Specialized Industries - Construction Defect Liability
Challenges in Construction Defect Liability
Are Changing the Way Builders and Developers Manage Risk
Tremendous risk and insurance challenges have confronted residential contractors and developers in recent years. Starting in California and moving east, construction defect claims plaguing the industry became one of the primary problem areas during the building boom of the last five years.Mounting losses caused insurers to begin a substantial pull back from the residential construction marketplace, and despite some softening in the overall insurance marketplace, most insurers remain very cautious about insuring contractors or developers that become involved in projects encompassing any form of residential exposure, whether it be single family, multi-family, or institutional types of properties. When construction defect liability insurance is available, the policies are often accompanied by a myriad of coverage limitations that vary substantially from insurer to insurer. You have to be careful.
We Believe in a Different Approach
At Beecher Carlson, we believe these issues require out-of-the-box solutions. In recent years, many residential homebuilders and developers have changed the way they mange risk – instead of transferring risk, many now assume a substantially larger portion than in the past.The reason for this migration? Insurance carriers generally don’t know how to price construction insurance; underwriting and actuarial models don’t accommodate the length of time between the completion of a house and the lawsuits that might arise from its building. Also, residential loss experience isn’t segregated from commercial loss experience, which doesn’t often work to a homebuilder’s advantage. Therefore, premiums are extremely high and coverage provisions are often inflexible.
Another challenge is that builders often don’t have control over the claims and legal process. Even if builders believe they purchased financial certainty, at claims time, it may turn out that the actual coverage isn’t what they thought they purchased. In addition, subcontractors sometimes have exclusion put on their policies, so the certificate of insurance doesn’t accurately represent the coverage they actually have.
Given the legal, regulatory and risk management challenges facing them today, many builders, developers and contractors are now turning to alternative risk management options - including captives - as they seek better coverage at better prices.
New and innovative insurance approaches and products are available for builders and contractors to consider. We welcome the opportunity to discuss the construction defect liability alternatives with you.