Magazine article Risk Management

Where Does the Moral Hazard Lie?

Magazine article Risk Management

Where Does the Moral Hazard Lie?

Article excerpt

In his article "Additional Insured and the Moral Hazards" (RM, January 2006) William J. Warfel offered an altruistic belief that changing insurance language can control safety in the construction industry. He further states that "amending anti-indemnification statutes to close the additional insured loophole is the only viable way to control the moral hazard." It is true that the Oregon anti-indemnification statute is being followed by other jurisdictions and causing contractual changes, specifically in the construction industry. This attempt to legislate safety through the back door of insurance and contract language, however, has already failed.

Entities purchasing contractor services in such states no longer believe that indemnification agreements, which were once able to protect their organization, will continue to do so in the future. To remediate this erosion in protection, owners are utilizing Owner Contractor Protectives (OCP), standalone, third-party general liability insurance policies with specified limits placed in the name of the owner. They provide coverage for owners' potential liability resulting from the work performed by the general contractor or subcontractors for the duration of the project. Since this is a direct policy, it provides cover to the owner, without impacting the owner's general liability policy, loss history or premium. The contractor, who pays for the policy, has no rights regarding the policy once it is issued. Losses on these policies do not impact owners who do not have a relationship with construction underwriters. Contractors have an ongoing relationship with the underwriters and will be required to purchase the product in the future. The costs once again return to the contractor, and the contractor is ultimately responsible for the safety of its employees.

Smart businesses understand how losses that impact individuals cost money, slow production and create unwanted media attention. To manage losses, bids on construction work incorporate both workers compensation experience modifiers and OSHA statistics. These statistics have weight and offset pricing, which means that the lowest bidder will not necessarily win the contract if its safety metrics are askew. This is a key marketing point for all major construction firms, who compare their own safety metrics against those of their competitors. …

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