You Wear It Well: Dress Codes in the Workplace

As the manager of a business, you want to focus on those things that drive success – productivity, innovation, performance, and strategy. As you work to grow the business, you probably do not want to deal with more mundane office matters. Sometimes, however, these issues can have a major impact on employee morale, and they must be handled well. One such issue is the employee dress code. It would be nice if all employees used common sense every day and wore tasteful, professional clothing. Taste and professionalism, however, can be in the eye of the beholder. It is likely that your organization needs some kind of guidance on appropriate dress.

If the organization has an employee handbook, it probably has a section on acceptable dress for the workplace. Is the policy too vague to be useful or overly specific? Does it comply with legal requirements? Does it require dress that is more formal than necessary given the amount of customer contact employees have? Does it allow clothing that is too informal for regular customer contact? If the answer to any of these questions is yes, consider updating it. If not, make sure that you are enforcing it. Also, it may be wise to periodically remind employees of the dress code policy. This will inform new employees and reinforce the policy with veterans.

The organization should enforce the dress code without partiality. Individuals and groups of employees should be treated equally. Federal employment laws and regulations permit employers to set employee dress codes and to treat men and women differently within social norms. It is acceptable to require men to cut their hair while not making the same demand of women. It may not be acceptable to require women to wear skirts or men to wear uniforms while not making equivalent demands of the other sex.

Be aware that federal and state laws protect employees from discrimination on the basis of religion. Employers must make reasonable accommodations to employees who want to dress a certain way for religious observance reasons. Some men may cover their heads or wear beards for this reason; women may wear clothing that almost completely covers them up; employees of both sexes may wear certain pieces of jewelry. Unless complying with these requests would pose an undue hardship for the organization, the employees’ wishes must be honored. Employers may refuse such requests if the clothing or style creates a safety hazard; in most other cases, they must make the accommodation.

On the other hand, the law does not require employers to allow workers to display tattoos and body piercing. Rather, employers are free to make business decisions about the display of these styles. Some employers may permit it for employees who seldom or never interact with customers. Others may permit it for everyone, especially if their customers frequently have tattoos or piercings. Still others may decide that it is inappropriate for their businesses in all cases. The decision is entirely the employer’s, based on the balance between business needs and the need to attract and retain good employees.

This is really what dress codes are all about. Every business projects an image, and how its employees dress affects that image. Managers naturally want to put their best foot forward with customers. At the same time, a good workforce is not easy to build and retain. A too-strict dress code will repel good job candidates and may cause valuable employees to consider leaving. Inflexibility may violate anti-discrimination laws and inspire workers to file lawsuits. It is in an employer’s best interest to develop a dress code that reflects well on the business and keeps employees happy.

Playing with Fire: What Will the Tenant’s Liability Insurance Cover?

Insurance companies, agents and buyers tend to focus on the major coverages within the Commercial General Liability policy: Liability for injuries caused by a business’s premises, operations, products or finished projects, and liability for property damage. However, for businesses that do not own the buildings where they operate, there is an often-overlooked coverage that could be very important. The policy declarations refer to it as Damage To Premises Rented To You, although it has traditionally been known as Fire Damage Legal Liability Coverage. It provides limited coverage for tenants who cause fire damage to rented premises.

Fire Damage Legal Liability is a “give-back” coverage. Coverage A – Bodily Injury and Property Damage Liability contains 14 exclusions — clauses that describe types of losses to which the coverage does not apply. The final paragraph states that the last 12 exclusions do not apply to fire damage to premises while rented to or temporarily occupied by the insured with permission of the owner, so it gives the coverage back from the exclusions. This means that, if the insured is legally liable for fire damage to premises rented or temporarily occupied, the policy will provide coverage for fire damage to premises in the insured’s care, custody or control, and fire damage resulting from release of pollutants, among others.

This coverage has several limitations:

* It usually has a limit of only $50,000 or $100,000.

* It applies only to the premises, not to contents such as furniture or wall coverings.

* It covers fire damage only, not water damage or other types of losses.

* It provides coverage only if the insured is legally liable for the damage. It does not cover liability the insured assumed under a contract.


