Insurance Premium Blues...Help?

jcbdog

We're a turnkey framing contractor in Colorado. Up to now my premium assessment has always been based soley on my labor expense. After the last audit they suddenly decided to include our material expense as part of the cost as well. This new inclusion will take my premium from about 45k/year to about 140k/year and they want 96k for this last year now. I believe that this new inclusion is because they believe me to be a GC when I am in fact only a subcontractor though I am only getting confusion and silence back from my insurance company on this.

Though this would have always been a tough pill to swallow the slower residential market makes this particularly tough at this time. This will basically close the doors on a company that has done very well in the last five years and has been comfortably treading water in a slower market.

Does anyone have any thoughts, experience, or advice with this?

Floordude

Change insurance companies, pronto!

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eagleandbaby

You are talking about State Farm right?

jcbdog

No, I'm not talking about State Farm, they actually won't take someone who does business on our level. As for changing insurance companies, I will probablly have to but I will still be stuck with the 96k from last year as long as I maintain this company. My hope is that someone can confirm that the insurance premium is assessed differently as a sub than it is as a GC. I'm pretty confident that this is the case I just haven't been able to get anyone to confirm. I know that the GC is already paying liability based what he pays me. As that bill includes the material then he is paying liability on the material. That would stand to mean that if I'm paying liability on the material and the GC is paying liability based on what he pays me then the material is being covered twice. It doesn't seem to me that this can be correct. My insurance agent agrees that this doesn't sound correct but can't get anyone to confirm so that's where I'm lost somewhere in limbo but with a huge bill hanging over my head...

Bob Kovacs

The premium is based on whatever the policy says it's based on. Unless they sent you a notice that your premium basis was being changed (or they changed your policy when you renewed, and you didn't catch it- in which case you're screwed), they can't try to impose the new basis on past billings. If it's a new premium going forward, you can either accept it and raise your rates, or tell them to go scratch and find a new carrier.

Are you furnishing materials to the GCs, or just labor?

daArch

If the policy is only for workers comp, only labor payroll should be assesed at your state's and profession's rate.

If the policy includes general liability and covers loss due to fire, theft, natural disasters, etc, then they may consider your materials as assests. If you had a load of materials on site and it was destroyed, you'd expect it to be covered, right? If the materials are covered, don't you think the insurance company needs to charge a percentage of the value of the goods they insure? More materials = higher risk = higher premiums.

But you should clarify all this. I would talk to your state's insurance commissioner - if you are regulated like we in Mass are. Otherwise read the policy carefully and talk to your agent.

Sounds like are caught between a rock and a hard place, good luck.

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Putty Truck

I know the insurance companies are experiencing a higher rate of claims from people who are in dire straights. I've seen highly doubtful things happen in the last 3 months and it's not going to get better. As always, the cost of insurance claims, real and fraud, is passed on to us.

Grumpy

Simply change insurance companies if you don't like what you are gettting. Change your borker as well if your broker is unable to assist you with your needs. Ask your colleagues who they use and start calling.

jcbdog

The strange thing is that it's not really clear whether or not they can charge for our material use or not. Even they are confused. And as far as them covering a material loss, they specifically exclude it. They also specifically exclude paying for anything that I installed incorrectly. Truthfully, when you get through all the exclusions, I'm not sure what they actually cover. This isn't really new information but I've just looked at it as a cost of doing business. I AM currently looking for a new insurance policy but untill this situation is resolved I'm looking at $96k bill that is the difference between the 144k they now want to charge me and the $48k they had originally assessed.

Bob Kovacs

NO insurance policy covers what you install incorrectly- they cover ancillary damage caused by your negligence. For example, if you build a frame, and the house falls over, your insurance will not pay you to rebuild the house. Now, if you frame a house and it falls over and injures the neighbor's kid, your policy covers the kid's medical expenses, but you've still got to cover rebuilding the frame yourself.

thom

You don't give us enough information. What kind of policy is it? Is it WC? Is it Liability? Is it combined? How do you pay your labor (W-2 or 1099)? Who is responsible for paying for all lumber (you or the general)?

I'm a GC. I supply lumber, my framer supplies labor. He pays comp on his labor. If I pay a sub who does not have comp then I must pay the comp on the entire bill, including labor and materials. So, if my framer supplied materials and did not have comp I would pay comp on materials, labor, profit and overhead.

