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General liability coverage pitfalls

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The last 12 months has seen improved general liability insurance rates and capacity from a carrier standpoint for firms engaged in the construction industry.

On average, the rate reductions have been anywhere from 10 percent to 20 percent over the prior year programs.

Furthermore, there are more insurance carriers actively quoting and placing coverage for construction related companies than in previous years.

The fact that rates are decreasing and competition is increasing does not mean the overall insurance product being delivered is providing the broadest coverage available for contractors.

Over the last 12 months carriers have offered renewal terms and/or policy premiums that are an improvement over an expiring program, but still have many of the coverage exclusions and conditions that can cause problems for a contractor down the road in the event of a claim.

The following exclusions and conditions are up for negotiation if a company's policy is adequately marketed:

Subsidence: Subsidence exclusion for a builder or contractor can be very dangerous and broad in the event of a claim. This exclusion will preclude coverage for a property damage related claim that is a result of settling and/or movement of land.

Generally, most contracting insurance markets will automatically exclude subsidence and, if not negotiating up front, this exclusion can prove to be devastating in the event of a subsidence claim down the road. The good news is the market is opening up to the point that competition is creating a situation whereby carriers must remove this exclusion to remain competitive.

Prior-works Exclusion: The prior-works exclusion included in most general liability can be very dangerous and change the coverage trigger of a general liability policy tremendously.

This, in our opinion, is an exceedingly onerous exclusion and can create major gaps in coverage if not removed. Basically, this exclusion will limit any coverage for work that occurred prior to the inception date of a given policy. As many well know, a construction related claim could occur over time and across multiple policy periods.

With this exclusion, a contractor is basically eliminating coverage for a claim that was a result of a past project, but is continuous and progressive over time. If negotiated and leveraged correctly, an insurance broker can effectively negotiate this exclusion out and broaden an insured's overall general liability insurance program.

Self-insured retention/deductible: Self-insured retentions or deductibles can be negotiated and reduced to a lower amount under current market conditions. Two to three years ago high self-insured retentions and deductibles were the norm. Now, as the competition grows it is important to evaluate and negotiate this issue associated with the policy to minimize the overall risk. In some situations, a contractor can reduce its self-insured retention/deductible upwards of 50 percent without significantly impacting premium.

Minimum earned/minimum and deposit endorsements: Many general liability policies contain minimum premium related endorsements that limit the amount an insured can receive back in premium, in a cancellation or final audit event.

Again, the market is competitive enough to negotiate more favorable terms related to minimum earned premiums. An example would include reducing or eliminating a minimum premium requirement in the event of a final audit that was less than estimated. This means that if revenue and/or payroll were underestimated at policy inception, premium will be returned at final audit.

There are many other endorsements and coverages to evaluate, but keep in mind that now more than ever it is possible to remove and/or amend endorsements to more effectively cover a contractor's operation. While it may not result in successful removal of certain exclusions and conditions, now is the time to start negotiating and implementing policies that better cover overall exposure.

It is important at this point in time to evaluate many different options and create a program that maximizes coverage because it can be very dangerous to focus only on price. The premium alone should not be the deciding factor in evaluating a general liability insurance option.

Brennan is a principal with Barney & Barney and is team leader of the firm's Construction Practice. For more information, call (858) 587-7404 or e-mail bbrennan@barneyandbarney.com.>

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