Healthy claims ratios, competition, and innovative new products and services reduce risks and costs – but you need to know how to avoid the pitfalls
By Mark Buckshon
Ontario Construction Report staff writer
In some respects, these are the “best of times” for Ontario contractors seeking insurance and bonding coverage. Despite the dramatic collapse (and claims) from the TriWest/ConCreate failure last year and a collection of natural and industrial disasters in various parts of the country this year, Surety Association of Canada data indicates that the claims to premium ratio is healthy. This indicates there won’t be high pressure for surety providers to increase their premiums. Meanwhile, insurance and surety brokers report that, despite consolidation within the industry reducing the number of insurers and surety providers, competition is intense, and so premium rates and terms (including coverage scope) are improving.
Yet, the brokers say you would be unwise to ditch long-standing relationships just to save a little money short-term. Insurance and bonding decisions – even if sometimes they must be made in the intensity of bid response and RFP submittal deadlines – should be thoughtful, planned and co-ordinated well in advance.
“The mistake some contractors make when purchasing insurance and surety is by allowing multiple insurance brokers (to) quote oon their business and essentially using a competitive bid process as the means of determining who their broker will be,” said Charles Quenneville, an account manager with the construction services group at Aon Risk Solutions in Toronto. “Considering contractors are subject to a similar competitive bidding process this is the natural direction most would take when selecting a broker.
“However, contractors should evaluate the services a broker has to offer mid-year when there is no pressure to renew their insurance. Choose the broker that is most qualified and can offer the most comprehensive services, and then allow that broker to review and negotiate improved insurance and surety terms.”
Stacy Elliott, a broker at Bradley’s Commercial Insurance in Ottawa, agrees. He notes that contractors rarely rush to change surety providers because the process of gaining surety approvals can be arduous – and once the “company has built a history and comfort level with as surety provider it’s always easiest to stay with that company.”
“However, in the past few years we have seen some construction companies moving their business to other surety companies,” he said. “Usually a move from one surety to another is driven by bonding rates, better terms or increased capacity. Where there were once two or three bidders on a job, there are now five or six companies bidding. Keeping your bonding rates, terms and limits competetive can be very important.”
Meanwhile, surety provider Trisura reminds contractors that, while price competition is a fact-of-life in the marketplace, the most important quality to consider is whether the contractor receives top-notch value and advice.
“These (competitive) pressures, combined with the advancement of technology have forced all successful companies/brokerages to provide superior customer service and relationship management,” said Chris Kucman, Trsura’s assistant vice-president, surety. “It is not about the lowest price. It is ensuring the client is getting the proper value and advice as the construction industry continues to evolve and become increasingly complex from procurement to close-out.”
Certainly, this year there were no dramatic claims like last year’s collapse of ConCreate USL (part of the TriWest Limited Partnership), which resulted in claims for approximately 50 contracts with a surety value of $214 million.
“We are very proud to say we’ve got a completing contractor working on all of its (TriWest’s) projects, and all projects are progressing,” Bob Dempsey, president and chief operating officer of the Guarantee Company of North America (The Guarantee) said last year. (He was on vacation at a cottage without electricity this year at the time OCR sought to interview him.)
Probably the biggest project affected by that claim, the $48 million Strandherd-Armstrong Bridge in Ottawa, is moving forward, though much slower than the City of Ottawa would like. The bonding company has elected to pay hefty per-diem late fees – costing more than $1.8 million – rather than try to keep the project close to its original schedule, presumably because the costs of speeding things up would be even greater.
Still, even though the bridge is being delayed, it will be built, and Ottawa taxpayers won’t be on the hook for the failed original contractor, in part because the surety system worked as it should. The Guarantee is well-capitalized and, while no one likes to experience a big claim, the bonding company’s overall financials remain healthy, along with its underwriting capacities.
Here are some other observations from brokers and surety providers who answered a series of questions about key questions relating to construction insurance and bonding. (In some cases, their answers are reported above, so are not repeated here.)
OCR: If you could describe the biggest change in the past years in insurance/bonding for Ontario’s construction industry, what would it be? Describe its significance.
Charles Quenneville, Aon Risk Solutions
“Increased prevalence of alternative delivery models in canada, such as P3s, has impacted the insurance and bonding industry. The traditional form of performance security most commonly used by contractors is the surety bond. The private sector require more liquid forms of security and prefer instruments such as letters of credit (LC). This can be very constraining on the contractors balance sheet and is not always the best option for a contractor. The insurance and surety industry now has the opportunity to offer innovative products which meet the needs of investors and put insurance capital in place rather than LCs. An example of such an innovation is the liquid surety bond now offered by select surety carriers in Canada. It offers a pay-on-demand feature of 10 per cent providing the liquidity investors are looking for, and in a way is better than a LC from the owner’s or lender’s perspective because with the bond comes the due diligence performed by the surety carrier.”
Stacy Elliott, Bradley’s Commercial Insurance, Ottawa
Bonding
“In Canada, insurance and bonding companies compare premiums written versus losses incurred each year. This ratio of premiums written to losses incurred is called the loss ratio. In 1992, Canada’s surety industry recorded a loss ratio of 135 per cent. In 2002, the loss ratio was 39 per cent and in 2012 the unofficial loss ratio is 25 per cent.
“The all-time high for surety premiums written occurred in2010 with 2011 and 2012 following as second and third on the all-time list. Considering the recent uncertainty in the global financial markets, the Canadian surety industry has remained strong.”