Liability is a function of the price of the work done. It will include the cost of materials. In fact, there is a lot of overlap here. Much of the work is covered by both the sub and the gc.

jcbdog

Thanks for the interest and some of the questions. For what it's worth this is regarding a general liability policy. Below is a copy of my letter to the agent that is above my agent. It may answer some of the questions that some of you have had and will at least open a window to my current argument.... I'm open to any thoughts.

(Name withheld)...,

Thank you very much for taking the time to read this and to contemplate our interpretation of this situation. Because I believe that our case is exceptional as a turnkey framing contractor, I appreciate the opportunity to explain our business practices and examine policy decisions that are vital to our ability to continue to remain in business. I understand you are very busy and that it is unusual to be dealing directly with the insured. Thank you.

I'm sure you are aware of the basics of our case. For the last five years we have been audited regularly, given all the information required, and have been assessed a yearly bill that started at about $2,800 and has grown to about $49,000. As our sales only doubled during that time the increase in premium was more a matter of a change in insurance pricing than our increased business. Our sales increased 100%, the insurance premium 2,000%. Though that was a difficult pill to swallow we regarded this as the price of doing business, adjusted some of our practices, and moved on. This latest assesment will increase our current premium an additional $96,000 which is almost a 6,000% increase in the last 6 years compared to roughly a 100% increase from our initial sales. This sudden change, combined with the much slower residential market, could very well put us out of business. To see those kind of increases there has to be a misunderstanding.

As I see it there are a few.
1. We are a subcontractor not a general contractor.
2. The general contractor is already paying liabiilty on the material and it would be redundant to have us pay for it as well. This would not only be redundant but would eliminate the advantage of using a company like ours. One of the primary advantages for a builder to use a turnkey framer and not buy his own material is that by being vested in the material management process the framer will be more efficient with material use and will therefore save the bulider money. We do save them money but only by one or two percentage points. If we, in addition to the builder, are now paying insurance on the materials this puts us at an immediate 3% disadvantage which will in most cases render our service worthless.
3. My buying lumber does not cause any additional exposure for the insurance company. If we were a labor only company and the builder was buying materials the cost of the materials would not be part of our policy premium assessment. My crews would however be working with the same material, have the same opportunity to improperly install that material, or to drop that material on someone or someone's property. The exposure then that the insurance company would have to potentially replace or repair a work would be the same. How then, with the exposure being the same, can our premium suddenly jump 300% just because we have another expense?
4. Payment for materials is excluded in our policy. In the exclusions of section 1 of our policy; parts J,K,M, and N, it is spelled out that materials and property used for the product are not covered. If they are not covered how can we be charged for them?


In addition to the material not increasing exposure to the insurance company, precedent has already been set that material is not part of the assessment. For the last 6 years we have been completely honest about our labor and material expense and material was never taken into account. Our entire business model has been based on this and there has been no reason to ever assume that that was a faulty conclusion as we had given all the information we had ever been asked for. To suddenly, with no prior warning, have an extra $146,000 bill seems to be the same as me suddenly deciding to charge $100,000 more for a house model I've framed at the price of $30,000 for the last 5 years. How could I expect the builder to pay for that?

I have tried to be concise but as you can see this is not nearly as "cut and dry" as it may have originally seemed. I would like very much to be able to sit down with you and discuss this in person before a bill becomes finalized. We have paid a couple hundred thousand dollars in premiums over the last six years without incident and I would hope that this would deserve personal attention before someone makes a decision that will destroy a good client.

Very sincerely yours,

jcbdog

For anyone interested in the continuing saga here is is. I spoke on the phone with the insurance broker yesterday who says that the insurance company is considering the case and has not actually issued a bill yet. Strangely enough it is truly debateable whether or not they can assess a premium based on our material useage and this is further muddied by the fact that they have a long history of ignoring material useage. Here's my most recent letter as a follow up to yesterdays telephone conversation.

I'm open to any thoughts, opinions, etc...

(name withheld),

Thanks again for taking time with this case. As you know this is a very difficult time for us.

One thing, however, came immediately to mind as a result of our communication and I thought it might help the insurance company to make a decision in our favor.

