Skip to contentUnited States Department of Transportation - Federal Highway AdministrationSearch FHWAFeedback

Construction

<< PreviousContentsNext >>

Guide to FHWA Funded Wrap-Up Projects

X. Insurance Carriers

  1. Insurance Carriers

    Insurance companies fall into a number of categories or classifications. Wrap-ups may use the services of various segments or categories of the insurance market. The following chart identifies the type of markets used for various coverages:

    CoverageType of InsurerComment
    Basic Wrap-up:
    1. Workers' Compensation
    2. Commercial General Liability
    3. Excess Liability
    4. Builder's risk
    • Admitted (licensed) Insurance Company, providing primary coverage
    1. Required to write Workers' Compensation in all states except Louisiana
    2. Primary carriers have the service infrastructure to offer necessary audit, safety and claims services
    1. Stand-Alone General Liability
    2. Airport Construction Liability Policy
    3. Excess Liability
    4. Pollution Liability
    5. Professional Liability
    6. Builder's risk
    • Admitted Carrier
    • Non-Admitted Carrier approved for Surplus Lines Use
    • Alien or Foreign Carrier such as Lloyd's of London Syndicates
    1. Limited administration is required - a single policy is issued for the project (except Texas, which requires a separate GL policy for each contractor
    2. Non-Admitted Carriers that are approved Excess and Surplus Lines markets may offer more competitive terms and conditions because they are not subject to certain state regulations requiring approval of rates and forms. These carriers require an additional charge for surplus lines tax and in the event of carrier insolvency, the state guarantee funds do not apply. (Admitted carriers include the state tax within the premium, which is deposited into the state fund.)
    3. Lloyd's and other international markets are used on airport and other unusual risks or capacity needs. Tax and insolvency issues are the same as in item #2
  2. Ratings

    The first consideration in choosing a wrap-up insurance carrier should be the financial strength of the company. There are a number of organizations that rate companies financial strength, management, and claims paying ability including:

    1. A.M. Best
    2. Stand & Poor's
    3. Moody's
    4. Federal Treasury List

    Many owners and brokers have minimum standards for insurers, requiring an AM Best Rating of A- VI or above (and the equivalent for Lloyd's of London syndicates).

  3. Insurer Response Evaluation

    Evaluating insurer responses should be based on a methodology that compares insurance company offers and determining the best value (combination of coverage, of service and cost). It is the broker's responsibility to assist the owner in establishing criteria for evaluation and selection as well as performing the necessary analysis and comparison of costs, cash flow, coverage, services and other relevant program components.

  4. Evaluation Criteria

    Some owners identify specific criteria and the relative weighting of those criteria. Publicizing the criteria may lock in a choice without consideration for other factors or without the flexibility to address changing priorities. Whether included in the Underwriting Submission, or used and published after the fact, the criteria should measure the responsiveness to the owner's objectives. It is clear that the choice cannot be based solely on cost.

  5. Written Proposal - Non-Cost Criteria
    1. Financial Rating
    2. Wrap-up Experience - number written within past five years, number currently insured
    3. References
    4. Response to Coverage Specifications
    5. Response to Service Specifications
    6. Objective and Subjective Assessment of the proposed team's experience, workload and service plan
  6. Evaluation Forms

    Forms should be designed by the broker (or owner's standard form should be adapted) and submitted to the owner for review and approval. In addition to addressing the summary categories of the evaluation, detailed analysis of all program components is performed by the broker.

    Criteria or Component Carrier's Response:
    Agreed - Meets Requirement
    Exceeds - Specify
    Alternative - See Comments
    Not Responsive
    Weighting: Importance Points:
    an be one-to-five ranking or more detailed
    Comments
    Explanatory Information

    The evaluation would total the weighted points - this preliminary evaluation would be discussed and reviewed with the Owner's Selection Committee and subject to finalization.

