Trickledown wrap-up tricks: midsized construction projects may benefit from an insurance approach long used at the largest sites. A careful analysis will show if this approach makes sense for specific projects.
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Rising costs are prompting general contractors, developers and owners with midsized projects to explore an insurance program that has controlled the cost of risk on much larger projects.
Consolidated insurance programs, or CIPs, create a single workers'
Benefits of a CIP include cost savings and more consistent, broader and longer insurance coverage.
Before purchasing a CIP, the potential insureds and their brokers and agents should become familiar with a CIP's requirements. One consideration is the time needed to manage a CIP. Another is becoming comfortable with larger deductibles and collateral.
To decide if a CIP is the best insurance solution, answer two questions. First, are the advantages of CIPs greater than the cost of meeting the program's requirements? If so, is a CIP more efficient than the more traditional approach to insuring construction projects, where each subcontractor provides their own coverage?
By understanding the advantages and requirements of a CIP, and the process of comparing such programs with traditional insurance, partners on midsized projects will better be able to decide if a CIP is right for them.
ADVANTAGES
A CIP can deliver savings by reducing job-site accidents and litigation through its focus on:
* Safety. Safety drives a CIP, from selection of subcontractors to how they work. Dedicated safety resources craft a central safety program. They also monitor performance, rewarding those who follow the safety policies and correcting those who do not. This vigilance pays off: CIPs tend to have fewer workers' comp and general liability claims.
* Claims management. Accidents happen at even the safest sites. The sooner a claim is reported, the more impact an insurer can have by quickly applying the right resources. So each CIP provides a single claims management process, detailing how a claim will be reported and managed, including how each subcontractor will return injured workers to work. As a result, CIPs typically have lower claim costs.
* Legal teamwork. A CIP unites the legal interests of a project's partners. This can dramatically reduce costs by eliminating lawsuits between partners when an accident happens.
CIPs may also provide you with key coverage benefits, including consistency, breadth and length.
Everyone has the same coverage, limits and exclusions, so subcontractors can't lose their insurance in the middle of a project. This consistency can aid already tight deadlines and budgets.
Because insurers bidding on a CIP better understand the project, they may offer better coverage. A CIP also runs longer--beyond a project's completion--while traditional coverage likely ends earlier. Providing additional insurance protection also helps attract subcontractors, including historically disadvantaged contractors, to the project.
REQUIREMENTS
The requirements of a single insurance program, however, could potentially offset these advantages. These requisites include:
* More lime. While the insurance broker or agent takes the lead in analyzing the merits of a CIP and in administering the program, this approach requires a considerable amount of time.
* Deductible. Nearly all CIPs involve large deductibles and retentions, with the policyholder typically responsible for the first $250,000 or more of claims. While this allows the insured to directly benefit from the CIP's performance, it can deter those more comfortable with guaranteed cost programs.
* Collateral. The policyholder must post collateral or security equal to the estimated losses within the deductible or retention--a potential strain on finances.
* Greater expertise. An insured and its insurance agent or broker must have a detailed understanding of insurance and risk management to even consider a CIP, let alone tailor one to the specific needs of a project.
* Additional cost. With their dedicated safety resources, CIPs shift some of the costs otherwise berne by subcontractors to the general contractor, developer or owner.
MAKING THE DECISION
Potential policyholders and their partners next need to evaluate insurance and loss costs. This can be done by calculating the premiums for a CIP versus the traditional approach; factor in all experience modifications, dividends and other relevant items.
For loss costs, interested parties must compare the likely performance of the CIP's unified programs with those of each subcontractors stand-alone coverage.
A host of nonfinancial issues also must be considered. Stakeholders need to decide how each approach might impact such factors as worker safety, the project's delivery time and each partners' reputation and capital. Comparing the performance of CIPs and traditional insurance in these three areas can help an insured and its agent or broker select the best insurance solution for a midsized project.
MAKING THE MOST OF A CIP
* JACK PROBOLUS
Four best practices are critical to capturing all the potential benefits of a consolidated insurance programs, whether it covers multiple midsize, projects or one large job:
* Communicate, Regular communication helps everyone understand how the CIP works, what is expected of them and how they are performing. Use a mix of communication tools, from prebid and weekly safety meetings to awards recognizing safe work practices.
