The Case for Caution in Construction Insurance Compliance
We’ve all heard that an ounce of prevention is worth a pound of cure. This was never more true than when we recently heard the story of an uninsured crane operator working in the streets of Manhattan. Apparently those tasked with making sure the contractor’s insurance was in order missed a few things. Fortunately there were no claims, but the error set in motion a cascade of finger-pointing, damaged reputations and terminated contracts for the service provider who said the contractor was in compliance when in fact he was not.
Although it is critically important to verify contractual compliance with any type of risk, construction poses a particularly thorny set of issues that require a high level of knowledge and attention to detail. And in a locale like New York City, with its regulatory complexities and unique labor laws, the need for specialized competencies and unrelenting vigilance is mandatory.
Compounding all this is the interrelated legal arrangements between property owner, general contractor and its subcontractors. The contracts between these parties, or their lack, are the driver of responsibility (and blame) when things go wrong. The property owner and the GC’s subs normally have no written agreement between themselves. Absent this privity of interest the contractual agreement between the GC and its subs control the assignation of any liability arising from their negligence.
Insurance compliance verification becomes a race to collect and examine a lengthy paper trail, often with legal counsel watching over the shoulder of the auditor. And of course, all this work is required to be done quickly, as more often than not time is of the essence - the job is about to start and delays only add additional costs and mounting frustration to the project.
So, what do you look for in this situation? At minimum, the following documents must be collected and examined:
- All contracts between the parties. Extract the insurance requirements specific to each.
- Read the insurance policies. Yes, the policies, there is no avoiding it. Policies may contain exclusions, sometimes not easily found, that could have a material effect on coverage. (That is what happened with the crane operator, the very task the contractor was performing was excluded from coverage.)
- Check the carriers writing the policies. Some insurance companies routinely exclude coverage that will affect special situations, such as third-party over action claims by workers.
- Verify the carrier’s A.M. Best rating.
- Make sure the proper endorsements are contained in the policy.
- Identify the class codes for the work performed and that they align properly with all other documentation.
- Verify there are no exclusions related to height limitation, multi-habitational, residential conversions or other unique conditions (such as torch down for cold apply roofers).
The control point is the auditing team. "Who checks the checkers?" is the threshold question. Auditors should, at minimum, be licensed insurance agents with P&C credentials. In addition, the CRIS designation (Construction Risk and Insurance Specialist) developed by IRMI (Insurance Risk Management Institute) will arm the compliance team members with further understanding of insurance issues specifically related to the construction industry.
Don’t be caught in a panic like the GC with an uninsured sub. Years spent building your business could be gone in a flash from one unfortunate failing to look carefully at what is necessary. Make sure your compliance process is tight and in order. Stay in close communication with the auditors and above all, don’t let anyone on the job site until they have been cleared for insurance compliance.
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