February 6, 2002

Builders get slammed on insurance

This is the first of a two-part look at construction insurance and bonding issues. Tomorrow, the surety industry's troubles.

Last year, the concrete subcontractor's liability insurance doubled to $50,000. While licking his wounds over that, the death blow was delivered this year: now insurance will cost him $200,000.

Many contractors are finding themselves in similar situations and are being forced to exit the business, which Skoog plans to do after he finishes up his last job this month.

High rates are bad enough, but now several major insurance carriers have decided to stop or sharply curtail business in the state.

Kit Carson, an Everett-based insurance agent for 25 years, said Farmers, Safeco, Zurick and Mutual of Enumclaw are pulling out of insuring most residential general contractors in Washington.

Carson, who represents Zurick and Farmers, said the two are only renewing insurance for smaller contractors -- those who build 10 or fewer housing units -- until March 1.

The only insurer that Carson could name that is still taking residential contractors is Contractors Bonding and Insurance Co. of Seattle. That company, however, is only taking small builders that have under $1.5 million in annual volume.

Carson said contractors can get insurance through some secondary line insurers, but it is pricey -- perhaps two to three times as much -- and many stipulations are made. One of his clients, whose revenues stayed the same over the past year, saw his premium jump from $15,000 to $76,000 because he went from a preferred to a secondary carrier.

One of Zurick's casualties is Jay Kechloain, owner of Sanur Construction and Sanur Homes. Kechloain said Zurick is not renewing his builders' liability insurance after it expires on Valentine's Day. Without the insurance, Kechloain can't get and retain a contractor's license.

Kechloain said Zurick indicated it may continue insuring a 10-unit, zero-lot-line project he has under construction, but other new projects are out of the question.

Kechloain

"Every builder in the entire state that has Zurick is going to lose their insurance," Kechloain said.

Kechloain, who has been in business for about 20 years and has never had a claim, will close his construction companies after Feb. 14 because he says no other insurer will want to be on the hook for his completed projects.

Instead, Kechloain is opening a different company, Tekoa Builders LLC, so that any insurance company he does business with won't have the past liabilities. He said Tekoa will build zero-lot-line and detached single-family homes because those projects can get normal insurance.

Kechloain said a crisis is brewing in the state because of the insurance situation. He said one builder he knows can't build a 24-unit condo because the insurance is over $200,000 and has many exemptions.

Affordable housing hit

Even nonprofit housing developers are feeling the squeeze.

Carla Okigwe, executive director of the Housing Development Consortium of Seattle-King County, said the group's 29 nonprofit members are being hit hard.

HomeSight, a member of the consortium, wants to build a 32-unit condo near Rainier Avenue South and South Dearborn Street in Seattle. The project, which is in the planning stages, features 16 affordable and 16 market-rate units at prices of $140,000-$180,000.

The problem is contractor's liability insurance for the project might run between $100,000 and $400,000 -- adding $3,000-$12,000 to the price of each unit.

"It's going to knock (low-income buyers) out," said Tony To, HomeSight's deputy director. He said previously insurance would have been $8,000-$12,000 for the entire project.

The condo project is the first for HomeSight, which in the past has built affordable single-family homes. The developer was drawn to condos because they are less expensive to develop.

"We are having to rethink how we do projects," To said.

To said the difficulties in developing affordable housing will trickle down to homeless shelters. "To solve the housing problem, you have to have a continuum of housing," he said, which starts with shelters and moves up to subsidized housing, then affordable housing.

"It's like having a clogged drain," To said.

Skittish insurers

Last October, Safeco spokeswoman Julie Krause told the Journal: "To state it simply, general contractors who build residential structures are not within our market appetite." When contacted for this story, she reaffirmed the company's stance.

Mutual of Enumclaw has stopped insuring contractors who work on building exteriors.

"We imposed a partial moratorium in order to get our arms around what the issues are," said John Willis, vice president of marketing for Mutual of Enumclaw. "It's a step that we rather would have not taken."

Willis said the firm had hoped to end the moratorium, but couldn't because losses continued to mount with no tort reform in sight to alleviate the problem. He said finish contractors who work inside buildings are still covered by the company.

Schaumburg, Ill.-based Zurick North America didn't return a phone call for comment.

