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Insurance Foresight: Parlez-vous insurance?

April 24, 2008
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My husband has the same answer for a question I have learned to ask less and less through the years. I ask, “You know what I don’t understand?” and before I get to the rest of my point, he interjects, “French.”



Similarly, insurance seems to be written in a foreign language for many. I hope the following “Insurance-to-English” guide helps you understand what you are paying for and helps you get the protection you need from this “foreign marketplace.”

Contract Liability

Many builders, contractors and owners do not understand the difference between the insurance needs for contractors versus consultants. Construction-work contracts require many coverage enhancements for risks to bodily injury and property damage that may not be necessary for design professionals such as land surveyors. For contractors performing construction work, the main risk is bodily injury and property damage to third parties--areas that are covered by general liability insurance. However, the main risk for design professionals is negligence in the performance of their professional services--an area covered by professional liability insurance. Therefore, when contracts define surveyors as “subcontractors” instead of “subconsultants,” a red flag should go up.

Nine times out of 10, contracts that surveyors work on do not mention professional liability coverage, when, in fact, they should. And too often, land surveyors are faced with costly and unnecessary general liability insurance costs after the work has been completed--when charging for these costs is impossible. As surveyors, you must make sure to negotiate the insurance requirements based on these differences before starting the work.

Surveyors should also not sign contracts that require insurance coverage they do not have. If you agree to perform under a contract that includes an insurance coverage you do not have, you may find yourself in a breach-of-contract suit with no insurance to back you.

One way to negotiate coverage and contract requirements with your client is to explain that you are a consultant--not a contractor bringing physical hazards (like excavators) to the jobsite. Excavators bring much more risk of loss from a general liability (property damage/bodily injury to a third party) perspective than do surveying instruments. You can avoid future costs by insisting on seeing the contract and insurance requirements prior to beginning any work.

Professional Liability

Professional liability, as previously mentioned, provides coverage for negligence in the performance of professional services. Policies should include “first-dollar defense” coverage where attorney fees are payable by the insurance company, not by you. Deductibles do not apply to defense costs in first-dollar defense policies. Separately, limits purchased should not be eroded by compensation for defense attorneys--commonly referred to as “defense outside the limit.” For example, if you have a $1 million limit and are sued for $1 million by a third party, you will not have the full limit of $1 million to pay the claim. Instead, you will have what is left over from the $1 million limit after paying attorney fees. Cost for these policies is based on your gross billings, so keep track of directly reimbursable items, such as expenditures on gas, hotels and materials (including monuments, copies of town records, etc.) for possible credits.

Many contracts require coverage for two or three years after job completion. If a job requires higher limits than your standard, make sure your fee includes the cost for this increase multiplied by the years required for that coverage. Here again, negotiating coverage requirements up front can make or break job profitability.

Because there is a gray area between general liability and professional liability coverages, it is in your best interest to have the same insurance carrier provide both policies. In one case, a land surveyor staked out a portion of a subdivision. The job was later abandoned by the bankrupt developer, and children from an adjoining subdivision took the stakes and used them as javelins. A young boy was severely injured. The general liability insurance carrier insisted it was a professional liability issue since the injury was a result of the negligence of the surveyor not picking up his stakes. The professional liability carrier insisted it was a clear case of bodily injury to a third party--a general liability issue. At the time of loss, the client was faced with two insurers fighting over responsibility while the parents of the small boy became more and more frustrated with the delays due to the finger pointing. Had the general liability and professional liability been covered by the same insurance carrier, the argument and delays would never have happened.

Property

Property coverage for field equipment should include a valuation clause that specifies “functional replacement cost,” not “depreciated or actual cash value.” While standard policies only allow for replacement of “like kind and quality” models, functional replacement cost would allow a seven-year-old total station (that is no longer on the market) to be replaced by a new total station with upgraded technology. Additionally, the limit of property coverage in your policy should represent the cost for new equipment. Make sure field equipment coverage does not exclude scientific instruments, fragile articles, glass or use while over the water (such as on a boat). Coverage should also provide for equipment rental while equipment is being repaired.

