Insuring Contractors

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E&O Communique - A publication of the Utica National Insurance Group Insuring Contractors?
Be Careful - It Can Be A Big E&O Headache

by Curtis M. Pearsall, Vice President, Agents' Errors and Omissions Department

With very few exceptions, most agents can count at least a few contractors among their clients. Unfortunately, this class of business probably accounts for more E&O claims than any other.

While the property coverages are easy to find markets for, when you get to the general liability and workers compensation coverages, coverage is not easily found. With the market beginning to harden, finding markets for contractors will grow increasingly difficult.

Some of the issues that you will probably face:

Due to the market availability, don't indicate to your contracting client that coverage is bound unless you have confirmation that it is.
Since this exposure can lead to significant dollars, many contractors, especially the smaller ones, like to "self-insure." Of course at the time of the loss, you can rest assured that they will try to argue that they thought you bound the coverage you recently gave them a proposal for. Make your documentation to the client very clear whether coverage is bound or not.
To save money, contractors may try to low-ball the payroll or receipts to get the premium down. Then when the account gets audited, they will scream that they don't have the money. You are then stuck with a potential uncollectible audit.
When you are marketing coverage for a contractor, be certain you know exactly what type of work the contractor performs. If the company is writing what they think is a carpenter only to find out through a claim being submitted that roofing is also being done, you may have a real problem. Get something in writing from the contractor detailing the type of work they are going to be doing. If you know that company is not interested in roofers, tell the contractor that up front and document your conversation.
Bonds. When something goes wrong here, big dollars are typically at stake. As you will note by the following claim, it is critical that you know the proper procedure, and the exact level of authority your agency has for bonds.

The claim against the agency was for failure to provide a performance bond as required by a contract. The agent was requested by a broker to provide an equipment manufacturer with a performance bond that was being required by the client's customer.

The agent responded that the bond limit sought was in excess of its bonding authority with the carrier. It was suggested that the contractor determine if the single bond could be replaced with sequential bonds of amounts within the agency authority. The broker advised that this could be done.

The broker then advised the client that the bonding could be provided. Upon being awarded the contract, the manufacturer was informed that the contract required a single bond for the total amount and that multiple bonds covering the job would not be permitted. Since a single bond could not be provided, the client's bid was rejected. The manufacturer then brought suit against the broker, agent and carrier for loss of business.

This claim could have been avoided. In this situation, as in other E&O defense, the documentation of agreements is necessary to establish the intent and understanding of the parties. It is important for a bonding agency to know clearly the requirements of the company and to communicate clearly any authority limitations when what is being requested is in excess of its bonding limits.

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