Construction Liability Costs Hurt Oregon Contractors

May 18, 2004

Soaring construction liability insurance premiums are causing contractors to raise house prices and even leave the business, builders say.

Insurance rates for contractors doing commercial construction also have surged, but insurance costs have more than tripled for general contractors and a wide range of subcontractors building single-family homes and apartments.

The coverage, made mandatory in 1973, was intended to protect consumers when a construction accident or building problem damaged their property. Likewise, builders could fall back on their insurance to avoid crippling financial losses.

For many contractors, however, the increase in premiums comes despite having never made a claim to their insurance companies.

Adair Homes Inc., a Beaverton-based homebuilder, has never made a claim on its construction liability insurance, but premiums have skyrocketed, adding almost $1,000 to the price of homes to offset the insurance costs, said Chuck Day, company spokesman.

“Were going to lose a lot of small family businesses that aren’t putting consumers at risk,” said Craig Smith, administrator of the Construction Contractors Board, a state agency that regulates building contractors.

“They’re building wonderful homes and they’re being priced out of existence by this insurance mandate,” Smith said.

At a recent Oregon Insurance Division hearing, Smith testified the situation “constitutes an emergency” with an average liability insurance bill for a single-family homebuilder at about $8,000 per year.

A few of the state’s largest residential contractors pay more than $1 million per year for liability coverage.

Some companies are forced to pass along the cost to their employees.

Pacific Renaissance, a Salem plaster and stucco contractor, decided it couldn’t raise prices to cover insurance premiums that are 300 percent higher than a few years ago. Instead, the company’s workers are shouldering the burden.

“Guys will take a pay cut to keep working,” said DJ Thommen, Pacific Renaissance owner.

Sunco Homes and Remodeling was hammered with a 400 percent increase in its liability insurance premiums last year. When a buyer purchases one of the Salem builder’s new homes, they will pay an extra $1,300 to offset the companys insurance costs.

Dan Dorn, president of Sunco, said he was “one of the lucky ones.” Dorn saw the trends and had time to prepare his business for higher insurance premiums, but the cost still came as a shock.

Some builders blame the high cost on an increase in lawsuits, including mold and “sick-building syndrome” complaints.

“The litigation industry has found a new pot of gold in construction defects,” said Day of Adair Homes.

Some legal experts say the toxic-mold problem could lead to more insurance losses than asbestos claims. Faulty siding and improperly installed synthetic stucco has generated a large number of lawsuits while the damp Pacific Northwest winter climate has insurance companies worried about their exposure.

“The mold potential has got the insurance companies scared to death,” said Kelly Atwood, president and CEO of Contractors Insurance Services Inc. in Lake Oswego, an insurance agency that deals specifically with contractors.

Atwood, a 30-year veteran of the insurance industry, said insurance rates have started to stabilize but it may take several years before they begin to fall.

Meanwhile, Oregon Department of Justice officials have opposed any attempt to reduce the insurance requirements. To pass risks that are now covered by the contractors insurance to the home buyer is “simply unacceptable,” the agency stated in a memorandum to the insurance division.

Copyright 2004 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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