The Exciting World of Insurance Compliance
Unfortunately, construction is an industry full of significant risk above and beyond the general business risk of failing to complete projects on time or on schedule. One often overlooked area of risk mitigation is insurance compliance. While not the most exciting of subjects, failure to maintain compliance on a given project during construction can result in serious liability falling on the developer’s shoulders when it likely was someone else’s responsibility. To that end, we recommend taking a hard look at one’s existing insurance practices and applying the best practices outlined below if not already in place.
First, every developer must evaluate whether or not employing an insurance compliance service is worthwhile. If the developer is managing a small number of projects under construction at any given time, this may be handled internally by a well-trained administrator. However, firms may elect to outsource this compliance monitoring to a third-party service (more on the challenges of these services below). Naturally, a solid vendor contract should establish necessary insurance requirements. These requirements should be translated into a simple review checklist such as follows:
General Liability coverage is sufficient
Workmen’s Compensation coverage is sufficient
Automobile coverage is sufficient
Umbrella coverage is sufficient
Correct additional entities are listed as additionally insured, including the project LLC, the parent entity and “its affiliates.”
Project is under construction or construction concluded less than the required years for insurance maintenance. NOTE: The statute of limitations is 12 years, however, requiring a vendor to maintain insurance compliance for that long is often impractical. Therefore, a developer may wish to consider some shorter, but more reasonable timeframe (such as five years).
Given these inputs, vendors should be required to provide proof of insurance prior to setting foot on the developer’s property. In practice, however, most firms require insurance compliance as a condition for payment. This can result in a liability gap if the insurance is not compliant, and injury occurs. Therefore, it is recommended that proof of insurance be provided at the time a vendor contract is signed to ensure a higher likelihood of proper coverage.
Internal Review vs. Third Party Monitoring
There are advantages and disadvantages to employing a third-party insurance Compliance. If the developer has someone internally with bandwidth who has a high level of affinity for ensuring i’s are dotted and t’s are crossed, this can be an internal function. However, some developers feel uncomfortable placing responsibility for insurance compliance on a single individual, no matter how skilled. Personnel employed by third party services are specifically trained to review insurance certificates and have a good understanding of what criteria meets compliance. Third party services also often utilize software which can enable XML data exports which can be pulled into other reporting. The advantage of merging this data with the developers own internal reporting is that dashboards may be developed to provide reports that clearly indicate non-compliance and areas of greatest liability. Merging these external an internal data sources is usually a simple matter of utilizing VLOOKUP’s and/or the concatenate function in excel. For instance, a compliance report might look as follows:
The color coding, which is usually established by a code internal to the compliance monitor’s system, helps quickly identify the issue and the report would be accompanied with a coding key such as follows:
Green = Vendor is in the system and compliant for this project
Yellow = Vendor is in the system and not yet compliant (compliance under review or compliance monitor in process of contacting vendor for updated insurance certificate)
Orange = Vendor is in the system, non-compliant and non-responsive
Red = Vendor is not yet in the system
Naturally, this report can also include relevant data internal to the developer to assist with management (such as responsible manager or project team).
The advantage of constant monitoring by a third-party vendor is that insurance certificates are only typically written for a single year. Therefore, unless the vendor proactively updates their insurance and sends that insurance of their own volition to the developer or the monitoring service just before the expiration of the old policy, the developer may never know that the vendor is operating under expired insurance.
One of the challenges to the third-party monitoring system is highlighted by the Orange category. The monitoring service is dependent upon the vendor contact information provided by the developer at the time the contract is executed and relevant paperwork submitted (typically a W9 and the Insurance Certificate). The vendor contact may be the individual with whom the team had been working, which may be the owner of the company or one of their project managers. Generally, these are the last people within the vendor’s organization who can provide updated insurance information. They may ignore the calls by the monitoring service, a service they have likely never heard of, or believe their calls to be spam. This is why having a cross-pollinated compliance report such as the above, including the developer’s responsible team member is needed. Typically, an internal team member managing the vendor relationship is best suited to communicate the specific insurance need to the vendor.
The advantage of a focused, visual report is that the monitoring services system will comprise every vendor for every project which can quickly balloon in the hundreds if not thousands. However, a report of this nature will help the project execution team focus compliance efforts only for the vendors for whom the risk is greatest.
In addition, many developers employ an additional internal process with their accounting team that no vendor should be paid without compliance. As stated earlier, this process serves as a “belt,” but we still recommend this proactive monitoring process as the “suspenders.”
While no system is perfect, we believe a weekly or monthly snapshot can help senior leadership monitor the current level of risk on a project. This process can also be extended should the developer internalize general contracting, and subcontractors must be similarly monitored. Alternatively, a general contractor may be required by contract to provide such a report at each OAC meeting.
At the end of the day, insurance risk management is likely the last priority on the mind of any project execution team. However, the implementation of simple procedures and easy to understand reporting can greatly reduce the Developer’s liability.
