HOW TO LOWER YOUR GENERAL LIABILITY INSURANCE BY THOUSANDS OF DOLLARS! AN INSIDER'S GUIDE TO GETTING THE BEST POLICY AT THE LOWEST PRICE AVAILABLE

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1 HOW TO LOWER YOUR GENERAL LIABILITY INSURANCE BY THOUSANDS OF DOLLARS! AN INSIDER'S GUIDE TO GETTING THE BEST POLICY AT THE LOWEST PRICE AVAILABLE If you are a small contractor, you or your wife have to deal with insurance. If you are a mid size contractor, it s either you or you have a person in your office who will dothis chore. If you are a very large contractor you may have a qualified person in your organization who knows what they are doing and can ask the right questions, fill out the forms correctly and get the best price available. Regardless of your size, I am sure the following information can help anyone do their job better and cut the cost of their insurance. Even people who hate dealing with insurance. A few tips before we get started BEFORE YOU START SHOPPING Know your payroll figures for the next 12 months (best estimate) Know your sub costs for the next 12 months (best estimate) Know your gross sales for the next 12 months (best estimate) Percentage (%) of work subbed out for the next 12 months (best estimate) Number of employees for the next 12 months (best estimate) 2. DON'T DIAL THE PHONE WITHOUT THIS INFORMATION! YOU ARE WASTING YOUR TIME, AND YOU WILL NOT GET THE BEST PRICE. Be prepared to explain your operation in detail, make it easy on yourself, write out your operation in detail and fax it to the person giving you a quote. Do you have to sign a contract? Are you going to sign different contracts to work with different people? If you do, have a copy of the contract(s) handy and give them to the person you are asking for a quote. Do you have loss runs? Many people tell me, I have been in business for 20 years and never had a claim. Loss runs are what a company gives you at the end of your policy period and states what losses you have had in that policy period or it will say, No losses were reported in the policy period. That is how you prove you have not had a loss. This is very important. You should always ask for a copy of your loss history after a policy period. Okay, now let's see how insurance companies come up with those rates. Not all insurance companies rate the same way. There are many variations.

2 I get calls from contractors who want a quote. When I start asking them questions, they tell me, I don t want to give you that information, just give me a quote. Well, it just does not work that way. Insurance companies base their rates depending on a lot of factors, I need certain information to get them a quote. FAQs Just how does an insurance company come up with the rates it charges? Do different companies charge different rates? How can two companies base their rates differently and come up with the same rate? My Subs have insurance, why do I have to pay based on subs? What difference does it make how many employees I have? What have my sales have to do with anything? Why does the insurance company care how much I sub out? Smaller construction companies are usually based on payroll. Why, do you ask? The more payroll you have the more work you do, the more

3 you do, the more you pay because the more work you do the larger the risk of you having a claim. Payroll is a very important factor in rating. When a program is based on payroll, be very careful what you say. In contractors insurance, payroll means field payroll. Do not give the payroll for any office employees, including, receptionist, clerical or estimators. To make this simple, office employee payroll is NOT included in contractor s general liability insurance. Also!! State your payroll WITHOUT THE OWNER. Simply say my field payroll is $500,000 (for example) plus the owner. Why? Well for sure the owner is the highest paid person in the company, and insurance companies allow for this by making owner payroll a static number. (It s a static number, but each insurance company has its own static number, I did not say this was going to make sense) All companies are different, they rate the field payroll and ADD $25,000 (for example) for owner payroll, some add $15,000 for the owner, I have seen $10,000, $33,600 (don t ask where that came from, I don t know) There is no standard in the industry. So if you say my payroll is $600,000 (owner included) instead of $500,000 Plus the owner, you will overpay for your insurance! Reminder the payroll number is based on the next 12 months of payroll. If you have a project that is going to last 18 months, you do not have to give the payroll for the entire project, just the next 12 months! If your estimate was LOW, you do not get money refunded. The situation is completely one way. Again, be very careful what you estimate. Sales is sales, right? Well not really, it hits your books when you Invoice. If you invoice 60, 90, 120 days in advance, but the money does not come in. Then you have increased your sales by that amount! When the auditor comes in, he is going to see the sales, including invoices that were NOT paid to you during the policy period (12 months).

