Contractors See Softening On Pricing For Liability, But Carriers Firm On Terms

Kevin Hastings, co-founder of Jansen & Hastings, said that maybe one or two standard carriers have come in to write subcontractors, but this is on a limited regional basis.

Mr. Hastings also said that it is fairly typical in a soft market to see some of the less-exposed trades fall to the standard market, but with contractors liability, he said, "it's around the fringe of what is essentially, and should still be, an E&S marketplace."

Coverage terms have remained generally unchanged despite the soft market, noted John Mentz, executive vice president of construction for Arch Insurance, who cited some expansion of coverage, but not much. "Some of the coverage givebacks are probably reactions more to the over-tightening that occurred in the market in the 2003-04 period," he said.

Mr. Mentz noted that insurers in this niche are still cognizant of the legal landscape within the contractors liability market. He specifically cited the continuing burden of the construction defect issues in the courts that took a foothold in the West and have since moved east.

With these concerns, it is perhaps not surprising that Todd Rowland, senior vice president of construction specialty products and services at Zurich North America Commercial, said one of the only newer products he has seen has been the Home Builders Protective product–designed to provide construction defect coverage for homebuilders.

Other than that, and some specific endorsements to deal with certain regional issues, Mr. Rowland agreed with Mr. Mentz that there has not been much broadening with respect to products offered.

Mr. Rowland also pointed to "historical construction defect issues" as a continuing reason why the market has not opened up more. "Liability is still extremely difficult for residential construction, for homebuilders," he said.

In states that have not experienced construction defect issues, he added, some standard markets will write risks on a "very limited basis," but he noted that these are typically only local carriers that will do business in their own state.

"The [legal] landscape has not improved," said Mr. Rowland. "Frankly, it's gotten worse in a number of places on the liability side."

He noted that legal issues concerning construction defect started in the mid- to late-1980s in California, and the issues have gotten worse over time.

But Mr. Rowland said that when the legal landscape took a turn for the worse back then, it did so for a reason. "Frankly, in those times in Southern California, people were building very bad homes, and they leaked and they didn't perform well. And that's what started the litigation, and it's gotten worse from there."

In recent years, there has been some effort legislatively to ease the burden caused by construction defect court decisions, and in particular the well-known Montrose decision, which established continuous triggers for construction defect issues.

Mr. Rowland said so-called "right to repair" laws were passed to give a builder the right to fix construction flaws before having to go to court. Over 20 states have adopted some type of right-to-repair law, he noted.

Mr. Mentz said these laws attempt "to get more money focused on just fixing the defect as opposed to the legal interaction."

He added that "in the past, particularly in California, more than half of the money spent went to legal and lawyer fees. Less than half of the money went to the actual indemnification for the loss."

The ultimate effect of these laws, though, has yet to be determined.

"I think we've seen some positive results," said Mr. Mentz, "but it's still too early to tell how big of an impact they will have. My general sense is that it's had a positive impact, but likely not as positive as I would have hoped."

Mr. Hastings said that the laws have at least begun to positively affect insurers' appetite for contractors liability risks, but he added that carriers are still tentative.

"I think there is a hope that the stronger right-to-repair laws will actually improve the loss ratios going forward over the next 10 years," he said. "So I think that has created an element of greater comfort in that market sector, but it's still highly specialized, and the variances between states are great."

Mr. Jansen said that "obviously the Montrose decision was probably the most damaging legal decision that the residential construction industry could have foreseen."

He said that decision caused general contractor insurance carriers and subcontractor carriers to fight over the construction defects in a particular project.

"The right-to-repair laws, for the first time, actually defined what a construction defect could be," he noted. He cited SB 800 in California, which listed 45 functionality standards of a home, "and you can only make a claim against the builder if it could be shown that one of those functionality standards has been breached."

Mr. Jansen explained that "most of the right-to-repair laws have helped to define exactly what a construction defect is in an effort to get away from the plaintiff's bar just trying to use it as a money-making machine by filing frivolous lawsuits."

Mr. Hastings said that in recent years, there has also been "a change in the underwriting mechanism that is being employed by most markets."

Beginning on the West Coast, Mr. Hastings noted, companies have been writing "wrap up" coverages, which cover everyone on a construction site under the same policy, including subcontractors, on a project-specific basis.

While liability issues have plagued the residential construction market, they have not been apparent on the commercial construction side, which "has been soft for many, many years," according to Mr. Jansen.

Explaining why the construction defect issues have not affected this market, he said: "In most cases, with commercial construction, you're not selling the property on to a third party–you're retaining it. Most people retain it for their own use, and if it's office space, they'll lease that space out. So you are still the owner…."

With the legal landscape so prominent in contractors liability, it should be noted that, as in most other lines of insurance, insurers' experience varies depending on the state and the region.

"The West Coast has traditionally been problematic in the residential construction arena," said Mr. Hastings. "Historically, that's where the construction defect problems have emanated from, and gradually some moved toward the Southeast across to the East Coast, to a certain extent."

He also cited New York as having issues not so much with construction defect but rather with job-site injury and labor laws.

Mr. Mentz and Mr. Rowland both noted that the coasts tend to be more litigious, with the central part of the country being more favorable for insurers. Mr. Mentz cited Texas as the exception.

Regarding the issues along the coasts, Mr. Rowland said that "for whatever reason, the courts are more difficult in those places."

Speculating on the reason for a possible misunderstanding in the courts with respect to construction risks, Mr. Rowland cited the Montrose decision and explained that perhaps the courts do not look at liability issues from a "pure contractor's standpoint."

"The continuous-trigger issue came about generally with regards to pollution, and it just happened to apply to construction, and in effect contractors," he said. "So their biggest mistake is probably making a decision in one place, trying to get some limits to apply to large pollution cases, and not understanding the effects on other industries."

Indeed, Mr. Jansen noted that, prior to the Montrose decision, standard markets were writing residential risks, but they lost billions of dollars as a result of construction defect litigation post-Montrose.

Getting the standard carriers back now–particularly in the current market, where the pricing has come down a bit–would take "a huge shift in their thinking," Mr. Jansen said.