These limitations can leave a business at least partially unprotected in a variety of situations. Some examples:

* The business’s liability for damage to a rented space is $200,000.

* The business is an auto body shop. While a car is being spray painted, a spark ignites the fumes and causes an explosion.

* The business rents meeting space in a hotel. A projector overheats, starting a fire that damages tables, chairs, easels, and a cart holding refreshments.

* The business’s lease makes it responsible for damage to the premises, regardless of cause. A nearsighted driver crashes his car into the display window.


In all of these situations, the insured will either have no coverage or insufficient coverage.

If these limitations could cause a problem, the business may want to consider some options. It may want to look at buying a property Legal Liability Coverage Form. This policy covers the insured’s legal liability for damage to property described in the policy and in the insured’s care, custody or control. An advantage of this is that it provides coverage for a variety of perils, not just fire. However, it does not cover liability assumed under a contract, so it still would not cover damage caused by the nearsighted driver. A regular property insurance policy will provide broader coverage, but it probably duplicates the landlord’s coverage and is more expensive than other options. The tenant may want to ask the landlord to remove assumed liability from the lease.

To determine which coverage options are best for a particular situation, the business should work with an experienced insurance agent. The agent can explain alternatives, give an idea as to their costs, and provide information about various insurance companies’ claim handling practices. Get the facts early – the time to find out about your coverage is before a loss occurs.

When Your Employees Date, Make Sure You Don’t Get a Courtroom Date

In the modern workplace, men and women work together for eight or ten hours a day; sometimes even longer. When people spend that much time together, it’s not surprising that occasional romances will bloom. Many people have met their spouses at work. Unfortunately, workplace romances don’t always have happy endings. When a couple in an office breaks up, the atmosphere can become, at best, uncomfortable and, at worst, hostile. Productivity can suffer as the ex-partners feud with each other. More serious, in some cases the firm may have a significant financial exposure when love goes wrong.

Relationships between two people of equal position in the company may not be cause for concern, but romances involving supervisors and their subordinates can expose the company to legal liability. Workers outside the relationship may detect favoritism toward the subordinate when he or she receives pay raises, promotions, or other desired rewards. Conversely, if the couple breaks up, the subordinate may be sensitive to any actions that smack of retaliation. In the worst cases, the subordinate may decide he or she is a victim of sexual harassment and take legal action against the company. The federal Equal Employment Opportunity Commission received almost 14,000 complaints of sexual harassment in 2008. Almost 30 percent of these settled in the injured employee’s favor, costing the employers $47 million, not including damage awards won through litigation.

Employers who wish to avoid close relationships with government investigators may consider several options, including:

* Not having an office romance policy. Firms who choose this option may emphasize anti-harassment and anti-discrimination policies instead.

* At the other extreme, some companies have outright bans on employee romances. While this may have some appeal, it can be difficult to implement because the forbidden behavior may be hard to define. Also, courts may not uphold such a ban.

* Some companies require employees who date each other to notify a company representative, such as the human resources manager, when the relationship begins and if it ends. This may protect the company from ensuing sexual harassment claims.

* Many companies have policies against spouses working for the same company or against employees supervising significant others, spouses, or other relatives. This can make it less likely that other employees will perceive favoritism, but the company must apply the policy equal to members of both sexes to avoid discrimination claims.

* Some companies actually require employees in a relationship to sign contracts. These agreements state that the employees have entered into a voluntary relationship, affirm that they understand the company harassment policy, describe how to report complaints, and describe acceptable and unacceptable behaviors.


In addition to adopting one of these options, employers can take some steps to reduce their chances of having to fend off sexual harassment claims. First, they should communicate to supervisors that relationships with subordinates should be avoided. They should create an environment where supervisors and other employees feel safe to report improper behavior. They should have policies against harassment and implement procedures for making complaints. They should take steps to end direct reporting relationships between romantic partners by transferring one of them, if possible.

