You may have heard of one catastrophic project taking a whole construction company down – usually due to a combination of issues that may include delays, damages, and mismanagement. This has unfortunately become more common, which is why there’s a new insurance product in the industry: Project Loss Insurance. Daniel Fulcher from Travelers joins us to discuss the benefits, costs, and details of how this coverage works.
Topics we cover in this episode include:
- What Project Loss Insurance is and what it covers
- How underwriting is done for Project Loss Insurance
- How a project loss is assessed
- Using PLI when exiting or scaling your business
- PLI coverage limits
- PLI and Joint Ventures
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[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today we’re talking about how to protect project losses with project loss insurance. Amazing. This is probably the only place you’re gonna hear about this, because we are the one place, the Contractor Success Forum, where we discuss how to run a more profitable, successful construction business.
And our regulars we have on here are Wade Carpenter, Carpenter and Company, CPAs and Stephen Brown with McDaniel-Whitley Bonding and insurance agency. And who is this wonderful guest we have today, Stephen?
[00:00:41] Stephen Brown: Well, first of all I love the idea that you say this is the only place you’re gonna get this kind of information. It’s really not a hundred percent accurate, but I love it. I like your attitude behind it. And our guest today listeners, is Daniel Fulcher. And Daniel is with Travelers Insurance Company and he is the account regional director for a new product called Project Loss Insurance.
And Daniel was a surety underwriter and Travelers started working on this insurance coverage called Project Loss Insurance. and it really, really fits well in managing your risk. I’m excited about it. I hope you are too, as a listener, and Daniel, would you mind introducing yourself and just telling us a little bit about how you got into this, what Travelers is doing with this Project Loss Insurance?
What is Project Loss Insurance?
[00:01:34] Daniel Fulcher: Sure. First off, thank you so much for your time today, and excited to educate your listeners about this this new product we have. And as you mentioned, I am a surety underwriter as well. And this product came out of the surety space.
And as Travelers, one of the largest surety writers in North America, we have 4,500 accounts across that area. And so we see a big swath of the market and a trend that we started seeing over the last 10 to 15 years, and it’s really been accelerating, is a construction company coming across just one catastrophic project loss that is, is typically a, multifactorial of things.
A difficult owner, challenges with subs, maybe some delays and damages. Just a multitude of things, mismanagement. And that this one catastrophic project just blows a hole in the company’s balance sheet. And that’s really what we’re trying to do with the product, is protect that investment that the business owners have in that construction company.
[00:02:32] Stephen Brown: Well, all of us know about that, that one catastrophic job that just eats your lunch. And all of us certainly have stories about that, and I’m sure all our listeners do too, or have heard a story about that. So how do you use this project loss insurance to keep that from happening?
[00:02:52] Daniel Fulcher: Sure. Well, so the coverage is a first party coverage, right? So unlike a bond that’s really to the benefit of an owner or the subs below you, the funds from the product come directly to the business. And what kind of happens is we put the coverage in place and then new contracts as they’re assigned are enrolled in the coverage. And then in real simple terms, if you have a catastrophic project that’s above your retention amount, we start refunding dollars lost. It’s usually a 75/25% split. So the way I like to think about it is we’re really giving you back 75 cents of every dollar lost over your retention amount until we’ve exhausted the limits of the policy.
And we can, of course, get into the types of drivers of a project loss that would actually be covered by the policy itself. But at its very core that’s what we’re doing is helping you cash flow through a catastrophic situation.
[00:03:47] Wade Carpenter: I was thinking, well, which types of project do we insure? But this is more of a line to cover multiple projects? We don’t look at it on a project by project basis?
Which projects are covered?
[00:03:56] Daniel Fulcher: That’s right. We get that question a lot and we can be somewhat flexible there. We’ve been in business with this for about two years and what we find is, some people get hung up on having to insure the very smallest jobs they do, and we could carve those out.
There’s an adverse selection risk there from an insurance pool standpoint to let everybody just pick and choose. They’d only choose the project with, $10,000 per bed, per day, LDs, or, you know, all of the nastiest deals. And so really to get a robust risk pool where we can respond like we need to to our insureds, we have to have a broader risk cover.
