marketing manager, and general agency manager. He also completed his Chartered Property and Casualty Underwriter (CPCU) and Associate in Risk Management (ARM) certifications.

In 1986 he left the independent agency system to co-found Professional Software Systems, a software company that created the widely used Professional Survey, Submission and Sales System (PS4).

Mr. Smith has written several articles on insurance topics and has been a frequent guest speaker at many industry events. In addition to authoring the FC&S™ Target Market Series, Mr. Smith continues to direct the research and development for the Producer Plus product at AMS Services in Bothell Washington.

Chapter 1: Building Trade Contractors

INDUSTRY BACKGROUND

Building trade contractors can be defined as companies that build, fabricate, install or perform related services for others under a contract. In the United States, the construction industry may vie with the food industry as the largest business sector.

Although there are a number of ways of dividing the construction industry, there are three generally recognized classifications:

General Contractors – who act as primary builders of new construction projects. Their activities can be broken down into three basic methods of operation: (1) building for an owner according to existing plans, (2) contracting with an owner to provide design as well as construction work and (3) acting as a package builder in which the owner is provided with complete turnkey services (i.e., the purchase of land, financing, design, and construction).

You will find that most general contractors will do at least a portion of a job themselves (usually concrete, masonry, or carpentry), although many act as brokers and utilize subcontractors to complete all phases of a project. This second type, often referred to as paper contractors, tend to maintain very small staffs to keep their overhead low. Other firms may engage in general construction activities but are not usually considered true general contactors. This includes developers who build for themselves; and project management companies, that supervise projects without assuming responsibility for their completion.

Heavy Construction Contractors – who limit themselves to specialized construction activities that fall outside the scope of traditional building construction. Some common examples of such contractors might include road building or paving contractors, demolition contractors, utility contractors (gas/water mains, power lines), dam and bridge builders, logging contactors, oil and gas contractors, and asbestos abatement or other environmentally-related operation. Since many of these companies provide highly specialized work, it is not uncommon for them to act as both general contractor and subcontractor, depending on the job.

Building Trade or Artisan Contractors – who provide a specialized type of new construction work (usually as a subcontractor); or who engage in remodeling, repair or installation services directly with an owner for a specific job involving their specialty trade. Most are locally owned with many being second or third generation family run companies. Of these, over 95% are small to medium size establishments employing fewer than 100 employees. Consequently, this category is the largest type of contracting company operating in the United States today and is the subject of this manual.

Chapter 2: Building Trade Sic Classifications

The Standard Industrial Classification manual (SIC) classifies most building trade contractors under major Group 17 – Construction – Special Trade Contractors. Most insurance carriers follow this listing as a basis for eligibility for their respective contractor’s package programs. The following is a brief description of those business types that fall under this heading.

Please note that many carriers consider one or more of the above SIC classifications as high risk exposures and will not write such contractors under their artisan contractor programs. Common exceptions include roofing, demolition, welding, scaffolding, excavation and water well contractors. Conversely, some contractors may routinely be considered as an artisan contractor by many carriers yet may fall under another SIC listing, such as landscapers (SIC classification 0782).

SUGGESTED TRADE CONTRACTORS CLASSIFICATION CODES

The following is a summation of the various class codes commonly used for building trade contractors. Often, specific accounts may mix and match these classifications depending on the activities they are involved in.

Chapter 3: Market Profile

There are more than 3,000,000 companies in business today that can be classified as construction contractors. The average premium for these accounts is approximately $9,497 per year, making them prime candidates for most agencies’ target marketing efforts. Below is a work up for the NAICS listing Construction. Data courtesy of MarketStance (www.marketstance.com). MarketStance provides analysis tools, market statistics and analytical services on and for the U.S. insurance industry. 

KEY INDUSTRY GROUPS

The following is a listing of several key contractor associations operating in the United States today. These organizations are an excellent source for further information about contractors in general and for assistance in an agency’s marketing and sales efforts for this industry (e.g. advertising, membership lists, product endorsement).

Chapter 4: Insurance And Surety Markets

Most artisan contractors are insured with simplified policies that include common mandatory liability insurance along with various optional property and/or inland marine coverages under one package policy. In addition, many carriers that offer such programs will write supporting lines of business (such as auto, umbrella, and workers compensation) in conjunction with these packages.

As with other business classes, larger contractors may be insured in risk-sensitive programs and may be eligible for additional coverage considerations.

The differences in size and type of contractor can greatly influence the marketplace that is open to any particular contractor risk.

Contract surety (bonding) is a vital part of most contractor businesses. Depending on the size of potential construction projects and the clientele, meeting surety requirements may be a greater concern for some contractors than their actual insurance coverage.

It is impossible to list every insurance and surety company that will deal with contractors. However, a list of insurers and surety companies that actively solicit such risks is available for online access at http://www.fcands.com/contractors. It is in no way comprehensive, and some of the listed companies may cease writing contractor risks in the future.

