Omni Risk Mgmt E‑Newsletter
Fall, 2007 We proudly sponsor Contractors For Kids charity. www.contractorsforkids.org Volume 8, Number 1
In This Issue · Commercial Lines · Personal Lines · Surety Bonds · Life & Health · Construction News Insurance Industry Links www.ambest.com Lines Of Business Bonds Property Work Comp Commercial Auto General Liability Umbrella Inland Marine Ocean Marine Personal Auto Homeowners Flood Insurance Group Personal Lines Pension Plans Payroll Deduct Plans Health Insurance Disability Insurance Boiler & Machinery Professional Liability Executives Rob Mastrantonio, Pres. Rob@omni-risk.com Frank Strcich, VP Frank@omni-risk.com Glenn Glubiak, VP Surety Glenn@omni-risk.com Commercial Lines Tara Pattona Tara@omni-risk.com Christine Schuller Chris@omni-risk.com Adam Stone Adam@omni-risk.com Gina Di Paoloa Gina@omni-risk.com Casandra Rienth Cassie@omni-risk.com Natalie Perry Natalie@omni-risk.com Personal Lines Patricia Micari Pat@omni-risk.com Joe Schepis Joe@omni-risk.com Candace Strasser Candace@omni-risk.com Surety Jennifer Spadaro Jen@omni-risk.com Penny Rocco penny@omni-risk.com Life & Health Joe Schepis Joe@omni-risk.com Claims Debbie Oggeri Debbie@omni-risk.com Accounting Maria Salvo Maria@omni-risk.com Administration Joan Ady Joan@omni-risk.com Olivia Rodgers Olivia@omni-risk.com Sales Bob Burton Bob@theburtonagency.com Tom Weigand Tom@omni-risk.com Adam Rostkowski AR@omni-risk.com	Please visit us at our website www.omni-risk.com Construction/ Commercial Lines Oct. 1 workers’ compensation rate revision and a bonus The 2007 workers’ compensation rate revision will take effect Oct. 1, 2007, with an overall average premium decrease of 18.4 percent, including a 19.1 percent decrease in the average manual-rate level. The New York Compensation Insurance Rating Board attributes 15 percent of the decrease in manual rates to favorable results expected to be realized from the 2007 Workers’ Compensation Reform Act. New York state assessment. In addition, the New York state assessment charge decreases from 18.6 percent to 15.5 percent, mostly due to the closing of the Special Disability Fund (Section 15.8), which was created to spread among all employers the added costs incurred to compensate a person whose previous disability compounds the severity of the [second] injury at the current employment. Manual rates. The rate change will vary significantly from one classification to another. In fact, 81 of the 572 classifications incurred an increase in rate, such as drive-in theaters (+10.3 percent) and telecommuters (+12.5 percent). On the other hand, 100 classifications decreased 30 percent or more, such as dry cleaners (-40.9 percent) and fast-food restaurants (-41 percent).     Oct. 1 surprise. Every employer in the state gets a bonus from the Workers’ Compensation Reform Act in the form of a credit on their policies. A credit of 16.1 percent will be applied across the board on in-force policies, prorated from Oct. 1 to the next anniversary rating date. This means that even employers having classifications that increase under the 2007 rate revision can expect to see immediate relief for the remainder of their policy term. However, you should warn employers whose new classification rate will not decrease 16.1 percent or more that the reduction in premium is temporary and the rate at which the policy renews could be significantly higher. Also, insurers may choose whether to offer an immediate credit or wait until the policy is audited. Details about the temporary credit are available from the Outstanding Rate Change section in R.C. Bulletin No. 2139. Payroll Limitation Program. In addition to manual rates, commercial contractors will be impacted by changes in the New York Construction Employment Payroll Limitation Program. Territorial differentials significantly decrease from 29 to 8.5 percent in New York City (Territory 1), from 22 to 6.8 percent in counties near New York City (Territory 2) and from 14 to 4 percent in the rest of the state (Territory 3). The payroll cap remains at $750. Rating values changed. The maximum average weekly remuneration for executive officers, sole proprietors and partners increases from $1,450 to $1,625. The maximum remuneration for nonexecutive officers increases from $3,900 to $4,325. Minimum remuneration amounts increase by $50 for executive officers, sole proprietors and partners to $550, and by $25 for not-for-profit executive officers to $275. The 2007 workers’ compensation rates for each classification and the percentage rate change by classification were published by the New York Compensation Insurance Rating Board and are available by clicking here. 9/07 Personal Lines Home improvement Home improvement By Dan Corbin, CPCU, CIC, LUTC Does everybody know what time it is? It's time for your clients to start a home improvement project or maybe a new construction project. And who do you want your clients to have on the job? Certainly not Tim "The Toolman" Taylor . Al, maybe, if he leaves Tim back at the Tool Time set. Even if Jill or Heidi did the job, everyone would, at least, be much safer. This resource kit is devoted to those times when you are called upon to give your clients some risk management advice when they prepare to hire a contractor or plan to supervise or perform the work themselves. Contractor screening For those who don't intend to do their own work, hiring the right contractor is of utmost importance. The Internet is a great place to begin