But the other thing I’d say is, it’s not always the job that you think is gonna sting you that does. I mean, a lot of times that job that you’re of most worried about, you load up with additional management, with additional contingency, with additional profit and you’re really watching it. And it can be that unexpected project that maybe you wouldn’t have chosen to cover otherwise that, that really gets you.
[00:04:53] Stephen Brown: That’s right. If you knew that job was gonna sink your ship, you wouldn’t take it.
[00:04:58] Daniel Fulcher: That’s a great point. Yeah,
[00:04:59] Wade Carpenter: Well–
[00:05:00] Rob Williams: Or there, definitely have been jobs, we were just talking about in our last podcast about how you can control and get your estimates or dif different things. Correct. Sometimes it’s staying in your, a area of expertise. So I guess we could just ensure the ones that we don’t know what the hell we’re doing. That, that would be one strategy. I guess if you–
[00:05:20] Stephen Brown: Yeah, it’ll be easier for me to get the bond too if I said, Hey, Daniel insured this project and he wouldn’t do it if he didn’t think they knew what they were doing.
[00:05:28] Rob Williams: Yeah, right.
How underwriting is done for Project Loss insurance
[00:05:30] Wade Carpenter: Well, that leads in into another question I had was, how do you underwrite something like this? I guess it’s based on the experience and the health of the company?
[00:05:38] Daniel Fulcher: Yeah, definitely. I mean, again, this product is actually born out of the surety space. And so it’s very similar to that. I mean, it’s really a financial underwrite more than digging into EMR and things like that. Although we do have some commentary around safety.
But we just take a deep dive– and not that we don’t do this already in surety, but we really take a deep dive into the work in progress. We look back at least five years. We’re looking at gains and fades and jobs that did lose money, frequency of that happening things of that nature. And then we have a robust discussion.
We even involve our in-house engineers, that these are the guys that manage our surety losses. When we do have them, they get involved in that too. And we try to give some good feedback to the client even on the front end. You guys are all about contractor success, right? And that’s really what we’re about too.
Our mission statement is, we’re in the business of helping contractors succeed. And so what we’d like to do is try to give some feedback to help people be more profitable on the front end. It’s kinda like we all buy insurance in case our house burns down, right? But we’d rather it never happen and so that’s really the end goal there is to give some some good robust feedback, help people on the front end too.
[00:06:45] Rob Williams: One of my thought s was about companies that are growing and the cash flow of people. We do this cash flow, story drill and the profit the 1% profit, what’s that called, Wade?
[00:06:57] Wade Carpenter: The drivers part?
[00:06:58] Rob Williams: The driver, well, the profit drivers where you do the power of one. That’s what I was thinking of. We calculate how fast you can grow for you. We can say, oh, well you cannot sustain that level of growth with your cash flow the, your timing of it. And so it’s very important to stay really close to those numbers.
Some of the people that need it the most are not the people that aren’t successful, it’s the ones that are experienced success. What is that, that mergers and acquisition conference I was at, it is talking about indigestion of job not, not starving, but there, the indigestion is what puts people out of business by having too much money and something like this can really knock you off.
We had another episode where we were talking about valuing your company. Those people buying your companies are looking at not your revenue and not just the growth, but they wanna see how steady the growth of your revenue is. But also, your gross margin and your net profit, and that’s really gonna affect your valuation.
So, in those things, if you’re selling for a five or 10 time multiple, something like this, to keep that steady margin could be five to 10 times that loss on your valuation depending on what your multiplier is.
[00:08:15] Daniel Fulcher: Well, it’s interesting that you bring up ownership transition because I would say that is one of the most common drivers of the reason why somebody picks up the phone and is reaching out to us. I mean, it’s not always that people buy project loss insurance for a multitude of reasons, but particularly when it’s a these are closely held businesses and it’s an owner finance deal.
