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Adding Value Through Risk Management – Part III

FMI’s Andrew Patron, Zurich’s Karen Schwartzkopf, and Lockton’s Tom Miller continue their discussion on the importance of safety and becoming risk-aware. Understanding risk and communicating those risks clearly to everyone in your company is paramount to managing risk.  (Click [here] to read Part I and [here] to read Part II of this Q&A.)

Patron: What are the types of coverages that I should consider buying to protect myself against some of the risks that are out there?

Miller: You need standard coverage, such as workers’ compensation and general liability, to go onto any site. Consider whatever excess liability you are going to maintain, which typically is a builder’s risk product, and whether it is contractor or owner provided. You may need coverage for inland and ocean marine, transit, equipment, professional liability policies, environmental liability policies, and subcontractor and supplier bonds. Before you decide what to purchase, focus on whether the risk one you can bear some liability on your balance sheet—is it a risk you would be willing to undertake? If the answer is no, I do not think the ability to buy insurance for it should change your ultimate decision.

Patron: I think the perception out there for many is, “I’ll just transfer the risk and this is how I’ll do it” instead of considering whether or not it is a risk that they even want to absorb.

Miller: You see it as a philosophy from some general contractors who tend to push risk down to the subcontractors. Every time you push a risk down, the scope of the coverage tends to be narrower and the insurance premium associated with that reduced scope of coverage tends to be greater than you would otherwise pay for it if you were to manage appropriately the risk at the general contractor level. There are a number of ways to do that, one being to approach it through a contractor- controlled insurance program, where you look at your selection and retention of quality subcontractors, etc., rather than continuing to push risk downward. Not that there isn’t a place for subcontractors to bear risk.

Patron: Do you find that companies that really understand what their costs are do a better job at managing risk?

Schwartzkopf: Yes, and those companies that understand that concept also do a better job consulting with their project teams.

Miller: A risk manager who is in tune with the project team has a better handle on cost and knows where insurance fits into the picture.

Patron: When something unexpected happens and a risk is realized, how do the best companies respond?

Schwartzkopf: For those companies that have anticipated the unexpected and have a crisis or loss management plan in place, it is not a moment of panic. They have an internal and external process and a communication plan. They know if it is an event that is going to attract media attention the president or CEO will speak to the media. They are prepared to control the outcome of the event in an expeditious way.

Patron: How do people prepare themselves for that? Is there value in scenario planning for project teams to be prepared?

Schwartzkopf: There are crisis management plans for natural disasters and plans for worker injuries. If a worker is seriously injured on site, which happens frequently in our business, what is the plan and who gets involved? Who from senior management contacts the victims’ relatives? What is the process to get the employee the quickest medical attention?

Patron: Let’s take an environmental concern. Someone spills a hazardous material or there is a breach in the environmental control plan or erosion control plan. Does the same practice apply?

Miller: Absolutely. The sooner you respond, the better off you are, even if you do not have all of the answers at a given time. Ignoring a crisis is not going to make it go away, and I think ignoring an issue leads to a tremendous reputational risk, particularly in an environmental scenario. There are jobs that go so poorly that the contractor may have a very hard time completing the project without considering filing for bankruptcy. In that case, I think early discussion with the project owner can make that outcome better. Nothing can make the outcome perfect—you are simply looking for the best possible outcome under a given set of circumstances. Perhaps it is a project where you have extensive rework issues and you can afford to put forward X amount toward a rework repair. Discuss it with the owner and say, “Look, I’m not trying to hide the pea here. I understand that I’m responsible, but this is all I have without going bankrupt. If I go bankrupt, your work does not get done by me. Will you accept X or contribute Y, etc.?” Earlier is better.

Schwartzkopf: Going back to everything contractors can do to prepare themselves, think about losses associated with quality as well as safety. This includes the project documents and retention of any third-party inspections, work site photos, etc., and keeping the documents retained in an electronic format that is searchable so they are able to provide evidence of the site without performing destructive testing of a building they have completed. A little front-end help will reduce loss and allow them to manage through that loss in a more efficient and economical way. The benefit is also that in the process of documenting the site and work, additional opportunities are present to take corrective action during the course of construction.

Patron: So it goes back to having good processes. If you have a good safety program, you’re going to have safety logs. You’re going to be able to show that you have a culture of safety. That is a form of risk management in and of itself.

Schwartzkopf: If you have a good quality program and can evidence it, you might reduce your losses associated with construction defects on the back end.

Patron: So taking action, external and internal action, is better than not doing anything when a crisis happens, as a general rule?

Miller: Yes, provided it is a reasonable action and you have appropriately vetted it with senior management. You need senior management commitment.

Schwartzkopf: It should also be a pre-planned action.

Patron: So after a risk has been realized, when should I call my insurer?

Miller: The sooner the better.

Schwartzkopf: Many times our risk engineers or claims professionals are the second or third called to come to the scene and help provide assistance in managing the crisis at the jobsite. When there is a severe accident, our risk engineers, who have come from the construction industry with an average of 15 years experience, can get on the jobsite and help the insured manage the safety response and the site for investigation, whether for OSHA or from the claims perspective.

Patron: What is the value of risk management? Why should risk management be at the top of the industry’s list?

Miller: I would turn the question around and ask companies, “are you providing any value if you are not appropriately managing your risk? Are you providing any value to the construction process?” I think the answer to that question is no. If you are a company that focuses on risk management throughout the contracting process, the operational aspect of the construction and focus on the fortuitous elements, you wind up with a client who is going to be happier with your work at the end of the day, and thereby you’ll get additional work from that client. If it’s a one-off client, you at least enjoy the reputation that that client will pass along to peers on your behalf.

Additionally, the contractors who we see as being very successful in terms of managing the safety elements of the process add to their bottom line with lower EMRs and lower insurance premiums. These contractors are able to take higher retentions or deductibles as compared to other contractors because they are confident they can manage it, and are able to reduce premiums that way. Focusing on the contracting piece of this as well, successful contractors know what’s in their contract. What is interesting, if you ask contractors what they do, they always tell you that they build. However, they are not called contractors without reason. A large part of what they do is the contracting process itself—reviewing, negotiating, and signing contracts. They need to know what is in those contracts to manage the inherent risks.

Schwartzkopf: Some CII data, and I’m not sure it’s the most current, talks about having senior management’s commitment to create a culture of safety or a culture of managing risks. CII found that when top management was involved in reviewing every recordable incident investigation, the recordable incident rate was 1.2, as opposed to the recordable incident rate of almost 7.0 when top managers participate 50 percent or less of the time in the investigation. That is pretty compelling.

Patron: Is there anything else you would want to highlight around risk?

Miller: Understand what you’re signing when you sign that contract. If you wind up in litigation, nobody is going to forgive you because you didn’t see it or didn’t understand it.

Patron: Then risk management starts there?

Miller: It actually starts in selecting the types of projects you want your business development manager to focus on.

CONCLUSION

Jeremy Laurance, journalist and health editor for The Independent, captures this dilemma very succinctly, “The message here is that it is not enough to share information on risks—we have to communicate them meaningfully as well. The language of risk increasingly dominates our lives, but no one is translating it.” We know construction is an inherently risky business. The ability to understand what the risks are is only the first step. The real value of knowing lies in how effective you are in managing risk.

Reprinted with permission from FMI Corporation, 919.787.8400. For more information, visit http://www.fminet.com or call Sarah Avallone at 919.785.9221.

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