In states with tough construction defect laws, litigation has long been a burden on balance sheets for general contractors and created challenges in seeking adequate insurance coverage. Builders in states such as California, Colorado, Florida, Oregon and Washington, already challenged by construction defect laws, are now navigating an even tougher market thanks to material cost increases, concrete rationing, and delayed plumbing fixtures and kitchen appliances.
Project delays, materials costs and rising insurance rates are bearing down on residential contractors, making it tougher to conduct business.
How We Got Here
This pressure on the construction industry did not happen overnight. In 2018, the insurance industry started to see adverse development in claims related to homebuilders, many of them related to water intrusion. Claims related to faulty stucco installation have once again taken a front-row seat in the Florida market. Over the last three years, claims settlements have escalated thanks to higher jury awards and overall “social inflation.” Buoyed by a long soft market period, pricing was too thin to sustain the increasing losses, and risk management and oversight requirements were not at optimum levels.
That perfect storm is causing the insurance market to respond with rate increases, coverage restrictions, lower limit offerings, and more underwriting scrutiny. To protect against losses, insurers are pulling back. A number of admitted markets are no longer writing residential construction, with non-admitted markets picking up the slack.
On the primary side, new exclusions are being added to policies in a number of states. For example, stucco exclusions have been added to policies in Florida. Likewise, markets are tightening terms on tract home construction by limiting the number of homes per community. The same holds true for multi-family construction. Some insurers are excluding coverage for townhome construction and condominium exclusions are commonplace on annual practice policies.
There have been additions too, in the form of loss control and QA/QC initiatives that insurers are placing on contractors. General contractors must ensure that their hired subcontractors have adequate coverage and additional insured status, appropriate limits, contracts in place, and, in some cases, these requirements extend for many years in to the future.
The insurance market serving subcontractors is experiencing many of the same adverse market conditions and subcontractors often have difficulty meeting these requirements.
That increases risks for contractors. Should the subs not be able to obtain the right amount of insurance, the contractors cannot meet their requirements. That could result in penalties or worse, losses that must be paid out of pocket.
Lenders too are requiring more. Many lenders are expecting policy limits to equal 50% of construction value. That leaves contractors scrambling to piece together coverage from a number of insurers due to the insurers’ available limits being reduced. For contractors who have had some losses, getting limits to meet lending requirements could be impossible.
There is little relief to be found in the excess market. Segments have seen excess rate increases as high as 100% over the last 18 to 24 months, and insurers are again shortening limits. Insurers who would write coverage in both primary and excess markets are now limiting their business to one market or the other. Some insurers have left the market entirely.
Even so, there is still coverage to be had. The difference: Contractors must work harder to put together their insurance programs.
Contractors are seeking insurance solutions that offer “extended products-completed operations coverage” through the applicable state statutes of limitations. This is often referred to as “Close of Escrow” wording. This coverage extension enhances the policy to capture future construction defect liabilities that arise from homes sold during the policy period. It greatly reduces the chance for unexpected balance sheet risk that can result from coverage restrictions or availability issues from annual practice policies. NFP has access to enhanced practice, project and wrap products that all include this critical coverage component.
Contractors are also purchasing insurance in “phases.” By breaking down insurance coverage “per construction phase,” contractors can find coverage at the appropriate levels and with policy terms that align with completion of the phase. With construction projects being lengthened by delays and supply issues, phased insurance purchasing makes more sense.
As the pressures on the construction industry continue, contractors will need to meet the coverage challenges brought on by delays, higher claim costs and stricter terms from insurers. Meeting those challenges requires a forward-thinking approach to insuring projects, including a phased insurance program. Working with NFP, contractors can put together a comprehensive insurance plan that keeps them protected and working even in the toughest market conditions.
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