We’ve seen it plenty of times where it’s the five year plan turns into the 10 year plan, right? Because of a catastrophic project in the middle. And you have to pause that. And so, I think having that backstop of project loss insurance there gives a lot of comfort to really the buyer and the seller to, to know that transaction is gonna actually get to the end line without any major hiccups. And you’re still gonna have a going concern at the end of the day. So that’s important.
What does Project Loss insurance cover?
[00:09:00] Daniel Fulcher: And I guess I realize I’ll say quickly because we haven’t really talked about exactly what it covers. We really look at it as three buckets of risk, that, that typically take down a construction project that historically you couldn’t insure away.
Okay. So you have like your own. Faults. I’ll say this is you mis bid a project or you just make some wrong assumptions. You put the wrong project manager, super on the job. You have turnover in that space, those types of issues, right?
Then you have the bucket of stuff that other people do to you. So this is a bad sub or supplier. This is material price increases, which has been a big deal over the last 18 months to two years. Supply chain issues. Just an owner that keeps on changing their mind is killing your productivity, those types of things.
And then the third bucket is a little bit more miscellaneous. These are things like liquidated damages, actual damages, unforeseen soil conditions. And then think of all those things that you get time but no money for, right, on a job. And those carry general conditions. So those the buckets. It’s losses driven by those types of things are what we’re addressing.
[00:10:04] Stephen Brown: And sometimes a combination of those.
[00:10:06] Daniel Fulcher: Very often on a catastrophic project, a combination. You’re right, Stephen.
How a project loss is assessed
[00:10:10] Wade Carpenter: As a CPA I guess I’ve gotta ask, I assume you come back in and you’re looking at it on a project by project basis, so it’s, I mean, are they looking at the job costing? One of the common subjects we have on here is what if they’re not very good at job costing? Short question is how do you assess what the loss is?
[00:10:29] Daniel Fulcher: That’s a great question. And of course we’re trying to ferret out some of that on the front end through the underwriting, right? And make sure that it’s a Contractor that has two hands on the wheel. We’re not looking for perfection by any means, but we want some level of sophistication.
I mean, think about the type of Contractor that’s, at least able to generate quarterly WIPs internally and is having monthly project meetings and things like that. So that’s one piece of that.
Then on the back end, we did wanna make it easy to make a claim. So it, it’s really we have a proof of loss, but it’s frankly just arithmetic. I mean, it’s direct cost. And then any liquidated damages or actual damages, the net of whatever you could charge back to a sub basically. And then just to the extent that’s higher than contract price, that’s a loss, right? And then you’ll have a retention amount or a deductible on the policy. And so to the extent that our covered drivers are driving a loss that’s greater than that amount that’s a covered project loss.
So it’s really the write down of the job on the WIP, Wade. So not a fade, not a under billing. But that moment in time that the project is taken down below the deductible amount due to the covered issues.
And then for indirects being charged to jobs, we work through that on the front end and we just apply a percentage. So, we don’t wanna get in an argument on the back end. So we would say, okay, what do you normally apply to your jobs? 2%, 3%, 4%. And so that again, would just be arithmetic in a claim.
Now, I’m sure we’d ask for some backup information out of Procore or whatever system they’re using, but we want to try to make that as painless as possible.
Using Project Loss Insurance when exiting the business
[00:11:56] Rob Williams: One thing I was thinking about is I run into people that are wanting to exit the business and one of our practices is run your business as if you’re gonna sell it. And then once you can run it like that as you, one of the points is getting the owner to where the company can run without them.
Well, the owner kind of wants to get out. I’ve actually had this thought before of leaving a company. Well, if I’m not there day-to-day, I don’t know if I want that risk of these guys. Just like that example that we used in the last podcast of the guy missing one line item on a takeoff. Something like that.
But these losses that they have when you’re not there anymore can greatly affect you personally. And you may, being the owner, again if you decide not to sell the company, but you’ve prepared it so well that might as well keep it. It’s a great investment, but you just don’t want that loss and there are only certain amount of things that you can cover against.
I can see this being a big headache to take away because you have the liability and you have some of these other insurances, gosh, that just didn’t even seem possible to ensure that part, if I’m retired. Not coming to the office very often anymore. I’d love to see that. It’d be a big peace of mind.