    Some owner's identify certain criteria as eliminators - regardless of how the rest of the program points. Common eliminators include:

    1. Financial rating below a specific rating
    2. A specific coverage issue (for example, an attempt to exclude injury or illness resulting from exposure to radioactive material when quoting a wrap-up for a Nuclear Power Plant)
    3. Unwillingness to provide full-time on-site safety personnel (if requested)
    4. Unwillingness to consult or seek authority for settlement of losses over a certain dollar amount
  7. Written Proposal - Program Cost

    The program cost is the total premium, including losses and other related charges. Each program may contain some or all of the same components or charges. Deductibles and aggregate retentions (the maximum amount of losses that may be charged to the program regardless of actual loss experience) can vary. Because the programs are being evaluated prior to the project inception, the cost of each program at various loss levels up to the maximum cost is compared. The evaluation focuses on the cost of the program at the projected loss level and the maximum cost of the program. The following are typical cost comparison evaluation worksheets:

    In addition to a summary of the key components (based on the owner's objectives, issues and concerns), the following worksheets are representative of the detail review:

    Summary - Key Components
    COMPONENTCarrier 1Carrier 2Carrier 3
    Loss Limit/Ded250,000250,000225,000
    Hard Dollars377,486593,618537,940
    Cost of Losses - %7.00%7.00%7.00%
    Cost at Expected107,25082,25080,500
    Per Loss Cost CapNoNo7,000
    Cost at Expected1,659,7361,850,8681,768,440
    Maximum Cost2,516,7692,750,1432,656,755
    Cost of Managed Care25% of Savings??% of Savings18% of Savings
    Buy-Out OptionNoYesNo
    Other Enhancements or   
    Restrictions   
    1. Expenses: the costs for risk transfer (insurance), carrier services and other non-variable charges (not directly related to losses). These costs developed either as a percentage of workers' compensation premium (using bureau-published rates for each category of payroll) or more typically as a composite rate based on total project payroll. The "premium" is estimated at program inception based on estimated payrolls and adjusted based on the actual audited payroll.
    2. Cost of Losses: the charge for adjusting and administering claim payments. This is a variable cost directly related to either the value of the loss (charged on a percent basis) or the number of losses (charged on a per claim basis). In addition to the loss adjustment costs, the carrier also provides cost containment or managed care services designed to reduce medical provider charges. This cost is developed as a percentage of the medical fee savings.
    3. Minimum and Maximum Costs: The minimum charge is the cost of the program at zero losses and is typically equal to the Program Expenses (see #1). The maximum is a worst case scenario - and represents the program cost using the highest amount of losses allowable based on the pre-determined cap (aggregate or maximum).
    4. Payment Terms: the method for payment of expenses, reimbursement of actual losses and collateral or security requirements where certain payments or costs are deferred. These deferred amounts are generally related to loss reimbursement where the reserve amount (for payments to be made in the future) is not required to be reimbursed until actual payment is made. The liability associated with the reserve is secured by collateral (usually a letter of credit or surety bond) in lieu of premium payment.
    5. Program Cost at Various Loss Levels: The projected cost of each program, based on adjusting the variable costs to reflect multiple scenarios.
  8. Oral Presentation

    The second part of the carrier selection process is the oral presentation. Carriers are invited to discuss their services, introduce the service team and respond to questions from the selection committee members.

  9. Format

    This portion of the selection process usually carries less weight - up to twenty-five percent (25%) of the total points. Most owners' do not invite all offerors. The results of the written evaluation are used to narrow the potential options. Many owners prefer that only the top three carriers participate. The broker may recommend expanding this list if the written evaluations produce very close results or if the offers present unique components. The participants are invited to make a presentation with specific time limits. Most owners identify the topics to be addressed and may incorporate specific questions in the invitation. Among the topics included:

    1. Introduction of the Service Team
    2. Explanation of how the carrier can assure effective implementation
    3. Discussion of the carrier's risk control service and highlight success stories on other wrap-ups
    4. Presentation of why the carrier's representatives think their company should be chosen
    5. Demonstration or explanation of the carrier's data management system and the information available to track project participants, losses and loss trends
  10. Carrier Representatives

    All key members of the actual service team or their supervisors should be present and required to participate. Appropriate representatives include:

    1. Underwriter
    2. Underwriting manager (optional)
    3. Safety representative
    4. Claims representative(s)
    5. Information system representative
  11. Owner Representatives

    The oral presentations offer the opportunity to assess the personnel that will become integral and important members of the team. The owner should include staff members who will have direct interaction with the project team or provide specific information needs.

    1. Senior contact person with decision-making authority
    2. General council or a member of that staff
    3. Contract compliance officer
    4. Staff safety officer
    5. In-house project manager
    6. In-house safety officer (if applicable)
    7. Project Construction Manager's project supervisor and safety manager

    Where Project or Construction Management staff members are included as part of the evaluation team, it is typical to accept their evaluation form for information purposes only. Their inclusion is to assure that no barriers are identified that would disrupt a working relationship.

    Broker personnel also should be present, however their role is to act as non-voting technical advisors to the group. The broker can direct questions to the carrier during the presentation and assist the selection committee by providing explanatory information during the subsequent debriefing.

