Cost-Effective Liability Insurance Still Dulls Bright Builder Marketplace by Peter Mosca
Encouraged by continuing low mortgage rates and robust demand for new homes, single-family home builders are more confident this June than they've been all year, according to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index. But, not all the news is good. In virtually all parts of the country, liability insurance is dramatically less available and more costly for homebuilders than it was as little as six-to-12 months ago. According to attorneys from Newport Beach, California-based Newmeyer & Dillion LLP, builders are having difficulty obtaining coverage due to construction defect litigation. Most notable are claims involving mold and indoor air quality. These cases are putting pressure on insurers who are having to pay larger and larger settlement awards for both property damage and bodily injury. Despite an ongoing strong housing market, builders are still reportedly having difficulty obtaining adequate liability insurance due to construction defect litigation, said Greg Dillion Newport Beach, California-based Newmeyer & Dillion LLP. Such coverage, when it is available, is reportedly more limited and more costly, and a major factor in constraining builders and their subcontractors from meeting demands. Liability insurance is the single most important component of a builders insurance program. It provides coverage against bodily injury, property damage, a slip and fall at the office or model home, a job site injury to a worker, as well as construction defects. Builders always have been a difficult class of business to insure. The proliferation of construction defect lawsuits has resulted in enormous losses for liability insurers, wrote Jeffrey D. Masters, Sandra C. Stewart and R. Jane Lynch of Cox, Castle & Nicholson LLP, Los Angeles, California, in a report prepared for the NAHB. Non-insurance risk management strategies designed to avoid, minimize and/or shift liabilities must become a core part of every builder's company philosophy and operational practices. Effective implementation of such strategies increasingly will be a prerequisite for builders to qualify for adequate liability insurance, both in the current market and in the future. Until recently, insurers have provided flexibility to builders in its coverage options. From conventional annual renewal programs, where projects and other entities are placed under a master corporate liability insurance program to project-specific and discontinued operations policies, these offerings are becoming less and less available, at a cost-effective rate, in the marketplace. For builders looking for new coverage or those seeking to modify their current liability insurance, Dillion offers these four tips. - Hire an insurance broker with access to as many domestic and foreign markets as possible and one who has substantial experience in placing the type of wrap (specified projects) product requested.
- Hire experienced insurance coverage counsel to review and compare your policies.
- Have in place a top notch quality assurance program that includes third party peer review and an exemplary customer service program.
- Be willing to share the risk (and pain) in terms of high self-insured retentions/deductibles and premiums.
As previously stated, builders must approach risk management as more than simply calling their agent or broker to purchase insurance. The process of identifying and managing risk must be a core part of every builder's company philosophy and operational practice. They encourage builders to follow a four-part strategy: - Avoid liabilities.
- Minimize liabilities.
- Shift liabilities to other parties.
- Insure liabilities.
Certain liabilities can be avoided or minimized by product selection decisions, for example electing to build only detached residences rather than higher-risk condominiums and townhomes. Liabilities can be shifted to other parties by contractual risk transfer provisions, such as insurance, indemnification and compliance with laws provisions in trade contracts and design professional contracts. All of this translates into fewer claims and better loss experience, which makes the builder more attractive to workers compensation and liability insurers. The market for liability insurance coverage for builders has always been restrictive. Today, the proliferation and high cost of construction defect litigation from mold and indoor air quality claims has made it even more prohibitive. But, since the insurance industry is driven, like other businesses, by the basic economic principle of supply and demand, with proper planning and research savvy builders will find suppliers and policy coverage that allows them to meet consumer demands. | 
