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Are Contractor-Controlled Programs Right for Your Company?

FOUR TIPS TO HELP DRIVE THEIR SUCCESS
BY DOUG CAUTI
LIBERY MUTUAL INSURANCE

The long-awaited recovery of the commercial construction market has many general contractors evaluating the role Contractor Controlled Insurance Programs (CCIPs) may play in better managing risks.

When deciding if this approach makes sense for their companies, general contractors should understand the four tips that drive the effectiveness of CCIPs.

Before exploring those, it’s helpful to understand the possible benefits of CCIPs and the trends driving contractors’ renewed interest in this approach.

THE DRAW
CCIPs can help contractors lower the total cost of risk, which includes both insurance premiums and claim costs. How? By centralizing the purchase and administration of insurance, either for a single jobsite or across all of a general contractor’s projects.

Having a general contractor oversee a single insurance program is a more cost-effective way to manage risk than having each subcontractor independently buy coverage and include that cost in their bid.

A CCIP can cut the general contractor’s cost of managing insurance. It removes the need for the general contractor to establish minimum insurance requirements, communicate these to subcontractors, and confirm the coverage for each sub.

It can also result in better insurance pricing, since lots of smaller insurance purchases by subcontractors are replaced by a single larger and more sophisticated risk management program. This can allow for a more efficient insurance structure, such as a large deducible plan, rather than the fully insured policies typically bought by individual subcontractors.

Pricing also reflects the CCIPs’ unique ability to build and manage a central safety program covering everyone on the jobsite. Improving safety cuts the potential for claims and their associated costs.

When injuries or accidents inevitably happen, the CCIP can speed claims management by eliminating the discussion of who is responsible and which insurance policy is in play. Eliminating such finger pointing improves claims management, better controlling claim costs.

Beyond these potential cost advantages, CCIPs can also provide general contractors with another key benefit: the ability to include minority subcontractors in a project who might otherwise not be able to bid on the job, given their limited scale and experience. This can be critical when bidding on federal and state contracts.

INCREASING INTEREST
In addition to the general benefits of CCIPs, four trends are driving contractors’ renewed interest in CCIPs.

The resurgent commercial construction market is the first, and perhaps biggest, driver.

Protecting general contractors as the number and scope of potential projects grow is a far different insurance challenge than builders faced over the last three to five years, as commercial construction starts all but disappeared.

Many contractors are looking for proactive ways – like CCIPs – to manage the increasing risks they are likely to face in today’s market.

A second driver of renewed CCIP interest is the project owners’ desire to protect limited and expensive letters of credit. As owners face a rebounding market and prepare their financials for more development opportunities, they will likely continue to push insurance onto contractors.

Regulatory pressure is also increasing contractor interest in CCIPs. Several states have limited the ability of general contractors to push liability onto subcontractors. CCIPs can offer contractors a way to strategically manage and coordinate risk transfer, essentially accomplishing the same end.

The final driver of renewed contractor interest is scale. The rising construction market makes it more likely that contractors can meet the minimum threshold required by a CCIP, typically $300 million in construction value over two to three years.

TIPS TO DRIVE SUCCESS
Given the potential benefits of CCIPs and the increasing interest in this approach, contractors should understand the four elements that drive the success of such programs in order to decide if CCIPs are the best approach to managing risk.

A comprehensive insurance program is the first best practice of a successful CCIP.

The best performing CCIPs tend to have the broadest and most strategic view of risk management.

In such programs, general contractors partner with insurance agents, brokers and providers to identify and manage all of the risks faced by the contractor or project. The team moves beyond general liability, commercial auto and workers’ compensation coverages to consider more specialized policies, such as builders’ risk, inland-marine and professional liability. They even explore the potential impact of the risk management program on the contractor’s surety bonds.

A strong safety program is the second best practice. Improving safety helps prevent accidents and injuries. This avoids the costs associated with such accidents – from general liability settlements to medical payments for injured workers – and positions the company for more competitive insurance premiums.

Best-in-class safety programs share these ingredients:

  • Absolute management commitment to safety. Smart contractors understand that safety provides a competitive advantage, enabling the firm to protect its bottom line and deliver quality projects on time and budget. Such contractors consistently underscore the importance of safety in their actions and decisions.
  • Project pre-planning. Bringing together subcontractors to review the project and particularly dangerous elements – such as crane lifts and highway work zones – helps identify and resolve potential problems before a shovel enters the ground.
  • Quality assessment. The benefits of safety stem from how people actually work. It is critical for a general contractor to monitor work habits at a jobsite, immediately correct any dangerous situations and track performance to spot improvement opportunities. Technology allows real time observation, tracking and reporting.
  • Benchmarking. General contractors go beyond tracking safety performance internally, say year-over-year performance at a single site, or comparing injury rates between multiple projects managed by the firm. They work with insurance partners to understand how their performance compares to other contractors working on similar projects, or even to other industries.

Even with a strong centralized safety program, chances are that something bad can happen during the project. That’s why having a clear process for managing claims is the third best practice of successful CCIPs.

Such a process starts with the general contractor and insurance partners setting specific service standards. These detail how claims will be reported, investigated and managed. The faster a claim is reported, the sooner it can be investigated, appropriate evidence preserved and the right claims management tools brought to bear.

All claims are not equal. The general contractor should understand how the CCIP insurer will segment these claims and deliver the right management resources to each.

For example, the focus in managing general liability claims should be on controlling legal expenses, since they drive total claim costs. General contractors evaluating a potential CCIP should understand the full range of tools the insurer will use to manage legal costs. Can the insurer evaluate potential legal providers to select the one that will likely produce the best outcome, given the specific accident and jurisdiction? Can they review legal bills to make sure work was done at the right level within the firm and billed at appropriate – or better yet – discounted rates?

The focus of managing workers’ compensation claims, however, should be controlling medical costs, since these drive total claim expenses. How will the insurer quickly identify the small portion of claims that can quickly grow to the represent the majority of total claim costs, and provide each with the right resources? Can the insurer review prescriptions to make sure they are appropriate and to prevent addiction and other negative side effects?

The fourth best practice of effective CCIPs is subcontractor selection.

The best performing CCIPs tend to be those where the general contractor select subcontractors by looking beyond cost to also consider other issues.

Since the past predicts the future, general contractors should closely evaluate the safety experience of potential subcontractors. Do they have a commitment to safety and an active safety program? How have they responded to past injuries and accidents? Can they add value in broader project planning about how their operations impact — and may be impacted by — other trades?

Cost will always be an important factor, but by also evaluating safety when selecting subcontractors, general contractors are more likely to avoid the costs and delays associated with jobsite accidents and injuries.

GETTING IT DONE
Contractors are excited by the emerging construction market.

Smart ones are also concerned. Enough so to explore how the prospect of more and larger jobs will impact their operations, including risk management. And this is causing increased interest in CCIPs.

When judging if this approach makes sense, general contractors should understand the four areas of effective CCIPs – a comprehensive insurance program, a strong safety program, a clear claims management process and a broad perspective when selecting subs.

Doug Cauti leads the construction practice of Liberty Mutual Insurance’s Commercial Insurance strategic business unit, which provides a full range of primary and excess coverages to mid-size and large contractors, subcontractors and project owners.