Hidden Insurance Gaps: What Contractors Need to Know!

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ℹ ABOUT THIS EPISODE

Discover the hidden insurance gaps that cost contractors thousands! 

Wade and Stephen reveal what's actually covered when your equipment is stolen, materials get damaged in transit, or accidents happen on job sites. 

Learn the difference between builder's risk, installation floater, and inland marine coverage. Plus, get real case studies and a free insurance checklist to protect your business from costly surprises.

Text 901-340-8085 to get Stephen's free checklist!

⌚️ Key moments in this episode:

• 00:00 Insurance Wake Up Call
• 00:35 What Needs Coverage
• 01:58 Core Policies Explained
• 03:24 Inland Marine Demystified
• 04:55 Contracts Transit Responsibility
• 06:48 Bidding Costs And Specs
• 08:41 Crane Roof Disaster Story
• 10:43 Rental Equipment Pitfalls
• 13:26 Skid Steer Liability Chain
• 15:04 Glass Shipment And Builders Risk
• 17:46 Rules Of Thumb Communicate
• 20:29 Checklist And Wrap Up

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Head to profitfirstconstruction.com/blueprint to download your free copy. 

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] You know when contractors usually discover what their insurance actually covers? Right after something expensive catches fire, gets stolen, or falls off the trailer. And that's when the phrase shows up, "Well, I thought it was covered." That sentence has probably cost contractors more money than bad estimates, slow pay, and employees named Bubba combined.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel-Whitley Bonding & Insurance. And today, Stephen is gonna set us straight on what is actually covered. Stephen, this is a great topic. Kick us off.

Stephen Brown: Well, you've got property, you've got equipment, you've got materials, you got stuff in your shop. You've got stuff outside of your shop. You've got stuff in transit. All these things depend on you getting the job done. And how are you covered? What kind of losses could you have that you may have insured? Are you insurance poor? What coverage protects different items that you have, and when does it [00:01:00] apply?

It's kinda hard for contractors to understand this because there's a lot of moving parts. A lot of times a contractor just talks to the agent and assume that they've communicated to us what they want covered that you've taken care of.

Well, you knew I was doing that job. You knew I had a bunch of materials. Why didn't you insure it? That sort of thing. So that's kinda what I thought we'd talk about today.

Wade Carpenter: When you started talking about this, my head started swimming, actually, because I had never thought about some of these things that you're talking about, like coverage can change depending on where the property is or who owns it, what stage it's in. Where do we even start on this topic? 

Stephen Brown: Well, I was thinking about it, and I thought the best thing to do, short of putting our listeners to sleep today, is just kinda talk about the different type of coverages briefly, okay? I promise it'll be brief.

And then we can do some case studies, because that's kinda more interesting. How losses occurred, how it could've been covered, what the contractor was supposed to do, maybe what the insurance agent was supposed to do. I don't know.

Anyway, you're a contractor, and [00:02:00] you sign a contract to do something, and a lot of times that contract says, "Well, you cover this, you cover that."

As a subcontractor, you're assuming that the general contractor covers all the materials and all your work on the site because they have a builder's risk policy. And that's not necessarily the case. It doesn't cover your work, it covers the building. That's what a builder's risk does.

Then you've got equipment coverage. You rent equipment, you have your own policy you have rented and leased equipment, or you have equipment that you schedule. So if you own that equipment, you've got to call your agent and schedule it. They're gonna need the make, model, VIN number, just like insuring your car, okay? And then you tell them how much insurance you want on that piece of equipment. So it's up to you to make sure you got the right amount on it.

The next thing is you have property at your shop. You have equipment for manufacturing things in your shop, that doesn't go out to the job site. Then you need property insurance right there on site.

You take [00:03:00] that equipment and materials in transit to the job site, then what happens if something happens, and there's a wreck and that material's destroyed? Well, that's transportation coverage. And then you get to the job site and your materials arrive, then that's called installation floater. Is that as clear as mud or...?

