PRACTICAL TIPS FOR A QUALITY INSURANCE PROGRAM

Insurance products are like any other products you buy. To determine the nature or quality of a product, you can Google the reviews. However, for the contractor insurance buyer, insurance reviews are not available. If you Google insurance reviews, you will find many reviews on personal insurance. Not much is found on construction insurance programs.

As a buyer, you need to make sure that you have an insurance program that will be there for the catastrophic claim that could put you out of business or into severe debt if the claim is not covered. To achieve this, be sure to select an experienced insurance broker with a focus on designing and implementing comprehensive construction insurance programs. The program must be inclusive of all aspects of your operations. You will also have contractual obligations required by construction contracts that involve all lines of liability insurance and your program must interact seamlessly.

We picture the insurance component of construction losses as an inverted pyramid. The point of the pyramid is always on the contractor causing the loss. The weight of all of the upstream contractors and owners are pressing down on that point. When you are under all that pressure, it is not the time to worry if your insurance company can expertly handle the claim or whether they have the financial strength to pay the claim.

Insurance is not important today, but tomorrow it could be the only thing on your mind. Work with your insurance broker and ask questions before you buy the insurance product. What does the underwriter know about your operations? Is it part of the insurance company’s risk portfolio? Is the claim department familiar with the type of claims you might incur? Discuss your worst-case claim scenario. Run through the steps to settle the claim so there are no surprises if it does happen.

The financial strength of your insurance company is also important. New Jersey courts have declared insolvency on 104 insurance companies since 1970. As a safety net for claimants and policyholders, the Property and Liability Insurance Guaranty Association (PLIGA) Act was passed in 1974. The act provides the framework and rules for the guaranty association to settle the outstanding claims of the insolvent insurance company.

When an insurance company is declared insolvent, a liquidator is appointed. Their job is to review, assemble, and disburse the assets of the defunct insurance company which is now called an estate. The liquidator forwards all outstanding claims to PLIGA. The guaranty association then begins the claim settlement process utilizing a $300,000 cap for each claim. Claim loss adjustments and expenses are sent to the liquidator, who in turn provides the funds to PLIGA to pay the claims and expenses.

This process goes on until either all claims are settled or the assets are depleted. If there are assets remaining, then the unpaid claims exceeding $300,000 will be reviewed and additional dollars allocated. This is a simplified overview of the process. The

BY MICHAEL PUGACZEWSKI

actual process is far more detailed and can take years and even decades to complete.

The most obvious problem here is the short fall on the final claim value. For a catastrophic loss, $300,000 will not fill the ticket, and you will fall short on property reconstruction costs or there will be financial obligations for you to the third-party claimant going forward.

These are not the only problems you encounter. Occurrence policy forms respond to claims on the date the accident or loss happened. Down the road, if there is an incurred loss not reported to you of which you are unaware, and if it falls to a settled estate, you will not have any insurance to fall back on to defend or pay the claim.

For as long as you were insured by the defunct company, that period will leave you uninsured. The bankruptcy clause in your umbrella policy prohibits the drop-down clause from activating, which prevents the umbrella from covering claims up to the underlying policy’s limits.

Work with an experienced construction insurance broker and ask questions. Remember to ask for an A.M. best credit rating on the insurance company proposed. Over the long-term, quality always wins.

If you want to learn more about the Property and Liability Insurance Guaranty Association, check their website out at njguaranty.org. In addition to a list of the current New Jersey estates being liquidated, there is a list of companies in liquidation from all states.