Insurance: it’s required on every building project. It protects against lawsuits and material price surges, and can provide a builder the “peace of mind” promised in ads. What it covers can be quite specific, or less so. Sometimes a certain type is required to win a certain bid.

But it’s also an area where contractors – especially inexperienced ones – may skimp when they should spend. While the wealth of information about insurance and the law can admittedly feel overwhelming, those in the know say there’s really only one thing a good builder needs to grasp.

“Don’t try this at home,” said Kevin Spellman, a business consultant to construction firms.

Experienced builders say retaining an industry-focused broker and lawyer, though often more expensive than the “retail” agents, saves money in the end.

Joe Hughes found one in the same when he was starting out 36 years ago. A good friend, Tom Bowen, was a broker with a law degree. He helped Hughes make sense of both insurance boilerplate and legalese, which to the young builder were “about the most mind-numbing stuff on earth.”

“He really set the gold standard for me where brokers and lawyers are concerned,” Hughes said.

Then about 16 years into Hughes’ career, a subcontractor’s employee was catastrophically injured on a Joe Hughes Construction jobsite. The emotional cost on operations was great. But what could have been a morass of legal fees and years of litigation was handled in a brisk and businesslike manner, Hughes said.

“It’s one of those things. You never want to think about it,” he said. “Contractors are risk-takers. But it’s got to be a calculated risk. Those risky things have got to be covered with contracts, because something terrible could always happen.”

GOOD, BETTER, BEST

The Oregon Construction Contractors Board requires builders to have public liability and property damage insurance for no less than $500,000 to perform general contracting work.

Often, builders take out little more than that, said Stacey Martinson, an attorney with Miller Nash Graham & Dunn.

“I’ve seen so many contracts come through that are just basic, bare-bones, just-because-you-have-to-have-it insurance,” Martinson said. “But they don’t spell out exactly what they need.”

Martinson uses a car analogy with her construction clients because it’s easy for most people to understand. Factors that determine what a construction contractor pays in insurance are akin to driving – accident history, the driver’s level of experience, the value of a vehicle, etc.

And if you have the bare minimum insurance allowed by the CCB, you’re in trouble if you rear-end a Lamborghini. If you’re in a multi-car pileup on the Interstate, it’s even worse.

Martinson said smaller firms will sometimes choose cheaper insurance for the cost savings, but this can stunt growth over the long term.

“Sometimes you have to spend money up front so you can save money in the future,” she said. “That’s why you want a good construction contract, because, basically, you don’t want to have to spend money fighting about it later. Better to take care of it upfront.”

But all this is difficult to understand, so consulting with a good broker and lawyer can pay off.

“I mean, who reads their insurance policy, right?” said Martinson said.

Well-regarded lawyers and brokers know to be specific, Spellman said. There’s insurance for liability, builder’s risk, fire and equipment. If a project is near the water, there’s a different insurance for that. Same if a project is near a railroad.

“I wouldn’t pretend to know enough about this to do it myself,” said Spellman, a former president of Emerick Construction. “I can’t imagine how hard it would be for someone just starting out, with little experience.”

DETAILS, DETAILS, DETAILS

On Oct. 19 of last year, an excavator with Loy Clark Pipeline nicked a natural gas line, setting off a chain reaction that led to explosions and a leveled a Northwest Portland building (another was seriously damaged). In the aftermath, another predictable chain of events no doubt unfolded involving general contractor Bremik Construction, its sub Loy Clark, the building owners and their tenants.

It’s a good, if dramatic, illustration of a tangled insurance web. When the lawyers got involved, their questions would have likely included, whose policy should be primary, and to what amount? Who is covered, and who is not? Did the sub comply with its contract? Did Bremik get copies of the endorsements from its subs at the time it retained them?

“It would be a complete nightmare figuring all that out,” Martinson said.

(In the end, Oregon’s Occupational Health and Safety Administration fined Loy Clark $4,900 for its role, and Bremik nothing.)

A good general contractor has to make sure that all its subs have the same insurance, and they should all name the owner as an additionally insured party so if there’s ever a problem, they can make a claim against the owner. It’s on them to make sure their subcontracts have the right language that requires the right kind of coverage.

A lot of times, a general contractor will assign a sub higher limit depending its role. An interior painter who won’t be dealing with a buried gas line or other high-risk work, for example, won’t have to carry as much insurance as one who does.
It’s also likely a builder’s subcontractors will have different insurance carriers, some AAA-rated, some not as good. It helps to have a contract manager within a company to gather all of the subcontracts and insurance certificates from subs.

“A lot of this is who did what, when? And ultimately, do they have the right insurance?” said construction attorney Jeremy Vermilyea.

A contractor further really needs to have read the particular rider for each particular project and know what it means. Vermilyea estimates about 75 percent of projects have some kind of issue with this, usually involving subcontractor, such as not having the type of coverage covered under the contract or not having all the proper endorsements on hand.

But it’s a “dirty little secret” in construction that a plaintiff often goes after the client with the best insurance, according to consultant Spellman. “In this situation, they might go after State Farm, and then when that’s exhausted, they go after the deep pockets.”

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