All commercial general contractors have unique risks and exposures. Partnering with an insurance agent or broker and securing coverage from a sophisticated carrier can help protect commercial general contractors in a number of ways.
What are the insurance needs of commercial general contractors?
As most of your readers know, there are coverages that offer liability protection for businesses, such as general liability, workers’ compensation, professional liability, and auto liability. Then there are coverages that help protect against physical risk, such as builders’ risk and property insurance. Some might consider adding a cyber insurance policy to guard against a cyberattack. Others might purchase a commercial umbrella insurance policy, which provides coverage that exceeds the limits in a primary policy. A new product Travelers is offering is Project Loss Insurance (PLI), which helps mitigate catastrophic project loss because, as we know too well, one loss of this nature may be enough to severely affect a company financially, or even bankrupt it.
Could you share the results of the Travelers review of construction surety claims?
Every year we review our 10 largest contract surety losses to try to understand where these companies may have failed with their businesses—in essence, what missteps they took that put their businesses in jeopardy. There are some consistent themes that stand out, most notably that one bad job can cause a contractor to lose their entire business and that companies with poor internal controls have a much greater chance of failure. The insights we obtain allow us to deliver actionable advice to our clients, provide better overall service and, as we’ve done just recently, introduce a new product geared toward protecting the longevity of a contractor’s business.
What is the PLI product? How is the product designed to mitigate risk of a catastrophic project loss?
From our surety loss study, we see too many times that one bad job can put even the best construction companies in a difficult financial position or, sadly, out of business. Projects can become problematic for a variety of reasons, such as a difficult owner, expansion issues, having the wrong team in place, subcontractors who don’t perform, and even mistakes made on bid day. To address what previously had largely been uninsurable risks, we created our PLI product, which provides financial protection when a large loss does take place.
How does the PLI product help contractors emerge from a loss rather than succumb to it? Could you give a real-world construction company example?
PLI is designed to offer enterprise protection for construction companies and the people who own those businesses. If a contractor sustains a significant financial loss on a project, it can greatly impair or even threaten the viability of the company. If PLI is in place, the company will still absorb a portion of the loss, but it will reduce the financial impact of that project while providing proceeds from the policy when it is needed most.
One claim we received involved a contractor who started a successful business more than 20 years ago. The firm took on a relatively modest-size job for $5.5 million, and due to several factors, including a bad superintendent and a challenging owner, the contractor ended up losing more than $3 million. The firm’s equity dropped significantly, and it was left with no liquidity to run the business. In addition, because the company had to devote so many resources to get the job finished, the remainder of its backlog was negatively impacted. If PLI had been in place at limits consistent with a company of that size, the contractor’s loss would have been approximately $1.3 million. This would have had a much smaller impact on the balance sheet, putting the company in a better position to continue to execute its business plan.
How does a commercial general contractor add this product to their company’s insurance needs?
It’s quite easy. Connect with an insurance agent or broker and ask for the PLI product from Travelers.
CLOSING THOUGHT
Contractors take on significant risk every day. There are so many facets of running a construction business, all of which need to work together for a company to prosper long term. How effectively companies manage the problems that arise day to day is how they sustain and differentiate themselves. PLI is a vehicle that can help a business deal with the unforeseen potholes that contractors encounter as part of their normal business operations. In addition, since many business owners have a high concentration of personal investment in their companies, PLI is there to help ensure those owners protect the nest egg they have spent a lifetime growing.
About the author:
Answers courtesy of Gregg Lyon, chief strategy officer for Bond Construction Services, Strategic Initiatives, and Product Management at Travelers. For more, visit www.travelers.com.
Modern Contractor Solutions, February 2021
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