While California and New York enjoy all of the headlines for their exciting workers’ compensation and insurance legislation, we sometimes forget there are 48 other states in the union out there with active legislative and judicial branches. For instance in Washington, we have seen some key legislation passed for construction law that is now causing quite a stir for our Northwestern neighbors.
“The legal climate in the state of Washington is the worst in the country for contractors,” claimed an underwriter as he prepared the insurance broker a 45 percent premium increase for a residential trade contractor.
In an attempt to curtail dramatic rate increases, Washington passed the 2002 Cure Bill and the 2003 Contractor Protection Bill, yet the insurance community continues to have the perception that Washington is not a good state in which to insure contractors. The Cure Bill allows builders to offer to fix a construction defect before being taken to court. The Contractor Protection Bill allows you to limit the statute of repose (limitations for us laypeople) contractually and offers seven affirmation defenses against legal attack.
These laws (RCW64.50.020 and SHB2039) offer strong defense against construction defect. Shouldn’t Washington be seeing some rate relief?
Statute of repose
Unfortunately, construction defect claims have long tails which often use the entire statute of repose before reporting the defect. Of course, across the country, this time limit varies from state to state. With the Washington six year statute of repose, just now in 2004, brokers, insurers and contractors are finding out about things that went wrong in 1998 and 1999.
Think back, and try to recall what the largest project on your desk was in December of 1998. Can’t remember? How about what you bought your spouse for Christmas in 1998?
Imaging trying to reconstruct what happened on a jobsite with 15 different subcontracting trades and a total of 50 warm bodies who came and went over a four month construction period. That is the nature of a construction defect claim on a single family home. Now imagine what it might be like for a condominium tower.
When will we see rate relief?
These delays in claim reporting are ultimately what is stopping the new laws from manifesting immediate premium relief for contractors. It is going to take a long time before we are caught up to buildings built in 2003 which are subject to both laws. Additionally, the courts will interpret these new laws. Exactly how they will do so remains unknown.
Insurance companies are businesses, with an obligation to return a profit to their stockholders. Insurance is the science of pooling of risk. For a premium, you gain the right to turn in a claim up to the limits offered under the policy. Premium is usually based on sales or payroll and the theory that the more of either that there is, the greater the premium, since it is more likely that a claim will occur. Insurance companies use actuaries to figure out how many claims are likely for various types of business, and figure out a premium which will cover their claims and overhead and return a profit to the stockholders. If a particular class of business isn’t doing well, they will increase the rates to try and make a profit or stop writing it all together.
Construction hasn’t been very profitable with the long tail of claims. Actuarially, the insurance companies used the likelihood of contractors making mistakes, but they never figured in what would happen with aggressive construction defect litigation. Because of this, each insurance company spends as much defending the claim as they do for the claim payout itself. This wasn’t in their original projections for 1998 pricing which they made in 1996.
In order for prices to go down, insurance companies have to start making a profit on a particular class of business. Without this profitability, you can’t draw more competition into the field, and drop prices.
A light at the end of the tunnel
Things are getting better. There are a few new insurance companies offering coverage that wasn’t available 18 months ago. A few. Hopefully this trend will continue, and we will see some rate relief. However, this will happen first for only the best of the best risks.
Contractor survival guide
In the meantime, there are some things that we urge our contractor clients to do that will help them through the process.
• Consult with their attorney, (or retain an attorney) to review the new laws to see how they can incorporate them into their business.
•Use contracts for all areas of their business—both with their customers and their subcontractors. If purchase orders must be used, they should be drafted by an experienced construction contract attorney. Further, contracts should be updated on a regular basis. The fees to update these annually are a small fraction of what it might cost a contractor not to update them.
• Contractors should have a maintenance manual to give to their customers which includes a signed acceptance page for both parties.
• Research all subcontractors and all general contractors before agreeing to work with them. A couple of phone calls before a project starts can save a lot of time and money later.
• Implement a procedure where subcontractors are paid only if they have provided all of the formal documentation necessary for the job. This should include current & valid insurance certificates, signed subcontracts and safety program verification, including drug testing.
• Contractors need to document their work. They may use everything from traditional methods like complete, organized, and up to date files, to more creative methods such as video tapes or construction consultants. This is an additional up front cost for your client but it will pay off later.
• Contractors should partner with a knowledgeable insurance broker and stick with them. Fortune 500 companies do broker selections based on experience and resources that a broker will bring to them. Smaller companies will shop insurance like a commodity. This is not printer toner cartridges. Brokers are individuals offering advice and service who will partner with contractors to help them run their business better.
• Have a clear Web site that discusses their core business.
• Have a formal safety plan with documentation of safety meetings as well as proof the employees have read and understood the manual. It looks pretty on a shelf, but insurers need to know that the information is actually conveyed to the workers.
• Use a construction CPA, not the family accountant.
• Maintain an updated claims history, and update it annually. Contractors should know the details on all claims over $10,000, and be prepared to offer a reason why it won’t happen again.
• Maintain a standard of regular drug testing and criminal background tests for recruits.
Insurance pricing and coverage is a sine wave that goes up and down over time. History shows us where the curve has been, but we can’t know where we are at present. Other types of business are starting to see some price decreases. Logically we can assume that some will follow for contractors. For now, businesses just need to do the best job they can to mitigate potential risk.
Susan Brodahl is a vice president with Heffernan Insurance Brokers. She can be reached at (503) 419-5805 or at email@example.com.
Was this article valuable?
Here are more articles you may enjoy.