Experience has become a critical underwriting factor for insurers deciding whether or not to extend liability coverage to contractors taking part of the Gulf Coast rebuilding effort, as well as how much to charge, players in the market warn.
Contactors liability coverage appears to be available, for the most part, to experienced parties, according to a wholesale broker in the region.
However, a bevy of start-up contractors doing business in the area present new challenges to insurers–which, on the one hand, want to make sure a lack of coverage does not hinder the rebuilding effort, while at the same time maintaining the kind of underwriting standards necessary to run profitable insurance businesses.
Many insurance company markets will not underwrite start-ups, according to Allan Davis, president of Irving, Texas-based A.D. Carlton Insurance. "They would rather see some experience," he said.
Mr. Davis, who works only in the nonadmitted market, said that while some insurers will be willing to underwrite a contractor with a solid r?sum? of working in the industry, "even some surplus companies will not write them. They will say, 'You get three years under your belt and we will talk.'"
He added, "I have seen a lot of start-up guys leaving their current positions and working for other contractors, or going out for themselves."
As a wholesale broker, Mr. Davis is "once-removed from the real problem," he noted, but "retail brokers have their work cut out for them in that you have a lot of guys who are anxious to do some work–work that needs to be done. It becomes just a matter of cutting through the red tape."
Mr. Davis said any start-up operation will have to pay a premium price. "They do debit," he said, referring to experience rating factors applied by insurers. "It goes against the insureds because they have no track record, and it is not known what kind of businessmen [the contractors] are."
Many contractors, both new and experienced, will limit their tasks to clean-up and debris removal, he said, noting that he placed one new outfit cleaning up the city of Kennard. "While I had to get him a higher rate, the retailer said he was fine with that because there was so much work available. They must be getting paid pretty well because there is a pass-down cost somewhere," he said.
For the most part, the contracts handed out come from government entities. There will be a whole new set of issues when homeowners start hiring firms to rebuild their homes, he noted, "but the insurers are fighting out what is wind and what is flood, so that will be quite awhile."
Steve Graham, an underwriting director in the Broomfield, Colo., office of American Safety Insurance, said his company made the decision to stick with his current book of business. American Safety offers liability coverage for general contractors, environmental contractors and consultants, as well as soil remediation and hazardous waste contractors.
"At American Safety, we have a book of business that is geared toward the smaller risk, and as we looked at the situation in the Gulf, we were seeing a lot of start-up operations," Mr. Graham said.
"You know how many roofers you will suddenly see when there is a hailstorm," he said, drawing a parallel to the post-Katrina rebuilding activity.
"We did not have a comfort with that situation. So we sent out some material to our producers to the effect that the ongoing environmental companies we insure, we have comfort with–but that was not the case with the start-ups."
To sum up, Mr. Graham said his "feeling is that if you have never done this before, then this place and situation is not where you should learn to do it."
Eric Meyers, vice president for Chevy Chase, Md.-based Victor O. Schinnerer & Co., said no unusual issues have arisen in underwriting Gulf rebuilding risks. "We are open for business, is what we say," he noted. "There is no difference in our operations."
He added, however, that some of the wholesaler's contractor insureds have seen their businesses destroyed–"and some of them took on a lot of work all of a sudden."
"But as far as we are concerned, on the coverage side and availability side, there is no real issue," he said.
Not only have construction workers in the affected areas set up their own shops as general contractors, but some operations have migrated to the area to get some of the new business.
Allan Sague, industry practice manager at The Hartford, said his company has not been active in the contractors market in Louisiana and Mississippi, but some of the Connecticut-based company's insureds from Florida and Texas have moved into the area.
"Aside from contractors, we see other risks changing operations to take on additional work or relocating to Louisiana, such as janitorial services, architects, engineers and surveyors," Mr. Sague said.
The region presents not only environmental uncertainties, but a potentially challenging legal climate that resulted from Hurricanes Katrina and Rita.
"Most of the work being done in the area right now would be considered high hazard, but The Hartford generally writes in less hazardous industries," said Mr. Sague, who noted that more traditional contractors will likely be doing most of the restoration work in the future.
Jim Whittle, senior counsel for the American Insurance Association, said any construction boom also presents the possibility of a subsequent explosion in construction defect litigation.
"When you have this kind of volume, and a volatile situation, you could have problems," he said, adding that loss control measures designed for underwriting the contractors market become ever more critical in such a climate.
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