Wade Carpenter: Yeah. I mean, these terms like builder's risk and installation floater, you sort of get. But the one that always stumped me was like inland marine. Explain to us what inland marine is. Is that some kind of fisherman without a boat or... 

Stephen Brown: No, inland marine is just the term for property coverages that are in transportation or on a job site.

You've got property coverage on your building and you've got contents on your office furniture there, Wade, so do most contractors. They have business personal property coverage.

But everything else, once it's being transported, once it's on the job site, once it has to do with the builder's risk or installation floater, that all falls [00:04:00] under inland marine. That's it.

So there's general liability coverage, there's property coverage, there's auto coverage, there's inland marine coverages. So think of inland marine, that unit of coverages that is a specialty. Okay?

You know, at McDaniel-Whitley, we deal with the best inland marine underwriters we can find, and we have the craziest situations come up that need coverage. You name it.

It comes up on a daily basis, and we gotta figure out how to cover it, if it can be covered, and then communicate to the contractor what the cost is. And a lot of times we gotta tell them the cost while they're preparing a bid. You do a job, you send us the bid specs, we look it over and we see what kind of insurance coverages that you don't have, and then we give you a price on the coverages that you need. Usually it's a pretty close ballpark.

Even then, I think it's important that our listeners understand how they're covered properly, and kind of what it costs.

But think about it, Wade, when you sign a [00:05:00] contract to deliver materials, you need to understand: do they assume that you're covering those materials in transit until they arrive at your job site or at your office?

Once it leaves their warehouse, are you responsible? If so, you need to tell your agent and have transportation coverage on that material.

Most of the times you negotiate the contract hauler that they're responsible for the equipment or materials until it arrives. A lot of contractors use a lot of services for shipping their equipment back and forth to job sites.

So, who's responsible for that if there's an accident? You just gotta understand that when you sign a contract to do business that way.

Wade Carpenter: Makes a lot of sense. And I guess I never thought about like me as an accountant, well, I got you know, a desk and computers that are all here in the office for the most part. But these contractors are taking their equipment all over the place, and does it matter whether it's on their yard versus on the job site versus in transit?

Same thing with the materials. [00:06:00] I think a lot of that stuff, and some of these case studies I think you're gonna get into are pretty fascinating to me.

Stephen Brown: Yeah, I know. We can go over know, some of the case studies and tell you some real-life stories of things that have happened.

The biggest horror stories to us is you're doing a job that we don't know about. If we handle your bonds and it's a bonded job, we generally know what's going on and what your exposures are, and at least we have a copy of the specs to see what the insurance requirements are.

But you're doing a job that's, not bonded or we don't know about, you know, it's your responsibility to figure out what the risks are, and a lot of times it's your project manager that's doing the estimating that has to understand the risks.

So I spend a lot of time with my customers and the project managers. From time to time, going and just, questions and answers. Showing them how it's covered and roughly how much to plug into their bids for this particular cost.

For example, the cost to, rent a piece of equipment. If you schedule it, I'm just giving you a ballpark, okay, so don't hold me to it, [00:07:00] but it's 75 cents per $100 of insured value if you schedule it. So you own that equipment and you're scheduling it. That's roughly the cost.

If it's, rented and leased equipment coverage and it's floating around, it's usually roughly a dollar per $100 of insured value. So you can estimate, if I buy this equipment for $100,000 it's gonna cost me about $750 a year to insure it.

You're bidding a job, it requires you to carry a builder's risk, or an installation floater. A lot of times the insurance specs, the engineers or the owners that are putting those specs together, they don't know anything about insurance.

So they have a lot of old language in there, and they want coverages that you can really talk them out of, that aren't applicable, you know, to the project. Like a builder's risk policy for an underground waterline project.

 I talk briefly about that builder's risk. Think of a builder's risk as a building from the ground up, new. And an installation for work in an existing [00:08:00] building, or your work on other people's projects to cover you.