Human nature being what it is, there will probably always be workplace romances. Thoughtful consideration and implementation of policy alternatives will help protect a company from potential resulting lawsuits. However, all the best precautions may still fail to prevent litigation, so all employers should carry employment practices liability insurance. An experienced insurance agent can provide advise on the available coverage options and companies. With preventive measures in place and risk financing in the form of a good insurance policy, employers can focus on their top priorities: Growing their businesses.

Three Ways to Transfer Legal Liability for Your Products

Whether you are a business bringing a new, exciting product to market or a 20 year-old firm selling the latest version of a successful product line, certain risks face you. Users of the product may suffer injuries or damage to their property. These accidents may stem from inappropriate use of the product, such as using a lawn mower to trim hedges. However, some products may be dangerous under normal use by untrained or inexperienced operators. Furthermore, vendors or contractors who sell or install a product may modify it or otherwise affect its performance. These changes can increase the chances that the product will cause injury or damage, and that can land the manufacturer in a courtroom. However, there are steps the firm can take to transfer the risks of financial loss from these incidents.

First, the manufacturer should require, as part of its contracts with contractors, that those parties name it as an additional insured on their liability insurance policies. If the contractor is at least one percent liable for the accident, the endorsement gives the manufacturer rights to coverage under the policy for amounts necessary to settle a lawsuit. Perhaps more importantly, it covers the cost of defending the firm against the suit. These costs are often substantially higher than the cost of the settlement. The contracts should require the other party to give the manufacturer certificates of insurance showing that the liability policies include this coverage.

Assume, however, that either the other party neglected to have the manufacturer added as an additional insured or for some reason the insurance company denied coverage under the endorsement. If the company pays for the settlement on behalf of its insured (the contractor), it has a legal right to try to recover its payment (subrogate) from the manufacturer or its insurance company. To prevent that from happening, the contract between the manufacturer and the other party should require the contractor to waive subrogation rights. The waiver of subrogation will bind the insurance company, preventing it from going after the manufacturer. The ISO liability insurance policy implies that the insured can waive subrogation rights at any time before a loss occurs. However, if the manufacturer wants no doubt as to whether a waiver applies, it should require the other party to add a specific endorsement to its policy, waiving the insurance company’s subrogation rights.

One commonly used technique for transferring liability is requiring a contract to include an indemnity agreement, also known as a hold harmless agreement. Such an agreement will require the contractor to indemnify the manufacturer for the costs of any suits resulting from that party’s work for the manufacturer. For example, assume Contractor A installs a turbine made by Manufacturer B in a power plant and the turbine malfunctions, injuring several employees. Under this agreement, A would indemnify B for the costs of the ensuing lawsuits. Contractor A’s liability insurance should provide coverage for this if it does not contain an absolute contractual liability exclusion. An experienced contract attorney can help develop the appropriate language for this agreement.

Because some of these techniques involve modification of insurance coverage, the manufacturer should consult with an insurance agent. Some insurance companies may require the manufacturer to have these techniques in place before they will offer coverage, while others may accept the account without them but may offer reduced premiums if they are in place.

Contractual arrangements are no substitute for providing a safe, quality product. However, since accidents are possible no matter how many precautions are taken, manufacturers are well advised to use these techniques to lower the chance of financial loss.

What We Have Here Is a Failure to Communicate: Improving the Claims Process

Occasional severe injuries are an unfortunate part of the construction business. When they happen, a contractor may be looking at a very large lawsuit and will seek coverage under its liability insurance policy. Undesirable side effects of liability insurance claims include disputes between the contractor and the insurance company. Bad feelings can begin with the claim notice from the contractor, build with a letter from the claim adjuster listing every policy condition that might mean no coverage for the claim, exacerbate when the adjuster balks at the defense attorney’s bills, and erupt during negotiations over a settlement.

A contractor cannot control a claim adjuster’s actions, but there are things that can be done to influence the adjuster’s behavior for the better, minimize areas of disagreement, and make the whole process a little smoother.

Claim adjusters find it frustrating when they receive initial claim notices that provide limited information. When giving the initial notice of a liability claim to its insurance company, the contractor should provide at minimum the following information:

* Basic information, such as the date and location of the loss, names of injured persons, nature of injuries, and so on.