4 Remember to make sure your books are correct for the auditor and if you do not want to pay on sales during the policy period until you COLLECT the money, be careful what and when you invoice. Here is an example: Your insurance policy expires on You guessed that your sales for 2004 were going to be $750,000. It s November 2004 and you are already at $750,000. You have change orders for an additional $50,000 and you know you are NOT going to collect the money in If you invoice those sales, you will go over the $750,000 and have to pay more when the auditor comes in. The amount of sub costs you tell the insurance company makes a difference in what rates you can qualify for. Different companies have guideline limits. What does this mean? It means with some companies 25%, 40% 50% 80% is their cut off point for sub costs. Let me explain, you say you sub out 45% and that eliminates you from the company that has a 40% cut off point. That company you just (unknowingly) eliminated yourself from may have had the best rate, sometimes 25-40% less! I am not telling you to lie, I am telling you to NOT guess off the top of your head. (Remember what I told you? Be prepared) Study your financial statements, and make sure what you say is correct. Guessing can cost you thousands of dollars. Clients tell me, how do I know what my sub costs are going to be a year in advance? I agree, there is no way to tell, unless you have booked the entire years worth of work in advance and you have already figured out what you can do yourself and what needs to sub out (or you have visited a physic). So if you don t know, give it your best guess, if you have no idea guess low. It really does not matter if you guess low; you will have to pay the correct price anyway on the audit.

5 Some companies (very few) base general liability on how many employees you have. Full time and part time. This may seem like a silly way to rate an insurance policy, but some company s think this is the best way to go. It does not hurt to go this way, if it is to your benefit. Think of this as Minimum PER line item... This is an older way of rating, and it is not usually to your advantage.here is an example: Your company performs the following three trades: Carpentry Class $50 per $1,000 Your payroll is $100,000 = $5,000 Electrical Class $30 per $1,000 Your payroll is $100,000 = $3,000 Drywall Class $25 per $1,000 Your payroll is $100,000 = $2,500 Grand Total $10,000 Here is the problem. Your total payroll (estimate) is $300,000 and you paid $10,500 for your policy, but let s say at the end of the policy period you did not have $100,000 in carpentry you had say $50,000 in carpentry and your drywall was $150,000 stead of $100,000. It would seem you are even, your estimated payroll was $300,000 but not exactly broken down the way you estimated.

6 When the auditor comes in he will charge you $5,000 MINIMUM for Carpentry (even though you only did ½ of what you estimated, but he will hit you with $2,500 additional for the overage on the drywall. Making it a grand total of $13,000 even though your total payroll was a perfect guess. This is a bad game to play, because there is no way you are going to KNOW your exact payroll broken down by class A YEAR in advance. Stay away from this type of rating. Most insurance companies have different rates in different parts of Ontario. Be specific in your territorial explanation to the underwriters. This is an interesting subject, a subject you need to understand. Minimum Premium (MP) is exactly what it says; all policies have a MP, what does that mean to you? It really affects you in two different ways. A Company states their policy has a MP of $5,000. That means it will not sell a policy to anyone for less that $5,000. It also means if you buy the policy and decide to cancel the next day. You Still owe them the $5,000!

7 Here is an example: We are going to say that this policy is based on Sales! So you tell the company that your sales are $100,000. (Your best estimate) So the policy is written with $100,000 in sales for $5000. If you do $200,000 in sales you will owe another $5000 at audit time. If you do only $75,000 in sales it does not matter, you will not be getting any money back, Remember MP But, there is a better way to buy this policy! You should have asked what is the MP? When you were told the MP is $5,000, your next question should be how much sales would equal the $5000 MP? The answer might surprise you. It could be that the company would give you $200,000 in sales for the $5000 MP. Yes I know your best estimate on sales was $100,000, but why not get as much Sales as you can get. Since you already are going to pay $5000, get as much sales for your money as you can! As you can see from the example above, if the company gave you $200,000 in sales for $5000 instead of paying $5000 plus the $5000 audit, you could have had the policy for $5000! Saving you $5000. Insurance companies treat A/I s differently, some companies offer NO A/I s, some charge PER A/I and some offer a Blanket or a limited Blanket. Buying from a company that does not offer A/I s, can be a problem, mainly because it can limit you to the jobs you can bid on. If you must have an A/I and the company does not offer them you will have to pass up on the job, or cancel the policy and buy one that does offer A/I s. (See cancellations) If the company charges per A/I, you need to know what the cost is up front. This way if

8 you need to provide an A/I you can build it into your bid. If you know you are going to need a lot of A/I s, ask if the company will offer a Blanket. A blanket is insurance talk for unlimited A/I s in a policy period. The company will charge for a blanket, but the price is usually less than buying them one at a time, most of the time, a lot less. With some companies they will give you a discount on A/I s if you buy them up front, but limited, for instance, 10 A/I s for an additional $300. On smaller policies, you cannot negotiate the cost of A/I s, on larger policies, you can negotiate, make a counter offer on A/I s, sometimes it works, you have nothing to lose. Usually, when you purchase A/I s the waiver of subrogation is included in the A/I price, BUT sometimes it is separate. So do not assume, ASK! You do not want to be surprised! And don t forget, you want to make sure you know the cost (Up Front) so you can include it in your bids. Be very specific when explaining what you do. Keep in mind that even the most experienced broker needs to know what it is you do. It is very important that your policy has you classified correctly. If you say you are carpenter, but you really are a roofer, It will not do you any good to lie, why? Because many policies have an exclusion if you do not do what you say you do. So do not get caught.

