Daniel Frazee, Executive Vice President of Rancho Mesa Insurance, and Vice President of the Construction Group, Sam Clayton discuss important forms and endorsements in general liability policies.

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Director: Alyssa Burley

Producer/Editor: Lauren Stumpf

Host: Daniel Frazee

Guest: Sam Clayton

Music: "Home" by JHS Pedals, "Movin' Up" by Dan Lebowitz

© Copyright 2023. Rancho Mesa Insurance Services, Inc. All rights reserved.

transcript

[Introduction Music]

Daniel Frazee: Welcome, everyone, and thank you for joining us. I'm Daniel Frazee, Vice President at Rancho Mesa. Today, we're excited to speak with fellow Agency Principal, Sam Clayton, from our construction group. We're going to talk today about some important forms and endorsements inside general liability policies. Sam, thanks for joining us.

Sam Clayton: Thanks, Dan. Thanks for having me. Great to be back in StudioOne™.

DF: We're excited to have you. To get us started, let's get to know you a little bit better. Tell us about your family background, history with Rancho Mesa, and the work you do within the construction group.

SC: All right. I've been with Rancho Mesa for 22 years now. I was born and raised back on the East Coast in Philadelphia, Pennsylvania, graduated from Penn State and moved to San Diego, I guess, 23 years ago. And I've got two little girls, Lola and Elsie, ages 13 and 10. And they keep me busy. So, that's kind of my family background. And, as far as the construction group, you and I lead that, and we work with the other producers and helping them build their book business as well as our carrier relationships that we have.

DF: Good. I appreciate you sharing that. And good kind of quick summary. So, inside of that, let's kind of shift gears and dive into the reason we're here today. I think we'd like to talk about three key topics and/or terms that we both see within the construction insurance space. We'll start with kind of an overriding theme of residential work and maybe how it's defined within the scope of general liability underwriting. Can you expand on that a little bit for our listeners?

SC: That's a great question. A lot of times it's a challenging thing to understand because every carrier is different on how they view residential work. So really, as a policyholder, you've got to understand what is included and excluded under the residential endorsement. So, let's just kind of start out with what residential means. It's basically a structure that's intended for use or used in human dwellings, including but not limited to condos, townhomes, townhouses, villas, co-ops, master plan housing facilities, track homes, you name it. But, then there's some carve outs that the carriers will do depending on the type of work that you do. So, really you want to understand what that is. Are they willing to allow you to do new apartment work? Will they allow you to do assisted living facilities, naturalistic quarters or military housing? Hotels, motels? That's all going to be clearly defined in the policy. So, it's very important that you, the policyholder, know what's covered and what's not covered.

DF: So, maybe in the most simple terms, these residential exclusions, in a lot of cases, they're all they're all worded differently. Is that fair to say?

SC: Absolutely. Absolutely.

DF: Okay. And so, as a policyholder, if I'm going in and I'm reading it, I'm looking for exceptions, like you said, carve out. So, where the carrier might give back some coverage?

SC: Exactly. Exactly. And then, you know, also, you got to take into consideration some of this, the work that you're doing may be covered under an OCIP or CCIP. So, you know, like let's say you're building a new apartment building and it's a large project. That owner or general contractor may provide an OCCIP policy for that specific project. So, obviously that wouldn't be included in your practice policy. So, you really got to understand what is and what isn’t included.

DF: Okay. I know I think of that a lot. And the OCIP, CCIP, you hear those terms all the time. An underwriter said to me, it's really just a project specific policy, per your point.

SC: Correct.

DF: So, that's good to have that conversation. It feels like there's a lot of what we would call infill work. You know, a lot of that mixed use. You see the apartments on top of maybe a retail development on the bottom floor. So, that's a good example, right, of the type of work that our clients might get opportunities to do. But, they need to understand the scope of whether they're going to have coverage.

SC: Correct. And if they don't have coverage under their practice policy. Is the owner or general contractor providing an OCIP or CCIP for that specific project?

DF: Sounds good. Appreciate that summary. Let's move on to something we are familiar with, but I think many trade and or general contractors can be confused by, and that is a subcontractor’s warranty endorsement. Explain to our listeners what exactly this is and the importance of knowing how the warranty on your policy actually reads.