the process. One site I found to be very useful is www.b4ubuild.com; it's full of excellent resources, including a guide on how to qualify a contractor. Next you will want to visit the site of your local building department. Often on these sites, there is valuable information about permits and contractor licensing requirements, as well as helpful tips. Local building associations also may offer some useful information. A visit to the building department (or phone call) will allow you and your clients the opportunity to ask specific questions. If a permit is required for the home improvement or new construction project, make sure your client knows who is assuming the responsibility to obtain it (should be addressed in the builder's contract). Remember, your client is ultimately going to suffer if the building permit has not been obtained and local codes have not been complied with. Inspections made after the work has been completed can be costly because the inspector may have to deconstruct the home to view the work of plumbers and electricians. Surprisingly, there is no state requirement to license or register a home improvement contractor in New Hampshire and New York, but there is a requirement for contractor registration in Connecticut (verify registration at https://www.ask-dcp.ct.gov/lookup/SearchCriteria.asp) and New Jersey (verify registration at http://www.state.nj.us/cgi-bin/consumeraffairs/search/searchentry.pl). Typically, though, electrical contractors and plumbing contractors are required to be licensed (not New York ). Two useful Internet sites for locating state licensing requirements can be found at www.contractorreferral.com or www.permitplace.com. Property insurance If your client is planning a project that will increase property values, there will be the need to adjust property insurance limits. Renovations and additions necessitate establishing a new replacement cost limit for Coverage A—Dwelling. A new or improved “other structure” on the premises will likewise require an appropriate limit for Coverage B—Other Structures; keeping in mind the limit restriction of 10 percent of Coverage A, unless increased by endorsement. Don't forget to ask how the other structure is being used. Business use or rental use (other than as a private garage) will void coverage on the structure, regardless of the limit applicable to Coverage B. Depending on the circumstances, an endorsement or a separate policy may be required. If a new home is being constructed, there will be a need to write a new policy. The construction contract should address the issue of who is responsible for insuring the dwelling under construction. Since your client likely holds the deed to the real estate, your client may be the one to obtain the property insurance. If your client assumes that responsibility, then he must choose between a personal lines dwelling policy, a homeowners policy or an inland marine builders risk policy. Dwelling policy. An Insurance Services Office Inc. dwelling policy endorsed with the Dwelling Under Construction (DP 11 43) form will provide basic coverage. Because the property at risk during the course of construction gradually reaches the completed value over a period of months, the policy is reasonably priced 35 percent below the owner-occupied Coverage A—Dwelling rate for the projected value upon completion. The insured must notify the insurer within 30 days of occupancy in order to preserve coverage on the dwelling. Typically, then, the policy would be canceled and rewritten in the homeowners program. Although the contractor can be named as an additional insured on the dwelling policy, the contractor will not be covered for property located off the premises. Should the contractor need coverage off the premises, the contractor or subcontractors may need to purchase installation risk policies (or the entire project could be insured on a builders risk policy). And, even though the ISO dwelling program includes the option to add a Broad Theft Coverage (DP 04 72) endorsement, its wording would preclude coverage for the theft of construction materials. Homeowners policy. The homeowners policy is priced higher than a dwelling policy, but it has the advantage of simplicity, as there will be no need to change policies when the project is completed and the client occupies the new home. Like the dwelling policy, the contractor can be named as an additional insured for property on the premises and there is no provision in the ISO homeowners program for covering the theft of construction materials. Some insurers do offer a construction endorsement that reduces the premium for a limited period of time while the dwelling is under construction. Builders' risk policy. Ideally, a dwelling under construction should be insured with an inland marine builders' risk policy, whether purchased by the contractor or your client (the contractor may be able to negotiate better terms). A builders risk policy has the potential of providing more comprehensive coverage, which might include the theft of construction materials, fewer exclusions, off-premises coverage (e.g., in transit), protection for soft costs and the ability to name multiple interests (e.g., subcontractors). Personal liability insurance Section II—Liability Coverages found in the various ISO homeowners policies will protect your clients against suits involving renovations, additions and new construction, whether work is preformed by a contractor or by the