The American Dream in California is Just That-A Dream

When you hear the phrase, “I want to live the American dream,” and you ask what that means, many people say that they want to own their own home where they can raise their family. Unfortunately, the dream is becoming more difficult to achieve in California because of the current challenges we face in dealing with construction defect claims, lawsuits, and the construction dispute resolution process.

Although the California Legislature continues to deal with issues in workers’ compensation, energy, and the budget, it must now deal with one of the less publicly visible but equally challenging issues—insurance for construction defects.

If California builders, sub-contractors and laborers cannot get insurance, homes cannot be built, and the American dream cannot be realized. This may sound overly dramatic, but the issue is real. Consider this:
• California has seven out of 10 of the highest priced housing communities in the nation.
• The median housing price in California has reached nearly $323,000, well out of the price range for a large number of families.
• Firefighters and teachers in some parts of the state cannot live in their own communities because of housing prices, and they have to commute up to three hours away from where they live.

The root of the problem
So, what is driving the current construction defect insurance crisis, and why is it so difficult for builders and sub-contractors to find insurance at any price? I’ll use the California workers’ compensation crisis to help explain why construction defect insurance is unaffordable. Major newspapers recently reported that for every $1.00 that insurers collect in workers’ comp premiums, they are paying out $1.47 in workers’ comp claims.

These losses pale in comparison to the construction dispute insurance situation. Most insurers are paying out $2.50 for every $1.00 they collect in premiums for construction dispute insurance. In some cases it is as high as $5.00 for every $1.00 collected. Many insurers are paying out more in just the expenses associated with the handling of construction defect claims than they are in collecting premiums.

Another serious problem is adjusting claims in the construction resolution process.

For every claim that is brought by a housing complex or condominium association, there are a large number of lawyers involved. Each party is represented by multiple counsels each seeking to protect their own self-interest to the exclusion, if not harm, of the other party. The lawyers are paid by the hour to defend and protect the interest of their party, even if the party is not at fault for any of the alleged defects.

The California courts are another major cause of the problem.

Unfortunately, a number of different court decisions have added to the complexity, confusion and impossible nature of risk assessment for construction dispute claims. In each case, the basic tenet of insurance has been challenged—to be able to accurately determine the proper price to charge and accurately assess the risk.

Because parties today can be held at fault for total indemnification as well as defense costs throughout the process of the dispute, hundreds of thousands of dollars in exposure are added to a case where only a couple of thousand dollars in premium was collected. Thus, fewer and fewer insurers have decided to do business in California. Those who do are generally non-admitted insurers and offer a large number of exclusions, or only write coverage for large complex risks that have multiple players at the table. Small developers and sub-contractors are finding it more and difficult to find coverage at any price.

There is hope
Because of the unique nature of all the parties impacted, there is hope that something can be done in Sacramento.

For the first time in recent history, organized labor is joining the discussion table to find affordable insurance for sub-contractors. Representatives of builders continue to bring to the attention of public policymakers the importance of bringing balance to the system. In addition, the enactment of SB 800 in 2002 is a positive first step towards a solution. Much of the problem is the on going “tail” of previous insurance policies. Even the trial lawyers have offered suggestions in this area to more fairly appropriate damages. This alone is not enough to solve the problem. All parties must be willing to come to the table and participate in dialogue to reach a swift resolution that will repair homes and not result in staggering plaintiffs and defense costs.

Dan Dunmoyer serves as President of the Personal Insurance Federation of California. Dunmoyer has served as PIFC’s chief lobbyist since 1989, and President since 1996. E-mail Dunmoyer at dunmoyer@pifc.org.

Topics California Workers' Compensation Contractors Construction