* If the contractor has already hired defense attorneys, an explanation of its reasons for selecting that firm. For example, a particular firm may have significant experience defending contractors of the same type; the notice to the insurance company should state that.

* A statement of what the contractor expects from the company during the claim process. This should present several questions for the company to answer, such as whether the attorneys will act as the conduit for information between the contractor and the company, whether the company will hold an early meeting with the contractor to discuss the case, and the confidentiality of certain communications.

It is a good idea for the contractor to seek an in-person meeting with the claim adjuster within the first few months after making the initial notice. This meeting will separate the contractor’s claim from the dozens of other cases on the adjuster’s desk. It will facilitate exchange of information, introduce the adjuster to the attorneys, educate the adjuster about the case, and allow both sides to discuss their expectations for the claim process, such as frequency of updates and the payment schedule for the attorneys.

Even with a detailed initial notice and an early meeting, disputes between the contractor and the company may still arise. If the two parties can specifically define the issues, they can limit the disagreements and focus on producing a successful claim resolution. Even if they disagree on whether the policy will cover the claim, a specific description of each side’s concerns can help narrow the areas of disagreement and reduce uncertainty. Therefore, it is in the contractor’s interest to be specific about its questions and concerns in all communications with the company. This should give the company an incentive to be clear about why it might not cover the claim. Armed with this information, the contractor can more easily decide how to proceed next, whether that will be to mediation, appeals to the company’s management, litigation, or other alternatives.

During this process, the contractor should not overlook his insurance agent as a resource and advocate. Agents deal with claim situations on a daily basis and can provide valuable information on what to expect and ways to make the process easier. Workplace injuries are upsetting and disruptive; ensuing lawsuits are stressful and take a contractor away from his real business. Following these steps can reduce the amount of stress and help bring the claim to a conclusion that all parties can live with.

The Devil’s in the Details of an OCIP

With increasing regularity, construction project owners are creating Owner Controlled Insurance Programs to cover many of their loss exposures during projects. These programs, also known as “wrap ups,” are insurance policies that cover all construction and contractors working on the site. They allow owners to control the insurance program instead of relying on the contractors to purchase adequate insurance. In theory, owners pay less for the coverage “in bulk” than the individual contractors would pay on their own. Also, OCIPs often include an integrated owner-contractor safety program designed to reduce the frequency and severity of losses. Finally, with everyone covered under one program, questions over which contractor may have been responsible for a loss become irrelevant.

Contractors who have contracts for jobs involving OCIPs need to consider several factors. What firms, operations and locations will the OCIP cover? OCIPs often do not cover truckers, vendors, suppliers, and contractors doing high-hazard work like demolition. They may also exclude coverage for contractors below a certain number of employees or payroll. Does coverage extend to locations off the primary job site, such as storage facilities, fabrication sites, and staging areas? Does it cover contractors’ employees when they must travel off the site to obtain supplies, tools or documents?

Another consideration is when the program’s coverage ceases. If it provides completed operations coverage, how long will it last? Some OCIPs may provide coverage for up to three years after the completion date, but state law or contract indemnification clauses may extend a contractor’s potential liability beyond that. The contractor should verify that its own liability policy will supplement the OCIP.

A major issue is the scope of the OCIP’s coverage. It might provide liability coverage only, liability and workers’ compensation, or coverages in addition to those two. It will probably not cover automobile liability, so the contractors will need full coverage for this risk. Does it cover damage to the work and pollution liability? The contractors will need individual builders risk or installation floater policies and pollution liability coverage otherwise.

The adequacy of the insurance limits is another important consideration. The combination of the primary and excess limits should be high enough to fund any catastrophic losses. Do the limits apply separately to each location or to all locations collectively? Does the policy reinstate them annually or do they apply in aggregate to the whole project? How many parties (owner, contractors) are sharing the limits?

Because each contractor will continue to carry individual coverages for other work, it is important to determine how the OCIP will coordinate with them. The contractor should obtain assurance that the OCIP coverage will be primary and that its own policies will be excess. The contractor may also need difference in conditions coverage to fill in gaps left by the OCIP, such as property losses from flood or earthquake. The contractor’s insurance company should reduce its premium in recognition of the OCIP’s primary coverage.