9 This is a very touchy subject. Most insurance companies do an inspection AFTER the sale. Why? Well there are many reasons: 1. They want to see if the information the broker sent them is correct. 2. They want to see if you were lying. 3. They want to make sure they are insuring what they think they are insuring. 4. They want to see if you are working on projects they do not want to insure. 5. They want to make sure your payroll and sales and sub numbers were correct. If the inspection comes in different than the paperwork sent in by the broker, you may be cancelled... What to avoid in an inspection Do not guess! If you are asked your payroll and sales or sub costs and you do not have your paperwork in front of you, just say I don t have my paperwork in front of me. Call me back tomorrow and I will have the answers for you. Inspectors don t like that answer and they want to get the inspection over with quickly so they will ask you to just guess. Don t do it. If your memory is not good, and your numbers are way off, you will re-rated upward or cancelled. 2. Avoid bragging. Contractors say the damnest things, they say things like, I can build anything, Condo s no problem, tract homes, sure I can do that, Roofing no problem. And on and on. Well if the policy you just bought excludes condos, tract homes and roofing, you may be cancelled.

10 If you decide to cancel a insurance policy mid term, there are some things to consider: 1. First off, remember Minimum Premium, if you cancel a policy that has an annual minimum premium, you will still have to pay whatever the minimum is. 2. You will be subject to a short rate cancellation. A short rate from an insurance company means you can cancel but will be penalized depending on the time of cancellation in the policy term. Do you have a website? If you do, be very careful what is displayed on your site. Insurance companies search for sites. The go on the net and look to see if you have a site and they will look to see if you are doing things that are excluded in their policy. If you said you are a remodeler and your website shows a worker on a roof, they will rate or maybe cancel your policy midterm. Show exactly what kind of contracting you do to avoid confusion with the insurance company.

11 Sometimes we shoot ourselves in the foot. Detailed record keeping is critical when it comes to construction insurance. How we classify our people can make a difference of thousands of dollars in 2 ways. 1. We do not give the correct numbers to get a quote. 2. We give the auditor bad numbers and we get an increase in cost. If your policy is sold to you on spilt classes, for example, your company does carpentry and drywall, your insurance company will sometimes give you separate rates for each class. If you do not keep your payroll separate for these two classes, the auditor will throw all the payroll into carpentry, the higher class, and you pay more for your insurance than you should. Virtually all payroll is done by computer, and there is no reason you cannot keep detailed records of your payroll. Paying subs out of your payroll account will also distort your numbers and again you pay the price. Posting invoices ahead of time (as discussed above) can also change your sales number in favour of the insurance company. I was not going to talk about workers comp in this report, but If you ordered a waiver of subrogation, your payroll must be spilt by JOB. Or you will over pay. Keeping detailed payroll, sub costs, and sales is extra work, but well worth it.

12 If you do not already know, The Higher the deductible the lower the rate. Very simple, but I still see people with $500 and $1,000 deductible policies. Raise your deductible to $2,500, $5000 or $10,000 and see what the difference in cost is. You may be surprised at the savings. It is my experience that most contractors do not turn in small claims. So use your good judgment when determining what your deductible should be. Can you negotiate with an insurance company? The answer is yes and no. What items are negotiable? The price Ask for a lower rate. Additional Insured Endorsements The quote you get from the company will not always spell out how much the A/I s cost, but the cost is in there. Ask them to give you the A/I s at no cost. If they do give a separate line item for A/I s ask them to be removed. Ask them to lower the deductible at no additional cost. If there is an exclusion in the policy you do not like, ask them to remove it, at no

13 additional cost. For larger contractors (usually $100,000 and up), ask for tiered rates. An example of tiered rates: Your gross receipts are $5,000,000 and the policy cost is $100,000. (A $20.00 rate) You are pretty sure you will do the $5,000,000 but you have been biding on larger jobs. If you are awarded those jobs, you sales can go up to $7,000,000. Make a counter offer Offer to pay a $20.00 rate for the first $5,000,000 in sales, $18.00 rate from $5,000,000 to $6,000,000 and a $15.00 rate for $6,000,000 and up. When you make this type of counter offer, you must say, If my terms are met, I will buy. No maybes'. If they accept your offer you will take the policy... If you make the offer in that way, you have an excellent chance that they will accept. Keep in mind, rates are not carved in stone. If your account is a good account with low losses, you can make a counter offer. They do not have to accept it, but what have you got to loose?