March 28, 2002
Put a cap on skyrocketing insurance costs
By SUSAN BRODAHL
Heffernan Insurance Brokers
General contractors, and the construction industry in general, are facing an insurance crisis that is ultimately threatening affordable housing in Washington.
The impact of this issue is wide spread: new contractors are finding it almost impossible to get insurance and those with insurance are facing large rate hikes. Quality contractors are leaving the condo market and GMA goals for dense urban development are not being met. Insurers have all but abandoned the market because they are unable to maintain a viable business in the state.
As a result, contractors are increasingly going “underground” and working without insurance. Clearly this is an industry in crisis.
In order to resolve this issue, sweeping changes need to be made with the way construction defect cases are handled. Since this is a long-term solution that will involve all facets of the construction industry, as well as the insurance industry, general contractors must also look for ways to limit risk and maintain profitability in the current industry climate.
The big picture
A number of issues have led to the dramatic rise in insurance rates. Builders are faced with an increasingly hostile legal environment. General contractors are bound by strict liability so those suing for a defect no longer need to prove that the builder was negligent — just that the building was defectively built.
More specifically, there has been a dramatic rise in condominium defect litigation, prompted in part by law firms specializing in construction defect cases. Recently, mold litigation has reached epidemic proportions in Washington.
General contractors in particular are faced with a high rate of liability in these situations, shouldering over half of the liability for construction defects. To make matters worse for general contractors, if the subcontractor goes out of business, the general contractor is liable for the entire job.
Fixing an industry in crisis
In order to bring insurers back to the construction market, we need to create an environment that enables insurers to be profitable.
One of the most effective ways to achieve this goal is to eliminate trivial construction defect litigation. The reality is that when a defect case makes it to court, the legal fees far outweigh the cost of fixing the problem. Therefore, by taking these issues out of the courts, the same resolution will cost the entire industry much less money.
We need to create an environment where people are focusing on solving the problem — not benefiting from the problem. In order to achieve this, we need to institute an alternative dispute resolution system that includes mandated arbitration. More specifically, this system would require that building owners provide general contractors with notice of potential defects and the opportunity to inspect and cure them before commencing litigation. Additionally, it would require building owners to develop a list of defects at the start of any legal action. Lastly, this system would eliminate blanket lawsuits, so that only those parties related to the alleged defect would be named.
What should generals do?
While there are larger issues that need to be fixed in Washington’s construction industry, general contractors need to find ways to operate in today’s environment in order to maintain a profitable business.
First, general contractors need to select an insurance broker who will work with them to put together a comprehensive insurance and risk management program — instead of shopping for the cheapest price.
In the short term, general contractors also need to focus their efforts on reducing liability and ultimately insurance premiums. This involves instituting proceedings that ensure the hiring of quality subcontractors. General contractors should insist on working with subs that have a long-standing record of quality work. In this competitive market, it is always tempting to focus on price. However, with insurance premiums on the rise and legal action at an all time high, it is more important than ever for general contractors to put quality first.
Lastly, general contractors need to do a better job of documenting their work, in order to defend themselves against potential claims. In order to do this, general contractors should video the entire construction process and document all work clearly.
This will help contractors in two ways. One, it will ensure that the general contractor is present throughout the construction process and monitoring the work of its subcontractors. Secondly, if the case does go to court or arbitration, the general contractor will have proof of the quality of its work.
Just as we didn’t arrive in this crisis overnight, the solution to this situation will not come quickly. Until these issues are resolved, the effects are going to be most clearly felt in a rising cost of housing. In order to solve this crisis, the community needs to view this problem as everybody’s — not just the builder’s — issue.
Susan Brodahl is assistant vice president with Heffernan Insurance Brokers in Portland.
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