This article was produced in partnership with Economical Insurance
Client expertise blurb: Karen Surca of Insurance Business Canada sat down with Jim English (pictured below), senior technical specialist at Economical insurance and Steven Beeston (pictured top), technical specialist with Economical Insurance to discuss what to look for when assessing the risk of general contractors in commercial construction underwriting.
COVID-19 may have upended many businesses in the short term, however, for the commercial construction sector, things have not slowed down. The need for new construction has only gone up over recent years, with an increased demand for large-scale commercial projects to help fill the void.
Jim English, senior technical specialist at Economical Insurance, told Insurance Business Canada that this increased need for new construction does not come without some risk. Most specifically, there is a real need to have mechanisms in place by insurance providers to help differentiate one general contractor from another. This process remains a top priority for commercial construction underwriters.
This ability, English pointed out, to differentiate experienced general contractors from others also hinges on just how this information is obtained by insurance professionals working within the realm of commercial construction.
“General contractors are distinct from sub-trades,” English highlighted. “The first thing we would do (from an underwriting perspective) is get a sense of their operations. We will ask questions like how they manage their operations, what is their track record, their project experience, or what is their area of specialty. We will focus on the expertise that they are in,” English stated.
“We want to find out basically what these contractors are known for, and do they stick to the area that they are good at,” English continued.
The principals contracted on a particular commercial construction project are the key thing. Who is behind the contractor? This is what underwriters should be focusing on — the background and experience of the principals.
Relating to the focus on the principals behind the general contractors, English reflected on what history has taught him in past positions in the industry. One of the areas that he determined needs to be given special attention is strategic leadership.
One of the main drivers, English discovered, has been the systemic failure of general contractors to “have a good vision or plan. They simply didn’t have a game plan.”
To help address this issue, English explained that underwriters can look to the team or backbone behind the general contractor to help insurance providers understand just how prepared the construction team may be for a particular commercial construction project.
“Sometimes underwriters will look a little deeper and find that maybe the contractor hasn’t been around very long, but maybe the principals behind it are coming from different companies and will have a wealth of experience behind them. In other words, maybe their key personnel have key experience,” English stated.
A second piece to consider is the financial piece of the puzzle, Steve Beeston, technical specialist at Economical Insurance further illustrated. He explained that a top reason that general contractors fail is that they are simply not properly capitalized, especially during the COVID crisis. Having the adequate financial leverage to weather the COVID storm became a make or break for many commercial general contractors.
“The big piece or takeaway about the overextension of the contractor is that we have seen it so many times. I can say from my previous life, before coming to Economical, I saw this regularly,” Beeston reflected.
“It is what got contactors in trouble and what cost them their bond program. Once they were not able to bid on these types of jobs, they started taking on riskier jobs. Then it becomes a snowballing effect. If you start stretching yourself too thin, then you are not able to get the jobs you usually get. This means that you are just differentiating yourself in a negative way rather than a positive way, which ultimately makes it harder (for these general contractors) to find coverage,” Beeston elaborated.
To help get around the problem of financial overextension, commercial construction underwriters can help by looking at the historical revenue growth, or by assessing the fleet to ensure that the equipment is up to standard.
A third major area of focus for commercial underwriters is that of asset management.
“Good general contractors have vehicle use agreements in place with their employees that are using company vehicles. We will check to see if they have sound risk management practices, to help protect and manage the assets of the company,” English stated.
Of equal importance is claims management.
“We will look at the history of claims made. Has there been a frequency in the number of claims or the severity of claims? Claims management is a huge area to cover, but it does include the propensity to file a claim. Are small nuisance claims made regularly to be reimbursed or indemnified by the insurance company?” English said.
It follows, Beeston added, that another area that can help insurance professionals when differentiating between different contractors pertains to risk management. Simply put, how do the general contractors manage the overall risk?
“What is their loss control protocol or practices on a job site? Use of a good health and safety manual and the way they treat their human assets and protect their people all come into play,” Beeston explained.
By extension, insurance professionals should also be focusing on qualitative factors.
“This gets into the attitude of the contractor. There are tell-tale signs that you look for, such as ‘are they receptive to recommendations made by insurance professionals?’ Or ‘are they involved in a construction association and valued by their peers?’” Beeston elaborated.
Having a good relationship with commercial brokers forms the background of information gathering for commercial underwriters.
“Most (information gathering) falls with the commercial broker, but there are things underwriters can do above and beyond in terms of digging in and getting more information,” English stated.
“A good, savvy commercial construction broker is an asset to an underwriter. Claims can also give you useful information. A previous claim made can give you a lot of information because the adjuster that handled it has had direct interaction with the customer,” English further added.
Both Beeston and English agree that there are other information methods open to insurance underwriters, including company websites or having a conversation with colleagues in other areas such as loss control, claims, and speciality lines.
Regardless of where the information is collected to make insurance-based decisions, the goal for all parties involved is to help mitigate risk. Doing this will provide the groundwork to apply the appropriate insurance coverage for well-experienced, informed, and prepared general contractors to get down to the nuts and bolts of their construction operations.
Jim English is a senior technical specialist with Economical in Canada. He has spent his career working many years in the insurance, reinsurance, and brokerage side prior to joining Economical in February of 2021.
Steven Beeston is a technical specialist for Economical in Western Canada. He has spent most of his career working in construction risk for one of the largest global firms prior to joining Economical in June of 2021.
