Insurance Review
Re-Examining Your Coverage Can Save You Money
by John Milne
These are difficult times in the homebuilding industry. Smart builders and developers are scrutinizing all costs associated with doing business and cutting wherever possible, which is the most responsible approach in this market.
While homebuilders crunch margins and reassess expenses, there are ways to cut costs that can have a positive impact on the quality of your project and the strength of your bottom line. These include re-evaluating fixed insurance expenses to determine more cost effective solutions, exploring the safety of yourmultifamily properties, considering going green to save you money and re-examining contractor and subcontractor contracts.
Re-consider your fixed insurance expenses.
Be sure you have adequate safety nets in place with your business or project insurance, and at the same time, look for opportunities to cut costs. You may be taking it for granted that insurance costs are non-negotiable, but that may not be the case.
If you're not sure how you can save, call your agent and ask for a new quote, and if they hedge, seek out other agents who specialize in homebuilding and development and get a new quote. Prices will differ from carrier to carrier, but a little legwork can save you more in the long run. Now is a good time to do some comparison shopping, and agents should be willing to be competitive.
Another savings strategy is to ask your insurance carrier about the possibilities of lowering your insurance limits. If there is no contractual reason for purchasing high limits, perhaps lower limits can suffice where appropriate. Also, keeping a higher deductible may help your company retain more cash flow throughout the month.
Also ask about package policies to replace individual coverage you may be purchasing to cover contractors or subcontractors. An owner controlled insurance program (OCIP), which covers all contractors, subcontractors and current jobs under development might better fit your insurance needs. While some might dismiss the higher up-front costs and leave it up to contractors and subcontractors to handle their own insurance, the OCIP covers all aspects of the project and manages payouts so that the entire process from construction to potential defect suits are covered.
Safety pays.
For homebuilders developing multifamily projects, consider how your property can become safer for occupants. Crime prevention training programs can offer savings for homebuilders and property owners who take safetymanagement training courses, community awareness training classes, undergo a security survey of the property and/or have employees and service providers to the property undergo background checks.
Once the programis completed, property owners can save asmuch as 40 percent on their insurance rates due to the effectiveness of the program, which lowers maintenance and repair costs and reduces liability on the property as well as lowering crime and safeguarding residents and property managers. It also makes the property more attractive, which could lead to faster sales.
Go green to make green.
Going green in the commercial property industry isn't just a trend; it's a long-term financial must for smart builders. New insurance programs offer the opportunity to save significant amounts on premiums if commercial buildings are LEED (Leadership in Energy and Environmental Design) certified or if the builders have taken steps to be more energy efficient.
LEED is not just a trend; 44 states, including Arizona, have LEED initiatives. These executive orders, resolutions, policies, ordinances and incentives ensure the future of building will be much greener. While investing in LEED certification at first glance may seem to involve more costs rather than taking some away, a reduced insurance premium can help offset initial costs, save money each month and reduce expenses significantly down the road.
Moreover, many energy saving strategies such as planting low-water landscaping, getting rid of wasteful sprinklers, switching to a micro-irrigation system, planting drought-tolerant grass and installing low-e windows can be done withoutmajor impact on the property's look and feel. Savings can be accrued through all of these rather simple efforts.
Build strong contracts.
If it's been awhile since your standard contracts between general and subcontractors have been reviewed, now is the time to do so.While it can be a daunting task, a little time spent reviewing can save your business money both now and over time. Strong contracts should include several key provisions to provide more cost-effective insurance protection for the developer or builder. These include:
Primary and non-contributory clauses-meaning the contractor's policy must pay before other applicable policies (primary) and without seeking contribution from other policies that also claim to be primary (non-contributory).
A waiver of subrogation. In the event of a claim, this is an agreement not to sue a third party who might be responsible for any negligence.
Hold harmless and indemnity agreements. Indemnity agreements provide that the culpable party bear the costs and expense for damages on a job site claim. Since the contractor does not have total control over the entire job site and all subcontractors, this protects them from being held completely responsible on a claim.
Mi casa es su casa.
Finally, it is vital that homebuilders and developers build with their own families inmind.Consider that the golden rule applies to everything you deem acceptable with your own work and your sub-contractors' work. From an insurance perspective, the builders who are able to do so diminish exponentially their likelihood of claims.
While it is wise to look for ways to cut construction expenses, homebuildersmust retain the proper protection.A crisis can be handled with ease and fewer out-of-pocket dollars with the appropriate insurance coverage in place.Without it, a small crisis can turn into a catastrophe, and that's something no builder can afford.
John Milne is Founder and Managing Broker of Sterling Grant & Associates, an insurance services company specializing in coverage programs for the construction, public transportation and entertainment industries as well as programs for LEED building projects and the company's own Sterling Crime Free products.
