Illinois Could Be The Next Trouble Spot for Contractors

The law has a "strict liability standard," he said. "So if someone falls from a scaffold or a ladder or any height, which can be liberally interpreted, the insurer doesnt have the usual defenses with respect to contributory negligence on the part of the employee or of another contractor," he said.

"It really just becomes a matter of negotiating how much is to be paid."

"That has really made it difficult for both admitted and nonadmitted markets to write business successfully," he said.

Over in Illinois, which had a scaffolding act on the books until 1994, insurers and the construction industry are concerned that the law could be reinstated through the efforts of a newly elected Democrat governor and a Democratic majority in both the House and Senate. In fact, Gov. Rod Blagojevich used reinstatement of the Structural Work Act as a campaign platform, Sean McManamy, regional public affairs director for the American Insurance Association in Chicago, explained.

Mr. McManamy said trial lawyers are arguing that the issue is about safety. But "this is not a safety issue," he asserted, citing figures by the Illinois Industrial Commission showing that construction fall fatalities are actually down, from 20 in 1994 to 14 in 2000–"even with a 24 percent increase in workers."

"At a time when we're talking about trying to create jobs in Illinois and making Illinois a better environment for doing business, this is not going to help," he said.

At present, he said, no legislation has been introduced. But "we're pointing to New York and saying that is what could very well happen if we put this law back on the books."

In New York, various agent, producer and insurer associations have been actively lobbying to improve that states law, according to Mr. Bingeman. But unions and trial lawyers, "who perceive it as taking away a right," are fighting such efforts, he said.

Mr. Bingeman said that a number of proposals have been introduced to change legislation, but whether it can be changed "depends on whether the insurance industry can clearly communicate the problems, and have the trial bar and the unions understand and come to some sort of a compromise."

He said that placing business with general contractors has been difficult in New York. It is also challenging to find insurance for "people who do residential construction on a mass scale, such as developments or condo developments, he said. For those groups, he said, "most of what we do is all nonadmitted now."

The real issue, he contended, is that the only way many insurers have to provide coverage is on a very restricted form, which often excludes injuries of subcontractors. This means buyers have to be careful to fully understand the coverage being offered.

This leaves "a big responsibility on the part of the producers to clearly understand the terms that are being offered" and communicate those terms well to their clients, he said.

In other states, the construction liability insurance market is hard, but the severity of market conditions varies, according to David Price, executive vice president and chief underwriting officer for Burns & Wilcox Ltd., an independent national wholesaler in Farmington Hills, Mich.

"Here in Michigan, we have some pricing issues, but nothing to any great extent," Mr. Price said. "In many parts of the country, its business as usual at higher rates. But there is no real problem in placing the account," he said.

Mr. Price went on to say that what sets the tone in many states is the legal climate and "what kind of awards are given."

California, Nevada and Arizona have the challenge of construction defect claims arising out of the 1995 Montrose ruling, he said. He explained that the California Supreme Court ruling, in Montrose Chemical Corp. v. Admiral Ins., states that a covered occurrence doesnt have to be "a sudden thing, it can be a multiple trigger."

This means that the original contractor of a structure can be liable for the structure's slow detioriation, he said.

"So it is a nasty thing because there are huge losses involving primarily residential general contractors. Laid on top of that, in a number of states, is the mold issue, which involves again, primarily residential contractors."

Commercial contractors of medium size, however, do not appear to have the same problems, he said. Coverage for them "is not so hard to get, providing they arent building bridges or things of a significant nature which involve actions over," he said, explaining the "actions over" refer to contractual claims arising out of workers compensation issues from subcontractors.

The combination of all of these issues has made for "rather an unprofitable class," he said. "So there has been a considerable restriction in the market, especially amongst the residential contractors in the Western states. Its also showing up in Florida and Texas."

What has helped the situation, he said, is that the surplus lines industry has been "coming to the forefront with some creative marketing" and policies with higher premiums and self-insured retentions.

"Its beginning to come forward in the surplus lines industry because of the nature of the beast," he said, noting that surplus lines insurers "can modify their policies so they dont cover claims they dont want to pay for."

Back in New York, Len LoVullo, president and chief executive officer of LoVullo Associates Inc. in Buffalo, N.Y., said that hard market conditions now prevail in his state for reasons beyond the states labor laws. "The situation with the hard market [exists] because rates have been so inadequate for the last 15 years."

Labor issues aside, he said, insurance "rates have been dropping consistently for the past 10 years," while construction costs have gone up. "It's just natural that the market had to turn."

On top of that, he said, "there are more multimillion-dollar settlements now than ever," which insurers have not prepared for "on the rate side."

The prior soft market and the legal situation have created "a double-whammy on contractors," he said.

Steven LoVullo, senior commercial underwriter with LoVullo Associates, said the combination of the labor law situation in New York and the tight market has caused some carriers to either pull back on their coverage or change the form of coverage.

"There are only a couple of carriers offering the same terms and conditions they were offering a year or 18 months ago," he said. "Everybody else has tightened their form and everybody, including the companies that are still offering the same form, has increased rates as much as 100 percent."

He said the residential side of the market "has gotten a lot tougher than the commercial side."

Although contractors are paying a lot more money for coverage, he said, "I don't see them going out of business. But I'm sure they are passing a lot of this on to the consumer."

Even if building associations succeed in pulling together "some kind of reciprocal or purchasing groupand there are a lot of rumors to that effecthow are they going to survive?" he asked.

The problem, he said, is that "they're still going to be sued."

If such groups are going to provide the same coverages the insurance companies have provided over the past five years, "they're going to get killed," he predicted.

Reproduced from National Underwriter Edition, February 10, 2003. Copyright 2003 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.