client. One issue that may need to be addressed is the amount of limits that are appropriate for this added exposure. This is particularly true in New York, where the owner who is acting as general contractor can be held liable for injuries to workers under Section 240, 241 and 241-a of the Labor Law. Consider, also, the professional liability exclusion in the homeowners policy. Suppose your client is an architect who draws up the plans for his home, then hires a contractor to build it. Liability for design flaws will not be covered. However, suits that involve negligent hiring of the contractor would be covered, along with liability for unsafe premises. There is even contractual coverage in the policy should your client assume another party's liability for bodily injury or property damage. If your client's new home is being built at a location away from the current residence, there is a need for premises coverage at that location. In the ISO homeowners policy, land designated for the building of a one- or two-family dwelling is an "insured location" as defined in the policy and will automatically be covered if there is a policy in force at the current residence (even if only a renters policy). Commercial general liability insurance One way to help ensure your client isn't dragged into a lawsuit over the contractor's work is to verify, by means of a certificate of insurance, that the contractor has commercial general liability insurance. If your client is acting as the general contractor, certificates should be obtained from every subcontractor. Plantiffs are less likely to search for creative legal theories to bring in the owner when the contractor is insured. In fact, when your client is building a new home or performing extensive work on an existing home, you may want to advise your client to be named as an insured on the contractor's policy. Beyond third party liability, the contractor's insurance will provide a remedy for injuries to your client's family and damage to your client's property caused by the contractor. Workers' compensation insurance It is in everyone's best interest to be certain all workers on the job are covered with workers' compensation insurance. When your client hires a contractor, a certificate of workers' compensation should be requested. And if your client is acting as the general contractor, certificates should be obtained from every subcontractor. In fact, some states (for example, New Hampshire) may hold a homeowner acting as the general contractor contingently liable for uninsured subcontractors. Consequently, it will be necessary for the homeowner to purchase a workers' compensation policy in these states, despite the fact the homeowner has hired no employees. In addition, if there is even a remote possibility your client will hire a worker that could be considered an employee of the client and eligible for benefits under the workers' compensation law, a policy should be purchased. Nevertheless, New York and Connecticut have very specific statutory workers' compensation requirements when applying for a building permit. New York. According to state law, someone who obtains a building permit, whether the contractor or the homeowner, will be required to show evidence of workers' compensation before a permit will be issued. The person who applies for the permit must provide the local building official with a certificate of insurance indicating that a workers' compensation policy and a disability policy are in force covering all employees working at the site, or prove eligibility for an exemption. For homeowners who intend to act as the general contractor, an exemption will be granted if the prescribed BP-1 form is filed with the building official when applying for a permit. The BP-1 form is only acceptable if the homeowner will either be: 1) doing all the work without help, or 2) hiring workers for less than 40 hours per week (aggregate for all workers) while maintaining a New York homeowners policy (which automatically covers any workers' compensation obligation imposed for this limited employment). Otherwise, either the homeowner or the homeowner's contractor will need to provide proof of insurance (by filing the C-105.2 or U-26.3 form) or provide proof of exempted status (by filing the WC/DB-100 or WC/DB-101 form). [The forms referenced above may be obtained at http://www.wcb.state.ny.us/content/main/Forms.jsp.] Prudence I understand that rescuing home improvement do-it-yourselfers has become a growing industry. If your client doesn't want to end up with a Tim "The Toolman" Taylor project, close attention should be given to whether your client possesses the knowledge and skills to complete the work safely. Not every botched job can be fixed with duct tape. Surety News Provisions (Part 2) August 2007 As noted in Part 1, the June 2007 article, public and private obligees, including property owners and general contractors, are rewriting bond forms and contract provisions for contractors or subcontractors. The following article provides more examples. by Marilyn Klinger * Sedgwick, Detert, Moran & Arnold LLP Provisions by which the penal sum of the bond increases with change orders are becoming more common. Penal Sum Increases with Change Orders One of the most common examples of such provisions is the following: Any increase in the Contract amount shall automatically result in a corresponding increase in the Bond's penal amount without notice to or consent from Surety, such notice