The contractor also needs to consider whether the OCIP makes it responsible for any deductibles or penalties. Will the contractor be responsible for deductibles from all losses or only those for which it is liable? If it’s the latter, how will the owner determine which contractor is responsible? Will the liability question extend to “no fault” coverages like workers’ compensation?

Whenever an OCIP is involved in a project, the contractor should review the requirements very carefully and ask these and many other questions. The contractor should work closely with its insurance agent to ensure that any coverage gaps are filled and that the limits are adequate. OCIPs are an inevitable part of the construction industry today. Contractors who handle them properly can limit the financial risk they present.

Injuries May Be Catastrophic, But They Need Not Be Fatal to Your Construction Business

Construction can be dangerous work. The majority of injuries to workers and members of the public are relatively minor; the injured persons fully recover in short order. However, catastrophic injuries, while rare, can devastate a person’s life, cost enormous amounts of money, attract unwanted media attention, and harm a contractor’s reputation and business.

There is no single definition of catastrophic injury. Organizations may define it in dollar terms, such as an injury that incurs liability of $250,000 or more. Others may define it in terms of the injury’s severity – a broken arm might not be considered catastrophic, but a crushed or severed arm might be. Still others may define it in terms of a change in an individual’s earning capacity – an injury that prevents a person from working or reduces his wages for less than a year might not be considered catastrophic, but one that permanently reduces or eliminates earning capacity might be.

Whatever the definition, there are some things a contractor can do to effectively manage a claim. A few steps the contractor can take before an injury occurs may pay dividends later:

  • Plan ahead. Most construction businesses are too small to have their own risk management departments, so form a partnership with an insurance agent experienced in insuring construction risks and obtain coverage from a company with expertise in handling construction claims.
  • Form good relationships. Many companies that insure contractors are willing to have a meeting involving the customer, agent, loss control and claims staff. Take advantage of this and form good working relationships with the people who will respond to a severe claim. If the contractor uses a third party administrator for claim handling, meet in advance with the appropriate staff and get their contact information.

After a loss occurs, the company can do several things to manage the claim:

  • Work with the agent, insurance company, and others to evaluate the claim and prepare possible legal defenses.
  • In cases, where the contractor’s liability is clear, make quick contact with the claimant and the family. Work with the medical facilities to ensure that the claimant does not receive a bill.
  • Be truthful with the claimant, family, investigating authorities, and the media.
  • Begin the claim investigation as soon as possible to determine the facts and build a defense strategy.
  • In cases where the contractor’s liability is unclear, identify possible legal defenses. These can include contributory negligence on the part of others, no negligence on the contractor’s part, intervening causes, product defects, and others. Use these defenses to get the contractor dismissed from the case.

Good communications are the keys to successfully managing a catastrophic injury case – with the claimant and family, medical providers, insurance adjusters, and other interested parties.

  • Be prepared to answer the claimant’s questions or to find the answers. Frequent and meaningful communication with the claimant should assure him that the company cares about his situation. A claimant who feels that someone is paying attention to his needs is less likely to hire a lawyer.
  • Working with medical providers will keep the contractor informed as to the claimant’s progress, expected therapies and treatments, and projected length of disability.
  • Work with the insurance company and medical providers to minimize and resolve disputes.
  • Stay involved with the insurance company’s handling of the claim. The company’s goals might not be the same as the contractor’s.

No contractor wants to see someone harmed because of construction operations. However, severe injuries can and do occur on job sites. With careful pre-planning, proactive involvement after the fact, and prudent claim management, a contractor can do the right thing by the claimant and protect his business at the same time.

Don’t Let a Slow Economy Stop Risk Management

The recession that started in December 2007 has had a major impact on the construction industry. The demand for new homes has collapsed along with the general housing market. Owners of commercial projects have put them on hold, either due to lack of financing, cash flow problems, or lack of demand for the space. While surviving may seem like the top priority for contractors, a period of economic slowdown might be the perfect time to take steps that will plant the seeds for long-term profitability.

