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Presented by Greg Schmidt, CPCU, ARM

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1 Presented by Greg Schmidt, CPCU, ARM
For the WTBA Contractor-Engineer Conference January 2009

2 Construction Risk Management
In this presentation, we will review: Risk Management Process Commercial Insurance Construction Contracts + Contractual Liability Safety Issues Lowering Costs & Staying Pretty 2

3 Definition of Risk Management:
The process of planning, leading and controlling the resources and activities of an organization -- To fulfill its objectives cost effectively To protect and grow corporate assets To enhance shareholder value 3

4 Risk Management Process Defined: 4 Identify Exposures to Loss
Examine Feasibility of Alternative Techniques Select the Apparent Best Technique Implement the Chosen Techniques Monitor and Improve the Risk Mgmt. Program 4

5 Identify Exposures to Loss:
Risk Management Identify Exposures to Loss: Property Personnel Net Income Liability 5

6 Risk Funding Techniques:
Risk Management Risk Funding Techniques: Current Expensing Unfunded Reserves Funded Reserves Borrowing Captive Insurers Commercial Insurance Contractual Transfer for Risk Financing 6

7 Definition of Commercial Insurance:
A contract under which one party, the insurer, agrees - in exchange for the payment of a premium - to pay for specified losses the insured may suffer, up to specified amounts, under conditions specified in the insurance contract. 7

8 Commercial Insurance Sample Insurance Portfolio for WTBA Members:
Workers Compensation General Liability Automobile Umbrella or Excess Liability Professional Liability (Design Build, Engineering Only Property/ Contractor’s Equipment Property/ Builder’s Risk EPLI/D&O/RRP/OCP/Pollution 8

9 Permanent Disability Payments
Commercial Insurance Workers Compensation Coverage: Workers Compensation Costs: Premium = Payroll x Rate x Experience Factor Medical Expenses Lost Wages Permanent Disability Payments Death Benefits Workers’ compensation insurance covers work-related injuries. 9

10 Commercial Insurance General Liability Coverages & Costs:
Third Party Damages Bodily Injury, Property Damage, Personal Injury Defense Expenses Settlements, Awards Premium = Payroll/ Sales x Rates x Experience 10

11 Commercial Insurance Automobile Coverages & Costs:
Third Party Damages - Bodily Injury & Property Damage Liability Hired and Non-Owned Liability Medical Payments First Party Damages - Uninsured and Underinsured Motorists Comprehensive and Collision Coverages Hired Physical Damage Premium = Vehicle Type, Usage and Cost x Rates x Experience 11

12 Commercial Insurance Umbrella or Excess Liability Coverages & Costs:
Third Party Damages – Extends Limits Over Underlying: General Liability Auto Liability Employer’s Liability Premium = Limits Selected and Underlying Premiums x Rates 12

13 Commercial Insurance Professional Liability Coverages & Costs:
Third Party Damages – Professional Errors & Omissions Defense Expenses Settlements, Awards Premium = Type of Professional/Sales/Limits x Rates x Experience 13

14 Commercial Insurance Contractor’s Equipment Coverages & Costs:
First Party Coverage - Mobile Equipment At Shop On Job-sites In Transit Hired, Borrowed and Rented Crane Overload Installation Floater Materials Premium = Value of Equipment X Rates X Experience 14

15 Commercial Insurance Builder’s Risk Coverages & Costs:
Owner’s and Contractor’s Interests Structure Under Construction Material On-site Materials Off-site Materials In Transit Loss of Use Premium = Cost of Construction X Rates Premium = Cost of Construction x Rates 15

16 Commercial Insurance Experience (claim history) plays significant role in premium level Underwriters concerned with loss frequency issues Just as your workers compensation premium is adjusted via an experience rating factor, rates on other lines are debited (credited) according to claim history 16

17 Commercial Insurance Marketplace Conditions: Repercussions for WTBA Members: Upward pressure on rates. The global recession will temper this pressure via lower demand Hard market and escalating rates are predicted to persist as new capital infusions into the industry are scarce due to frozen credit/capital markets* Expectations are that insurance-related costs will increase. In some cases, and on some lines, those increases will be significant. Stressed profit margins will face additional pressure * Advisen, Dec. 20, 2008 17

18 Commercial Insurance Concerns/Opportunities for WTBA Members:
State budget issues Record projected deficit Revenue shrinkage due to business conditions Long-term infrastructure funding mechanisms need re-vamping Possible federal infrastructure stimulus bill forthcoming with new administration Depending on where dollars are distributed, out-of-state competition likely to increase With funding comes strings 18

19 Commercial Insurance Federal-Level Funding Scenarios:
With funding comes strings Prequalification process and safety standards may be ramped up Workers compensation experience mod over 1.00 may disqualify your bid Some private owners require written procedures for pre-planning safety issues into each project OCIP safety requirements likely to become more stringent WisDOT use of OCIPs likely to become a matter of course on large “mega corridor” projects 19