The builder's risk covers the building itself and the installation floater covers your materials and equipment while they're away at a job site doing work.

Generally at McDaniel-Whitley, we'll put, you know, just starting off with the customer, $100,000 of installation coverage for materials on the job, and then we put miscellaneous tools and equipment. We list that. There'll be a maximum amount they'll pay on any one item, and then a overall amount.

So we put that on. That's generally pretty reasonable premium. You know, ballpark, $1,000 a year for that type of coverage. And you get a lot of protection for that.

One thing when we were talking about claim scenarios. Had a situation where a contractor was a general contractor building at Target store, and they used their crane to help a subcontractor lift the air conditioner up on the roof.

They used their [00:09:00] own operator. They slipped, the air conditioner went through the roof. The subcontractor expected the general contractor to pay. The general contractor said, "I didn't even charge you. I was doing you a favor."

Furthermore, there were liquidated damages incurred because the roof had to be rebuilt and the air conditioning unit had to be reordered. Somebody had to pay for that.

Luckily, the subcontractor had installation floater that covered that. Liability coverage for the general contractor picked up the repair of the damage. And all they were out were the materials to replace the beams and sheet metal and roofing system where the roof was damaged and the mounts.

Now, there were huge liquidated damages, it was a Target store. Big retail stores like that usually have $10,000 or more a day in liquidated damage, sometimes $100,000, because that's how much they figure they lose by not being open in profits.

That was the big problem, the liquidated damage. But, luckily, the general contractor was able to negotiate with the owner, [00:10:00] do some other things. Other subs stepped up and helped them get things done faster. They had to redirect a lot of their resources to get the job done faster, but they did it.

It was one of those situations where there was a lot of moving parts.

Wade Carpenter: Yeah. I mean, my head's swimming with thoughts now.

Is it equipment that you owned versus you rented and the equipment rental company, are they covering things like that? What happens if something is wrong with the equipment and it causes injury or other damage, whatever?

I mean, who's responsible for that kind of stuff when, say, you're renting the equipment? I know it sort of depends. I could see all kinds of case studies where these things come out.

Can you give us some of the biggest contractor mistakes that they make in trying to figure out some of these things?

Stephen Brown: Yes, a lot of it has to do with rental equipment, okay? So with rental equipment, you either buy the insurance from the rental company, you know, It's just kinda like renting on a car at the airport. You know, or how are you covered?

[00:11:00] And then there is your own rented and leased equipment coverage. A lot of times, way that works is you cover your rented and leased equipment. The premium is based on how much you spend a year in rental equipment. and It's also based on the highest limit of any one item that you get.

So we're seeing now like a long reach excavator is costing 1 million, 1.2 million to 1.4 million to insure, and it's rental equipment. And they don't need that all the time, but it's a high-dollar piece of equipment.

So what we have to do is we have to explain to the underwriter what you're using the equipment for, about how long you're going to use it, bump up the rented and leased coverage, you know, to a million and a half if we can. Then, let contractor know about what the charge is going to be.

So the expenditures is how much you expend between the policy period. So if your coverage is effective from June 1st to June 1st, it's everything you spend on [00:12:00] renting and leasing equipment during that time period.

It's generally something that you are renting or leasing six months or less, as a general rule. That's how they look at it. It's a short-term exposure for the insurance company, and the equipment companies mark up their insurance. It's another form of profit for them.

But then again, is it really covered? If you get the coverage from them, is it better coverage than rented and leased equipment? The answer is no, I don't believe so. Because every exposure you're concerned about, you need to talk to your agent about and see if it's covered. It's just that simple.

Now, you've got a deductible involved if you have a loss to the rented or leased equipment. But there's also a lot of conditions involved. What if the equipment was stolen and you left the key in it? What if it mysteriously disappeared and there's no police report? What if you specifically violated the equipment company's warranty by rewiring it or repairing something [00:13:00] yourself? So all these are conditions you have to be aware of.