  12. Evaluation Criteria

    The criteria may be more subjective during the oral presentations and can be done on a point basis or pass/fail for each topic.

  13. Binding

    Based on the results of the evaluations, a carrier is selected. At this point the broker and owner may engage in best-and-final discussions in an attempt to improve particular components of the offer. The broker is then instructed by the owner to bind coverage. The binder is a legal document that summarizes all elements of the offer including coverage, costs and proposed services. It is a temporary document that is replaced by the actual policies, payment and service agreements. The broker prepares the binder and submits it to the carrier who must sign the document as the Authorized Representative.

    Payments - Payment of various components are subject to different time schedules as follows:
    ComponentTimingAdjustmentComment
    Premiums
    Workers' Comp. And General Liability
    1. ExpensesEqual Monthly Installments based on estimated costsAnnually using actual audited payrollCan be paid at inception, annually, quarterly or semi-annually. Modest premium reductions are offered for accelerated payment.
    Option: Monthly based on actual reported payrollAnnual - random audit check of voluntary reports
    2. Specific State Surcharges or other assessmentsAt inceptionIn some cases depending on the stateVery minor cost
    3. Escrow or Loss Reserve Fund (Negotiable: generally equal to two months' paid losses. Example: If loss estimated at $3.6 million for project:

    Year 1 estimate = $1.2
    Est. Paid 30% = $360K
    Two Months = $60K

    At inceptionRefunded at close of programEscrow fund is used to pay losses during the first two months of the program. Subsequent paid losses are reimbursed by monthly billing. The fund usually is equal to two months' estimated paid losses. A project cost of $500 million with a three year duration might require an escrow of $75,000
    4. Letter of CreditDue within 30 days of inceptionCan be readjusted monthly, quarterly or annually depending on project size 
    5. Monthly Paid LossesDue five days after the close of the month  
    6. Claims Handling CostsBilled monthly  
    Builder's RiskAnnual, monthly or quarterlyYes - based on completed values 
    Excess LiabilityAnnuallyNegotiable - may be "flat" charge or adjusted on project hard costs or payrollMarkets may require accelerated payment depending on duration (excess of three years) and current market conditions
    Professional Liability and Pollution LiabilityAnnuallyNegotiable - may be "flat" charge or adjusted on project professional feesMarkets may require accelerated payment depending on duration (excess of three years) and current market conditions
    Broker FeesMonthly - generally initial payment is front loaded to address work performed in securing and implementing programIf service contract contains provisions for adjustment based on changing project conditions 
  14. Self-Insurance Reserve Fund

    The purpose of the reserve fund is to assure that financial resources are in place to pay the cost of insurance deductibles and other self-insured coverage.

    Some examples of the types of exposures that carry deductibles to be paid by the reserve fund include the following:

    1. Fire and other direct damage perils to buildings and contents
    2. General Liability
    3. Automobile liability

    Examples of exposure that would be paid entirely from the reserve fund:

    1. Theft of money and securities
    2. Automobile collision damage

    Examples of exposure that might not be subject to reimbursement from the fund:

    1. Mechanical breakdown of equipment
    2. Mysterious disappearance of property and inventory
    3. Obsolescence

    An independent auditor should monitor the operation of the fund continually. Such monitoring and evaluation of the fund and the exposure to loss to which it is subject is an essential part of any insurance process. Adjusting deductible levels, increasing safety and loss control efforts, and amending insurance coverage's are a few of the techniques available in managing the fund.

    Revenues to the reserve fund are budgeted each year to replenish those amounts expended on actuarial losses as well as to allow for the continued growth and actuarial soundness of the fund.

