There is risk in everything we do as contractors. Taking actions to manage these risks protects the investment you make in your business and in money, time and energy. Getting an insurance policy in place is not managing risk; it is putting the ambulance at the bottom of the cliff. Managing risk is building a barricade at the top of the cliff. This first article in a four-part series about risk management will help you develop simple risk management tools, create the barricade and provide an ambulance in waiting.
The first step in creating a risk management tool is to assess your risk. As we begin to list the risk we assume, let’s think about each of them in terms of our ability to prevent, avoid or transfer the risk.
Prevention, Avoidance and Transference
Prevention is simple; things we can do to prevent, or attempt to prevent, the risk from being part of our processes. Avoidance is the choice we make to not take on a risk or to reduce the risk. Transference is our ability to transfer the risk to others.
Throughout this series we will discuss more about PAT in regard to these seven areas of risk management: Insurance, jobsite selection, human resources, business operations, contracts, jobsite safety and product liability.
Most builders focus their entire risk management efforts on a single part of risk transference through purchasing insurance. Insurance is an important part of any risk management plan, but it is the ambulance at the bottom of the cliff. We normally purchase three different policies of insurance: General liability, builder’s risk and worker’s compensation. However, even insurance does not transfer all the risk to the insurance carrier. For example, worker’s compensation will cover the cost of an employee-related jobsite accident, but it will not cover penalties and fees assessed by OSHA nor the cost of litigation related to a worker’s claim.
Utilization of any insurance is the ultimate rate multiplier. Insurance is a regulated industry, and most carriers file two to four rate tiers with the state insurance department. If you’ve used your insurance you are more likely to get priced into a more expensive tier. Worker’s compensation has a “modification factor” that provides a discount from the filed rate or applies a surcharge. Based on your claims history, your rate could be 30 to 40 percent more expensive than it should be.
Another challenge with insurance is the fine print. Policies typically are large and may not actually assume the risk you think you are transferring. It is imperative each policy be reviewed in detail to ensure it has the correct endorsements and coverage you require for your business. Look at the list of the risk you are trying to transfer, make sure the policy covers these risks and list all of your business entities, including any DBA you might be using.
Although insurance is the most common risk transference tool, other risk transference tools provide a broader range of protection. Of all the risk management tools, insurance is the one that utilizes transference only. It does not provide prevention or avoidance.
As we continue this series, we will focus on the prevention and avoidance of risk. This being said, insurance is absolutely necessary. Even with your best efforts, your systems in prevention, avoidance and even other transference will not be perfect and may not always be successful. Insurance fills in and protects against these eventualities.
J. Bradley Simons has more than 30 years experience in managing construction companies. Brad is past president of the Utah Valley HBA and a licensed real estate broker. Currently Brad is CFO of Magleby Construction and vice president of the Utah Valley Habitat for Humanity. He has served more than 15 years on NAHB’s Board of Directors.