Wade Carpenter: It's a lot to take in, and I think a lot of our contractors are probably thinking, "Well, is somebody else covering this?" Or they take the insurance, like you said, and is it good enough insurance?

If they had very minimal coverage but you paid for it, are you as the contractor gonna be on the hook for that even though you took that insurance through the equipment company?

I know you were talking about that skid steer case study too. I don't know if you wanna get into that one right now, but I thought that one was interesting.

Stephen Brown: In that situation, they left a key in a skid steer on a job site. A sub came in and started it up, and ran the skid steer out into heavy traffic, backing some equipment, caused a bunch of injuries and an accident. The equipment was destroyed and everybody was pointing fingers. And the sub was like, " No, this guy worked for me part-time, but I had no idea he would go out there and take this on himself in the middle of the night."

What was covered? Well, the, the skid steer was scheduled. It was covered [00:14:00] by the, the contractor. They went against the subcontractor to try to recuperate that loss.

The liability coverage for all the accidents involved were the subcontractor's, until his limits ran out. And then it went into the general contractor's policy. So, yeah. Trying to figure out where things are covered, how they're covered is kind of a mystery, but it doesn't need to be.

You just need to think to yourself: it's either insured at my property or once it leaves my property or it's in transit, how's it covered?

And so let's talk about that inland marine you were talking about that sounds so mysterious. Inland marine is just an old insurance term that goes way back.

There's marine insurance, which is out on the ocean, and then there's marine insurance that's inland, it's on dry land.

So marine coverage is generally considered by, and this goes back to Lloyd's of London coverage, for things that are being transported back and forth by vehicles, either ships or [00:15:00] trucks. Okay?

So it started as transportation coverage, and then it evolved to include equipment coverage, and then installation floater. Now, a lot of times our contractors will have a certain job where they gotta buy a bunch of materials fast, they're not gonna necessarily install it.

They'll work out an arrangement with the owner that, "I'm gonna go ahead and order all this equipment because I've got the right price for it now, and it's gotta be here for me to finish this job on time."

And the owner will agree before the project even starts, "We will reimburse you for the cost of that material as long as we have proof that the material has arrived and that it's being stored and that it's insured."

They also only usually do that if it's a bonded project and they've got that protection as well. There's a lot of material costs that come and go.

Our good friend and customer Eric had a situation where he orders some glass from-- just so I don't disrespect the country that he ordered it from, we'll just say [00:16:00] Bulgaria. But it was a spec'd out specialty glass that the architect wanted for this project, and they shipped it over, and it was damaged in transit.

So Eric had to carefully document opening those crates, videotape it to show that it was damaged when it was arrived. It turned out to be the absolute wrong thing to put in that particular application, and Eric had told them that all along. "This is not what you want. This is the wrong application." And the architect said, "We're doing it my way or the highway."

Turned out to be a big mistake, and then because glass had to be reordered from Bulgaria, that took time. They were blaming Eric for liquidated damages. "It's your fault now." And then, they came back to decide, "Well, yeah, you're right. We need to redo this."

He was able to let the architect save face showing him how much faster he could get the glass and avoid all these headaches where everybody was pointing fingers at everyone.

Anyway, who insures it? Once Eric put [00:17:00] that glass in the building, how was it covered?

It was covered under a builder's risk once the glass was installed. Once it was stored at the job site, it was Eric's installation floater. But once it went in the building to be installed, it's the builder's risk coverage that the general contractor had to carry.

So Eric had the right to know if there's a builder's risk policy in place, and would it protect them from materials installed until he gets paid for them?

A lot of contractors say, "No, no, it's all on you until the project's punched out." Or, "If there's a builder's risk claim, you're responsible for the deductible." "But I didn't cause the loss." "I don't care. That's what the contract says."

So I hope I didn't scare our listeners too much, but these are all things you have to think about.

Wade Carpenter: To sum all this up, what would you say some of the biggest mistakes... I mean, I think obviously not reading these insurance.

