More Insurers, Less Restrictions Seen

The Montrose ruling–which actually involved pollution cleanup at a chemical maker's facilities–rejected doctrines that previously stood as bars to coverage for claims from existing defects.

Montrose and subsequent decisions put contractors' liability carriers on the hook for losses and defense costs on policies issued after the onset of continuing damage claims that took place over a number of policy periods–like leaky roofs and other construction defects.

Not only did business flow quickly from the standard market to excess and surplus lines, making Lemac a major player, but carriers also retrenched from writing multifamily exposures and started introducing exclusions and changes in additional insured endorsements that virtually eliminated coverage for defect claims brought against residential contractors and builders by homeowners who discovered mold, cracks, or other defects.

That's not the story of this year's insurance market, however.

Jeff Lamb, Dallas-based director of business development for Richmond, Va.-based Markel Corp., reported several carriers are issuing policies without prior-acts (or Montrose) exclusions–which attempt to remove coverage for the continuation of damage known prior to a policy period.

"That's irresponsible," said Mr. Lamb, who was recently chief underwriting officer of Markel Underwriting Managers, a Red Bank, N.J.-based Markel subsidiary that writes large custom homebuilders, developers and general contractors (but not residential subcontractors) with premiums averaging $175,000. The exposure "not only demands that" the exclusion be present, "but there's very little pushback for that," he added.

But while neither Mr. Lamb nor any other expert interviewed by National Underwriter reported widespread irresponsibility on terms of coverage, brokers and carriers alike said new capacity is coming into the markets for homebuilders and contractors liability, that this year's policies carry lower price tags, and that there is regular evidence of more flexible underwriting on the part of insurers.

The observations are true from coast to coast, and for commercial as well as residential contractors and builders.

Sandra Rosenberg and Matthew Farbman, wholesale broker specialists for Jimcor Select Risks, a division of Jimcor Agencies in Montvale, N.J., giving the Northeast perspective, said having the right relationships with E&S insurers goes a long way toward getting once difficult placements done, adding that expanding insurer appetites are also a factor.

"Companies are obviously looking to write business. They are becoming a little more aggressive in the rates and coverages they offer, said Ms. Rosenberg, noting that this year there are a number of companies offering blanket additional insured endorsements for artisan contractors–something they didn't do last year.

"We've seen a lot of roofers–roofers that do hot tar and torch-down work," she said, noting the increased exposure involved with spreading hot tar and using an open flame caused a lot of markets to shy away in the recent past. "I guess because of the soft market, it's really not a problem any longer. There are markets writing these exposures," she noted, adding that there's also capacity for framing and fire-suppression contractors, which traditionally were difficult to place because of a history of losses.

According to Mr. Farbman, "It's not so much that [the carriers are saying], 'Here's our price, here are our terms, and that's the end of the story.' Now, it's, 'What can we do to make this fit the insureds' needs–so we can get a sale on this?'" broadly summing up the East Coast environment for both residential and commercial general contractors, as well as artisans and subcontractors.

"The market is definitely opening up here. I think a lot of the carriers are looking at [the construction market] as a source of additional income," he said. "They are seeing that the prices have been up there for so long, they feel it's something they can get into to make up some of the revenue" they're losing as the market softens in other areas, he said.

Brokers and insurers see a broad spectrum of new entrants to the residential contractors and homebuilders insurance markets. Mr. Newton, for example, said there's a lot of London capacity coming in, and some post-9/11 startups are looking for alternate ways of deploying excess capital.

"As other classes of business get more competitive, insurers still look to residential as a place where they can get certainly more dollars on [each] account," he explained, contrasting the lower account premiums for the average OL&T (owners, landlords & tenants) or products risk.

"Residential homebuilders are generally an expensive outfit to insure," said Robert Gore, senior vice president and director of insurance operations for Aon Construction Services Group in Irvine, Calif., noting that he's even seen "reinsurance houses that traditionally would not be a straight seller of excess insurance" offer primary insurance in excess of large self-insured retentions for big builders.

Brokers and insurers alike are skeptical of the ability of inexperienced players to correctly evaluate the risks of the contractors and builders liability insurance markets.

"When they look at it just on a market basis–without any fundamentals [about] what the actual risk is worth–some underwriters get into the trap [of thinking] they're going to make money," said Markel's Mr. Lamb. "That's not always the case," he added, drawing a parallel to the late 1990s nursing home liability market.

He recalled that nursing home coverage was priced at about $100-per-bed when new entrants came in and tripled the price. Of course we can make money if we can get three times the premium, they reasoned. "The next group came in at $1,000," he said, noting that a subsequent actuarial study showed the actual loss cost was about $6,000-per-bed–a level that ultimately destroyed those insurance operations.

In the current contractors and builders markets, new carriers may not be charging multiples of their competitors, but they are relying on the fact that market dynamics have pushed up rates significantly in past years, without the experience to know if the market prices–or lower ones–can support the risks, experts say.