* Build a culture of safety. Remember that the fastest way to derail such a culture is to place other goals ahead of safety.
* Set safety best practices, Involving frontline workers in setting the best practices helps create the strongest standards and gain buy-in.
* Manage claims aggressively. The ultimate cost of an accident depends on an insurer quickly bringing the best resources to bear on the claim. Everyone at a job site must understand how to report a claim and how it will be managed.
@ On the Web
* Brokers' analysis of how the construction sector is fairing.
* Our exclusive industry risk report table, in downloadable form.
www.riskandinsurance.com
JACK PROBOLUS is CIP marketing director for Liberty Mutual for construction risks with annual premiums and equivalents greater than $1 million. He can be reached at riskletters@lrp.com.
INDUSTRY RISK REPORT CONSTRUCTION
There may be no more competitive field than construction. If
sheer numbers of competitors weren't enough of an issue, larger
contractors with international operations manage risks ranging
from foreign political unrest to volatile exchange rates. Savvy
construction firms depend on partnerships with other contractors,
many times their competitors, to win and manage contracts near
and far. But those partnerships raise yet another issue. What if
the partner underperforms?
Company Name Location CRO
Fluor Corp. Irving, Texas David Reid, Executive
Director, Risk and Insurance
Management
KBR Inc. Houston, Texas David Fox, Director of Risk
Management
Jacobs Engineering Pasadena, Calif. Robert Erickson, Director of
Group Inc. Corporate Risk Management
CH2M Hill Cos. Ltd. Englewood, Colo. John Rosenquist, Director,
Risk Management
Emcor Group Inc. Norwalk, Conn. Rex Thrasher, VP, Risk
Management
Shaw Group Inc. Baton Rouge, La. Steve Allison, Risk Manager
URS Corp. San Francisco, Joe Masters, General Counsel
Calif.
Washington Group Boise, Idaho Edwin Apel, Jr., VP, Risk
International Inc. Management
Granite Watsonville, John Gilliland, Director of
Construction Inc. Calif. Risk Management
Quanta Services Inc. Houston, Texas Diana Ostendorf, Director,
Risk Management
2006 Total No. of
Company Name CFO Revenue Employees
Fluor Corp. D. Michael Steuert $14.07 billion 37,560
KBR Inc. Cedric Burgher $9.63 billion 56,000
Jacobs Engineering John W. Prosser $7.42 billion 43,800
Group Inc.
CH2M Hill Cos. Ltd. Samuel Iapalucci $5.25 billion 23,000
Emcor Group Inc. Mark Pompa $5.02 billion 27,000
Shaw Group Inc. Robert Selk $4.77 billion 22,000
URS Corp. H. Thomas Hicks $4.24 billion 29,300
Washington Group George Juetten $3.39 billion 25,000
International Inc.
Granite William Barton $2.96 billion 5,400
Construction Inc.
Quanta Services Inc. James Haddox $2.13 billion 12,000
Primary
Company Name Broker Captives
Fluor Corp. Marsh Global Builders Ins. Ltd,
(Bermuda) Pinnacle Ins.
Co. (Hawaii)
KBR Inc. Aon; McGriff, No
Seibels and
Williams;
Wortham
Jacobs Engineering Withheld No
Group Inc.
CH2M Hill Cos. Ltd. Marsh No
Emcor Group Inc. Aon and Marsh No
Shaw Group Inc. Withheld No
URS Corp. Withheld Professional Insurance Ltd
(Bermuda)
Washington Group Withheld Broadway Insurance Co.
International Inc. Ltd. (Bermuda)
Granite McSherry and No
Construction Inc. Hudson
Quanta Services Inc. Withheld No
Company Name Risk Exposure:
Fluor Corp. The company identifies its telecommunications
and power market segments as being particularly
vulnerable to cyclical market forces. In
addition, the company bears the risk of cost
overruns in 26 percent of the dollar value of
its contracts.
KBR Inc. KBR has significant overseas operations and
thus is vulnerable to foreign political unrest,
changes in currency exchange rates and varying
taxation rates of local authorities.
