Artisan contractors are being squeezed in the insurance market as general contractors and insurers do what they can to transfer and limit their exposures, especially in so-called “pain” states.
Artisans are contractors in roofing, farming, air conditioning, electrical, plumbing, framing, fire sprinkler and other specialties who primarily work under contract for general contractors on residential and commercial construction projects.
Specialty contractors’ difficulty purchasing affordable liability insurance is being driven by their assumption of broadened contractual obligations, compounded by the type of work being performed and the legal environments in certain states’ that have fostered the recent generation of multi-claimant lawsuits, commonly referred to as construction defect claims.
These artisan contractors enter into agreements with general contractors that specify the types of insurance coverage, limits and special endorsements (additional insured, waiver of subrogation). These endorsements transfer risk from the general contractor to the specialty contractor, creating broad liabilities for the subcontractor that were never contemplated in the forms or the rates being provided by insurance companies.
General contractors are mandating these risk transfers to specialty contractors involved in construction of residential tract homes and multi-unit habitational structures, such as condominiums, townhomes, duplexes, and triplexes in states commonly referred to as “pain states.” The effect of these endorsements is to limit and restrict affordable insurance.
The “pain states” are generally (although not limited to) Arizona, California, Colorado, Florida, Louisiana, New York, Nevada, Oregon, Texas and Washington. In addition, certain regions in states present distinct litigious concerns, such as the five boroughs of New York City and Cook County, Ill.
Source of the pain
The real source of the pain is construction defect claims. Carriers providing coverages for residential contractors are defending construction defect suits long after projects have been completed, which is not the intent of occurrence coverage. Insurers’ defense costs have painfully escalated and many carriers have become reluctant to write business in “pain states” for residential specialty contractors.
For a solution, specialty contractors are asking legislators to enact laws establishing standards that clarify their rights and indemnity obligations regarding their own work.
Meanwhile, insurance companies are attaching restrictive coverage endorsements to policies in an attempt to provide acceptable coverage at affordable rates. Just like the contractors seeking legislation to clarify their obligations, insurance companies are trying to accomplish the same when it comes to their obligation to defend insureds and indemnify claimants according to the true interpretation of occurrence coverage.
Paul Norman is CEO, NSM Insurance Group, Dayton, Ohio. He can be reached at (937) 432-1600 and PaulNorman@ nsminc.com.
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