One step with an immediate payoff is using equipment more efficiently.  Are employees making unnecessary trips up and down ladders to retrieve tools and materials? Consider using scaffolding or scissor lifts, which will allow the worker to bring all necessary materials in one trip while also keeping him safer than a ladder would. 

Now may be an excellent time to review contracts with an eye toward inserting clauses to improve worksite safety. For example, you might want to require tools with safety enhancements, specific fall protection measures on scaffolding, footwear that meets a specific protection standard, or eye protection. Improved safety practices will reduce liability insurance claims and make the business more attractive to insurance companies, resulting in lower rates.

During a slow economy, you probably have downtime between projects. Use this time to think about how to improve safety on the next job. Meet with the general contractor to discuss ways to prevent accidents. Meet with the subcontractors who will bid on the work. Ask them about how they will prevent accidents from happening. Take their answers into consideration when you evaluate their bids.

Don’t forget training. A downturn affords you time you didn’t have before to train employees on safety, different types of projects (such as environmentally sensitive jobs), and more efficient work processes. When the recovery comes, you will be in a position to bid on more and different jobs and your safety practices will make you attractive to general contractors.

Along with training, consider replacing outside safety consultants with your own jobsite superintendents. Give the supers the training they need to effectively manage worksite safety. This will give you stronger supers, allow for immediate safety improvements on the job, and save money that would have been spent on consultant fees and higher insurance premiums.

Arrange meetings with the loss control professionals at your insurance company. Ask them to evaluate your worksites, provide training materials, or even to come in and discuss loss prevention with your workers.

If your safety record is already solid, talk to your insurance agent about changing to a loss-sensitive insurance rating plan. These plans, which normally apply to workers’ compensation insurance but can also apply to other coverages, adjust your premium based on your loss experience during the policy term. Very large contractors may want to consider a retrospective rating plan, which bases the final audit premium almost entirely on the contractor’s loss experience during the term. Contractors with sound safety practices stand to benefit enormously from this type of approach.

The economy will eventually rebound. When it does, the companies that were proactive during the slowdown will reap handsome rewards in the form of more contracts, higher revenue and greater profits. By investing in efficiency, safety and training, contractors will be poised for future growth. The economy is at a standstill; your business shouldn’t be.

U.S. Supreme Court Strengthens Employers’ Hand Against Age Discrimination Claims

The American workforce is growing older and the economy is struggling. These two factors indicate that, as companies lay off workers to cope with a slow economy, older workers who lose their jobs may increasingly take their former employers to court for alleged age discrimination. However, a recent decision of the U.S. Supreme Court may make it harder for workers to win those lawsuits.

Jack Gross, a 54 year-old claims administration director for a financial services firm, was reassigned in 2003 to the position of claims project coordinator; some of his duties were transferred to a person in her forties whom he formerly supervised. Because he lost some of his duties, he considered the move a demotion and sued his employer a year later, claiming a violation of the Age Discrimination in Employment Act of 1967. At trial, the judge instructed the jury that it must find in Gross’s favor if he proved that he had been demoted and that age played a part in the employer’s decision. The jury did return a verdict in his favor and awarded him lost wages. An appeals court reversed the ruling, saying that the judge’s instructions were incorrect, and Gross appealed to the U.S. Supreme Court.

On June 18, 2009, a divided court ruled against Gross. Writing for the majority, Justice Clarence Thomas said that a person suing for a violation of the ADEA must prove that the employer would not have taken the action if not for the person’s advanced age. The employer does not have the burden of proving that it would have taken the action regardless of the employee’s age, even when the employee has evidence that age was one factor in the decision. He also wrote that the ADEA requires the employee to show that age was the primary reason for a demotion, not just one of multiple reasons. He noted that Congress had the opportunity to prohibit considering age among other factors and neglected to do so.