SC: Well, that's- it's very similar to the residential exclusion where it's- every carrier is different on the verbiage they use for their subcontractor warranty endorsement. Really, it boils down to, you got to do three things as the policyholder. You've got to have a hold harmless agreement between you and the subcontractor, you've got to be named as additional insured on their policy, and the subcontractors has to provide the same limits that you currently have under your practice policy. And some carriers, if you meet those three criteria, there's no dispute as far as coverage goes. Some carriers will do a higher deductible where, typically your deductible is $5,000. If you have this subcontractor warranty endorsement, that deductible could be raised to $25,000. Or the most challenging one is where the actual coverage is voided completely. So, it's very important that you understand, read and understand your subcontractor warranty endorsement as far as- so you know what's required of you when you're subcontracting work.

DF: So, just to kind of scale that back, if we're talking about the endorsement itself, really it pertains to generals and or trade contractors who are subcontracting work to, let's say, lower tier contractors and the issues that you're talking about are all centered around that lower tier trade contractor, right?

SC: Correct.

DF: Okay. All right. So, any recommendations for our clients and/ or prospective clients that they can do to maybe up level their controls when it comes to subcontracted work?

SC: Well, I think, you know, providing the underwriter with a copy of your subcontract agreement, as well as a couple sample certificates with the additional insured endorsements can help you as far as the pricing goes, because they understand that you have a contractual risk transfer program in place.

DF: Good. Okay. That's helpful. I appreciate that. I think we've talked about the residential space. We've talked about the subcontractors warranty endorsement. I'd like to kind of wrap up the conversation with some education on a term that that we hear a lot and obviously we're familiar with. But, that is the minimum and earn premium clause. You know, what exactly is the minimum and earn premium and how can contractors perhaps use it to their advantage when negotiating terms and pricing through their agent or broker?

SC: Well, it's actually called a minimum and deposit premium.

DF: Okay, alright.

SC: So, just to get clarification there and really what that is, is your policy. Let's say you have a rating basis of $5 million annually in gross sales. The insurance company is going to charge you a premium and if you go below that 5 million, you will not get any money back. Obviously, if you go over that $5 million, that final audit, they'll charge you for that additional premium. So, what you want to do as a trade contractor is try to negotiate a lower MND in the policy upfront. We recommend a 90% MND to kind of give us a little bit of a 10% cushion. So, when we do that, really what you're talking about is your break even cost for the annual cost per year instead of 5 million would be 4.5 million. So, it gives us a little bit of flexibility as far as getting premiums back. And, you know, we're heading into some unknown territory right now with the economy.

DF: Sure.

SC: So, it's very hard for trade contractors to project what they're going to do for the next 12 months as far as their sales. And they don't know how much of their work is going to be covered under OCIP or CCIP. So, by negotiating this upfront, this lower- this 90% MND can only have a positive impact on your insurance program.

DF: Good, good info. Appreciate you correcting me on that. Let's back up. If you're a contractor in today's insurance marketplace, what in your mind might be a first step that someone could take to learn more about their policies that are in place? I mean, you know, these policies are oftentimes 100, 100 plus pages, right? So where do they start to look? How do they begin to learn about these and other potential problem areas within their policies?

SC: First, I think you got to work with a trusted advisor and have them review the coverage policy’s terms and conditions and sit down with them and go through those different endorsements that could impact your program and then see what you can do to kind of negotiate better terms and conditions and make sure that you, you know, you have coverage for the work that you're doing.

DF: So really, separate of price, negotiating, you know, problematic exclusions and negotiating terms in general… Those are all things that are done separate of, you know, the work that your trusted advisor should be doing for you already, correct?

SC: Absolutely. Absolutely. And, you know, you know, we recommend, you know, working with your broker, 120 to 150 days prior to renewal, you know, getting an early start on it because the sooner you start, the better pricing you're going to get.

[Outro Music]

DF: Good. I like that approach and appreciate your time today. I know it's been short and sweet, but I think the information you've shared has been really helpful for our listeners and I think that's a wrap. So, we look forward to the next conversation. And thanks, Sam Clayton, for joining us.

SC: Thanks. Have a great day.

Alyssa Burley: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by StudioOne™. For more information, visit us at ranchomesa.com and subscribe to our weekly newsletter.