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January 17, 2002

Home Builders, Subcontractors Face Escalating Liability Insurance Costs

By Bridget McCrea
Inman News Features

Home builders nationwide are finding an unpleasant surprise in their mail these days: letters stating their liability insurance rates are rising 10-20 percent and sometimes even 100 percent or more.

Madelyn Flannagan, VP of education and research for theIndependent Insurance Agents of America in Alexandria, Va., said nearly every type of construction business across the nation began seeing increases in liability insurance costs even before the Sept. 11 terrorist attacks socked insurance firms with big losses.

"Capacity for certain types of risk was already drying up for some (insurance) companies, rates were going up and carriers were being more specific in their underwriting with many types of (construction) businesses," said Flannagan.

She said home builders with more than $1 million in revenue are seeing most of the increases and most of those are limited to 10 or 15 percent.

She also said an increase in home prices could result because the insurance premium hikes are sending builders scrambling to offset the additional costs.

An increase in the general contractor?s individual liability rate might not be worrisome in and of itself, but the aggregate cost of more expensive insurance for all the builders? subcontractors could trigger higher new home prices.

"If a general contractor?s subcontractors on a new home project are experiencing rate increases, the general contractor will be charged more by those contractors, making the price of the home go up," said Flannagan.

Steven Delva, division president for Standard Pacific Homes of South Bay in Campbell, Calif., said the large publicly owned home-building company soon will switch to an umbrella policy to cover not only itself, but also its consultants and subcontractors.

The total cost will be slightly more than the increased rate the general contractor currently is paying.

"That will allow us to manage the risk and the insurance requirements of our subcontractors," said Delva, who is a past chairman of the Home Builders Association of Northern California.

Delva said Standard Pacific decided to switch to an umbrella policy because exclusions in its subcontractors? insurance policies presented difficulties when the general contractor attempted to find insurance for its own protection.

The umbrella policy also will solve a problem Standard Pacific and other large home builders are grappling with: how to keep down the cost of building a home when subcontractors are facing their own liability insurance cost hikes.

"It?s not so much our own insurance that?s posing the problem, but rather the aggregate of what all of the subcontractors and consultants have to pay for their own insurance," said Delva. "They have to pass it on to us and that?s where the real cost comes in."

Debbie Gayman, co-owner of Eaton, Wash.-based Gayman and Sons Construction, which specializes in speculative single-family homes, said the company?s liability insurance increased from $326 a month last year to $758 a month this year.

She decided to find another insurance carrier to replace the one the company had been using since 1989 without any claims. But she was surprised to find the options had been whittled down to four from 16 the prior year.

Gayman and Sons works for two different general contractors and must carry a $2 million aggregate liability policy. The construction company now is paying $9100 a year, up from $4000 last year.

"That has to trickle down to the consumer because we?re going to pass it along to our general contractor," said Gayman, who is also a Realtor.

Jeff Frank, managing partner with Seattle law firm Bullivant Houser Bailey has represented a number of real estate developers and general contractors in construction defect lawsuits. He said he has heard more complaints about liability insurance prices, particularly during the last six to eight months.

The problem started in California, said Frank, then skipped Oregon and resurfaced in Washington, mainly because of that state?s Condominium Act. "It?s a very pro-consumer act that attracted several California lawyers to Washington when they saw how favorable the law is for consumers," Frank said.

"The end result is that many carriers aren?t even selling insurance to builders who want to develop condominiums or are selling them policies that don?t cover construction defects that occur after completion of the project," he said.

The higher insurance prices could result in a tightening of the real estate market, Frank predicted.

"Instead of having a selection of building starts to choose from," he said, "Realtors will have to focus more on existing homes and condominiums, then do more research on the latter because there?s so much litigation surrounding those (structures)."

Copyright: Inman News Service



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