Claim Severity Is Outgrowing Small Trade Contractors

Prior to the last decade, it was common practice for insurance agents to suggest limits to insureds based largely on their company’s annual revenue. In today’s litigation and construction environment, however, revenue alone is no longer a reliable indicator of potential loss severity.

For example, a contractor generating only a few million dollars in annual revenue may believe $5 million in total liability limits is sufficient. Yet, a single catastrophic loss, severe auto accident, or construction defect claim can quickly exceed those limits and threaten the financial viability of the business.

Small trade contractors face many of the same risk exposures as their larger industry peers. They work on high-risk job sites, operate commercial vehicles and equipment, and assume similar liability on their projects. But one loss can quickly exceed the size of the business itself, especially as higher construction costs, labor shortages, and increasingly severe claims amplify costs.

If revenue is no longer an indicator of potential claims severity, agents and brokers must dig deeper to understand the full scope of an insured’s risks, operations, the type of work they do, and the liability they assume and establish limits that truly address their exposures.

The Precarious Risk Environment

Small trade contractors is a broad term that defines a wide range of businesses such as heating, ventilation, and air conditioning (HVAC) professionals; plumbers; electricians; and more. Each of these businesses faces different exposures based on the type of work they perform. However, there are three clear challenges raising the stakes for small trade contractors today.

Higher Material & Labor Costs. Contractors often agree to perform work at set amounts, but material and labor availability and costs can fluctuate during a project. Such budget pressures might encourage contractors to substitute materials or settle for less-skilled labor to balance costs and meet tight construction schedules. For small trade contractors looking to take on more jobs, balancing time constraints, budget pressures, and quality of work can be particularly difficult.

Auto Exposures. While small trade contractors operate fewer vehicles than their larger counterparts, even one employee driving to and from job sites leaves the business open to auto risk exposure. Bodily injury claims as a result of auto accidents can quickly exceed an entire contractor’s revenue. As the auto sector remains volatile and claims remain severe, contractors cannot overlook fleet risks alongside the work they perform.

‘Electrical, HVAC, plumbing, and other subcontractors could find themselves brought into litigation, left to accrue significant costs to investigate and defend a claim.’

Claim & Litigation Costs. Skyrocketing jury awards in recent years have exacerbated potential claim severity. Investigating and defending a claim has become costly. Construction defect claims, for example, can impact several parties involved in a project to determine who performed the work, when damage began, and how far it spread. Electrical, HVAC, plumbing, and other subcontractors could find themselves brought into litigation, left to accrue significant costs to investigate and defend a claim.

Insuring the Actual Risk Exposure

Agents and brokers looking to serve as resources for their small trade contractor clients must start by looking beyond the general overview of the insured, and work to understand exactly what they do and how they operate. The description of HVAC company, for example, is not enough information to assess risk exposure. An HVAC contractor that works exclusively in single-family homes has different risk exposures to manage than a similarly sized company performing work in commercial buildings.

Agents should work to understand where an insured operates, with whom they work, and how they perform work. How are labor and material shortages impacting operations? How are contractors keeping up with tight schedules? How does the insured vet subcontractors? Does the insured rely only on certificates of insurance, or do they review policies and endorsements? Agents should not be aiming to make their clients appear risk-free. Instead, agents should make sure the insured, agent, and carrier understand the actual risk exposures at play and the coverage in place to combat them.

Understanding the contractual obligations insureds are navigating can also help agents ensure their insurance portfolio aligns with their commitments. For example, an insured might agree in a contract to maintain certain excess limits without realizing subcontractors are expected to carry the same. If a contractor does not meet those requirements or appropriately transfer risk, they could be left responsible for any contract gaps.

While insureds cannot control rising costs or how a jury might view a claim, they can make their business more defensible in the event of one. That begins with establishing a culture of safety. Regular safety talks, documented procedures, and visible safety practices can prove that a contractor prioritizes safety throughout an entire operation. These practices do not begin and end on a contractor’s property; they extend to fleets on the road and employees on job sites. Safety talks, particularly around driving techniques, how to manage other drivers in the field, and more, will help ensure that culture of safety spreads across the entire operation.

Agents should advise that safety policies, practices, and discussions should be formalized, communicated to all employees, and documented for easily reference to address employee questions and any potential claims. This way, contractors who are pulled into litigation can prove a documented history of effective safety practices and paint a more accurate picture of how the business operates.

Smaller revenue does not necessarily mean fewer risks. Small trade contractors assume significant exposures by the nature of their businesses, the organizations for whom they work, and the vehicles on which they depend to perform their work. Agents and brokers who understand those exposures can help ensure the right policies and limits are in place if a major loss occurs.

Ciccarelli is the vice president of Amwins Brokerage New Jersey. He can be reached at chris.ciccarelli@amwins.com.