Danette Jones, a vice president at Aon Construction in Los Angeles who specializes on the commercial side of the large builder market, said a number of domestic carriers are starting to dabble in the sector.

Referring to some midsized domestics (with surplus in the $100-to-$250 million range) that are "suddenly chopping the price out of the bottom of the market on a general liability wrap-up," she said there may be an inclination to bind coverage with them. However, she added, "these projects aren't going to be just a couple of months long, so you want to make sure there's a financially sound carrier that's going to be around for awhile."

On the residential side, a complicating factor in assessing rate levels is the underlying economics of the housing sector, according to Mr. Newton. The widely reported slowdown translates into dramatically reduced receipts for residential contractors and subcontractors, making it difficult to assess how much of an overall premium drop reflects a rate cut and how much simply reflects a drop in receipts.

"But certainly it is not unusual to see rate reductions for residential contractors in the 15-to-25 percent range," he said. The housing slowdown is also "putting a lot of pressure" on underwriters who want to keep their market share, he said–noting that retentions, which in the past were $25,000-to-$50,000, are now $10,000-to-$25,000, "and trending more toward $10,000."

Aon's Mr. Gore made similar observations with respect to builders. "If they were building $1 billion last year, and are looking at $600 million this year, the insurance market will take in less premium, so there's going to be more competition for the premium that's available."

Mr. Gore on the West Coast, and Jimcor's Ms. Rosenberg and Mr. Farbman on the East Coast, said competition for market share has prompted carriers to ease up on minimum premium requirements for contractors and builders.

"As a selling tool, a lot of carriers are willing to come off a 100 percent minimum deposit endorsement" for contractors, according to Mr. Farbman. When a 100 percent endorsement is in place, then if the exposure base–sales, contract cost or projected payroll–comes in less at year end than was anticipated when the premium was quoted, there's no return of premium.

"Now, because of the soft market, companies will consider maybe a 10 percent" return, Ms. Rosenberg noted.

Mr. Gore said carriers "are having to respond" as builders come up short of project expectations. "We've negotiated several policies in recent months where carriers were willing to go back to a 75 percent minimum premium, which is historically about where the market had always been," he said.

The length and depth of the housing slowdown could "absolutely" fuel competition in the commercial construction insurance market, said Chris Behymer, vice president for Markel Southwest in Scottsdale, Ariz.

New commercial buildings are going up regularly in Phoenix and Scottsdale–the whole valley of the Sun–and submission counts are holding steady, he reported.

At the same time, "there's a tremendous amount of capacity. Insurers are trying to put that capacity to work," he said, predicting that competition in the commercial contractors market "will definitely intensify."

Currently, Markel Southwest, with 40-to-50 percent of its liability book in commercial contractors, sees conditions in that West Coast market that aren't very different from the liability market overall.

"It's mirroring the rest of the industry. There's continued softening. There are some insurers who in the past weren't quite as aggressive as they are now–and maybe some new players coming in and taking market share," Mr. Behymer said.

He noted it's not unusual to see a request for a 10-to-20 percent rate cut. "We're being a little more judicious, especially about our renewals–and maybe going a little extra distance for those people that have been with us for a period of time," he said.

Turning to terms of coverage, Mr. Newton said they "haven't loosened too dramatically yet," but some are under pressure. "In my opinion, that just may be the next step," he said.

While key exclusions for residential contractors policies, such as completed work and subsidence exclusions, continue to hold, "we have seen a carrier that is offering to take defense outside limits"–something that hasn't happened since the market hardened around 2000.

"We've recently seen a Texas market that is writing residential construction on an admitted basis, giving ISO forms and including completed operations in additional insured endorsements, which no one has been giving," he added, without identifying either insurer.

Ms. Rosenberg said there are insurers now that are willing to remove action-over exclusions from subcontractors policies, noting that these had been an issue in New York for such coverage. (The exclusions essentially remove coverage in situations where general contractors, listed as additional insureds on subcontractors policies, are sued by subcontractors' employees for job-site injuries.)

Getting liability coverage at all for general contractors in New York has been a problem in past years, Mr. Farbman noted.

"They are absolutely the hardest to find market share for, essentially because of the labor law," he said, referring to Sections 240 and 241–sometimes referred to as the Scaffolding Acts–holding contractors and property owners strictly liable for any injuries resulting at or around a scaffolding site for falls from any height.

But with more than 20 years of experience in the marketplace and an understanding of individual carrier appetites, Jimcor is having some success in finding coverage for New York contractors, he said.

"We're seeing the market start to open up a little in New York," he said, also reporting that, on the residential side, appetites have broadened to "even accept some EIFS contractors at this point." EIFS contractors involved in the installation of exterior insulation and finish systems have been tagged with water damage and mold claims in past years.

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