by Kelly Faloon

The impact of construction defect litigation claims on coverage availability and affordability in some states has reached crisis status, according to Ann Rudd Hickman, an analyst for the Dallas-based International Risk Management Institute. California, Nevada, Arizona, Texas, Florida and Colorado have the most significant problems.

“Subcontractors, in particular, have experienced a drying up of insurance markets, because much of the risk from construction defects falls in their laps,” she said. “General and umbrella liability insurers have adopted an underwriting of avoiding altogether certain classes of contractors, types of construction or problematic regions.”

She added that some insurers will attach exclusions to contractors’ and subcontractors’ policies that target certain types of construction defect claims. These include known loss provisions, mold, residential construction work and additional insureds (subcontractors).

“California is a terrible place to be a contractor right now,” said Steve Lehtonen, executive manager of the Plumbing-Heating-Cooling Contractors California chapter. “Insurance companies dictate what types of work a contractor can do. Condo and townhome projects have been off-limits for awhile, but those projects are seeing a comeback due to housing prices. Service contractors are being told by their carriers that they cannot engage in contracts in multiple housing developments for repairs, or they won’t have coverage.”

He explained that in California, mold coverage has taken a back seat to workers’ compensation and other construction defect general issues. But it is still a major problem in other areas of the country.

“The trend of cutting back on construction defect coverage for mold impacts our contractors by placing the risk of frivolous lawsuits squarely on their shoulders,” said Pete Cheney, director of safety and health for the Mechanical Contractors Association of America.

In order to combat this trend, Cheney said that contractors are trying to be proactive. Some are seeking very expensive coverage from other insurers. Others are seeking to contractually transfer the risk to other parties. And a few are implementing aggressive moisture prevention and control programs. This includes educating construction owners and insisting such measures be implemented immediately after construction is completed.

Hickman said that changes in an insurer’s policy may not be readily recognizable, so agents and brokers serving the construction market should examine policy forms and endorsements for any irregularities in the language that could effect coverage.