Justice John Paul Stevens denounced the majority’s interpretation of the ADEA as “an unabashed display of judicial lawmaking.” Noting that the court had interpreted other anti-discrimination laws to prohibit discriminatory actions based partly on a protected characteristic, he said it was inconsistent and arbitrary for the court to apply a different standard to ADEA violations. He pointed to a previous decision where the court held that an action was illegal if discrimination against a protected characteristic was “a motivating factor” in the decision. Justice Stephen Breyer added that to apply the majority’s standard “is to engage in a hypothetical inquiry about what would have happened if the employer’s thoughts and other circumstances had been different.” The answer, he wrote, will often be far from obvious.

This decision should be good news for employers and their insurance companies. Employment Practices Liability Insurance policies normally cover employment terminations, demotions, decisions not to hire or promote, and denials of employment benefits based on factors such as age, sex, race, religion, sexual orientation, and others. This decision should result in fewer successful lawsuits against employers for alleged age discrimination, with a corresponding drop in payments under EPLI policies for these actions. While insurance companies will still incur the cost of legal defense, they are less likely to pay for judgments against employers.

Because the court based its reasoning on Congress’s failure to clearly prohibit actions based even in part on age, members of Congress may seek to change the law. Employers should continue to avoid any actions that older workers could perceive as unfairly discriminatory. If that proves to be unworkable, they should work with their attorneys and insurance agents to ensure that their practices are legal and their insurance coverages adequate.

When It Comes to Insuring Losses, Contractors Have Options

The commercial insurance market can often be a difficult place for contractors. The insurance industry goes through market cycles; companies that are eager to insure contractors today may have no desire to do so when their losses mount and the market tightens. Because of this uncertainty, larger contractors often consider alternative markets for financing their risks of loss. One alternative is a captive insurance company, which is created and owned by one or more non-insurance companies to insure the owners’ loss exposures. Other options include self-insurance (paying losses out of pocket) and insurance options such as dividend plans, large deductible plans, retrospective rating plans, risk retention groups and purchasing groups.

According to Business Insurance magazine, there were more than 5,200 captive insurance companies operating in 2008, falling into several types. Single parent captives are owned by one company. Group and association captives are owned by multiple entities. For example, groups of contractors could form captives to insure themselves and others. Businesses that cannot afford the capital requirements of a captive can “rent” one from an insurance company or reinsurer, allowing them to share in the risks and the profits. Captives often use what is called a “fronting” mechanism, where an insurance company or reinsurer issues and administers the policies and handles the claims, and the insured businesses pay for the losses. Captives may insure the risks of their major owners only, or they may also insure other organizations.

Large companies may choose to self-insure; groups of companies in particular industries may band together to self-insure the risks of the group. For example, in some states groups of contractors have formed trusts to self-insure for workers’ compensation losses. Companies may also choose to partially self-insure by purchasing a large deductible program (one with a deductible of $100,000 or greater per occurrence) for workers’ compensation. Retrospective rating plans, while still insurance policies, are closer to self-insurance in that the final premium includes the amount of the business’ losses during the policy term, subject to a minimum and maximum. Dividend plans are types of insurance policies that typically offer the business the chance of receiving a portion of the premium back via a dividend should losses fall below a specified level. Risk retention groups are groups of businesses in the same industry that have created an insurance company for liability coverage. Purchasing groups are groups in the same industry who band together to buy liability insurance from one insurance company.

Each alternative has advantages and disadvantages. Captives may offer tax advantages, they cut out the portion of the premium spent on insurance company overhead and profit, and they give the owners control over risk management. However, they must meet large capital requirements to comply with state laws, and fronting arrangements still require insurance company involvement. Self-insurance, large deductible and retrospective plans reduce premium costs, give businesses some control over their loss costs, and provide incentives for safe operations, but they can also be a drain on cash flow and their ultimate costs may be hard to predict. Contractors that can predict their future losses with reasonable accuracy may find these plans advantageous.

Since all of these options require contractors to finance at least some losses themselves, they should have access to significant financial resources before using any of them. Also, the options can be complex; a contractor should consult with a professional insurance agent to investigate each option’s implications for the business. Traditional insurance is no longer the only financial protection option available to contractors, but it would be unwise to jump into an alternative without learning the facts.