Crisis For Contractors Spreads
The hard market is causing problems in virtually every line of insurance today, but for general contractors liability, what had been a difficult line before has begun to take on the looks of a crisis.
According to managing general agents who handle this line, the magnitude of the problem is growing. While issues remain most acute in Texas and California, a growing number of claims is causing more difficulty in neighboring states.
The driving force behind these difficulties is mold claims, but it is not the sole cause, representatives say. And, if there is a light at the end of the tunnel, no one can see it.
"Prior to the hard market, pretty much all carriers were staying away from writing [contractors general liability]," said Ken Laderoute, associate vice president of underwriting and director of domestic operations nationally for MGA Burns & Wilcox based in Farmington Hills, Mich.
The difficulty in getting coverage in this line is "gradually spreading to different states," said Michael McCall, vice president for MGA Swett & Crawford, headquartered in Woodland Hills, Calif., and a subsidiary of Chicago-based Aon.
The ability to get coverage is very dependent upon the project the client is involved in, he said. Terms are very difficult to get for contractors building residential projects, whether it is single family homes, condos or townhouses. On the other hand, industrial and public works contractors are having an easier time primarily because there are fewer claims.
"There are certain issues that pop up, but the main one is mold," he said.
Claims are so severe that at this point Burns & Wilcox is sticking primarily to commercial general contractors, with rare exceptions for residential underwriters, according to Mr. Laderoute, who noted that the firm is generally following the lead of many insurers who are staying away.
In order for contractors to get some cover, they are forced to obtain very limited coverage with huge deductibles and limits on the number of homes to be covered, Mr. Laderoute said.
And then, there are the mold exclusions.
"This has been going on for a number of years," observed Mr. McCall. "It was a hard business before 9/11 and now it is that much more difficult. There has been a lot of pull-out."
He noted that Arizona was hit hard last year, as contractors saw increases ranging from 200 to 500 percent, and that Washington and Florida contractors are also seeing their share of problems.
The market problem, he pointed out, extends to the excess market. There are five companies left in California that are writing contractors coverage, he said, and two may be in jeopardy of failing. (He would not name the companies.)
Problems especially plague smaller builders with contracts ranging from $1 million to a few hundred million dollars, said Mr. McCall. Larger contractors are able to get specialty-tailored coverage with carriers they have been partnered with for years, he said.
But that has not stopped builders from building, said Sorn Harn, vice president at Anderson & Murison Inc., a California MGA based in Los Angeles.
Premiums are running at a minimum of $75,000 for multiple units, he said.
He also noted that general contractors want subcontractors to have additional insurance to protect themselves. This is significant in a state where homeowners can file claims for defects going back as far as 10 years and can involve all carriers that underwrote the contractor during that period.
"We are less and less residential and are focusing on the commercial side," Mr. Harn said. "We have not seen that many claims [on the commercial side] yet."
To combat the problem, some builders are employing third-party inspectors to ensure that the construction is done properly. Too many claims can be traced back to poor construction over the years, Mr. Harn pointed out.
Some builders are also purchasing a wrap-up policy for 10-year tail defense. The price is hefty, running around $400,000 for general contractors and sub-contractors who can share in the premium.
Driving this maddening situation is the attorney who seeks out clients whose homes are approaching the 10-year threshold in California, said Mr. Harn.
The media is also to blame, said Christine M. Fleming, a claim consultant at Milliman USA Inc., based in Seattle. Increased focus on mold is making more and more people aware of the harm of the fungus. However, while the awareness increases claims, the reality is that there are no standards for mold infestation, nor is there full knowledge of how harmful it can be, she said.
For insurers, Ms. Fleming points out, mold is the latest in what has been a litany of problems in the line for years.
"There have been a lot of claims all along," Ms. Fleming suggests, ranging from indoor air-quality issues to poor construction, but now mold allows for a single label for claims.
While the focus may be on general contractors liability, mold claims can also result in defect claims for material manufacturers; claims made over faulty designs affecting professional liability coverage; or representatives of homeowners associations who do not respond quickly enough to resolve the problem affecting directors and officers lines, suggested Ms. Fleming.
Insurers can also be open to first-party claims if they do not resolve the issue quickly, she observed.
While there are few answers, Ms. Fleming said risk management will be key to mitigating the situation. Getting information out to policyholders and contractors will be key to stemming the tide of claims.
However, Ms. Fleming echoed the feeling of the MGAs when she said, "it will get worse before it gets better."
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 17, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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