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HOW TO AVOID THE SEVEN DEADLY TRAPS WHEN
BUYING GENERAL LIABILITY INSURANCE
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| And how you as a Contractor can finally
get the peace of mind you work so hard for! |
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| This report was put together
at the request of my clients . I have been talking about
the 7 Deadly Traps for years. Ten years ago,
this report would not have been necessary, but times have changed.
Ten years ago you could bid a job complete the job and move on to
the next job. Lawsuits happened just to the next guy. Insurance policies
were simple and life was wonderful… General liability insurance
has changed drastically in the last ten years and now there are traps…
not intentional traps, but changes in the industry that you have to
keep abreast of, which brings us to the 7 Deadly Traps ...
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Choosing The Wrong Agent or
Broker
As strange as this may seem, your biggest problem might
be your current insurance agent or broker. Not that he can't
do a good job, but if he does not handle Construction insurance
on a day to day basis, he is out of touch with a marketplace
that is changing day to day. Keeping up with the Construction
Industry is a full time job. If your broker is not Independent
he may not have the tools Available to do a good job. Non Independent
agents must represent one company only. He may not represent
the best company for your business. |
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Getting Caught
In This Trap Can Wipe out Your Entire Life's Savings
Construction claims made policies became popular
in the mid 1980's and have been around ever since. The promise
of these policies were lower rates, but at what long-term
damage? In some instances there is no cost savings. Claims
made policies for a contractor are the worst possible policy
you can buy. Let me explain: Claims made policies allow
you to make a claim on your policy only during the policy
year they are in force. Contractors have claims down the
road not in the same year as the project is built!
If you want to leave that company and go to
another company you will have to purchase additional insurance
to cover you for the next 10 years…that's right 10 years!
Why? Because the law allows customers to file a lawsuit
for construction problems up to 10 years after the project
was completed.
An example
You build a new room addition, everything goes well and
you and your customer are very happy with the final outcome…
4 years later your customer calls you and says that the
roof is leaking and water came in the house and ruined his
new $25,000 grand piano. He expects you to repair the roof,
the drywall, wallpaper, carpets and, of course, replace
the grand piano…
A-Claims- made policy will not allow you to
file a claim 4 years later unless you stayed with the same
company the whole time. If you intend to shop other companies
after the claims made policy expires you must make a decision,
since you cannot make a claim against a claims made policy
after the policy expires unless you buy extended liability
coverage called a "tail." The tail coverage extends
the period of time you can report a claim.
If you decide not to buy the "tail"
you will not be able to report a claim against the claims
made policy. ? And to make matters worse, some companies
do not offer the 10-year extension.
When your policy comes up for renewal with
a claims- made policy you must decide.
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- Do I leave the company and pay the additional insurance
for coverage for the next 10 year period or go without?
- Do I stay with the same company? Their prices on
the new year may stay the same or go up sharply.
- Do I switch to another company who has better rates
and coverages?
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This limits the marketplace for you, and makes
it harder to accept a better bid from another carrier. Claims
made policies may work in other lines of insurance, but
for Contractors they are a disaster. Take time after
reading this report to look for your policy and see if your
current policy is either an occurrence form or claims made...
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Insurance Company Rating
Insurance Companies are given
a grade, just think about the grades you received in high
school or college. A,B,C,D,F. Insurance companies are given
a financial report card by the A.M. Best Company.
An Insurance company with less
than an "A" rating can be a potential problem for
two reasons, 1. There is a risk of the company going out of
business and 2. If you work for the state, county or city,
they will usually not accept any company less than an "A"
rating. Also if you hire on as a subcontractor most general
contractors will not accept any rating less than an "A".
With some state government offices and general contractors
not accepting your liability insurance, you will be limited
to the type of jobs you can accept. If you do not know
your Company Rating feel free to call my office at any time,
we will be glad to look it up for you.