[00:13:15] Daniel Fulcher: Yeah, we’ve had people buy it for that very reason, Rob. So you’re right. And then I think even outside of that, even someone who’s not stepping away from the business, but if the business is growing, I mean, you have a day in your business if you were the founder, where you could have your hands on everything, see everything, and, have a level of comfort in that way. And then once you scale to a certain level, I mean, you’re really lending your own personal worth in a way to your estimators, to your project managers, to your superintendents to go out there and execute. And you’re relying more on dashboard reports and hoping to head off things in the pass.
And so, yes I think those moments, or the moments where you’re trying to step away from the business, that’s a big deal and a big time that I think people would have interest in the product.
A Project Loss Insurance case study
[00:13:58] Stephen Brown: Daniel, give us a kind of a case study type of scenario of how this would play out.
[00:14:05] Daniel Fulcher: Sure. Well, this is the type of thing we see all the time, unfortunately. Let’s say you, you get a project and it’s a new owner and you’ve heard some problematic things about the owner, but you know, you know the architect well, and so you think, okay, he’ll help me through it.
And, you’re growing, so you got a up and coming PM that you put on the job and the owner’s a little price sensitive so you’re haggling back and forth. Maybe you sign up a sub or two that you didn’t know or maybe they had a low number, but you figure, well, we’ll manage through it, right?
This is the type of thing we see. And then all of a sudden you wake up 12 months, year and a half later, and it’s oh, well I’ve had to replace two or three subs and oh man, that project manager was in over his head. And, oh, we, we had some contingency on the job, but we took it out, or we whittled it down to fit the owner’s budget.
Oh, this owner has been extremely difficult and I’m, if you can’t tell, I’m thinking of a real scenario that happened, without divulging too much. But, it’s that type of thing. And then all of a sudden, you wake up and it’s well, heck, we’re losing a couple million dollars on this job.
And so that would be the type of scenario, if you have a project loss insurance policy in place, we’d step in. So to be clear on that, what we do is we carve out the risks that are generally insured by other coverages. So think about E&O, general liability, workers’ comp, things like that.
And we’re really picking up those risk inherent to construction that typically can’t be covered in other ways, like we’ve talked about, with the one difference there really being a subcontractor risk. Because of course there’s SDI policies and there’s bonds. But you know, there’s still risk there. I mean, maybe the project manager doesn’t remember to pull the bond.
One thing we’ve seen more and more lately is the sub that just walks before they’re ever even under contract and you gotta go spend money to replace them. And of course you can’t make a bond claim or an SDI claim because a contract was never signed in the first place. So, that’s really where we’re trying to get.
And so that’s, that’s kind of a general case study. I mean, you think about the paver that’s gotta go out and tear up a bunch of bad work and mill it back up and repave again and what that can mean. Scenarios like that. I’m sure our listeners have either had a scenario that hopefully hasn’t gotten completely catastrophic, but they can think about, oh man, if these two things hadn’t have fallen in place, it would’ve been a lot worse.
Or maybe their friend up the street is no longer around because of a catastrophic project.
[00:16:21] Rob Williams: Yeah.
[00:16:22] Stephen Brown: Okay. Well, you talked about sharing risk. It’s okay, you gotta have some skin in the game on this insurance policy. You’re gonna share 25% of the risk and we’re gonna take 75%.
How much Project Loss coverage can you buy?
[00:16:34] Stephen Brown: I would say, our listeners might wanna know how much coverage can you buy?
[00:16:40] Daniel Fulcher: Yeah.
[00:16:41] Stephen Brown: Basically, what does it cost?
[00:16:44] Daniel Fulcher: Sure. Well, we have flexibility there. We’re gonna work with you on limits with you and your agent. One great thing is the surplus lines product. So we can be flexible on some things and really try to tailor it to a way that it fits for your company.
But to give you some general guidelines, typical deductible, it depends on, the size projects you do it, it floats up and down. The larger your average project is, a little bit higher the deductible’s gonna be. Of course, the deductible is the main driver of pricing, as with most insurances. But you know, we’ve quoted deductibles as low as $250,000, and we can go basically as high as you want.