While a framing company will always provide labor they do not always provide material. The liability, however, to the insurance company is the same either way. This current additional $146,000 to our premium is based on a technicality of the structure of our company and has nothing to do with actual risk or exposure. Using a different structure there would be no additional material cost to assess.

For example:

1. The builder buys and manages their own material. There is no material expense to assess.
2. The builder buys their own material and pays the framer a management fee. There is no material expense to assess.
3. A separate company could buy and coordinate the delivery of materials. There is no material expense to assess.
4. The builder pays for materials with a two party check. Instead of Vanguard generating a material invoice to the builder, the material supplier invoices the builder directly. The material supplier then writes a cutback check to the framer for the difference. There is no material expense to assess.

Each of these are ways of structuring a company performing the same basic function but the insurance company would not assess based on material because there would be no material costs. Though material cost would not be part of the assessment the liability exposure would be the same.

My point is this; if insurance premiums are based on risk and exposure, and there are other business models that offer the same risk and exposure based only on labor expenses, charging us a premium based on material expense is only a technicality of our current business structure. It is not actually based on exposure or risk.


Also, it's been suggested that while it may be tough to have to pay this additional premium now, we are actually lucky that we didn't have to pay it before. I disagree and am extremely concerned that this sort of thinking will have a place in the decisions regarding our case. The issue is that we SUDDENLY have to pay this additional premium of $146,000 in retro and no warning. When our premium went from $2,800 to $40,000 per year it was difficult but still possible because we had a 6 month advance warning which allowed us to budget. In this case, we had no advance warning, we had no opportunity to change or adjust our structure of doing business. At a time when many construction companies are struggling to stay in business, an additional $146,000 bill will finish us. Had we been given the proper information we would not be looking at a $146,000 bill and the end of our company

Putty Truck

At that point in time, (the initial increase), I would have bailed, regardless of any circumstances that aren't specifically mentioned in the letter.

You didn't say where you are located, but in smaller towns, treachery is common. Getting a quote from someone who may be related to a rival is always a possibility here.

I change insurance companies at the drop of a hat. There is no need to be loyal.

Grumpy

I do agree since when the bad stuff does happen, the insurance company is going to look for ANY reason not to cover you. They don't care about you, why should you care about them? It's not like the nice guy whom you have built a relationship buying insurance actually has any say-so in what happens. He's just an insurance salesman.

I just got a 3% increase in my WC. It's a nusiance, but still the best quote I've got.

jcbdog

Unfortunately it's not as easy as just changing insurance companies. Four or five years ago there was a huge increase in claim in multi-family and production housing. At that time most of the big carriers dropped construction liability for trades like me and the handfull that were left decided they could charge whatever they wanted. Since that time things have leveled but they leveled at a rate that's very high in comparison to where they were several years ago. At this time there are only 5 carriers that will consider a company like ours and they are in the 50k to 90k a year range. My current insurance company has been the least expensive (though this has been somewhat of a joke after you read the policy that excludes almost everything) until they decided to assess their premium differently.

MWINE

I was about to close the doors of my company last year because of the outrageos premium they were trying to charge me. I'm based out of Florida and not sure if they are nationwide but I believe that my rep mentioned that they were. I have no upfront premium downpayment for general liability, it is pay as you go. I no longer have an audit at the end of the year because the GL is calculated exactly to the penny with my payroll. In addition to not paying the outrageous initial premium, they saved me about $8000 total for my workers comp and GL from what I was paying the year before. When I was referred to him, he said that if he couldn't save me money he would pay me $100, I'm not sure if they still do this but it's worth a try to mention it. The company is Construction Leasing Professionals and my reps name is Mike and his # is 727-953-5913.

jcbdog

The insurance has just come back with a $68,000 concession. While this beats the hell out of the original $146,000, and is now doable, it's still a lot more money. It also makes me wonder why a company in an industry that is not famous for making concessions would knock off so much money so quickly. Hmmmm....

MWINE

They thought that they could slide that by you. Funny how insurance companies think that they can do what they want and charge what they want and people will pay. After that episode I would leave that carrier no matter what. They are suppossed to be on your side and helping you, not taking advantage of you and stealing from you. Good luck with that. Seems like you're gonna have to watch them very closely from now on and this probably won't be the last time they try to pull something like this on you. Be prepared for more headaches from that company.

Putty Truck

Ask for more.