It's long and tedious things to read [00:18:00] and there some rules of thumb or things like that, that you had thrown out that-- 

Stephen Brown: Well, just like anything else, Wade, if you read them all the time and your agent has educated you on what to look for, when something abnormal appears in the contract language, just call your agent and talk to them about it. "Hey, this says this. Would I be covered? What do I need to cover this?"

As the agent, I might say, "Let me talk to our inland marine underwriter and see what we can work out, and I'll get back to you." But in this situation, it clearly states that the general contractor's covered the builder's risk. There's a twenty-five hundred dollar deductible.

Any part of the claim that applies to your materials or part of the installation, you're responsible for the deductible. Okay? And you're like, "Fine, I'll just plug in an extra twenty-five hundred dollars in my bid to cover that contingency."

Wade Carpenter: Yeah. I guess what I would say is, it's easy to assume that it may be covered, but you may not know it [00:19:00] is or not.

Reaching out to your insurance agent and having a good agent like you, I think goes a long way. I still think back with the old Bad News Bears, what assume means, and I think that's our problem.

You know, sometimes we need to think about: do we really know?

Stephen Brown: I was in another agent's office who had a customer on the speakerphone. I just walked in the door, and it was like, "Hey, man, how you doing?"

You know, "I'm fine. What's going on?"

" Hey, listen, we had a little situation come up... but it's okay, I'm covered, aren't I?" Right off the bat.

" Well, what happened?"

" I had that new excavator. It caught on fire. It could've been vandalism, okay? But it caught on fire."

" What's the excavator? What model? What number?"

"Well, you didn't rent it or lease it, and we didn't have it scheduled. You're not covered."

And the contractor started to cuss him out. He goes " we talked about it and you said you'd self-insure it, so I just sent you an email to remind you of that. I [00:20:00] just re-sent it to you."

And the contractor was-- started cussing.

And I was like, "Okay, you knew damn well it wasn't covered, you jerk."

It doesn't have to be that way. Don't worry about it. Just plan your costs. Plan your cost of insurance as part of the project, and communicate. That's the best thing I can say. Communicate, communicate, communicate.

And when anything that you're in charge of or that you own or that you're installing is outside of your actual workshop, make sure you've got coverage on it elsewhere.

Wade Carpenter: Makes a lot of sense. Well, to wrap us up, Hopefully we hit everything you wanted to hit in this episode, but I know you had created some kind of little checklist about is it covered. Is that something that you would share with our listeners? 

Stephen Brown: Sure. Reach out to me. I'd be happy to send it to you. It's Stephen Brown. Just text me at 901-340-8085, and I'd be happy to send it to you.

Wade Carpenter: Tell them what it is. I thought it was pretty [00:21:00] ingenious.

Stephen Brown: It's a checklist of questions that you can remind yourself on a certain project of whether everything is covered. That's all.

It helps you go through the process of thinking where everything is and what coverage applies. I built it as an idea for educating project managers.

Wade Carpenter: Yeah, I think that's a great tool. Set it up as like a scorecard and you know, if nothing else, maybe it'll make you think about picking up your phone and calling and asking the agent if it's not abundantly clear what's covered. 

Stephen Brown: Okay.

Wade Carpenter: Well, with that, I appreciate you some fascinating things to think about here, I know everybody thinks, well, we don't wanna think about the insurance, but better to think about it now before you... Just like your contractors that you were telling the story about that it's like, well, it's covered, right? That's the whole-- 

Stephen Brown: That's right.

Wade Carpenter: So, thanks again for bringing this to us. If you're listening to this, we appreciate you hanging out with us on this one.

We do this every single week. And we wanna hear from you. If you've got some [00:22:00] thoughts, comments on shows you'd like us to do, we'd love to hear that. Put that in the comments below.

We appreciate you joining us and if you would, like and share. It always helps us out a ton, and we will see you on the next one.