According to the Alliance of American Insurers, Nevada insurance regulators concerned about the availability of residential contractor’s liability insurance should not look to mandatory pools, but should develop a legislative solution to reduce the cost of construction defect litigation.
“The past several years have seen a dramatic increase in litigation centering on the issue of construction defect claims in Nevada and elsewhere,” Rita Nowak, Alliance assistant vice president of property/casualty, said during an informational hearing earlier this month at the Nevada Department of Insurance. “But because little case law exists in this area, courts have been struggling with issues that include whether or not construction defects fall within commercial general liability (CGL) insurance policies, what constitutes property damage, and what is the trigger of coverage that activates the right of an insured to receive coverage under a policy.”
Nowak explained that, “When a homeowner, or more commonly a homeowners or condominium association, sues a general contractor or developer, all the subcontractors—plumbers, electricians, masons, etc. are typically named in the suit as well. This dramatically increases the cost of the litigation. In addition, insurers are required to thoroughly investigate all claims before making coverage decisions—again, resulting in a significant increase in the cost of and time required to process such claims.”
She counseled against developing a joint underwriting association, such as the state recently did for medical malpractice insurance. “Such a mechanism could potentially become under funded, necessitating assessments on commercial insurers. If a similar plan is developed for contractors liability and requires additional funds, the potential insurer subsidies through assessments could create an unfriendly regulatory environment that would exacerbate the current availability problems.”
Instead, Nowak urged the commissioner to develop a legislative remedy that deals with the rising costs of construction defect litigation in a positive way while retaining appropriate consumer protections. “Efforts should focus on bringing insurers back into the contractor liability marketplace by eliminating frivolous construction defect litigation, while providing homeowners a tool to resolve such suits in an expedient manner,” she commented.
Such a bill should require homeowners to give contractors advance notice of a construction problem and their intent to file suit, while allowing construction professionals the opportunity to offer a “cure” for the problem prior to filing of the lawsuit. An alternative dispute resolution procedure also would help control the cost of lawsuits.
Nevada Insurance Comm-issioner Alice Molasky-Arman seemed very open to recommendations and is considering creating a task force to study the situation further, noted Nowak, who volunteered to take part in the panel.
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