Limits, out of the gate, we’re really looking at $10 million single project limit, 15 million aggregate is our cap. And again, that’s dollars out the door from Travelers, okay. So it’s not a $10 million job. It’s not a $10 million loss. Because you would have your retention piece of it. So again, that’s just once we breach the deductible, we start refunding some dollars and that, that limit is the exhaust limit of dollars out the door.
And as far as pricing, we’re typically coming in for general builders at one to $2 per thousand on new contracts. And for highway heavy and subs, two to $4 per thousand on new contracts. Now we say per thousand because that’s how bonds are rated. We talk it all day, every day. And I’ve realized when I say that we’ve learned a lot of people here, one to 2%, move that decimal. So we’re talking for a general builder 0.1 to 0.2% of contract price.
[00:18:14] Rob Williams: Thank you for that
[00:18:15] Daniel Fulcher: Yeah. and like we talked about, we can look at carving out smaller jobs. So you can’t necessarily apply that rate to like your revenue. It’s gonna be lumpier, right? But that’ll give you a good general sense of what it would annually be.
How it works, we bill it quarterly. So we would just look back. So I’m gonna make the math easy on me. Let’s say you’re a dollar per thousand. We’d look back, we’d say, okay, you signed up 40 million of work last quarter and we’d send you a bill for $40,000 to cover the 40 million in work is how that, that would work. So, we set it up that way on a per contract cost to try to make it easy for contractors to keep track of and make sure that they have it in their numbers.
So if you don’t get work, you don’t pay premium. And if you do get work, you do.
[00:18:59] Rob Williams: I guess this is rated like many of the other liability policies, especially, I guess since you have the deductible amounts that can change what you’re paying. But I guess, do they have experience ratings and things like that, or is it a fixed?
[00:19:13] Daniel Fulcher: Yeah. That does play in Rob. So what we do is we ask for five years of Work In Progress schedules, and that drives our rating. So what we’re doing is we’re looking back over the five years. Now, from an underwriting standpoint, we’re gonna look at things like fades and gains as well. But from a rating standpoint, it’s really looking at things like number of projects, average project size, number of times you’ve had projects that lost money, what that frequency is. And we have in our data, what we think is standard, right? And so then of course, to the extent you overperform or underperform that standard there’s gonna be a rate benefit or detriment based on that history. So that’s how that works.
[00:19:51] Stephen Brown: And the policy is, to me, it’s easy to understand, Daniel. It’s really not written in a way to trip anyone up. Your intent is to help people in these situations. You’re taking on the risk, and this is insurance, not a bond. So it’s you’re literally purchasing insurance for that risk. That’s what we do.
[00:20:13] Daniel Fulcher: Yeah, we try to make it readable and again we’re all surety folks, so we couldn’t get that deep into the insurance language, right? Because surety’s what we do, but yeah, on, on a serious note, we wanted it to be something that a contractor could sit down and read with their agent and it would make sense to them.
[00:20:29] Rob Williams: One thing I just thought about, does this help your bonding or has it not gotten that far yet? Maybe it’s something you’d think this would be a little bit less risk for your bond if you’re covered?
[00:20:39] Stephen Brown: No, it would most definitely help your bonding. And what I like about the product as a bond agent it doesn’t have to be a Traveler’s Bond account to write this insurance, but if it is, it’s easier for Daniel to underwrite because all the underwriting information is in their accounting and their computer system.
But it’s a freestanding product that’s open to everyone, and my thoughts were, if you’re interested in it, call, let us send you some more information. Then if you want, we can start the application process to give you a firm quote and then you can make a financial decision. Is this something that I want to start putting into my job cost as a part of doing business?
[00:21:22] Rob Williams: I will be interested to see in the future years, if we can look back to see how much Stephen or Wade you see them too, how much that saves you on your bond cost or maybe how much additional bond you get, which would be even more valuable. You might make a lot of money by getting it, if you can raise your bond and get more jobs, that, that’ll be an interesting financial scenario to look at.