and consent being hereby waived. Decreases in the Contract amount shall not, however, reduce the Bond's penal amount unless specifically provided in said Change Order. It is unclear why obligees are requiring these provisions. It is possible they do not understand that the full coverage under a traditional performance bond includes not just the amount of the bond but any remaining contract balance that remains unpaid. In those situations, the cost of completing the work would necessarily need to exceed both the remaining contract balance and the existing penal sum pegged at the original contract price in order for the surety's liability to cap. Consider this example: Original Contract Price $10,000,000 Change Orders $1,500,000 Revised Contract Price $11,500,000 Paid to date, including 10% retention of $650,000 (56% of project complete) $6,500,000 Paid to date, not including retention $5,850,000 Remaining Contract Balance ($11,500,000 - $5,850,000) $5,650,000 Penal Sum of Bond $10,000,000 Total amount available to complete project $15,650,000 Cost to complete (assume 10% over 44% completion percentage) $5,566,000 Thus, there is a cushion of over $10 million before the surety's liability caps. Further, obligees may not understand why sureties charge premium for change orders but do not have their bond penalties increase correspondingly. The performance bond covers the change order work, i.e., guarantees its completion, regardless of the surety's limit of liability. Accordingly, they charge more premium—they have guaranteed more work. Presumably, there have been situations where a surety is not prepared to complete a project, possibly where an obligee will not agree to cap the surety's liability at the penal sum. At that stage, a surety may simply pay the penal sum. Then, the obligee must complete the project itself and, presumably, that cost could exceed the penal sum. It may be those situations, although extremely rare, where obligees have decided they want to assure that the penal sum will track the revised contract price. It is also possible that obligees have decided to include these clauses to provide an incentive for sureties to complete projects. Generally speaking, unless the bond or the takeover agreement provides otherwise, a surety is deemed to have waived its penal sum upon takeover. Accordingly, if the penal sum increases with changes, the surety might be more inclined to take over rather than leave completion to the obligee. In addition to what is likely a misunderstanding on the part of obligees, it is possible that with the increase in the types of damages recoverable against a surety, the obligees want additional dollars available. For example, in California, a surety may be liable for certain consequential damages arising out of the bond principal's default.^1 Those consequential damages, such as actual delay damages (if there is no liquidated damages provision), can be substantial and far exceed the original contract price. Overall, there are relatively few instances where the penal sum cap comes into play. There is another concern. Surety underwriters partially base the amount of surety credit they provide for contractors on the amount of pending exposure. Admittedly, they look primarily at backlog or work in progress, which does track the value of the construction yet to be completed, including change orders. Nonetheless, if the penal sum and, thus, the surety's exposure on already-issued bonds can increase without notice to the surety, sureties will have no certainty. It is unclear how the moving target of ever increasing penal sums will affect surety underwriting into the future and how it will affect contractors' ability to obtain new bonds for new projects. Waiver of All Changes/Potential Result=Unlimited Penal Sum At least one trial court in an unreported decision has read the following provision with the one above to conclude that, regardless of the amount of the change order, the surety is on the hook: The Surety hereby waives notice of any change, including changes of time, to the Construction Contract or to related subcontracts, purchase orders and other obligations. In other words, the court has combined the provision that says that the penal sum of the bond increases with each change order with the provision that the surety waives notice of any change. Thus, even if the change order is many times larger than the original contract price, the surety arguably waived notice and agreed that the penal sum would increase accordingly. Waiver of All Changes The portion of the following waiver that is of the most concern is the last clause, "of any other act or acts by the Obligee or any of its authorized agents." The Principal shall ensure that the Surety is familiar with all of the terms and conditions of the Contract Documents, and shall obtain the Surety's written acknowledgment that it waives the right of special notification of any changes or modifications of the Contract, or of extensions of time, or of decreased or increased work, or of cancellation of the Contract, or of any other act or acts by the Obligee or any of its authorized agents. It is possible that the obligee could argue that, by virtue of this clause, the surety has waived all defenses, including wrongful termination, overpayment, or failure to mitigate damages. In California, waiver is "an intentional relinquishment of a known right after knowledge of the facts."