Presented by Greg Schmidt, CPCU, ARM For the WTBA Contractor-Engineer Conference January 2009

1. Presented by Greg Schmidt, CPCU, ARM For the WTBA Contractor-Engineer Conference January 2009

2. Construction Risk Management In this presentation, we will review: • Risk Management Process • Commercial Insurance • Construction Contracts + Contractual Liability • Safety Issues • Lowering Costs & Staying Pretty 2

3. Risk Management • Definition of Risk Management: The process of planning, leading and controlling the resources and activities of an organization -- To fulfill its objectives cost effectively To protect and grow corporate assets To enhance shareholder value 3

4. Risk Management • Process Defined: 4

5. Risk Management • Identify Exposures to Loss: • Property • Personnel • Net Income • Liability 5

6. Risk Management • Risk Funding Techniques: • Current Expensing • Unfunded Reserves • Funded Reserves • Borrowing • Captive Insurers • Commercial Insurance • Contractual Transfer for Risk Financing 6

7. Commercial Insurance Definition of Commercial Insurance: A contract under which one party, the insurer, agrees - in exchange for the payment of a premium - to pay for specified losses the insured may suffer, up to specified amounts, under conditions specified in the insurance contract. 7

8. Commercial Insurance • Sample Insurance Portfolio for WTBA Members: • Workers Compensation • General Liability • Automobile • Umbrella or Excess Liability • Professional Liability (Design Build, Engineering Only • Property/ Contractor’s Equipment • Property/ Builder’s Risk • EPLI/D&O/RRP/OCP/Pollution 8

9. Commercial Insurance • Workers Compensation Coverage: • Workers Compensation Costs: Premium = Payroll x Rate x Experience Factor 9

10. Commercial Insurance • General Liability Coverages & Costs: • Third Party Damages • Bodily Injury, Property Damage, Personal Injury • Defense Expenses • Settlements, Awards Premium = Payroll/ Sales x Rates x Experience 10

11. Commercial Insurance • Automobile Coverages & Costs: • Third Party Damages - • Bodily Injury & Property Damage Liability • Hired and Non-Owned Liability • Medical Payments First Party Damages - • Uninsured and Underinsured Motorists • Comprehensive and Collision Coverages • Hired Physical Damage Premium = Vehicle Type, Usage and Cost x Rates x Experience 11

12. Commercial Insurance • Umbrella or Excess Liability Coverages & Costs: Third Party Damages – Extends Limits Over Underlying: • General Liability • Auto Liability • Employer’s Liability Premium = Limits Selected and Underlying Premiums x Rates 12

13. Commercial Insurance • Professional Liability Coverages & Costs: Third Party Damages – • Professional Errors & Omissions • Defense Expenses • Settlements, Awards Premium = Type of Professional/Sales/Limits x Rates x Experience 13

14. Commercial Insurance • Contractor’s Equipment Coverages & Costs: First Party Coverage - • Mobile Equipment • At Shop • On Job-sites • In Transit • Hired, Borrowed and Rented • Crane Overload • Installation Floater Materials Premium = Value of Equipment X Rates X Experience 14

15. Commercial Insurance • Builder’s Risk Coverages & Costs: Premium = Cost of Construction x Rates 15

16. Commercial Insurance • Experience (claim history) plays significant role in premium level • Underwriters concerned with loss frequency issues • Just as your workers compensation premium is adjusted via an experience rating factor, rates on other lines are debited (credited) according to claim history 16

17. Commercial Insurance • Marketplace Conditions: Repercussions for WTBA Members: • Upward pressure on rates. The global recession will temper this pressure via lower demand • Hard market and escalating rates are predicted to persist as new capital infusions into the industry are scarce due to frozen credit/capital markets* • Expectations are that insurance-related costs will increase. In some cases, and on some lines, those increases will be significant. • Stressed profit margins will face additional pressure * Advisen, Dec. 20, 2008 17

18. Commercial Insurance • Concerns/Opportunities for WTBA Members: • State budget issues • Record projected deficit • Revenue shrinkage due to business conditions • Long-term infrastructure funding mechanisms need re-vamping • Possible federal infrastructure stimulus bill forthcoming with new administration • Depending on where dollars are distributed, out-of-state competition likely to increase • With funding comes strings 18

19. Commercial Insurance • Federal-Level Funding Scenarios: • With funding comes strings • Prequalification process and safety standards may be ramped up • Workers compensation experience mod over 1.00 may disqualify your bid • Some private owners require written procedures for pre-planning safety issues into each project • OCIP safety requirements likely to become more stringent • WisDOT use of OCIPs likely to become a matter of course on large “mega corridor” projects 19

