Insurance & Bonding
Agents say good recordkeeping is key to lower rates, getting bonded

By Sam Barnes and Martin Schwartz

It was supposed to be the best year for the insurance industry since the turn of the century.

Financial results for the first half of 2004 were among the best in 50 years, according to the Insurance Information Institute, a New York-based information and analysis organization.

But the arrival of four hurricanes all but assured that the second half of 2004 would be one of the worst on record.

In Florida, approximately one in five homes was damaged, bringing an estimated 15,000 insurance company claims adjusters from across the U.S. and Canada to cover 30,000 sq. mi. in the state.

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Despite its severity, the catastrophe should mean surprisingly little to contractors in Louisiana, say state insurance professionals. The insurance market is expected to soften in 2005, resulting in lower premiums and a stable deductible rate.

Louisiana insurance and bonding professionals were recently asked to discuss the future of their industry and its potential effects on the construction industry. Following are their responses.

Do you expect the insurance market to continue to soften during the next few years?

Barrett Fisher, Hogan Agency Inc. of West Monroe: Yes, I expect a continuing softening of the insurance and bonding market is ahead of us. I have been through four previous market cycles. As surely as night follows day and day follows night a soft market always follows a hardened market. And then in turn we go back to a hardened market and do it all over again.

That is not to say that some segments of the market will not remain tough. The general liability market for any residential or habitation exposure such as houses, apartments, hotels/motels etc. is improving but it remains essentially a hard market due to construction defect claims. This will eventually change, but not in the foreseeable future.

Cathy Grace, C. P. Grace & Associates Inc. of Baton Rouge: I think pricing for general liability, workers' compensation and auto insurance will be better in 2005. The rates seem to be leveling. I think the insurers are being selectively more competitive.

Craig Tappel, Hibernia Insurance of Metairie: On average, liability rates appear to be adequate. The outlook for investment income is positive. On property, we will not know the long-term effects of the Florida hurricanes for several months. Future pricing will depend on the reaction of the reinsurance market and any catastrophes that occur in 2005.

What are factors affecting the market?

Grace: The economy is still not quite where it should be. Also, low yield on investments and the continuing need for insurers to build reserves and strengthen overall financial conditions are factors likely to moderate any drastic rate decline.

Tappel: The restructuring of broker compensation agreements and potential federal or state legislation will affect the insurance market in 2005.

Fisher: The hurricanes in Florida have definitely affected the market for insurance if not also for bonds. In fact, it is my belief that these storms probably delayed us getting into a full-blown soft market. Of course I can't prove that, but I do think the idea has merit.

Construction defect claims are definitely driving the market for general liability with any residential/habitation exposure. The market for contractors with habitation/residential exposure is very tough. All of the carriers either quit writing or excluded this type of work from their policies.

These few companies that do write it demand tons of information and generally get more money for their coverage. Reinsurance also affects the market. We have had more players come back into the reinsurance market since the Sept. 11, 2001, departure. More players mean more capacity and better terms.

What can contractors do to improve their premiums?

Tappel: Partner with a competent broker and review all of your loss runs in detail six months in advance of the renewal. Also, develop a renewal strategy five to six months before renewal and supply renewal data and get into the market three to four months before renewal. Allow potential insurers time to ask questions and inspect your operations. Consider larger retentions and long-term risk management solutions.

Grace: That's simple - loss prevention and loss control. Not implementing safety controls is a first-class mistake.

Fisher: It is important that contractors keep good records to get the best coverage at the best prices. All insurance carriers require five years of hard copy loss runs showing the contractor's loss record. Without these loss runs the contractor will not get a competitive quote and may not get insurance at all. Contractors need to find an agent that is familiar with the construction industry and knows how to classify the general liability and workers compensation payrolls properly. And contractors should review all audits in detail every year for errors.

Additionally, I recommend that everyone review his workers' compensation experience rating sheet at least every year.

What are some mistakes contractors make when shopping for insurance?

Grace: Customers are price-sensitive, and that's well understood. However, in today's market they should be fairly confident that their business is properly insured for the heavy liability exposure.

Tappel: Focusing only on the price. Price is very important, but it is not the only factor.

Fisher: Probably the biggest mistake I see contractors make is failure to keep current and adequate records. We need five years of loss runs and too many contractors can't even find their old policies, much less have loss runs on hand. Another mistake many contractors make is trying to delegate the duty to procure insurance to someone else. The contractor has to know what is going on. It is important that the contractor make it his business to learn about his insurance. This takes effort, but it is worth it.

Any new types of coverage that contractors need to be aware of?

Fisher: I am not aware of any new coverages but I do know of some old ones that are not being used. Every contractor should take a close look at employee dishonesty coverage, but few do so and even fewer actually buy it. I also recommend looking carefully at Employee Practices Liability that protects against claims of discrimination or misconduct.

