Construction Today

Success Insured

Invest in proper insurance to limit your company’s liabilities and protect personal assets.

By Marie Demko

Most small and medium-size construction companies are inadequately insured. It’s easy to understand why, as most never consider their liability and exposure, and besides, no one likes paying for insurance. Owners would rather invest in more workers, bigger trucks, faster computers and other income-generating activities. Further, when budgets are tight, insurance seems like the best place to cut corners.

In today’s litigious society, a few dollars saved could cost owners their entire company, as well as all accumulated personal assets. Learn what your companys’ exposures and liabilities are and then invest in proper insurance accordingly.

Know what you need

Most construction companies carry workers’ compensation insurance, general liability and maybe an umbrella policy. Here is some information about insurance you need to know.

Workers’ Compensation - Companies dislike paying their workers’ compensation premiums and usually try to manipulate the law. For example, a project foreman in a steel erection company may be on-site every day, checking on progress and workers’ safety on floors from 1 to 50. But in the workers’ compensation records, he’s listed as a clerical manager. The company pays about 33 cents per $100 for a clerical office worker, versus $25 to $40 per $100 for someone who walks on scaffolding all year. If that foreman is blown off the 40th floor and dies, there will be an investigation and the company will be on the hook for insurance fraud.

Liability - Required by law throughout the United States, commercial general liability covers property damage and bodily injury. In addition, most construction and contracting companies need product liability because what they are building is a product. Remember that in the event of a catastrophic incident, everyone gets sued. For example, take a craftsman who fabricates expensive custom metal staircases. He installs a floating $100,000 staircase, someone walks on it and it collapses. The plaintiff’s lawyer will sue the company that made the steel, the company that put it together, the general contractor, the subcontractors and everyone else involved. The limit of liability is determined by who the user is.

Umbrella policy - Say the owner of a successful but under insured construction business drives down the street, collides with another vehicle and kills a child. The personal injury lawyers will go after his company because he was driving the corporate vehicle. They will go after him personally because he was not driving on business. A general liability policy of $1 to $2 million, depending on size - plus a $2 to $5 million umbrella to increase liability.

Vehicle insurance - Vehicle liability coverage in the range of $100,000 to $350,000 may be adequate for college students, but not for construction companies. Imagine what happens if a foreman who is driving a company truck hits a school bus and kills several children. True, if the company is small and owns little, the lawyers can’t take blood from a rock, but they will sue the company owners for everything they own personally. Every company should have a commercial vehicle policy with at least $1 million liability.

Errors and omissions - General contractors, who also handle design, need errors and omissions insurance, as well. If such a contractor designs and builds a structure that does not pass code, the client will sue and the contractor will have to tear down the structure and start over. Or, a company commits to fabricating a steel building at $20 a metric ton for the steel. Before the building is completed the price of steel goes up to $35 a metric ton and the contractor sends the client a bill based on this new price. The client sues, and the construction company had better have errors and omissions insurance to cover the error in representation.

What is the business really worth?

Knowing how much one stands to lose is an important first step in determining the level of coverage. Most construction companies, particularly small and medium-size businesses, are under insurance because their owners purposely understate their valuer in order to pay lower premiums. But ask that same owner to value the company for the purpose of obtaining financing or selling it and it’s going to be worth a fortune.

So what is the true value? Most owners really don’t know. When it comes to buying insurance, they look at the half-million dollars worth of sales they do a year and get a half-million dollars worth of coverage. That’s not even close. Ideally, get a professional valuation so that the limits of liability can be established for insurance purposes. If that’s not feasible, at least have a realistic look at the company and owner’s personal net worth and liquid net worth.

Get smart, get insured

During a recession the number of lawsuits increase because when people don’t have enough money they like to sue. For construction companies, any failure to produce the promised results in the established time frame may result in litigation.

Another consequence of an ailing economy is that construction companies try to cut costs by hiring cheap labor and providing work with insufficient supervision. That in turn leads to missed completion deadlines, as well as accidents and poor quality product. If it’s necessary to cut corners, at least don’t do so with insurance, or the business and everything the owner has worked for may be lost.