Inside the Contractors Market

If you find placing contractors insurance these days almost as daunting as building the house, condo, apartment or other facility itself, you are not alone.

A restrictive market, high minimum premiums and tighter underwriting conditions are just a few ways to describe the contractors market in California, Texas and a number of other states.

Jim Hippard, president and COO of California’s Yates & Associates, noted that agents find “the overall California contractors market is still very restrictive and very expensive. Anything to do with residential construction is still difficult to place unless the insured is willing to pay in high minimum premiums, no matter the size of the risk. Commerical contractors are easier to place and appear not to have as high of minimum premiums.” the risk. Commercial contractors are easier to place and appear not to have as high of minimum premiums.”

In Texas, things are not much better. Dallas-based Kyle Stevens, vice president with Western Security Surplus, commented that, “It is more and more difficult to place this coverage than in past years. We don’t have any markets willing to write tract home residential construction. There are very few markets that will do any residential new construction at all.”

Mold, construction defects can be costly
In a number of parts of the nation, agents are going the extra mile to find coverage for their clients due to a variety of factors that have added litigation as an issue to deal with in recent years, specifically mold and construction defects.

According to Eileen Ridley, a partner at the San Francisco law firm of Foley & Lardner and a member of the litigation department, which specializes in construction, appellate and insurance dispute resolution, “Construction defects are a burgeoning business these days. It has been a real issue in California for some time and has recently spread into Arizona and Nevada. More people are suing in California, but the trend is more are suing in Arizona and Nevada following California.”

To back that claim, Ridley pointed out that, “Nevada has what is called a ‘dirt’ court where certain judges are specifically designated to sit on construction defect cases. The new and burgeoning claim is the mold issue and how those claims are handled is still out for the jury so to speak. More and more contractors are having trouble getting insurance. We’re seeing more contractors going out of business. A lot of contractors are going to different markets for insurance—it is becoming a real business issue for them. We’re already seeing contractors jumping from state to state to do business.” Ridley even goes as far as to point out that some of the more sophisticated contractors are studying the laws in each state.

Ridley said the greatest challenge for agents in this market is to get good coverages for their clients that are marketable. Depending where you are in the country, the mold factor can play a big part in pricing.

“There is no standard in the nation as to when mold becomes toxic to humans if it ever does,” Ridley continued. “No state has made a standard regarding the toxicity of mold and that makes claims a free-for-all in court. There is a growing trend of states trying to have contractors and homeowners resolve things before they hit the courts. California just passed a bill and there is a raging debate as to whether or not that bill will limit litigation or just be an additional threshold before litigation comes up. What is interesting in such legislation is that some of the statutes are trying to create standards as to when a defect exists and when it doesn’t. That is more than anyone else has ever tried. Previously, it has been an ad-hoc determination with experts on either side opining on the issue. There is tremendous lobbying regarding such legislation in this market, from homeowners, realtors, insurers, contractors, all the way around.”

If the picture appears bleak, it is because there doesn’t appear to be a turning point on the near horizon.

Helene Lerner, underwriting manager at California-based Cascade/Amstar, noted that, “The market is very tight right now and very few carriers are writing. Those that are writing are writing limited forms, some are even talking about going back to claims made. [The Montrose decision] is still a big to-do with all of this. Claims are coming out of the woodwork for things that are five to 10 years old. Construction defects are again coming out of the woodwork. Your biggest cost is defense. The claims are not necessarily paid, but the defense will knock you out. Those that can get coverage, the premiums are double or triple.”

Bill Newton, president of Lemac & Associates in California feels the market is “Not getting better, if anything, it is probably getting worse. The residential market continues to be a huge problem with high minimum premiums, high SIR’s and deductibles. The reasons are construction defect claim activity, the fact that the industry has little or no faith in SB 800, and the fact that there is so little competition out there so there’s nothing to keep the prices down.”

If there is a bright spot, contrary to much of the industry’s and public’s opinion, Newton feels that the mold issue is “Only a semi-problem as every one excludes mold. On the other hand, I know of companies that even though they exclude mold, they won’t want to quote an account that has had a mold claim thinking they’ll get dragged into the claim even with their exclusion and they will still have to defend the loss.

“When I look at our book of business, particularly at our Nevada contractors, I think their loss experience is worse than our California contractors. In Arizona, we don’t do too much in the way of contractors because it seems to get placed fairly easily there in the standard marketplace with some exceptions. A lot of people have pulled out of the residential construction market.

“In commercial construction there still seems to be a number of carriers, but they have all raised their rates and want higher deductibles. Additional insured endorsements are becoming a problem. The latest problem that has hit the market is the constriction in market for those contractors that are building apartment buildings. Some people tell me that they see some construction defect activity on it and others tell me they’re raising their prices on it because so few other people will quote apartment builders.”

New dwellings getting tougher
The problem of contractors jumping from state to state doesn’t seem to be as prevalent in Texas as it is in the Western states. “I worked in California and I don’t see as many contractors here in Texas going to other states to work as there,” WSS’ Stevens said. “We can still write commercial GCs, I think that is still very tough in California. I don’t see them being forced to go out of state (Texas), however the smaller residential tract homebuilders are probably going uninsured. We’ve seen some carriers pull out of certain trades, like roofers altogether. We are lucky in that WSS has several markets and we can still write most contracting classes in Texas. One of our top binding authority markets that will remain nameless pulled out of all types of contractors’ altogether. A year ago they were writing general contractors and everything under the sun to do with contractors.”