[00:21:44] Stephen Brown: Yeah, I think folks at this point of financial sophistication are more concerned about losing money instead of losing bond credit.
[00:21:53] Rob Williams: Yeah, . That’s right. But, and by the way, I wanted to say that none of our vendors, none of the people that come on here pay us to come on this show. And that’s because nobody will pay us to come on this show. So, I just thought I’d get that straight. So we have taken no money from anyone that has appeared on here because no one has offered. Just to be clear!
[00:22:18] Stephen Brown: Good point.
[00:22:19] Daniel Fulcher: We’re just all here as friends.
[00:22:21] Wade Carpenter: Yeah, I think we all agreed that, this one was a topic that I think we thought our listeners would want to hear about, because it is new and it’s one of those things that I think a lot of people could use.
Project Loss insurance and joint ventures
[00:22:32] Wade Carpenter: But I did have one final question because I’m thinking of a specific situation with a joint venture. Or like a contractor that has not necessarily hit five years or something like that. So can it be done with joint ventures or is it like the individual companies? Can it be for a specific contract?
[00:22:51] Daniel Fulcher: Yeah I’m glad you brought that up, Wade. So, so how we’re approaching that is again and because you ask how a loss is reported as well. So it ties into that, right? There has to be a trust in the sophistication and character of the person keeping the books to report the loss to us, right?
And so how we’re doing that is if our PLI customer is the lead in a joint venture situation and they’re keeping the books then we would cover that– and now to their percentage, right? We don’t want some oddity where they actually come ahead in a loss. So if they’re 50% of the joint venture and the joint venture’s losing 10 million, then we’d cover it as their 5 million half to, to make sense on that.
So that’s how we would do that. So not if you’re the minority player in the JV, unless both JV partners are PLI customers. And then we would look at coverage there because again, the faith in the books and again, we’ve only been around two years, so I’ll be upfront. We haven’t yet encountered a joint venture between two PLI customers, but we look forward to that day.
[00:23:52] Rob Williams: And for you listeners that are wondering what PLI is, Project Loss Insurance, I guess. I know our acronyms here will get people.
[00:23:59] Daniel Fulcher: Yeah. Sorry, I should have said that.
[00:24:00] Stephen Brown: Hey Daniel, thank you so much. This has been a fantastic topic and we just started, and we’d love to get feedback from you, our listeners on YouTube. Let us know what you’re thinking about this and we can bring Daniel back on, hopefully if we haven’t offended him too much to answer those questions through the Contractor Success Forum.
[00:24:20] Rob Williams: Yep, that’s right. YouTube, Contractor Success Forum. Please go on there and subscribe and like our episodes, and that’ll help us out, and it’ll help us get the word to more people. The more of you that subscribe, the more that YouTube will decide to show it to other people. So, we appreciate you and any other questions before we sign off?
[00:24:42] Stephen Brown: I don’t know, Daniel, to our 57 listeners in Norway, is this gonna be a global product through Travelers?
[00:24:50] Daniel Fulcher: Oh, well, to the 57 in Norway, unfortunately, at this moment, we’re only riding them in North America. So, so not quite yet. But we write bonds internationally so I could foresee a day where we’re gonna go global. Let us know if you’re interested Norway, if we see a reason we need to get everything licensed out there, well, we can take a look.
[00:25:10] Rob Williams: I–
[00:25:10] Stephen Brown: Right.
[00:25:11] Rob Williams: –think we hear road trip here. Road trip.
[00:25:13] Stephen Brown: Well guys, thanks. Digressing.
[00:25:17] Rob Williams: Yeah, we better sign off before everybody hangs up. So.
[00:25:20] Stephen Brown: Thank you Daniel. Thank you for being our guest.
[00:25:23] Rob Williams: And this has been the Contractor Success Forum with Daniel Fulcher, Travelers Insurance and Wade Carpenter, Carpenter and Company, CPAs and Stephen Brown, McDaniel-Whitley Bonding and insurance agency. And Rob Williams with IronGate Entrepreneurial Support Systems. Thanks for listening and see us on the next show.