Jacobs Engineering Jacobs bears the risk of cost overruns in about
Group Inc. 10 percent of its contracts. Approximately 35
percent of the company's revenues are earned
from overseas clients. Relevant risk factors
include foreign recessions, trade restrictions
and difficulties staffing foreign operations.
CH2M Hill Cos. Ltd. Operations involving engineering, procurement,
construction and design services.
Emcor Group Inc. EMCOR's chief property and casualty risk
exposures are workers' compensation, general
liability and automobile liability claims
arising from EMCOR's U.S. operations involving
mechanical/electrical construction and mobile
and site-based facilities services.
Shaw Group Inc. The company does a lot of piping work on a
fixed-price basis. As such, it has a difficult
time recovering costs on projects with cost
overruns. Shaw also enters into numerous joint
partnerships and is thus vulnerable to under-
performance on the part of its various partners.
URS Corp. A portion of the company's federal contract work
involves the transportation and destruction of
chemical agents and other weapons stockpiles.
URS is also vulnerable to claims in connection
with cost overruns, personal injury, property
damage, weather problems and unforeseen
engineering problems.
Washington Group Washington Group has seen an increase in the
International Inc. number of claims it has filed against project
owners because of cost increases due to changes
in project scope. In addition, shareholders of
URS Corp. and Washington Group will vote on a
merger proposal this fall.
Granite Construction Approximately 68 percent of Granite's 2006
Inc. revenues were from government contracts. The
company is subject to possible claims of civil
or criminal fraud stemming from violations of
government contracting regulations. Risks
inherent with using acquisitions as a growth
strategy include problems integrating workforces
and management becoming distracted from ongoing
operations.
Quanta Services Inc. Quanta performs a high volume of work in the
Inc. field of electric power transmission. As such,
it is exposed to a high degree of occupational
risk. The company has suffered fatalities in
the past and could do so in the future.
Company Name Risk Strategies:
Fluor Corp. Like many contractors, Fluor Corp. uses teaming
arrangements to compete for contracts it might
not otherwise be able to win. The company
maintains insurance both as a corporate risk
management strategy and in order to satisfy
the requirements of its contracts.
KBR Inc. The company uses first check estimates to
monitor the cost of projects throughout their
completion. KBR manages its currency rate
exposures through the use of derivatives.
Jacobs Engineering The company maintains insurance coverage for
Group Inc. various aspects of its business. It has elected
to retain a portion of its losses through the
use of deductibles, limits and retentions under
its insurance programs.
CH2M Hill Cos. Ltd. A company spokeswoman said the company goes by
the phrase "Be Risk Smart."
Emcor Group Inc. Emcor's key risk management strategies are: 1.
Reducing accident frequency through safety
programs and training. 2. Ensuring that claims
are properly managed to achieve timely, optimum
outcomes. 3. Transferring appropriate levels of
operational and contractual risk to third
parties. 4. Securing insurance to transfer
property and casualty risks at balanced levels
of coverage and cost.
Shaw Group Inc. Shaw limits its backlog estimates to projects
that it thinks will be completed within five
years of the date of its financial statements.
In 2006, the company became a signatory to the
World Safety Declaration, a global industry
commitment to workplace safety.
URS Corp. The company maintains primary and excess limits
totalling $125 million per loss and $125 million
in the aggregate for general liability,
professional errors and omissions liability and
contractors' pollution liability insurance.
Washington Group The company limits its backlog for government
International Inc. contracts to two years of forecast revenue to
account for the risk that government contracts
might not be appropriated. The company maintains
self-insured reserves for its various uninsured
business risks.
Granite Construction The company plans to focus on fewer projects
Inc. over a smaller territory to reduce the risks
of losses in its heavy construction division.
Granite also plans to diversify into both the
public and private sectors to mitigate risk.
Quanta Services Inc. The company maintains a high degree of
Inc. liquidity, with $383.7 million in cash and
equivalents at year-end 2006. Quanta also
maintains strategic alliances with customers
that contain exclusivity clauses or rights of
first refusal for certain types of work.
COMPILED BY DAN REYNOLDS FROM THE FOLLOWING SOURCES: HOOVER'S, RISK
AND INSURANCE MANAGEMENT SOCIETY INC. DATABASES; COMPANY FILINGS AND
REPRESENTATIVES.
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