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Sometimes these articles just about write themselves. This is one of them. Twice this month I was contacted by pizzeria owners in similar situations. They were both in the process of opening a new location and both had signed lease of premises and had the key for the space. They were both building out raw space to become a pizzeria, and they both had little or no idea what they were getting into. Let me set up the scene for you:
Pizzaiolo #1 had signed a contract with a general contractor that was doing a turnkey build-out. His job was to stand back and just show up on the completion date to do the walk through with the contractor, then sign the punch list and hand over the last payment. Then, get to work. Pizzaiolo #2 was more of a hands-on kind of guy and decided to hire people on a per diem basis to do some of the work and get contractors for the stuff he couldn’t do, like licensed trades. His job was more involved and included things such as scheduling the work, ordering materials, coordinating the trades, having his employees (that’s right – employees) working around the subcontractors, getting inspections done and pretty much anything else that came up.
Nothing wrong with either model, just different cost benefit analysis. Pizzaiolo #1 has little or no involvement in the day-to-day work, but pays more for the job. Pizzaiolo #2 is hands-on day in and out on the job, but will save substantial money, maybe. What they have in common is that neither one understands the implications of the construction work on the insurance they want to buy. Both asked me to get them pizzeria insurance. After some insightful questions, I figured out what was going on with the construction and I promptly informed them (individually, of course), “My good man, what you have there is not a pizzeria. What you have is a construction site.”
OK, so I didn’t say it like that. I was a little more blunt, but the fact remains that both of these guys were looking for insurance on a pizzeria when what they really had was a construction risk. Now that may not seem like a big deal to you, and that’s the problem. It is a big deal. If you don’t approach this the right way, you can and will be left standing, metaphorically, naked when the ‘bad thing’ happens. Here’s why: Insurance companies that do pizzeria insurance may not do construction insurance. And, no company will take on risk they don’t fully understand. Warning: Just because an insurance company issues a policy does not mean that you have insurance.
If you tell an insurance guy that you have a pizzeria and you buy insurance based on the fact that you have a completed operating shop and then there’s a construction claim, the insurance company will do everything they can to walk away from you. They are just two entirely different sets of risk and the insurance company will not sit still for being duped into a risk. And they shouldn’t.
Again, I’m not saying these are the bad guys, but I am saying that they are very, very serious about this…and so is the insurance industry. So what to do? First of all, don’t fudge or let someone else fudge on your behalf. If you’re building out a new location, do the right thing and buy the right insurance. What is the right insurance? Glad you asked that question. Whether you are in situation #1 (complete turnkey build-out) or situation #2 (hands-on, day-to day-job responsibility) you need Worker’s Comp.
For the turnkey build-out situation, you have a vicarious liability. The bottom line is that if the general contractor’s Worker’s Comp fails, and the sub contractor’s Workers Comp fails, you can end up the responsible party. Now you are twice removed from the exposure so the cost is quite low. You basically buy a ‘contingent exposure’ policy with little or no attributable payroll. For the hands-on, day-to-day situation, you have direct exposure for the workers you employ and if the sub-contractor’s Worker’s Comp fails, you move into first position automatically. So, the cost is much higher because the risk is greater.
Important: Get Certificates of Insurance from each and every contractor. You will be audited by the insurance company and only those certificates will save you from huge premium charges! You also need liability insurace in both cases. In the turnkey build-out situation, you need two things: 1) Premises Liability: The lease you signed will have an insurance section and it requires you to have liability insurance. I’ve never seen a lease that says you don’t need it until the store is open. Every one I’ve seen says you must have it the day you sign the lease; and 2) Owner’s Contractors Protective Liability: This is for you, not for the landlord. It does one specific thing… it protects you from the vicarious liability generated by the actions of the general contractor you engaged. It’s inexpensive and usually obtained from the same company that insures the general contractor. In the hands-on, day-to-day situation you need more – and you’ll pay more for it.
Contractor’s Liability Insurance: Since you are operating as a contractor, you need contractors insurance. You need insurance for:
• Work done by your employees, ongoing and completed operations rated, based on payroll.
• Work done on your behalf by sub-contractors rated, based on cost of sub-contracted work.
• Premises Liability-what your lease requires you to have anyway.
Important: Get certificates of insurance from each and every contractor. You will be audited by the insurance company and only those certificates will save you from huge premium charges!
Be careful: Many liability insurance companies will require you to be included on the contractor’s policy as additional insured. They may also require the contractor sign an indemnity agreement in your favor. Do not play fast and loose with this. If it’s required, get it done or the insurance you pay for may not respond at the time of a loss.
And, you need insurance for your stuff…Do not assume that the contractor is responsible for the equipment and building material as it goes in. This is a matter of contract and can go either way. If you are the hands-on guy, then you are definitely at risk. What you need is a ‘builders risk or installation floater’. Insurance companies will use both names. Think of the worst case scenario: The day before work is done, the whole place is gone, taken by Martians, all that work and material is now lost. This is where you get insurance for it.
You buy insurance for the completed value of the project on day one. Since the complete value is not at risk until the end of the job, the premium is weighted accordingly. You pay for the average value of the amount at risk on a day-to-day basis. This all happens in the background. You don’t have to do anything but buy the right amount up front.
Careful: Most companies don’t like it if you try to up the value once the policy begins and may not even do it! Bottom line no BS summary: Don’t try to weasel on this. Tell your insurance guy what you are up to and let them get you the insurance you need. My standing offer: Feel free to call me with any questions 201-945-3100. I’ll do my best to help you and get you state specific help where needed.