Sample Oral Presentation Evaluation Form
CriteriaPass / FailPointsComments
Not
Responsive
Meets
Requirements
Exceeds
Requirements
 Acceptable0 - 234-5 
Experience     
Coordination     
Understanding of Role     
Safety Services     
Information System     
Multiple Carrier Evaluation Forms
 Carrier 1Carrier 2Carrier 3
Cost of Losses
Tax RateNot ApplicableNot ApplicableNot Applicable
LCF Rate0.0700.0700.070
LCF Cost CappedNoNo7,000
Cost of losses7.00%7.00%7.00%
Expected Losses
Workers' Compensation1,000,0001,000,0001,000,000
General Liability200,000200,000200,000
Total Expected Losses1,200,0001,200,0001,200,000
Adjusted Expected Losses1,175,0001,175,0001,150,000
Loss Adjustment82,25082,25080,500
Excess of Ded Charge25,000Not ApplicableNot Applicable
Tax on Loss CostsNot ApplicableNot ApplicableNot Applicable
Total-Losses & Costs1,282,2501,257,2501,230,500
Cost at Expected1,659,7361,850,8681,768,440
Plus Allocated Expense (Legal, Investigation, Managed Care etc. ) x LCF subject to Deductibles (Occurrence and Aggregate) & LCF Cap, if applicable
Managed Care (ALAE)
Fee Schedule25% of Savings30% of Savings for18% of Savings
Usual & Customary25% of SavingsMedical Bill Review18% of Savings
PPN: In-Source25% of Savings(Estimated)15% of Savings
PPN: Out-Source25% of Savings 20-25% of Savings
Case Mgt etc.$60 - $75+ per Hour $85 per hour(tenths)
Peer Review$100 - $175+ per Hour $125 -$175 Per Hour
Cost-$100,000 Savings25,00030,00018,000
Cost @ Expected incl. Mgd Care Cost Est.1,684,7361,880,8681,786,440
Duration4 Years
Project Cost$310,000,000
Payroll$51,041,994
 Carrier 1Carrier 2Carrier 3
ProgramLarge DeductibleLarge DeductibleLarge Deductible
Standard PremiumNot ApplicableNot ApplicableNot Applicable
Loss Limit/Deductible
Workers' Compensation250,000250,000225,000
General Liability250,000250,000225,000
Clash Cover250,000 225,000
Allocated ExpenseIncludedIncludedIncluded
Expenses
Basic/Ded-WC Rate0.467300.7230.566
Basic/Ded-WC Premium238,519369,034288,898
Basic/Ded-GL Rate0.272260.4400.292
Basic/Ded-GL Premium138,967224,585149,043
Basic/Ded Premium377,486593,618437,940
WC ELP FactorNot ApplicableIncludedAgg Ded Factor:
ELPNot ApplicableIncluded0.121
Fixed/Admin CostIncludedIncludedIncluded
Sub-Total377,486593,618437,940
Tax on ExpensesIncludedIncludedNot Applicable
Expense ConstantWaivedWaivedWaived
Loss ControlIncludedIncluded100,000
Visits/HoursNot Limited725 Hours790 Hours
RMISIncludedIncludedIncluded
Assess./RML RateIncludedIncludedIncluded
GL Excess (Non Subject)IncludedIncludedIncluded
Total Expenses377,486593,618537,940
Minimums & MaximumsCarrier 1Carrier 2Carrier 3
Minimum - FormulaWC & GL Ded Rate x PayrollWC & Gl Ded Rate x PayrollWC & Gl Ded & Agg Rate x Payroll + Loss Control
Minimum Cost377,486593,618537,940
Maximum - FormulaRate x Payroll = Aggregate Loss Content x LCF + Expense + ELPMaximum Rate x PayrollRate x Payroll = Aggregate Loss Content x LCF + Ded. Premium + Agg. Premium + LC
Maximum %Not ApplicableNot ApplicableNot Applicable
Retro MaximumNot ApplicableNot ApplicableNot Applicable
Expenses + Other Charges377,486Included537,940
Maximum Rate3.775.3883.918
Maximum PremiumNot Applicable Agg is Minimum
Maximum Loss Provision1,924,2832,750,1431,999,825
LCF134,700Not Applicable118,990
Tax on Adj CostNoneNot ApplicableNot Applicable
ELP Swing Cost80,300Not ApplicableNot Applicable
   Maximum LCF Cost Adjusted to reflect probable cap impact
Total Maximum Cost2,516,7692,750,1432,656,755
Loss Content1,924,2832,015,4431,999,825
 Carrier 1Carrier 2Carrier 3
Payment TermsDeductible Premium + Expected Losses x LCF.Deductible Premium + Expected Losses + LCF x Expected LossesDeductible Premium + LCF x (Zurich) Expected Losses + Agg Premium + Loss Control
Payable4 Annual Installment4 Annual Installment4 Annual Installments
Installment Amount   
EscrowNot ApplicableNot ApplicableNot Applicable
LOC - Year 1Not Applicable - Pre-FundedNot Applicable - Pre-FundedNot Applicable - Pre-Funded
<< PreviousContentsNext >>

Contact

Jerry Yakowenko
Office of Program Administration
202-366-1562
E-mail Jerry

 
 
Updated: 04/07/2011
 

FHWA
United States Department of Transportation - Federal Highway Administration