Lots of stability

When he is presented with a construction account at his office on Fifth Avenue in Manhattan, Rubin Alspector can quickly determine which insurers might write it. He knows his standard markets well enough to know that only one or two carriers will be interested.

“The marketplace has changed dramatically and the number of standard carriers is very, very small,” he notes.

Alspector is senior vice president for The Kornreich/NIA Organization, part of The NIA Group based in Paramus, N.J., one of the 25 largest brokers in the country. Due to unique labor law and other urban issues, insurance options in New York may be fewer in number than those elsewhere. But whether a producer is on Fifth Avenue in Manhattan or on Main Street in any U.S. city or town, success in the construction segment is heavily dependent upon this ability to accurately size up available markets and fit them to the right clients.

Not too long ago, there were plenty of standard national carriers willing to write construction risks, according to agents. Today, that number has shrunk for a variety of reasons that include mold, asbestos, construction defects, silica, hurricanes, mergers and the lawsuit climate in certain so-called “pain” states. Among those insurers agents say are still active in construction are AIG, Travelers St. Paul, Zurich, The Hartford, ACE, Chubb, Liberty Mutual, Fireman’s Fund, Safeco, Arch and CNA.

In his urban New York-Connecticut-New Jersey (he also does business in Florida) marketplace, Alspector counts about a dozen companies in construction. But after a particular risk is measured against the guidelines from individual insurers, there may be only one or two suitable choices.

Melody S. Peevy, partner with the Dallas, Texas-based Waldman Bros. LLP, who has specialized in large plumbing and other specialty contractors since 1980, has also found the marketplace restricted in the number of carriers considering construction.

“What’s unusual as opposed to the past is there are no new carriers wanting to get into the construction arena,” Peevy adds.

But if insurers aren’t exactly beating down the doors to write construction, neither are they running for the exits.

“The market has ceased its deterioration,” maintains Charles Comiskey, senior vice president of Brady, Chapman, Holland & Associates Inc., Houston, and chair of the RiskProNet International construction practice group. “I don’t see people fleeing the market. There’s not a great influx. I think there’s been a lot of stability over the last couple of years. Some are getting more aggressive and some aren’t. It varies.”

Not only are fewer carriers writing construction risks, but also the ones that remain are very careful about what they will write. Standard insurers generally prefer to focus on commercial contractors and leave primarily residential contractors to the surplus lines field. Many standard carriers will not go near liability for contractors building single homes and condominiums, out of fear of construction defect claims. This situation has been particularly troublesome in California, Washington, Oregon, Arizona, Nevada, Colorado, Texas and Florida for years-states that happen to be among those with the most construction demand. Thus far, the Midwest and Northeast have had less trouble in this regard.

Zeroing-in

Standard carriers have further zeroed-in on what they will and will not write by insisting on various endorsements that alter or exclude coverages. They weigh the degree of risk transferred by general contractors to subcontractors, and look for loss histories and loss control programs. They can be very particular.

“Carriers have decided what they will write,” says David Sinclair, Sinclair Group in Wallingford, Conn. “They have clearer strategies. They look only at what they like. There is some discipline there today that wasn’t several years ago. They learned what they are good at and they are sticking to it.”

Sinclair has nine different standard markets for construction risks. “Each has its own interests and appetites, and rarely do they overlap,” he contends, echoing Alspector’s experience.

For Tony Martely, vice president of Elliott, McKiever & Stowe Inc. in Coral Gables, Fla., Hurricane Andrew was the defining moment. After Andrew, what is included and excluded in coverage changed and each carrier had its own has unique exclusions, he maintained.

Dave Golden, director of commercial lines for the Property and Casualty Insurers Association of America, senses that carriers are fine-tuning, making relatively small adjustments as opposed to doing anything that might be termed a market trend. “That is really what you want to see in a stable market,” said Golden. “One company decides, ‘OK, I like these states,’ or another says, ‘I want to specialize in this area,’ and they are making various decisions.”

Residential woes

Lisa Heppler, vice president Wick Pilcher Insurance in Phoenix, has found that the majority of standard carriers in her region won’t write residential risks. “Anything in the residential tract that is structural-the framing, the roof, concrete-is tough to write because of the defect claims,” she notes.

Peevy, of Dallas, volunteers that residential accounts are “hands down” the toughest to properly insure. “It changes daily in that arena. Let’s say any trades subject to water damage, mechanical, plumbing, window construction-those are difficult to place.”

Contractors with strong internal safety programs and quality control measures fare the best with insurers, according to Peevy.

Even though construction defects have not become as big a problem in the Northeast as elsewhere, Sinclair in Connecticut noted that some of his insurers still shy away from condo builders out of fear “because it is so easy for one problem to multiply and turn into a class action.” So he sometimes has to go to specialty markets where premiums and deductibles are high. “It’s expensive coverage but at least they have it,” he added.

Florida’s Martely, too, has had standard markets close up for residential construction, largely over mold. “Now it is excess and surplus lines insurance, and the minimum premiums for a subcontractor are tremendous,” he said.

Puzzling pieces

Agents would always like to have more standard markets but they are accustomed to working with standard carriers and then going to excess and surplus lines as needed.

Sometimes it gets tricky. Alspector’s firm was recently working on a big project that required putting together various layers and players. “As we were placing it, it began to unravel. As one piece was put in place, another would drop out. It was very difficult.” But they did it.

The difficulty of finding traditional products and markets has forced agents to look into alternative solutions. Some insurers will write wrap-up products, or owner controlled insurance programs, that bring owners, developers and all subcontractors under one policy. Peevy thinks OCIPs are having a big impact. Sinclair has used wrap-ups for some large residential accounts but he doesn’t think too many agents do it.

Comiskey contends that despite fewer insurers with more discipline, the market works for agents who know what they are doing.

“It’s a good market for the right kind of contractors,” says the veteran. “There are strong carriers doing the right things. I can say nothing but good things, as long as you are approaching it from a very cautious and well-informed basis.”

Pricing

With the focus on locating and matching markets, pricing concerns appear to have taken a back seat. Agents contend that pricing on construction accounts, while not inexpensive, has been steady. But they are waiting to see what the effects of the hurricanes, higher building material costs and new reinsurance pacts will bring to pricing in the new year.

“We don’t know what impact the hurricanes will have on overall pricing. There’s reason to assume there will be some impact. Carriers are being closed mouth. Pricing was stable before the hurricanes,” notes Peevy.

Forms and exclusions

Comiskey, Alspector and others caution that agents and buyers alike need to beware of a proliferation of inadequate forms and tricky endorsements in the marketplace.

In Alspector’s opinion, some of the endorsements are “obnoxious” in that they result in major reductions in coverage. He cited one that sought to eliminate completed operations coverage. “Make sure the client understands,” he stresses.

Comiskey seconds that advice. “There are a bunch of insurance companies using inferior forms and you could end up with an inferior product unless you are very careful. It’s more important to be cautious today than ever before. In today’s world you have vast differences in the actual coverage being provided. It all goes by the same name; it’s all commercial general liability coverage, but it’s different.”

The buyer’s recourse is to deal with trusted advisors who really know the market. “It’s like any other contract. You need to know what’s in that contract,” Comiskey said.

The agent’s job is to be that trusted advisor with knowledge of the markets and their restrictions. “Don’t walk away from them; they need the insurance. It’s a question of navigating the marketplace,” advises Alspector.

Topics Florida Carriers Agencies Excess Surplus Hurricane Contractors Construction