A list of U.S. Department of Treasury certified surety companies may be found at www.fms.treas.gov/c570_a-z.html.

Chapter 5: Underwriting Concerns

The classification artisan contractor encompasses both common and specific hazards depending on the type of business that is being written. Although this manual cannot possibly outline all of the various individual hazards, the following are some of the more common primary underwriting concerns inherent to most artisan risks.

1. The financial stability and experience of a builder are probably the two most important areas of concern when reviewing trade contracting accounts. The construction industry is highly leveraged and very sensitive to changing economic conditions. Most underwriters will look closely at the financial strength of a company, years in business, reputation of the contractor, and amount of bid work done as a subcontractor when evaluating this exposure.

2. XCU (Explosion, Collapse, Underground) hazards are relevant for many trade builders. Trenching, excavation, and shoring are common activities which may result in collapse or underground related claims. Installation of equipment using gases, refrigerants, and other volatile substances are examples of explosion related hazards. Although current liability policies do not normally exclude XCU hazards, most underwriters will review these exposures closely.

3. The completed operations exposure can be substantial for trade contractors depending on the type of work they do. Underwriters will want to review the materials and construction methods used by the insured. Experience and training of employees will also be an important factor when reviewing this exposure.

4. Products liability can be important for contractors who install or service manufactured goods. Often a vendor’s endorsement may be required by an underwriter. While this does not eliminate the need for products liability insurance on the part of the contractor, it does give evidence that there is primary liability coverage for the contractor under the manufacturer’s policy.

5. Hold Harmless and indemnity provisions are extremently common in construction contracts. Underwriter will want to review contract documents to ascertain the degree of legal liability that the contractor is assuming.

6. Subcontracting work is a common practice found with some larger trade contractors. Underwriters will frequently want to make sure that certificates of insurance are required showing that primary general liability and workers compensation coverages are in force for all jobs subcontracted to others. The underwriter will often want to know what percentage of the contractor’s business is subcontracted out, and will want the contractor to be listed as additional insured on the subcontractor’s liability policy as well. Some carriers restrict the amount of work an insured can subcontract out.

7. Shop operations including woodworking, welding, painting, and the use of flammable materials or liquids, pose a considerable risk for some specialty builders. Most carriers will require that the contractor adhere to all appropriate NFPA requirements when any of these exposures are present.

8. Care, custody or control exposures can be present for contractors conducting on-site installation or service/repair operations. Often underwriters will want to review the loss frequency and severity potential for these types of activities if they are being performed on a regular basis.

9. Pollution liability is an important consideration for contractors that work with hazardous materials. Coolants, refrigerants, solvents, acids, oils, and stored petroleum products are examples of substances that present potential on and off-site pollution risks. Most underwriters closely review handling and disposal procedures when these substances are present.

10. The auto exposure can be quite sizable for some trade contractors. A large vehicle fleet will often require that the contractor adopt the same risk prevention procedures as required of trucking firms. These include a formal accident review policy, written auto maintenance logs, mandatory annual MVR reports and ongoing driver training for heavy unit operators.

11. Transportation of building materials or equipment to a project site may be at the risk of the contractor. Typically, carriers will want to evaluate that potential for loss that may be present in connection with such activities (i.e., overturn, theft/hijack, vandalism).

12. Design and consultation services present various types of professional liability exposures. Most underwriters will want to know the extent that the insured is involved in design activities and will often include specific exclusionary endorsements for these types of operations.

13. Worker safety is a trade contractor exposure that ranges from slight to severe. Employee turn over will be a key indicator to ascertain the stability and experience of company employees. Hazardous operations will require that contractors maintain formal loss control programs that outline strict guidelines as to employee hiring, training, and on-going safety management.

14. Employee training and supervision is especially relevant to contractors who use seasonal or common labor in their operations (such as landscapers). For these contractors, hiring practices, supervision, and training of personnel will be of importance when addressing liability and workers compensation exposures.

15. Job site safety is always a prime concern for contractors. Courts have held that contractors are responsible for every exposure that exists at a job site that he or she controls. Consequently, underwriters will want to review the contractor’s past safety record as well as job site safety procedures used by the contractor to minimize such loss potential.

16. Temporary storage of materials is another exposure related to job site hazards. Theft and vandalism will be of special concern and require that some type of inventory record keeping and job site security be provided for larger projects.

17. Equipment is closely tied to worker and job site safety. Many underwriters want to know if equipment is owned or leased, either from or to others, and if leased is it leased with or without an operator. The condition of the contractor’s equipment and tools is also important since properly maintained equipment is safer than neglected equipment. The type of equipment is important as well since some equipment is inherently more dangerous than other equipment.

18. Rigging activities involving the use of cranes or other heavy lifting equipment can