“Normally, we don’t see construction companies moving from one bonding company to another. The process to attain a bonding facility can be arduous. Once a construction company has built a history and comfort level with a surety provider, it’s always easiest to stay with that company. However, in the past few years we have seen some construction companies moving their business to other surety companies. Usually a move from one surety to another is driven by bonding rates, better terms or increased capacity. Where there were once two or three bidders on a job there are now five or six companies bidding. Keeping your bonding rates, terms, and limits competitive can be very important.”
Insurance
“Mergers and acquisitions in the past 12 years have dramatically decreased the number of insurance companies construction businesses have to choose from in Canada. Although there are approximately 220 property and casualty insurance carriers, there are only about eight insurers that cater to mid-size construction companies.
Despite the fact that there are fewer insurance carriers to choose from, these are very good times for the construction industry. We have been enjoying what is considered to be an insurance soft market for the past eight or nine years. In a soft market, premiums are low due to the fierce competition between insurance carriers to put premiums on the books. Another by-product of the soft market is that insurance carriers are becoming innovative in creating new policies and new wordings to help fill in the gaps of coverage for project owners, managers and contractors. Fewer claims are now falling through the cracks with these new insurance products tailored to the construction industry.”
OCR: This is an old, but important, question. What is the biggest single mistake you see people in the industry make when it comes to insurance and bonding? How would you suggest they change?
Chris Kucman, Trisura Guarantee Insurance Company
“People treating insurance and bonding as a commodity is the biggest mistake we see. While a company may be able to save a few dollars in the short term, this is very short-sighted as there is an abundance of risk being downloaded to contractors in an always-changing and dynamic environment. It is for these reasons that identifying and building relationships with companies that will partner and provide true value will help ensure the long-term success and profitability of contractors.”
Charles Quenneville, Aon Risk Solutions
“The mistake some insurance carriers make is by sticking to the same old ways of doing business and not innovating quickly enough. Lack of innovation can be a company killer in any business.
“The mistake some contractors make when purchasing insurance and surety is by allowing multiple insurance brokers to quote on their business and essentially using a competitive bid process as the means of determining who their broker will be. Considering (that) contractors are subject to a similar competitive bidding process, this is the natural direction most would take when selecting a broker. However, contractors should evaluate the services a broker has to offer mid-year when there is no pressure to renew their insurance. Choose the broker that is most qualified and can offer the most comprehensive services, then allow that broker to review and negotiate improved insurance and surety terms.”
Stacy Elliott, Bradley’s
Insurance
“One of the biggest problems I see revolves around commercial automobile insurance. Most construction companies hire employees whose role it is to drive company vehicles. Most employers will take a photocopy of the driver’s license and assume there are no problems since the license shows the driver as licensed. The next step is that they will forward the license number or a copy of the license to the broker, who then sends this information off to the insurance company.
“The insurance company is in no particular rush to run an abstract on a new driver. If they do, it may take up to four months. In some cases, when the abstract is run it comes up as ‘not licensed’ or there may be so many tickets that the insurance company will never agree to let the person be added to the policy.”
The solution to this problem, Elliott says, is to require each new driver to fill out a driver questionnaire, bring an up-to-date abstract to their interview, and check annually to see if every driver still has a valid license.
Bonding
“The biggest single mistake we see in bonding is a mistake by both the broker and the construction company. We as brokers can get last-minute request for bid bonds on jobs that exceed the limit the construction company has been approved for, or exceeds the total work-on-hand limit approved by the surety.”
Elliott suggests that both the broker and construction company should have a plan in place to regularly review the bonding facilities, and manage expectations. These include:
- attaining quarterly financials form the client
- setting a timeline to be informed of new tenders being worked on, and
- keeping up-to-date and accurate work-on-hand reports.
OCR: Are there new products/services/resources you offer that you thin the industry would find relevant and useful?
Chris Kucman, Trisura
“Trisura is always looking at ways to continue to provide great value to our clients and ultimately all stakeholders. Our goal is to deeply understand our clients’ needs so that we can find solutions that make them more successful and help them grow their business. Our people strive to listen, provide strategic advice and service the heck out of our clients. Along with the aforementioned, continually providing innovative solutions allows Trisura to remain a step above in creating exceptional experiences within the construction community.”
Stacy Elliott, Bradley’s
“One of the most interesting insurance products that has recently become more readily available is the ‘Owners and Contractors Protective’ policy, which closes many professional liability insurance gaps for project owners and contractors. In the design/build and design/bid/build words there are times when the insurance coverage provided by the architects or engineers (designers) on the project may not be sufficient in the event of major claim caused by design errors. Often times, it is the project owner or contractor that ends up dealing with this financial loss and this can add great risk to larger construction projects. The ‘Owners and Contractors Protective’ policy can fill these gaps and reduce the risk of financial loss, resulting, while not adding significant costs to the project.”
Charles Quenneville, AON
- Strategic advisory services to help contractors understand and compete using new delivery models such as P3s;
- Brokering service on specialty project such as Subguard and Subcontractor Default Insurance (SDI);
- Benchmarking tool to evaluate a contractor’s operations versus industry best practices: Contractors Enterprise Risk Assessment (CERA); and
- Tool to assist owners and contractors with identification and treatment of risk for products: Project Enterpise Risk Assessment (PERA).