Will the claim tendering missteps of Superstorm Sandy be repeated?

In the wake of the COVID-19 pandemic, contractors must learn from the claim tendering missteps of the past and vigilantly monitor their subcontractors.

Superstorm Sandy taught contractors a valuable lesson about claims. (Source: Fred Economic Research/Federal Reserve Bank of St. Louis)

As insurance experts in the construction industry know, it’s important for general contractors (GCs) to vet their subcontractors’ general liability (GL) policies to ensure the proper coverages are in place.

But during economic slowdowns like the one we’re in now, it’s even more important. Why? Let’s take a look at recent history to better understand this task.

From 2008-2012, the financial crisis and resulting economic downturn created havoc in the construction industry as projects across cities and suburbs stalled. Subcontractors found themselves out of work, leading many of them to let their insurance policies lapse. That all changed in 2012 when Superstorm Sandy hit, ravaging homes and businesses along the Eastern U.S. coastline. Suddenly, there was a need for contractors to clean up and rebuild, and trade contractors were unexpectedly in high demand. While this led to a welcome rebound in construction, it also set up a subcontractor tendering situation that was unfavorable to GCs.

Since trade contractors had to get their insurance up and running quickly but didn’t have much cash flow due to being unemployed, many of them bought inexpensive policies with restrictive coverages and exclusions. If a GC tried to tender a claim to their subcontractor’s insurance carrier due to improper work the sub performed and the subcontractor had inadequate coverage that prevented the claim from being tendered, the GC got stuck paying it. And the worst part? It can take years for that claim to come off a GC’s GL loss run, so future insurance costs increased.

All of this happened because the GC had to pay a claim they couldn’t properly tender to their subcontractor.

Fast forward to 2020

I’m noticing a similar, unsettling situation taking shape across the construction industry. As COVID-19 unexpectedly gripped the country in the first part of the year, rolling economic shutdowns brought construction to a crawl, if not a halt in some places. What the industry thought might be a lull of a few weeks stretched into months, with subcontractors losing work and letting their insurance policies lapse in a déjà vu Sandy scenario.

Now, as the economy has reopened and construction has picked up, trade contractors are back in demand — with a quick need for insurance. But just what kind of policies are they getting? And do they have the right coverages should GCs need to tender a claim?

Here’s the good news

History does NOT have to repeat itself. I’m confident that GCs can learn from the tendering missteps of the post-Sandy years by being extra vigilant in monitoring the performance and stability of their subcontractors. They should consider more established subs who didn’t allow their policies to lapse, have better cash flow, and won’t necessarily need the cheapest insurance policy to get back on the job.

Whomever they choose, my advice is that they take this ONE proactive step with regard to their subs: Thoroughly review each subcontractor insurance policy.

That’s it. That’s the secret sauce in this sub tendering recipe. By completely reviewing each policy — and not just the COI, but the entire policy — they can find restrictive language or exclusions that need to be addressed with their subs. And if GCs are too busy to adequately vet their subcontractors, they can hire a subcontractor policy management service to take on the burden of collecting and reviewing all of their sub insurance policies. Trust me, this will be money well spent. You and your GCs won’t want to learn about any exclusions after attempting to tender a claim and finding the coverage isn’t there.

One thing’s for sure, COVID has been hard enough on the construction industry. GCs don’t need any additional “sub surprises” that could come back to haunt them. If we’ve learned anything from the tendering issues that occurred after Superstorm Sandy, it’s that these surprises could come in the form of costly claims and rising premiums.

We need to learn from our mistakes, make smart decisions, and keep on building.

Jake Morin (jmorin@prosightspecialty.com) is a value creation executive with ProSight’s Construction Program, where he manages cranes, scaffolding, construction managers, and luxury home builders niches and distribution partners. He has over 20 years of experience in the insurance industry, having worked at The Hartford and Chubb.

These opinions are the author’s own.

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