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How Risk Control Saves Money for Alternative Market Programs
General Liability Residential Contractors

by Larry Bailey, CSP
ECS Risk Control, Inc. an XL Capital company (XLRC)

How does a residential construction GL group maintain a developed loss ratio of less than 40%, saving $10.0 million annually?

General Liability (GL) insurance coverage for Residential General Contractors and Artisans has been a losing proposition especially in states like California and Florida. Over the past nine years the number of claims related to construction defects in several states has risen to approximately 80% of GL claims. The remaining 20% of GL claims generally focus on risk transfer incidents and third party accidents. The few insurers left in these markets continue to emphasize traditional loss prevention efforts such as risk identification, construction safety, and contractual risk transfer mechanisms but have not had much success holding down loss ratios.

Over the past decade, plaintiff law firms in many states have capitalized on the lack of legally defensible residential construction quality assurance programs. Before the recent hard insurance market, many residential construction contractors have insisted that shoddy construction was not a problem and have blamed the plaintiff bar for the rising cost of GL coverage. When confronted with the need for improved quality assurance some in the building industry have resisted implementing proactive homeowner warranty programs for all new housing. Most residential contractors continue to rely on municipal building inspectors for quality control. Many don’t realize that municipal inspectors cannot be deposed as expert witnesses during construction defect lawsuits.

Given the growing cost of residential construction defects claims, a proactive approach has been developed by construction risk management specialists. This approach enables profitable underwriting of GL coverage for residential construction contractor groups. To be effective, Risk Control must be part of a team consisting of group managers, risk financiers, and claims managers. Working together they design and pro-actively manage residential construction GL groups. Groups using similar integrated approaches have maintained developed loss ratios of less than 40% for almost nine years in difficult markets that include: California, Nevada, Texas, Colorado, and Arizona.

To ensure the profitability and viability of residential construction GL groups, consultants typically use a combination of traditional loss prevention methods with proprietary quality assurance program standards that prevent GL incidents. Additionally, the group must continue to invest in developing, updating, and maintaining carefully tailored GL program support materials and tools for contractors and underwriters. These materials and tools help residential contractors develop and improve their own proactive loss control and quality assurance programs that are legally defensible.

Risk management consultants have typically been successful supporting residential contractor GL groups with:

1. trades-specific supplemental underwriting applications based on nearly nine years residential construction claims experience
   
   
2. pre-binding assessments and job site visits for every prospect
   
   
3. follow-up of recommendations to ensure compliance with program standards
   
   
4. pre-renewal surveys and jobsite visits to consult with insured and confirm ongoing compliance with program standards
   
   
5. additional scheduled surveys, site visits and training for renewed accounts
   
   
6. complimentary software for use by insured contractors to log and track contractors licenses, certificates of insurance and additional insured endorsements
   
   
7. training for contractor support staff in how-to properly screen for various types of additional insured endorsements
   
   
8. on-line document management systems accessible 24/7, allowing underwriters and authorized users to access consultant work products (surveys and site visits, recommendations, spreadsheets, and follow-up visits)
   
   
9. tailored program support manuals and materials that might include:
   
   a. GL Loss Control Manuals for general and artisan contractors
   b. Construction safety manuals (corporate)
   c. Supervisors construction safety guide
   d. Loss control consultant procedures manual and templates (for field risk control consultants)
   e. Program resource guides – quality assurance, peer review, risk transfer forms, contractual language and useful electronic templates
   f. Website access for additional construction loss control training materials
   
   
10. post claim on-site consultation and investigation services in support of claims administrators as required

Residential contractor GL Risk Control needs to be a pro-active win-win approach. Residential contractors can win by working with qualified consultants to develop and maintain legally defensible project recordkeeping systems, third party peer review and written quality assurance programs. In the process of upgrading their Risk Control systems, insured contractors avoid the indirect costs of supporting construction defects claims. Since GL claims are kept low this is a win for the risk financing organization. Fewer claims can equal future premium savings for group members.

How Much Might a Group Expect to Save with This Approach?

Groups who have implemented similar Risk Control programs for residential construction have maintained developed loss ratios of less than 40% for almost nine years.

Example: a residential construction GL group with $40.0 mil. in premium might typically have a developed loss ratio of 65% vs. a 40% loss ratio if they adopt the approach described in this article. This represents a savings of approximately $10.0 mil. annually over a traditional approach to loss control.

If you have questions about Risk Control and Alternative Markets please contact the author:

Mr. Larry Bailey, CSP
ECS Risk Control, Inc. an XL Capital company (XLRC)
Technical Services Manager
Ph 206-784-5604, fax 206-784-5605 (PDT)
e-mail baileyL@ecsinc.com