20 Commercial Insurance State of the Marketplace:
2008 Cat losses increased 50% over 2007 Financial market meltdown has eroded insurers’ balance sheets Reserve levels are being drawn down to pay for cat losses and to write off investments. Last month Towers Perrin estimated 15% of industry reserves would disappear Combined ratios (losses + expenses) are deteriorating and the industry is losing money on its underwriting 20

21 Construction Contracts
Definition: Specify the legal responsibilities and obligations between the project Owner and the Contractors. 21

22 Construction Contracts
Issues: Indemnification Agreements (Huge) Insurance Specifications Insurance Compliance/Certificates of Insurance Additional Insureds/Waivers of Subrogation Builder’s Risk (Who is responsible) Safety and Loss Control Programs (Discretion of Owner) OSHA Compliance 22

23 Construction Contracts
Indemnification Agreements: Broad Form – AVOID - Pay any and all damages, costs, expenses - even for sole negligence of owner. Your insurance carrier would pay for claims caused by others. Limited Form – ACCEPT – Pay bodily injury and property damages to the extent of own negligence 23

24 Construction Contracts
Insurance Specifications: Workers Compensation – Statutory Benefits General Liability – limits specified in contract Auto Liability – limits specified in contract Umbrella/ XS Liability – limits specified in contract Professional Liability – limits specified in contract Builder’s Risk - $Project Cost, $Materials On-site, Off-site and In Transit Additional Insureds, Waivers of Subrogation Certificates of Insurance 24

25 Construction Contracts
Insurance Compliance/ Certificates of Insurance: Seek to Avoid Losses of Others Watch Out for Sole Proprietors Can be Charged Additional Premium for Uninsured Subcontractors Often Project Manager’s Responsibility 25

26 Construction Contracts
Additional Insureds: Obligates an insurer to defend and possibly pay claims of another party AVOID – Primary Noncontributory Language. If it is included, add the phrase: “but limited to the operations conducted by the Named Insured.” Waivers of Subrogation: After payment of a claim, restricts an insurer’s right to collect from the responsible party 26

27 Construction Contracts

28 Construction Contracts

29 Construction Contracts
Builder’s Risk: Contract Should Specify Who Purchases Coverage – Owner or Contractor? Named Insured Should Include Both The Owner, Contractor and Subcontractors Contract Should Specify Who Pays the Deductible? Add Loss of Use & Testing Coverages 29

30 Safety Issues OSHA/MSHA Purpose
Establish minimum safe workplace standards Conduct workplace inspections for compliance 29 CFR 1926 Standard applies to road construction operations Table of Contents is nine pages long! 29 CFR 1910 applies to general construction OSHA Partnership program agreements exceed minimum safety standards Bottom line – Safety issues demand your attention 30

31 Safety Issues Accident Pyramid 1 Severity 30 Frequency 300 3,000
Lost Time Injury First Aid Cases Near Misses At - Risk Behaviors Severity Frequency Accident Potential Situations Major Accident 30 1 300 3,000 30,000 31

32 Safety Issues A successful safety program focuses its efforts on the bottom of the pyramid Reducing at-risk behaviors and near misses will result in lower claim frequency and severity rates over time Establish a corporate climate of eliminating at-risk behaviors Develop internal protocol to allow for site/project specificity safety procedures Lost Time Injury First Aid Cases Near Misses At - Risk Behaviors Severity Frequency Accident Potential Situations Major Accident 30 1 300 3,000 30,000

33 Critical components of a successful safety program:
Safety Issues Critical components of a successful safety program: Top management support and commitment Foreman/Supervisor involvement and accountability Recognition/Reward for meeting and exceeding expectations 33

34 Lowering Costs & Staying Pretty
Underwriters look for these account characteristics – Solid financial position Quality management Contractual/Risk Transfer controls Auto/fleet controls 34

35 Lowering Costs & Staying Pretty
Solid Financial Position: Profitable Willing to invest in safety, training and equipment Quality Management: Reputation and work quality Clear safety accountability structure 35

36 Lowering Costs & Staying Pretty
Contractual/Risk Transfer Controls: Qualified internal contract review prior to execution Applicable to both prime and subcontract work Auto/Fleet Controls: Uniformly enforce of company policies Be familiar with the doctrine of Negligent Entrustment 36

37 Lowering Costs and Staying Pretty
Meaningful improvement is possible Large, multi-state contractor – 3mm+ man hours without a lost-time injury Marquette OCIP accumulated 2.25mm man hours without a “major” injury Implementation will help ensure your firm is insurable regardless of market conditions 37

38 Lowering Costs & Staying Pretty
days out from insurance program renewal date is too late to pay adequate attention to the program structure Average insurance costs for road construction accounts run between 1% to 2.5% of revenue Make it your goal to be better than average 38

39 Questions and Comments
Thank you for your attendance and participation! Greg Schmidt WSA Account Executive Phone: Cell: 39

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