^2 Accordingly, there is a question of whether the provision would constitute a waiver of something to occur in the future that is not defined with more particularity. Nonetheless, it is a problematic clause that could cause a surety to refuse to issue the bond. Penal Sum Increases with Change Orders up to X% As a compromise, the surety industry has been able to convince some obligees that insist on having the penal sum increase with change orders to limit the percentage increase without surety consent. The following provision is an example. The Penal Sum of this Bond shall automatically increase as the Contract Amount increases; provided, however, the initial Penal Sum shall not increase more than ___% absent the Surety's written consent. Surety's refusal to consent to such an increase in the Penal Sum shall not be a breach of this Bond. The last sentence of the clause is quite essential. Otherwise, the percentage limit would be meaningless. If the surety refused to have its penal sum increased beyond the percentage limit and, because of that, the obligee declared the bond principal in default for failing to have the required bond, the surety would be facing a default. Thus, a percentage limitation without the last sentence would be meaningless. Life & Health Wal-Mart to expand $4 drug program BY JAMES BERNSTEIN james.bernstein@newsday.com 12:44 PM EDT, September 27, 2007 Wal-Mart Stores Inc., the nation's largest retailer, said Thursday it will expand its highly popular, year-old $4 prescription drug program, adding medications to cover such diseases as glaucoma, attention deficit disorder and hyperactivity. The Bentonville, Ark.-based company said it will add 24 new prescriptions. The company said it has also added $9 birth control prescriptions, which it said will save women as much as $250 a year. Wal-Mart said that the national average for birth control and fertility drugs ranged from $24 to $30 a month. "We're very thrilled to be announcing the expansion of the $4 prescription program," Bill Simon, Wal-Mart's executive vice president, said in a Thursday morning teleconference with reporters and securities analysts. "We knew the program would have an impact, but the size of the impact we didn't expect." Simon said that since the $4 prescription drug program began "we have removed over $610 million from the cost of health care in the U.S. That's the simple math." Dr. John Agwunobi, a senior vice president and president of Wal-Mart's professional services division, said the program is now "just scratching the surface," and that more medications are likely to be added. "I know the impact the high cost of prescriptions can have on people struggling with disease or fighting to maintain their health," Agwunobi said in the same teleconference. "No one in this country should have to skip a dose every other day in order not to have to purchase medications. Yet that is the kind of thing we're seeing." Wal-Mart has 12 stores on Long Island. Gregg Casarona, Wal Mart's pharmacy district manager for Long Island, said in an interview that no membership card is required to take advantage of the $4 prescriptions. Customers with insurance are charged either the co-pay for medications or the $4, whichever is lower, Casarona said. Those without insurance are simply charged the $4, he said. The most commonly supplied dosages are for 30 days. All of the medications Wal-Mart supplies are generic. Casarona said Wal-Mart has saved customers in the state of New York $13 million since last September. "This is all just due to the buying power of Wal-Mart," Casarona said. "We just talk to the (drug) manufacturers and tell them we want to save customers money, that they need to work with us. We're not -making a lot of money (from the program) but it is profitable." Wal-Mart said in an announcement that since September a year ago, its $4 prescriptions represented nearly 40 percent of prescriptions filled at Wal-Mart stores, Sam's Club and Neighborhood Market pharmacies. "We have been just south of 40 percent and we will be well north of 40 percent" of total prescriptions filled once the expanded program is fully under way, Simon said. "We will have coverage in virtually every therapeutic category." Simon said the U.S. health care system is "incredibly inefficient," and that Wal-Mart's "core competency is removing inefficiency from a supply chain. If ever there was a supply chain that had inefficiencies, this [health care] is one of them." A year ago, Wal-Mart announced it would sell nearly 300 generic prescription drugs for as little as $4 for a month's supply. Target Corp., a prime Wal-Mart competitor, responded immediately, saying it would match the lower prices. The price changes have been of particular benefit to the nation's 46.6 million uninsured Americans. Wal-Mart said last year it began the program to help the disadvantaged. During the teleconference, Simon said that the expanded program will be conducted on a national basis, and that the program has been profitable for the company so far. He declined to provide figures. Simon also said that Wal-Mart may consider filling prescriptions on a three-month, instead of only a one-month, basis. Among the other prescriptions Wal-Mart has added are medicines for glaucoma, fungus infections and heart problems. To add someone to this email list, send newsletter@omni-risk.com and put in subject Line “Add to Newsletter” To be removed from this email, send newsletter@omni-risk.com and put in subject Line “Remove from Newsletter”