Experience a World of Difference Contractors & Construction Defect Coverage BUILD A STRONGER APPROACH TO INSURING CONTRACTORS WHITE PAPER DEC 2017
Contractors & Construction Defect Coverage: Build a Stronger Approach to Insuring Contractors Retail insurance agents and their clients throughout Colorado and in multiple western states face a problematic coverage scenario a lack of market availability for construction risks. However, help is available with the assistance of a seasoned wholesaler that possesses not only the market access, but more importantly, coverage expertise with the ability to craft coverage details so vital to construction insurance. A Brief History of Construction Defect Litigation in Colorado The standard policy for construction risks is the ISO commercial general liability (CGL) form. Whether construction defect is considered an occurrence under the CGL varies by state and is a major factor influencing the availability of liability coverage for contractors workmanship. Construction defect as defined by International Risk Management Institute is: Generally speaking, a deficiency in the design or construction of a building or structure resulting from a failure to design or construct in a reasonably workmanlike manner and/or in accordance with a buyer s reasonable expectation. Colorado was the first state to define construction defect as an occurrence. In 2010, the Colorado state legislature enacted Colorado Code 13-20-808.1 While this law did not immediately cause a hard market across all construction, it did cause many carriers to stop writing multi-family homes (i.e., townhomes and 2
condominiums). New residential construction on the Front Range of Colorado Boulder, Denver, Greeley, and Fort Collins is currently one of the hottest markets in the nation, and insurance capacity remains good for single-family housing. However, many agents cannot write more complex construction products due to today s just say no underwriting climate. Each state approaches coverage differently based on court decisions, case law, and legislation. For example, in Colorado, construction defect is an occurrence while nearby in Wyoming, it is not. Utah has delivered a mixed message in construction defect decisions.2 Add into the mix two other variables new legislation in conjunction with emerging court decisions and construction defect litigation can change overnight. When exposures change, so do underwriting guidelines. This problem has been particularly acute in Colorado where the legislature recently took steps to address the construction defect issue in multi-family housing. The Colorado legislature recently passed House Bill 17-1279, which was signed into law on May 23, 2017. This law requires condominium owners to obtain approval through a vote of unit owners before they can file a construction defect claim.3 One law firm specializing in construction defect litigation referred to it as a misguided attempt at construction defect reform. To date, many carriers are still taking a hardline stance, refusing to write multifamily housing exposures in several states, including Colorado, Arizona, and Nevada. Many contractors face unit count restrictions on their projects, as well as other barriers. Furthermore, many insurers have a narrow appetite for the insured s potential operations. For example, contractors who install exterior insulation and finish systems (EIFS), waterproofing, or fire sprinklers have additional hurdles to clear as far as underwriting appetites are concerned. Even seasoned agents who specialize in coverage for contractors find it difficult to navigate this ever-changing maze while assisting their clients with adequate coverage. 3
How can you ensure your contractor clients have the appropriate coverage in all states where they operate? How can you confidently approach new clients if you lack confidence that you can place the risk once the contractor agrees to work with you? The answer is an experienced broker with expert knowledge of construction coverage availability across jurisdictions and who can help you place coverage while putting you ahead of your competitors. Market Consolidation: What Does It Mean to You? In the past fifteen years, the wholesale marketplace has experienced an extensive consolidation among brokerage firms: smaller firms sold to mid-size firms and mid-size firms sold to larger wholesale brokerages. Experts in mergers and acquisitions as well as executives in wholesale firms expect this consolidation trend to continue. The impact has been that larger wholesale firms can drive improved deals for particular accounts due to their carrier partners larger premium volume, which provides a competitive edge over smaller wholesale firms. Furthermore, a wholesale company you may have relied on in the past may be acquired tomorrow and its focus may change. The long-term relationship you develop with your wholesale broker is critical to insuring complex construction risks. In construction exposures, your clients insurance needs can change rapidly as they bid new projects. The days of a relatively easy standard-market package that provides robust coverage for contractors who build both commercial and residential construction are gone. Today s coverage design requires a more 4
strategic approach. Today s agent must consider not only what work the insured is doing today, but also what they might do tomorrow. The Right Coverage Is Critical For contractors, either having the right coverage in place as they contemplate bidding projects or a quick determination of coverage availability before they bid is critical to their success. Common examples of coverage requirements in this process include additional insured with completed operations, waivers of subrogation, primary non-contributory language, and per project aggregate endorsements. It is very common for a commercial contractor considering residential projects to have exclusionary language in his or her policy for tract-size limitations, condo/townhome projects, or in the worst case, a complete exclusion for any work in entire states. The current construction boom on the Front Range means opportunity for retail brokers to produce new business and grow their renewals. Statistical reporting from Metrostudy illustrates that housing starts in the Denver metro area alone topped 11,500 for the trailing 12 months ending 2Q 2017. Of that astronomical figure, over 30 percent of those are detached homes, meaning condominiums or townhomes.4 Such opportunity for contracting clients comes with the risk of being underinsured or uninsured, and it is important that the retail producer exercise a high level of due-diligence, risk management expertise, and reliance on knowledgeable partners when entering into the construction arena. The Importance of Crafting the Right Construction Coverage Package While defenses are available in construction defect litigation, the current insurance climate for contractor liability is still problematic. Relying on defenses like failure 5