However, Stevens added, “I expect things are going to get tougher. If the market is indeed flattening out like some say, I don’t see that happening in casualty with all the things going on. Contractors’ is an area that no one wants to mess with. We in Texas have had some markets pull out of contractors but I would say overall in the surplus lines industry, more and more contractors are pouring into it because of the standard markets continue to withdraw from construction classes. We, along with most of our surplus lines competitors, are seeing an increase in premium volume for contractors, but it is more and more difficult to get them done. Even though we may be writing more business in the contractors classes, commissions are down on contractors from years’ past.”

David Smith, a GL underwriter with Austin-based Tejas American General Agency sees no major changes in the market in the foreseeable future.

“On new dwellings like apartments, condos, townhouses, it is real tight, most companies just don’t want it. If it is commercial, they’re more receptive. The lawsuits aren’t as much a factor there as they are in residential. This market isn’t really anything new. Things pretty much tightened up two or three years ago. The agents will deal with it. The biggest challenge for companies writing contractors in Texas is picking accounts they can make money on. That’s going to be a tough challenge, most of them are just staying clear of it.”

Ron Barnett, executive vice president for Superior Access, said a number of companies are adjusting how they do business in the Lone Star State.

“The [habitational] markets are very hard. Apartments are not as affected as single-family residents [houses]. The homeowners market continues to be difficult. The smaller retailers such as convenience stores and restaurants are finding it more difficult to find coverage in the standard markets. I know that we write a great deal of apartments, condo associations, convenience stores, restaurants and other small retailers that the traditional BOP markets have purged.

“Retail is a more recent development,” Barnett continued. “Hartford [recently] stated they are not writing retail unless it is a ‘superior risk.’ Our response was to pull all the retail classes off our Web site for BOP. We are now placing those risks in surplus lines markets.”

According to a Hartford spokesperson, who addressed the adjustments they’ve had to make in the Texas contractors marketplace, “These actions pertain specifically to small business insurance and specifically to new business underwriting guidelines for contractors and retailers, and are targeted at improving our performance in those small business industry sectors where loss costs have been rising. The small business segment also continues to write some small contractors and retailers in the state, but has adjusted its new business underwriting to focus on the best risks in those industry sectors. Neither action affects existing business. The Hartford continues to be a stable market for both contractors and retailers in Texas. In fact, the company has a substantial contractors book with a particular growth area in specialty construction, for example.”

What is being written into contracts these days by agents and their clients? According to Ridley, “First, you see more tight language, especially you’ll see more mold exclusions, along with more exclusions regarding an issue called ‘additional insured coverage.’ In a typical case, a general contractor agrees with an owner to build a structure. That contractor will enter into several different contracts with other contractors who have specialties like plumbing, sidewalks, etc. If you’re a smart general contractor your contract with a subcontractor will say if something goes wrong with the subcontractor’s work and causes damage, the subcontractor must defend and indemnify the general contractor; the subcontractor must also get insurance and name the general contractor as a party to that insurance. In that circumstance, if a claim arises, the general contractor may seek recovery from the subcontractor as well as the subcontractor’s insurer.

An additional insured endorsement is very common in the construction industry. It is rare that you see a general contractor not asking for it. You’ll even see some subcontractors who have contractors below them asking for it. You’re beginning however to see some narrowing of the language in insurance policies regarding the coverage.”

Back to the future
What can we expect for the remainder of 2003?

According to Ridley, “I expect we’ll hear more and more about mold. I think we’ll see more discussions trying to do what we refer to as ‘alternative resolution issues’
before litigation. I think those are the two major trends. California has a statute of limitations that is confirmed to 10 years. That’s a long statute and I think you’ll see more states adopting that kind of thing because it takes so long for some of these damages to reveal themselves.”

As for Lerner, she expects things to be tough for the remainder of the year. “I don’t see any immediate answers to everything. Some people are going into self-insurers, risk retentions and risk purchasing, anything that they can do to get some coverage. Unless some laws are changed or something drastic happens, I don’t see an immediate light at the end of the tunnel. Somehow they’re going to have to get the attorneys to back off. This problem has affected us considerably as far as income, remarketing, trying to find markets. Business that we’ve had on the books, we have no home to give them at renewal. The trickling effect is all the way down. For the agents, all they can do is check all their markets. I don’t know, maybe they need to start to writing to their government advisors and see if they can maybe come up with someone who can put some legislation together.”

Newton, when asked for advice on agents being able to survive in the contractors market, replied, “They need to pick a wholesaler who really knows the residential construction market and has access to all of the markets and not go to two or more wholesalers on the same risk because there is not enough market out there. I think things will get worse before they get better. Even with the huge premiums we’re now talking about with some of these accounts, I don’t hear of anyone wanting to get into the market.”

As for Hippard, he sees no major changes on the horizon, a concern that others in the market share.

“I feel there may be a little more capacity on the larger residential contractors that are willing to pay the high prices, and in some cases the more restrictive coverages. Otherwise, I do not feel there will be any change from the current marketplace.”

Looking at the industry from Texas, Barnett added that, “I keep looking for signs that the hard commercial market is trying to ‘recover,’ but I see the opposite. For a company like us, in many ways, that is good news. The trend that we have seen in Texas over the past six months is that the habitational market was the first to show significant signs of a harder market. Of course, homeowners and dwelling insurance has been well publicized. Contractors markets are now just seeing the market significantly harden, especially the smaller artisan contractors and smaller general contractors. I see the small retail business to be the next to find the market more difficult.”

If that feeling holds true, those in the contractors market have more relationships to build in the coming months to see to their survival.

Editor’s Note: See a related article on the contractors market and the latest legislation in California, in the Parting Shots column. To comment on this story, e-mail: dthomas@insurancejournal.com.

Topics Lawsuits California Texas Agencies Legislation Claims Excess Surplus Homeowners Contractors Construction Arizona