20. Commercial Insurance • State of the Marketplace: • 2008 Cat losses increased 50% over 2007 • Financial market meltdown has eroded insurers’ balance sheets • Reserve levels are being drawn down to pay for cat losses and to write off investments. • Last month Towers Perrin estimated 15% of industry reserves would disappear • Combined ratios (losses + expenses) are deteriorating and the industry is losing money on its underwriting 20

21. Construction Contracts • Definition: Specify the legal responsibilities and obligations between the project Owner and the Contractors. 21

22. Construction Contracts • Issues: • Indemnification Agreements (Huge) • Insurance Specifications • Insurance Compliance/Certificates of Insurance • Additional Insureds/Waivers of Subrogation • Builder’s Risk (Who is responsible) • Safety and Loss Control Programs (Discretion of Owner) • OSHA Compliance 22

23. Construction Contracts • Indemnification Agreements: Broad Form – AVOID - Pay any and all damages, costs, expenses - even for sole negligence of owner. Your insurance carrier would pay for claims caused by others. Limited Form – ACCEPT – Pay bodily injury and property damages to the extent of own negligence 23

24. Construction Contracts • Insurance Specifications: • Workers Compensation – Statutory Benefits • General Liability – limits specified in contract • Auto Liability – limits specified in contract • Umbrella/ XS Liability – limits specified in contract • Professional Liability – limits specified in contract • Builder’s Risk - $Project Cost, $Materials On-site, Off-site and In Transit • Additional Insureds, Waivers of Subrogation • Certificates of Insurance 24

25. Construction Contracts • Insurance Compliance/ Certificates of Insurance: 25

26. Construction Contracts • Additional Insureds: • Obligates an insurer to defend and possibly pay claims of another party • AVOID – Primary Noncontributory Language. If it is included, add the phrase: “but limited to the operations conducted by the Named Insured.” • Waivers of Subrogation: • After payment of a claim, restricts an insurer’s right to collect from the responsible party 26

27. Construction Contracts 27

28. Construction Contracts 28

29. Construction Contracts • Builder’s Risk: 29

30. Safety Issues • OSHA/MSHA Purpose • Establish minimum safe workplace standards • Conduct workplace inspections for compliance • 29 CFR 1926 Standard applies to road construction operations • Table of Contents is nine pages long! • 29 CFR 1910 applies to general construction • OSHA Partnership program agreements exceed minimum safety standards • Bottom line – Safety issues demand your attention 30

31. Accident Pyramid Major Accident 1 Severity Lost Time Injury 30 Frequency First Aid Cases 300 Accident Near Misses 3,000 Potential At - Risk Situations 30,000 Behaviors Safety Issues 31

32. Major Accident 1 Severity Lost Time Injury 30 Frequency First Aid Cases 300 Accident Near Misses 3,000 Potential At - Risk Situations 30,000 Behaviors Safety Issues • A successful safety program focuses its efforts on the bottom of the pyramid • Reducing at-risk behaviors and near misses will result in lower claim frequency and severity rates over time • Establish a corporate climate of eliminating at-risk behaviors • Develop internal protocol to allow for site/project specificity safety procedures

33. Safety Issues • Critical components of a successful safety program: • Top management support and commitment • Foreman/Supervisor involvement and accountability • Recognition/Reward for meeting and exceeding expectations 33

34. Lowering Costs & Staying Pretty • Underwriters look for these account characteristics – • Solid financial position • Quality management • Contractual/Risk Transfer controls • Auto/fleet controls 34

35. Lowering Costs & Staying Pretty • Solid Financial Position: • Profitable • Willing to invest in safety, training and equipment • Quality Management: • Reputation and work quality • Clear safety accountability structure 35

36. Lowering Costs & Staying Pretty Contractual/Risk Transfer Controls: • Qualified internal contract review prior to execution • Applicable to both prime and subcontract work • Auto/Fleet Controls: • Uniformly enforce of company policies • Be familiar with the doctrine of Negligent Entrustment 36

37. Lowering Costs and Staying Pretty • Meaningful improvement is possible • Large, multi-state contractor – 3mm+ man hours without a lost-time injury • Marquette OCIP accumulated 2.25mm man hours without a “major” injury • Implementation will help ensure your firm is insurable regardless of market conditions 37

38. Lowering Costs & Staying Pretty • 90-120 days out from insurance program renewal date is too late to pay adequate attention to the program structure • Average insurance costs for road construction accounts run between 1% to 2.5% of revenue • Make it your goal to be better than average 38

39. Questions and Comments • Thank you for your attendance and participation! • Greg Schmidt • WSA Account Executive • Phone: 715.847.7792 • Cell: 715.574.1519 • Email: Gregory.Schmidt@WausauSA.com 39