Grace: My insurers advise that although there are no significant new coverages that contractors should be aware of, the existing coverages seem to be narrowed due to new liability exposures. Our judicial system seems to have played a big part in this unbalance. The excess liability exposure becomes more prevalent to the coverages.

Tappel: You will need to pay more attention to the liability insurance on mobile equipment. The new ISO policy forms could create a gap between the auto and commercial general liability coverage that must be addressed for any equipment licensed for use on public roads.

Any bills in the Legislature that could affect insurance rates for contractors?

Tappel: There will be several bills in the Louisiana Legislature attempting to make it easier for insurers to operate in Louisiana. The legal climate and administrative burden on insurers must continue to improve if we want to attract more insurers.

Are there more or less insurance companies or agents in Louisiana?

Tappel: There are more insurance companies because the environment is improving through protection from unexpected assessments, rate and form deregulation, tort reforms etc. But there are fewer insurance agents/brokers because of the consolidation of brokers.

Fisher: For the most part I would say the situation in Louisiana is stable. While there might not be a large infusion of carriers into the state, the ones that are here are seeing business. But in some segments of the construction market - residential, habitation etc. - there are fewer carriers.

The number of agents has probably declined due to mergers and the like, but the number of producers soliciting business has probably increased. As the market softens, agencies' volume shrinks and therefore they have to be more aggressive in seeking business.

Grace: Six of the top 10 surety companies are no longer in the surety business. Construction bonds have registered losses industry-wide.

Is it more or less difficult to get a bond now?

Grace: There is definitely a greater challenge for contractors to obtain bonds in today's market.

Charles Riddle, Hibernia Insurance of Baton Rouge: It is more difficult. There are only a handful of bonding companies operating in Louisiana. The transparency required on financial statements also has a negative impact on several contractors. Their balance sheet now includes transactions that did not show up on the balance sheet in prior years.

Fisher: The answer is . . . it depends. It is a very difficult market for small or emerging contractors who do not have a track record for bonding. We are beginning to see some sureties enter the market again but there are not many and the ones that will entertain this market are very demanding in their process of approving bond credit. The SBA Plan B was shut down for a long time but it has recently opened up again and that has been a big plus for the small contractor market.

For the established contractor that runs a good shop and is profitable, getting bonded is not all that difficult. Sureties do not want to lose their good clients. Alternatively, marginal to poor contractors always have difficulty getting bonded.

What can a contractor do to improve his ability to get a bond?

Fisher: In order to have a good surety bonding program the contractor needs three professionals on his team.

• An agent who has a thorough understanding of the bonding process and a thorough understanding of contracting.
  
• A banker who understands contracting and who understands the need for a bank line of credit
  
• A CPA who understands the surety's need for "full disclosure" and for financial data unique to contracting.

The contractor should learn quickly that working capital buys bond credit, or WC = BC. And they should also realize that in order to increase their bonding capacity they have to grow their company and that means making profit and avoiding debt. It also means paying some taxes and this is where a CPA who understands bonding comes in. Contractors who never make much profit to avoid taxes never grow their company and therefore their bond capacity does not increase.

Grace: I don't view bonding as an insurance product. It is a credit product. Therefore, sureties base their underwriting guidelines according to "acceptable" financial reporting practices by the contractor. I am a firm believer that if a contractor is profitable and surrounds himself with a good CPA, banker and bonding agent, his ability to get bonds is very favorable.

Riddle: Maintain a strong financial statement. Bonding companies are not as willing as in the past to base their decisions on a "feel" for an account. They want to see a sound financial statement and a well-run business that is willing to put money back into the company for a long-term commitment.

What factors are driving bonding?

Riddle: The primary factor is losses. As a result of the large losses re-insurers are no longer willing to support bonding companies with prior year pricing or limits of liability.

Fisher: Since bonding comes under the very large "tent" of insurance, all the factors that drive insurance also drive bonding. Reinsurance affects bonding just like it affects insurance. One big factor affecting bonding has been mergers and reorganizations. Every time companies merge there is always a period of uncertainty, and underwriters tend to be very conservative until they have a higher comfort level in the new organization.

And the same thing happens when companies reorganize. We have seen several big mergers and reorganizations over the last two years and they definitely affected the market. Overall, these things tend to improve service and capacity, but that period of adjustment after the change is usually a bit uncomfortable until everyone gets to know each other.

Have there been a lot of claims/defaults in Louisiana and the nation?

Riddle: There have been several very large losses, such as Enron, as well as some very large national contractors that have had bond losses. In Louisiana there have been several bond losses involving contractors.