The Agent’s Starter Guide to Insuring Risky Contractor Business

Construction is a vast sector for the insurance world, which isn't surprising considering how huge the market is, with nearly 3.8 million construction businesses across the US, according to IBIS World.*

While those 3.8 million businesses come in various shapes and sizes, many insurance agents go after small and midsize contractors, including artisan contractors and smaller residential and commercial contractors. Why? Because agents get client referrals from local contractors and build their books of business from there.

Common Challenges

Sounds easy, right? Not exactly. Many agents find insuring contractors challenging for several reasons, including the hazardous and often multiple jobs they perform.

"Contractors don't necessarily fit into a nice little box we can all understand," says Brendan Hanley, director, Binding P&C Product Line Leadership at Markel, speaking on the RPS Change Insurance podcast. "There are variations due to the size and complexity of their work, so it can be difficult to understand the needs of a typical insured."

For example, contractors may have one or many employees. In addition, a business may be a new venture or an established firm with a 10-year track record.

"Making sure you can deliver a product that meets the needs of both these types of businesses can be challenging," explains Hanley.

Another challenge? When people hear contractor, they envision someone who might perform basic carpentry work inside a house, do some type of decorative molding, or replace outdoor windows — all of which is work that's easy to grasp.

"However, there are general contractors as well — individuals who may be performing some of those trades or jobs themselves and depending on others to do a portion of the work for them. There is much more complexity in the artisan contractor field when involving other parties," adds Hanley.

Although the artisan contractor market is generally a profitable business for carriers and agents, in some regions of the country insuring them can be more difficult. "This includes states out west and construction defect states such as Florida, Illinois and New York that are litigious, which is a concern for carriers," says RPS Southeast Region Vice President Laura Allen.

What's more, when accounts begin to exceed more than half a million in sales or revenue, they become more complex and involve more underwriting with a need for additional coverages of which an agent must be aware.

Another big risk? Inexperienced individuals who decide to get into the construction business. "We've seen, for example, some truckers decide to leave their industry because of high freight rates and the cost of gasoline and enter the remodeling business," says Allen.

Get as Much Information as Possible Up Front

To help address this laundry list of challenges in writing contractor's business, Allen and Hanley emphasize the importance of pre-qualifying accounts to help ensure contractors have enough experience, are correctly classified and fit a carrier's appetite.

"It's important to ensure that contractors, including those with new ventures, have at least six months of experience in their business trades, whether carpentry, window installation or roofing," explains Allen.

In addition, classifying accounts properly for quote/bind/policy issuance is critical. Contractors often take on many types of jobs or change the type of work they initially performed. Be sure to ask clients what jobs they can or will do when pre-qualifying an account so the rates and quotes are accurate.

"At the end of the year, during an audit, if a contractor says he has done 50 roofing jobs but was initially rated as a carpenter, an additional premium will be due," notes Allen. "It's best for agents to advise contractors on how their policies are being rated and to call if any changes arise in their work. This can easily be done with all the communication that takes place year-round with contractors requesting certificates of insurance for specific jobs."

Hanley reiterates the importance of correctly classifying a business and recommends doing an internet search of the account to learn more about the business and the services advertised. "This research is helpful for underwriting and classifying the business correctly. Also, be sure to understand what the insured's business looks like at policy inception and renewal," he says.

And pay attention to carrier appetites and underwriting guidelines.

"Understanding the guidelines for a class of business and whether an account fits a carrier's appetite will facilitate the quote/bind process," says Hanley. "Also, look at the carrier's value chain, value proposition and how a claim is handled to determine whether clients will be well served."

The Vital Importance of Speed-to-Market

The construction industry is dynamic, with many moving parts, and contractors often need a quote and coverage in place quickly to land a job. In the standard market, various online policy rate/quote/bind platforms provide the speed-to-market agents require to help their clients. In the Excess and Surplus (E&S) market, RPS provides an easy and fast online platform for agents to quote and bind coverage.

"Since most of the contractor business agents obtain is through word of mouth, if you can provide quotes, policies and certificates of insurance quickly, this excellent servicing will translate into more business," says Allen.

Not only are the relationships between the retailer and wholesaler key, but the ability of a carrier to deliver is also crucial in making the entire process work.

"Being quick to respond involves an insured going to a retail agent with a need and the retail agent working with a wholesale managing general agent to try to place the coverage. But you also need a product that can quickly respond to those needs," adds Hanley.

To sum it up, if you want to write more contractor business, remember these keys to success:

• Understand the account.
• Get as much information as possible about the risk up front.
• Keep up to date with changes throughout the year.
• Partner with specialists who understand the industry's nuances and offer the ability to deliver quotes quickly.