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Exclusions
First off let's get one thing clear….. All
policies have exclusions . You hear terms like
all risk, special form, comprehensive, full coverage
. Those phrases do not mean there are no exclusions.
In a contractors general liability policy all the exclusions
are listed on the first or second page of the policy or on
the second page of the policy. The problem is that they are
usually listed by form number, not
by name . In order to make sure you understand the
exclusions, look at the form numbers on the front page and
go find that form (by number) in the policy. Then read it
carefully and see if that is a problem for the kind of work
that you do. If you see a form number on the front of
the policy but you cannot find that form in the policy, your
policy is NOT COMPLETE! Someone
forgot to add that form to the policy when the policy was
put together. People make mistakes!
The exclusions are critical, when you get a proposal for insurance
the first thing you should look at are the exclusions.
For instance, if you are a concrete contractor and you do
house pads, if you have exclusion for foundation work in your
policy you have a problem. The worse thing is you will not
find out about your problem until you have a claim and it
is denied, by then it's too late.
Here is a list of exclusions I have found in many policies;
this list is by no means "all inclusive"
. Look over this list and see what exclusion would apply
to your operation. |
| DESIGNATED WORK
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| Most general liability policies automatically cover
a business for just about any type of work that it engages
in during the policy year. Let's say a sub's premium
is based on the carpenter classification. Although,
that's what he does 90% of the time, he may do a little
roofing, electrical, or plumbing work. Most policies
will cover him for this other work, and if he does enough
of it, they'll just charge him accordingly for those classes
of work at his year end audit. If an underwriter
didn't want to cover his roofing or electrical work, he/she
could use the designated work endorsement to exclude those
classes. This exclusion could be nasty.
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| INDEPENDENT CONTRACTORS
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| Claims arising out of: The acts or omissions of independent
contractors while working on behalf of any insured, or
the negligent hiring or contracting, investigation, supervision,
training, retention of any independent contractor for
whom any insured is or ever was legally responsible and
whose acts or omissions would be excluded .
If you use subs, this exclusion can be a killer.
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| ASBESTOS |
| No coverage for exposures to asbestos, asbestos fiber,
or any material containing asbestos or asbestos products,
including without limitation, the costs of asbestos removal
or damage in the course of effecting such removal (Very
common exclusion). |
| PROFESSIONAL LIABILITY
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| Claims arising out of the rendering of or failure to
render any professional services by you or any engineer,
architect or survey, or who is either employed by you
or performing work on your behalf in such capacity. Professional
services include preparing, approving, or failing to prepare
or approve maps, shop drawings, opinions, reports, surveys,
field orders, change orders or drawings; and supervisory,
inspection, architectural or engineering activities. For
example, if you make a structural change without the architect's
approval, there is no coverage. (Typical exclusion)
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| CONSTRUCTION MANAGEMENT
ERRORS |
| * See Professional Liability |
| CONTRACTORS WARRANTY
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| This means that if you hire subcontractors, you must
get a certificate of insurance from them. If you
do not, the amount of your contract with the sub will
be added to your payroll or gross receipts and you will
be charged. In other words you will pay for the
subs general liability. Some companies use a stricter
version of this. They require the sub to have the
same limits of insurance as you do. |
| FORMALDEHYDE
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| Claims arising directly or indirectly out of formaldehyde
whether or not the formaldehyde is airborne as a fiber
or particle, contained in a product, carried or transmitted
on clothing contained in or a part of: any building, building
material, insulation product or any component part of
any building. |
| X.C.U. |
| Explosion, collapse, and underground property damage.
Not a good exclusion for Grading, Excavation, Sewer, Plumbing,
Septic, and Fencing contractors just to name a few. |
| CLAIMS IN PROGRESS
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| * See Prior Claims |
| KNOWN LOSSES
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| * See Prior Claims |
| ROOFING |
| Some roofing exclusions are plain and simple.
