Insurance and the Estimate

A costly item you cannot avoid

In a past column, I pointed out the standard procedures and precautions regarding insurance expenses that will affect a final bid price. Among those types of insurances are liability classifications, fire insurance when required, workers compensation policies for various work classifications, vehicle insurance provisions, and unemployment insurance contributions to name just a portion. Not forgotten in this collection is the question of providing bonds required on some projects. It is imperative that estimating departments be provided with the latest price updates as part of the labor burden and administrative overhead.

In the past these costs were fairly static and predictable. An error in entering or calculating a rate as applied to a project may have cut into the net profit, but to a negligible degree. This is not the case any longer for a variety of reasons that have proven challenging to rectify by the “white hats”—the signatory contractors of the industry.

The problem of insurance pricing is complex and some facets are out of the control range of even the best operating contractors. The returns from investments have affected the companies just as it has taken a toll on private and industry investments. At one time, lucrative investments would offset losses from jobs gone sour or contractors going broke. Consider on top of that ever-increasing jury awards on what, in some cases, are at best frivolous lawsuits and at worst outright fraud. The cyclical rate structures of past years are history.

A January 2004 article in Engineering News Record (ENR) points out that industry sources state that premium prices will continue to increase from 15 to 40 percent annually. While an individual contractor’s insurance may not have been threatened yet, it appears that most insurers will sooner or later raise their rates. Some large companies have chosen to get out of the construction field totally. This is particularly the case in California and New York State, albeit a matter of short duration before your geographic will become victim.

One of the insurers’ continuous exposure risks are such environmental factors as asbestos removal projects and mold problems. Depending on your area, you are probably aware of similar such claim areas. At one time, electrical contractors could safely consider themselves out of range for some of these claims, the worst having been asbestos-covered wire that hasn’t been available for years.

Some governmental projects have contract clauses that allow the recovery of retained funds after the project is more than 50 percent completed. Here again, many of these agencies are being pressured to withdraw such provisions to enable contractors to get performance and payment bonds, let alone bid bonds.

The amount of work on hand is likewise being scrutinized more conservatively. The result is that even if the contractor’s work load is high but manageable with the company’s assets, equipment and cash flow, they may still be denied a bid bond. Denial of a bid bond means that the carrier will not issue any required bonds. The result often causes the contractor to pay higher prices for their required bonds, thereby cutting the projects expected profit.

A method being employed by insurers is a switch in policy language from “occurrence” to “claims-made.” The difference is that in a policy covering occurrences, a claim may be filed many years after the issuing company may no longer be the contractor’s insurer. In claims-made policies, the claim can only be filed with an insurer while the company is insured with that firm. The result of these changes appears to be to remove the “deep pocket” from claims against contractors, albeit the exposure to contractors can still be damaging depending on the contractor’s assets.

At a recent chapter meeting, the governor of our chapter shared what his company was doing to pare insurance costs. One way to save is to increase any deductibles on your policies. How much depends on your exposure in the various policies, and what you can rationally afford without risk to the company. As with individual’s insurances, combining policies will produce savings as well. Each contractor’s operation is an individual case; what works for one entity may not be the answer for all.

The ENR article mentions an experimental program being worked on by insurance carrier Zurich designed to bring some constancy to the contractor. Many NECA chapters can suggest ways of stabilizing insurance risks and costs. The bottom line for the estimator is that they must be just as aware of insurance costs as they are of labor and material costs. EC

DAVID is a professor of electrical technology at Long Beach (Calif.) City College, a consultant and an expert witness. He can be reached at 562.597.1877 or at


About the Author

Eric David

Freelance Writer
Eric David is a professor of electrical technology at Long Beach (Calif.) City College, a consultant and an expert witness. He can be reached at 562.597.1877 or at .

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