After making sure your equipment coverage is as comprehensive as it can be, discuss the costs with your insurance broker. Increasing deductible levels sometimes has a significant impact on premiums. Remember that the deductible applies per loss. If a van full of equipment is stolen, that deductible will only apply once for all of the equipment.

Automobile

Automobile liability limits should be at a minimum of $1 million and include maximum available limits for all coverages. If your policy includes coverage for uninsured/underinsured motorists, this limit should equal the limit for liability on your policy. Many states have severely inadequate requirements for minimum limits for auto coverage. This means that even though the person who hits you may have as little as $25,000 to pay for his or her mistakes, your uninsured/underinsured motorist coverage will protect you despite his or her inadequate coverage. Personal injury and medical payment coverages, which are typically a very small percentage of overall auto policy cost, should be at the maximum available in your state.

Commercial auto policies provide credits for good loss history, driver training programs and management controls such as the restriction of personal use of company vehicles. Question your broker as to the credits applied on your policy for these items. Land surveyors’ automobiles should be rated as “service vehicles,” meaning that the vehicle is in one location for the majority of the day. This classification rating allows for further cost reductions, as well. Auto deductibles should be reviewed at different levels to make sure you get the best pricing for physical damage coverage. For example, when a vehicle is more than 10 years old, comprehensive and collision coverage is generally not a good deal.

Workers' Compensation

Workers’ compensation coverage provides payments for lost wages and medical expenses due to work-related injury or illness. Coverage should include benefits for all states in which you work. If employees regularly work out of state, that state should be listed on your policy so you can receive that state’s benefits if needed. Coverage should be broad enough to protect the personal liability of owners for employees injured while working on, near or about navigable waterways. Merit rating for premiums less than $5,000 in most states and experience rating for larger premiums are available to reduce the costs of these policies. Remember that anyone you hire to work on your behalf (1099 labor included) will be considered an employee under the labor law, and you will be responsible for their workers’ compensation coverage if they do not carry it for themselves.

Employee Benefits

Payroll is not the only expense related to a company’s employee costs. To keep your employees from the charms of your competitors, consider the type of employee benefits you offer. Are employees covered for their livelihood by working at your firm? Is long-term disability and long-term care coverage provided to ensure that your employees’ families are safe in their homes if an accident or injury prevents your employee from working? With home foreclosures on the rise, families are in need of income protection now more than ever.

Far too often, an employer finds himself or herself in the difficult position of deciding whether to discontinue paying an employee who is out of work due to a nonwork-related illness or injury. If a long-time employee is faced with an aggressive cancer, for example, imagine how difficult it would be to tell the family that you just can’t afford to continue paying him or her. Many employers want to continue payroll, but this can do unrecoverable financial harm to the firm. The price of this scenario is much greater than the cost of providing long-term disability income protection for the entire firm’s employees for many years.

Group life insurance is another way to secure your employees’ loyalty by protecting their family’s needs. The costs for these employee benefits do not necessarily have to be on the employer’s shoulders. Giving employees the ability to purchase coverage as a group is a benefit in itself. Group coverage allows individuals the ability to purchase insurance at a significant cost savings. Frequently, people who would otherwise not be insurable on an individual basis are allowed to purchase insurance with the group. For example, while it is very difficult for someone with diabetes or sleep apnea to purchase long-term disability on an individual basis, the coverage may be readily available to him or her as part of a group policy.

Health insurance companies change their plan designs, marketing and rates quarterly. You can change plans monthly if you like. Rates are locked in for a year, but you do not have to stay with a plan that becomes more expensive than the rest of the market. This is an area that warrants frequent and consistent attention due to high deductible options, cost sharing and insurance companies trying to buy market share. Here again, employees can contribute toward the cost with the implementation of a section 125 plan, which allows employees to fund certain expenses, like health insurance, via payroll deduction on a pre-tax basis.

The insurance industry is presently in a soft market cycle, so I encourage you to take the opportunity to translate and interpret your insurance needs for comprehensive coverage and cost savings. As they say in France, voilà!

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