NO ROOFING. Some are not as strict. You must
read the exclusion care-fully. Some roofing exclusions
say there is no coverage while the roof is under construction
or repair. For example: You tore off a roof, and
since the weather forecast called for sunny skies, you
decided there was no need to cover the roof overnight.
It rained. There is no coverage. Read all
exclusions carefully. |
| DEMOLITION
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| Plain and simple. No demolition! |
| SUBSIDENCE
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| Insurance does not apply to any liability arising out
of landslide, mud flow, earth sinking, earth rising or
earth shifting. |
| LEAD |
| Claims arising out of the actual or alleged presence
or actual, alleged or threatened dispersal of lead, lead
particles or products containing lead. |
| EARTH MOVEMENT
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| * See subsidence |
| NUCLEAR |
| Self explanatory |
| MULTI UNIT RESIDENTIAL
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| Any work in connection with the pre-construction, construction,
post-construction, reconstruction, exterior remodeling
or repairs of any multi-unit residential building. |
| CONDOS |
| No condos |
| TOWN HOUSES
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| No town houses |
| APARTMENTS
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| No apartments |
| EMPLOYMENT RELATED PRACTICES
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| Refusal to employ, wrongful termination, coercion,
demotion, evaluation, reassignment, discipline, defamation,
harassment, humiliation, discrimination or other employment-related
practices, policies, acts or omissions. |
| PRIOR CLAIMS
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| Claims that are in progress prior to the commencement
of this policy. |
| PESTICIDE, HERBICIDE
AND FUNGICIDE EXCLUSION |
| Not a good idea if you are a landscape contractor.
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| PRIOR ACTS
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| This is a very severe exclusion. This says that
any work you did prior to the policy date is not covered.
For contractors this can be a death sentence on all prior
work. 90% of all contractor claims occur after the work
was completed. |
| EXTERIOR INSULATION
AND FINISH SYSTEM |
| Exterior insulation and finish system means the design,
manufacture, construction, fabrication, preparation, installation,
application, maintenance or repair, including re-modeling,
service, correction, or replacement, of an exterior insulation
and finish system (commonly referred to as synthetic stucco)
or any part thereof, or any substantially similar system
or any part, including the application or use of conditioners,
primers, accessories, flashing, coatings, caulking or
sealants in connection with such a system when performed
by you. |
| POOL POP UP
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| The elevation of swimming pool due to high water table.
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| FOUNDATION WORK
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| Claims arising our of foundation work, including but
not limited to the design, specification, inspection,
construction, installation, repair, replacement, improvement
or reinforcement of any foundation or any part of a foundation.
Foundation means the entire substructure below the first
floor or frame of a building, including but not limited
to any footings, footing beams, piers, grade beams, pilings,
pilings or supports upon which the building rests. |
| If any of these exclusions or other exclusions in your
policy are a problem for you, one of three things happened.
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- You did not tell your broker that
you do this kind of work.
- You did tell your broker and he was
not listening.
- Your broker does not have enough knowledge
about construction insurance.
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In any case call your broker and explain the problem
and get it solved before a claim occurs, if your broker
can't help, find another broker.
By the way, I'm available at 1 (800) 888-2249. |
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Acceptance
We touched upon this a little
when speaking of company ratings, but there are many reasons
why governments, general contractors and more and more, smart
homeowners who will not accept just any certificate of insurance.
+ The Additional
Insured Endorsement. Most insurance companies will do an additional
insured endorsement. Some Insurance Companies charge for this
endorsement. But lately, many General Contractors have been
asking for specific endorsements. There are many kinds of
Endorsements with different language. The
CG 2010 11/85 has become the Additional Insured Endorsement
of choice . Many general
contractors and others will not accept any other certificate.
You must be very careful here as many companies will not offer
this exact endorsement. The companies that do offer this endorsement,
charge anywhere from $700-$5,000 or more. If the costs of
these new certificates are not in your bid you're losing money.
+ Primary Endorsements
– along with the above Additional Insured Endorsement, many
people are asking for primary endorsements, 95% of all insurance
companies have an additional charge for these as well, mostly
from $250- $1,000 each.
