Whats in it for the Subcontractor?
I was at a subcontractors association meeting and there was a lot of confusion and complaining about these types of policies. Large GC’s and owners know these insurance products, but often the subcontractor does not fully understand them. The short article with explore some of the pros and cons from a subcontractor’s perspective. Unfortunately the sub typically only sees the con. The benefit for the subcontractor is usually the unseen benefit. Let’s explore some of each to obtain a fair assessment.
Project cost and coverage availability.
The typical CIP offers a 1-3% savings on the total project cost. As a sub, you have to ask, whats in it for me? This savings on a $100+ million job, may be the edge needed for financing, got your GC/CM the winning bid (which in turn has given you the ability to put your people to work), or any number of things that help put the shovels in the ground for the job. Sometimes it is not the cost savings but coverage availability that drives the use of a CIP. Often coverages can be negotiated in a CIP that can not be negotiated in a traditional policy. Multi-family construction typically has had some severe exclusions in the coverage recently which often times can be negotiated out with the use of a CIP, thus making the risk for the owner/gc much more palatable.
Rigorous Safety Programs.
Often a CIP has a rigorous safety program requirement. How often have you been on a job and just wanted to get off of it because of another sub that has a substandard safety program that puts you and your people at risk? Too often a sub with a great safety program has it compromised by other subs which do not have a good safety program. Most CIP sponsors will not award a job to a sub that does not have a good safety program, to begin with. Often, there is greater oversight on safety programs on a CIP project.
This is the area that provides a huge benefit all around. Any sub that has had to defend a 3rd party over action from an injured employee, never wants to deal with the double whammy of paying a claim on the workers comp side and being forced to defend the owner/gc through their own liability policy as well. This exposure is greatly reduced in a CIP. This is an area that the sub may not see as a soft cost benefit. If one of your people ever gets severely injured on the job and they lose the ability to sue the owner/GC because they are collecting workers compensation from them, the sub will have been saved from a third party over action suit. Workers comp experience will be reflected in the ERM, the sub will often be shielded from a liability claim.
Limits of Insurance
This is where the sub has no control and may leave themselves unintentionally exposed. Usually the limits purchased through a CIP are much greater than the limits of any one sub and often the GC. The difficulty is that the limits are shared by everyone. The limits can be eroded away through claims that have nothing to do with your work, leaving you to have little or no coverage. There is an endorsement to the general liability policy that can be purchased which will provide excess coverage for a CIP on a regular insurance policy. This is one of those areas in which price isn’t everything. Many of your less expensive carriers will not offer it (that’s why they are cheaper). If the sub can negotiate a “difference in conditions” on his/her own policy that adds coverage for a CIP on an excess basis, this is the best solution. Even though CIPs are often excluded from a sub’s (and GC) policy, I have found through my research that a carrier may be forced by the court of good public policy to step up to the plate.
Case study, The Tropicana Garage Collapse. (All knowledge of this claim was through research as thankfully I have no first hand knowledge of this claim) The OCIP limit on the project was $25 Million. The settlement in this case was the largest construction accident settlement awarded at the time for $101 Million (2006). The engineers, subs, and undoubtedly the GC involved would have never had enough limits on their own to pay this claim. $25MM was surely not enough limits. The engineers, the owner, the GC, and the subs involved all had their insurance contribute to this loss, even though the GC and the subs insurance carriers could have used the “wrap up exclusion” as a means to walk away from this claim. It may be very easy to surmise that this CIP did not have enough limits for this type of project. While, I agree with that statement, I would also offer that if a CIP did not exist at $25MM, all of the other insurances and indemnifications to the additional insureds would not have produced nearly enough limits to cover the $101MM settlement. It is in these ugly situations, where we actually see the benefit of the CIP. This is also where I offer a counter argument to those that believe buying higher limits will invite the larger lawsuit. This settlement was going to be $101MM not matter the limits available or it was going to go through an ugly trial and I submit it would have succeeded in having a change of venue to an equally liberal court and the verdict would have dwarfed this record setting settlement.
In summary, CIPs may be an administrative nightmare but don’t forget the hidden benefits that may be looming in the background when something goes wrong. Like a good safety program the benefits are often taken for granted because we only see what it costs us in time and money to implement. Like that safety program, take it away, and you will see the true cost of not having it. This is an insurance product, the benefits are not going to be seen until someone gets hurt.