Construction defects

So, why are insurance companies leaving the market?

The answer lies in construction defect litigation, especially water intrusion problems.

Carson said the problem has been building in the state for the past five to seven years. Hardest hit are residential contractors who build multifamily or housing developments with five or more units. He said they get cut off from preferred rates because of lawsuits from homeowners' associations.

"If you have anything with the word 'association' in it, you're dead," Carson said.

"It's not a perfect world, (but) as far as construction is concerned, it is a perfect world," Carson said. "If it's made by a human being, more than likely you will be able to attack it (with litigation)."

Carson said every party that works on residential buildings is getting named in lawsuits.

Just ask Skoog, who has been in business for 32 years, doing concrete work on a variety of projects, from house foundations to multi-story hotels, office buildings and parking garages.

"Even though I have nothing to do with waterproofing, I get named in the lawsuits," Skoog complained.

Skoog said it would cost $40,000 to $50,000 in legal fees to prove each case. Instead, his lawyers end up giving the plaintiffs a lesser amount of money to go away. That causes more claims to be filed, followed by increases in insurance premiums.

Skoog said when the last condo owner buys in, lawyers are at the door saying there could be future waterproofing problems and the owners should act now.

"I think the condo lawyers are ambulance chasers and it's not just us that's going to get hurt," Skoog said. "Just try to buy a new condo in a year. Pretty soon you're going to be paying pretty much what you pay for a house."

Sam Anderson, executive officer of the Master Builders Association of King and Snohomish Counties, said lawyers are telling condo boards that they have to protect the interest of the entire community or they will be liable for not protecting them.

Condo owners in Washington currently have a four-year statutory warranty under state law.

Anderson said some lawyers are suggesting owners tear apart their condos to look for defects.

In California, there have been stories of lawyers called "condo commandos," who buy a unit just to take it apart to find defects. "It's a scenario that went on in California for a half dozen years," Anderson said.

Anderson said California still has not solved the problem.

"What has happened in California is condominium production has fallen to practically nothing," said John Frith, public affairs director of the California Building Industry Association in Sacramento.

A report by the Meyers Group of Irvine, Calif., showed California condo production fell from 18,691 units in 1994 to 2,945 units in 1999. Frith said production was already down since the late 1980s, when one industry report pegged new condos at one third of all residential construction. That's about 40,000 condo units.

Frith said last year there were about 6,000 condos built in that state, most of them luxury units that builders could still turn a profit on. The market for building affordable condos, he said, is dead.

Legislative relief?

The Master Builders has two bills in the Legislature that could provide some relief for builders.

The bills would allow builders to give an express warranty instead of an implied warranty. The express warranty would say the condo will hold up to certain standards, while the implied warranty says the condo will be free of defects.

Anderson said implied warranties are arbitrary and express warranties are "more of a real contract."

The Building Industry Association of Washington has similar legislation circulating in Olympia, but it addresses more general contractor issues while the Master Builders' legislation is more condo focused.

Hearings were held yesterday on the Master Builders' bills in the House and Senate.

Seattle-area lawyer Marion Morgenstern is opposed to legislation sought by both the BIAW and MBA.

"We believe they erode too greatly all the consumer protection provisions in the Washington Condominium Act," said Morgenstern, who also sits on the board of the Washington State Community Associations Institute, a nonprofit group that serves all stakeholders in community associations.

"Since our concern is with homeowners and homeowner associations, we can't support the legislation," she said.

Morgenstern said she was disappointed WSCAI was not invited by either group to be involved in drafting the legislation. "I don't think these bills promote a decrease in litigation," she added.

Morgenstern said there are substantial problems with most new condos. "I have yet to see a project that didn't have a problem," she said.

"Most people, especially first time buyers, don't understand construction issues," Morgenstern said. They don't know what to expect, so they need to be protected more than the developer.

"I don't know what the solution is at this point," she said, but all parties need to work cooperatively to find it. "Our organization is more than willing to participate in that effort."

If things don't change, Carson predicted that only large self-insuring contractors will be doing condos in the future.

As for Skoog, he is thinking about offering himself and his crew to a general contractor who may be considering self-performing its own concrete work. His other options include forming another company like Kechloain is doing or starting a consulting business.

One thing he won't do, Skoog says, is condos.