+ Waiver of Subrogation
– Another endorsement that has become popular. This is seen
more in Workers Comp but does come up in General Liability.
Depending on the Insurance Company, There is an additional
charge for this endorsement.
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Subcontractors
This one is potentially a
killer
I have seen dozens of companies go out of business
on this subject alone within the past 10 years. It's usually
your best friend or someone you were just trying to help out.
When you hire a subcontractor to do
work for you, he must carry General Liability insurance and
he must have the same limits of liability as you do.
For example, if you have a General Liability insurance policy
with a $1,000,000 limit the subcontractor that you hired must
also have the same.
What happens if your sub does not carry general liability?
The problem arises when your general liability company comes
and audits your books at the end of the year. If you do not
have a Certificate of Insurance for the sub, your general
liability company will add it to your payroll and You will
end up paying the general liability for the sub contractor
who did not buy it.
I can hear you now… It's not fair
…. fair or not, it's in the insurance contract. Let's
look at the insurance company's side on this subject. If there
is a problem on the job, whom is the customer going to sue?
He is going to sue the subcontractor and the General Contractor.
The insurance company has no recourse against the subcontractor
and must defend the entire lawsuit, while the subcontractor
walks away. Now, I do not expect you to have sympathy for
an insurance company, but, now you know how it works. Now
you know why I call it the KILLER that poses as a best
friend. You feel sorry for them – And you pay the price.
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ADMITTED VS. NON ADMITTED
COMPANIES
Admitted Companies are companies that are licensed in the
State of Indiana and contribute to the Indiana Guaranty Fund.
The Indiana Guaranty Fund is a pool of money set aside by
the State of Indiana. Everyone who buys General Liability
insurance in Indiana is charged a percentage of his or her
insurance premiums to go into the pool. This pool of money
is set aside to handle claims by people in the State whose
Insurance Company cannot pay their claims. The Indiana Guaranty
Fund will pay claims if there are no other companies to pay
claims and the insurer is deemed insolvent by the Indiana
Department of Insurance.
Non-admitted companies do not contribute to the Indiana Guaranty
Fund pool. If a Non-Admitted company goes out of business,
you have no recourse.
Non-admitted companies are not necessarily a bad deal. They
fill a gap in Indiana and provide insurance for the Contractor
business. However, if you use a Non-Admitted company (especially
one with a bad rating) you are probably asking for trouble.
Many general contractors and most large companies in the oil
& gas industry require their subcontractors to use admitted
carriers. Governmental subdivisions, municipalities, school
districts, cities, counties and especially the State of Indiana
will also normally require admitted carriers from their subcontractors.
Admitted carriers can easily insure 95% of all contractors,
and there is usually little or no difference in the cost for
the coverage.
Non-admitted carriers always charge fees and taxes, which
are shown on the declaration page (usually 1st page) of the
policy. Admitted carriers sometimes charge a fee but do not
charge any taxes. I urge you to look at your current policy
to see if taxes or fees have been charged. There is also a
notice on one of the first three pages that states:
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| This insurance contract is with an
insurer not licensed to transact insurance in this State
and is issued and delivered as a surplus line coverage
pursuant to the Indiana insurance statutes. The Indiana
Department of Insurance does not audit the finances or
review the solvency of the surplus lines insurer providing
this coverage, and this insurer is not a member of the
property and casualty insurance guaranty association.
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| I f your coverage is written with a Non-Admitted company,
it will limit the work available to you. You should ask
your agent or broker why you have not been insured with
an admitted carrier or find a broker or agent who can
place your coverage with an admitted carrier. |
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Thank You for taking the time to
read the 7 Deadly Traps Report.
You could be just minutes away from lowering your insurance
costs. Take the first step and apply now for a cost-free, no-obligation
quote within 24 hours and Remember, You can't save if you don't
compare. |
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