to mitigate damages or comparative negligence can reduce awards, but may not limit legal costs. Having the right coverage is crucial. Without it, contractors may not be paid for the work they have already performed or bid on or begin new projects. If they do bid but cannot demonstrate adequate coverage or limits, they may lose the award. Many things can go wrong on construction projects that do not cause bodily injury or property damage. Developers may require protection from cost overruns or mismanagement due to scheduling or plan supervision, for example. A contractor s or construction manager s professional liability policy can provide such coverage. The typical construction manager s policy, however, will not cover claims arising out of the performance of architectural or engineering work. While some carriers will endorse these additional services, many retail agents solve this coverage gap with a separate architect s or engineer s professional liability policy. Add the complexity of an occurrence policy on the general liability with the likely mix of a claims-made form on the professional liability policy, and the contractor s insurance plan becomes even more important to place correctly. The help of a highly experienced wholesale broker can ensure a retail agent covers all the bases on complex construction projects. If a contractor has a coverage gap, the retail agent s errors and omissions policy could be at risk. Working Across State Lines Increases Coverage Complexity In a perfect world, all states would handle construction defect claims in a comparable manner. That is far from reality. A tremendous lack of uniformity exists 6
in how each state handles construction defect litigation, even if those states are contiguous. Many larger contractors operate in more than one state or with smaller operations that exist in border areas like Four Corners (Arizona, Utah, Colorado, and New Mexico). Multi-state operations can cause coverage problems with the stroke of a pen on a new construction contract. Retail agents must contend with a changing maze of state laws and definitions of occurrence. They face assorted coverage positions by carriers who may say yes to insuring a contractor in Utah while saying no way to the same contractor who wants to bid a project in Colorado. Furthering this frustration an underwriter says no to your account, then writes the same risk for another retail agent. Relying on a wholesale broker who knows the coverage and understands carriers appetites can help retail agents win accounts and evolve as their contractors grow. Colorado legislation designed to assist condominium owners in remedying their construction defect claims had unintended consequences to the state s insurance market. The market challenges in writing contractor general liability extends beyond Colorado, however. Also problematic are Idaho, Nevada, Arizona, Wyoming, Utah, and Four Corners area. Because Colorado currently offers one of the greatest underwriting challenges, one of the ways to solve this problem is to begin with a Colorado approach for contractors who also perform work in other states. It is always easier to add other states to a well-designed Colorado insurance plan than to base your exposure in another state, pick up a project in Colorado, and then try to add that project. 7
Wrap-Ups an Option in Residential Construction and Condominiums One solid approach often a necessity in larger construction projects of any type is the Owner-Controlled Insurance Program (OCIPs) or Contractor Controlled Insurance Program (CCIPs), also known as wraps. In a wrap, the owner, general contractor, or developer purchases and controls the insurance program that covers the general contractor and all subcontractors. In return, subcontractors reduce the insurance markup they ordinarily charge in their bids. The general contractor, with the help of his or her agent and the wrap administrator, details the coverage in a manual which then becomes part of the construction contract. A wrap covers all contractors working on the site, helping to eliminate coverage gaps or coverage lapses by subcontractors. The typical wrap coverage can include general liability, workers compensation, design errors and omission, builder s risk insurance, and excess coverage. Defined under the wrap program are the responsibility for loss prevention, claims administration, and insurance coverage. Using a wrap offers both advantages and disadvantages, but unless a condominium project is under 20 to 40 units (depending on the state), a wrap may be the only coverage a carrier will offer on the project. The ability of a retail broker to offer a wrap is highly beneficial given the current construction coverage environment in Colorado. However, given the complexity of this multi-step coverage approach, an experienced broker is the best guide for the retail agent in wrap policies. Rely on Worldwide Facilities Your current wholesaler partner may lack the expertise needed to guide you in tailoring coverage for more complex construction risks. At Worldwide Facilities, 8
we ve been placing Colorado construction insurance since 1970. Our expertise in contractors general liability and other construction coverages is unparalleled. Worldwide Facilities, LLC is a national wholesale broker and managing general agent providing services to insurance agents and brokers. In business since 1970, our seasoned team of brokers and underwriters offers specialized knowledge of construction exposures, broad access to specialty markets, and extensive expertise in placing challenging insurance risks. We offer unmatched tools, resources, and strategies to help insurance agents and brokers expand their corporate accounts to include construction exposures, cranes, wraps, and other complex construction challenges. Take advantage of our expertise in placing construction risks today contact Kyle Domire in our Salt Lake City office at (801) 979-5081 or kdomire@wwfi.com to schedule a conversation. 9
Notes 1 Is Defective Construction an Occurrence? The Answer Isn t So Concrete. Sedgwick Law, February 2013. 2 Construction Defect Resource Guide. Munich RE, 2015. 3 Colorado House Bill 17-1279 A Misguided Attempt at Construction Defect Reform. Colorado Construction Litigation, March 27, 2017. 4 DENVER HOUSING 2Q17: Record Prices Push Activity into Attached Product and the Resale Market becomes a more Affordable Option. Metrostudy, August 22, 2017. Disclaimer This whitepaper is Copyright 2017 by Worldwide Facilities, LLC. It may be freely redistributed in its entirety provided that this copyright notice is not removed. It may not be sold for profit or used in commercial documents without the written permission of the copyright holder. This whitepaper is provided as is without any express or implied warranty. This whitepaper is for educational purposes only and does not purport to provide legal advice. If you require legal advice, you should consult with an attorney. The information provided here is for reference use only and does not constitute the rendering of legal, financial, or other professional advice or recommendations by Worldwide Facilities, LLC. The listing of an organization or website does not imply any sort of endorsement and Worldwide Facilities, LLC takes no responsibility for the products, tools, and Internet sites listed. 10
HEADQUARTERS 725 S. Figueroa Street 19th Floor Los Angeles, CA 90017 (213) 236-4500 Visit wwfi.com for a full list of offices throughout the country. Experience a World of Difference