The financially intimate relationship between contractors and insurers is more complicated this year, with contractors looking for relief from carriers on collateral or retained funds to cover deductibles for claims under workers’ compensation and liability policies.
Those issues were among the thornier ones mentioned by carriers, brokers and contractors at the International Risk Management Institute’s construction conference held Nov. 2-5 in Oxon Hill, Md. With ample capacity for builders risk, general liability and workers’ compensation and with pricing generally soft, no one was concerned about how much coverage was available. According to brokers and industry sources, special coverage can be bought, and contractors are purchasing excess lines at reasonable rates. For sureties, losses are increasing but not at an alarming rate.
Contractors and insurers say that in the depressed market, they are staying alert to possible financial problems among specialty contractors and subcontractors. “I have a joke I make about subcontractors,” quipped one contractor association staff member. “It’s that the market fell so fast, they didn’t have time to take the money out of the company.”
If that’s true, it could inadvertently help keep the company in business because, as several speakers indicated, in troubled times cash is king. One potential source is workers’ compensation premiums returned after an audit. Early this year, businesses began requesting that insurers return portions of their workers’ comp premium before the policy term had expired, according to Business Insurance, an industry publication.
What is different now are the discussions about collateral posted to cover deductibles in liability and workers’ compensation policies. The amounts can be substantial, such as $250,000 per claim for a middle-market-sized contractor. The total collateral required by an insurer is reviewed annually for any needed adjustments based on losses and the contractor’s finances.
“There are lots of conversations,” says James E. Conroy, chief underwriting officer for national market construction at Liberty Mutual Group, Boston. The conversations often revolve around contractors’ requests to return some collateral posted from prior years, since over time losses mature and customers have paid their obligations under any claims. “We’re probably being urged to do the reviews,” says Conroy.
The financial crisis has channeled more attention to this already complex aspect of insurance. In the last two to three years, “Many carriers have devoted more attention to the matter, dedicating internal resources that analyze credit and collateral factors, which have removed the [carriers’] underwriter from many facets of this process,” says Paul J. Primavera Jr., senior vice president for claims at broker Lockton Cos., Kansas City.
The collateral required has most often been posted with bank letters of credit, but the fees for these have increased sharply and can range from 1% to 4%. “Since credit tightened up it has become a big issue,” says Gary Kaplan, president of construction for Zurich North America Commercial, Schaumburg, Ill. His unit has created a special product through which a contractor can post collateral by paying Zurich to purchase an FDIC-insured certificate of deposit from one of Zurich’s banks. Kaplan says contractors have shown a lot of enthusiasm for the CD in the weeks since it has been introduced partly because it eliminates the expense and pays interest to the contractors. Zurich also offers to convert existing letters of credit into the CD or a trust—another new collateral form—to save the contractor’s letter-of-credit fees.
Some clients may be in a position to buy down or close out older years and eliminate the collateral. But other than working hard to control claims, Kaplan says there isn’t much you can do about the past years.