By Alison Rice. The insurance horror stories never seem to end. Premium increases that seem to defy reason. Hefty deductibles and minimum coverages. Wrap policies that end up costing, not saving, money for builders.
"It's a mess," says Tom Sattler, president of Sattler Homes, a custom builder in Greenwood Village, Colo., just outside of Denver. "You're subject to the secondary markets, and even if you find it, the rates are extremely high."
The insurance crisis is not a new trend, but it is getting worse. "Since 1998, we've seen a transfer of coverage from [standard] insurance to excess and surplus lines," says Clayton Sharkey, a consultant with Insurance Management Associates in Denver, referring to the secondary insurance markets that typically serve higher-risk industries: truckers, dynamite manufacturers, and now, builders. But even that market is shrinking. "Over the last year, we've seen a dwindling of excess and surplus lines," Sharkey notes.
National numbers bear out the local anecdotes. Joseph Peiser, a managing director at Marsh, the New York-based risk management firm, estimates that there is only $300 million to $400 million in insurance capacity available for home builder policy holders, compared to $1.7 billion capacity for policy holders in other industries.
It's a critical issue for many small builders, who can no longer find affordable liability insurance or any coverage at all from standard market insurance companies such as Zurich, Travelers, St. Paul Cos., or CNA. "The majority of the four will not write residential risks," Sharkey says. "Even the regionals won't write them."
Builders who do find insurance are stunned by the cost. After American Family informed Steve Holben of Holben Building Corp. that his company's policy would not be renewed, he pursued other options--until he learned that general liability premiums for his Denver-area small custom home building business would skyrocket from $1,800 annually to as much as $35,000. "As we speak, I've got four homes to start, but I'm not doing it. I'm not going to pay $15,000 to $30,000 for insurance. You can't put that much of an increase in a house," says Holben, who's holding off on purchasing a new policy until he finds more reasonable rates.
Besides their high cost, secondary-market insurance policies have other limitations--literally. "The coverage is so stripped down from what it was," says Sattler, with exclusions for mold and the soils problems that have been plaguing builders in Colorado. "You're really left feeling 'what do I have insurance for?' It's extremely frustrating, and there's virtually nowhere to turn."
Sattler and others hope that the right-to-repair laws that have passed in Colorado and other states will reduce the risk to insurers and bring more insurance companies back into the market, but others believe that will take time. "These laws typically are challenged by trial attorneys in the state," says Robert Hartwig, chief economist for the Insurance Information Institute in New York. He predicts "it will be business as usual" for builders and insurers for several years.
Questions to ask when choosing an insurer.
When you see your insurance premiums climbing steeply with no ceiling in sight, price becomes an undeniable factor in your decision. But there's more to choosing an insurer than bottom-line cost, especially in this tough market, where insolvency rates for insurers themselves are rising, generally because of insufficient reserves.
"Builders need to understand price isn't everything," says Robert Hartwig, chief economist for the Insurance Information Institute in New York. "If a price seems too good to be true, it probably is. You want to make sure you're dealing with a solid financial partner."
Here's what he recommends:
* Check an insurer's rating. Firms such as A.M. Best, Fitch, and Moody's rate the "overall financial strength of the company," Hartwig says. Most brokers will use a company with an A-rating or above, he adds. "If you're going with an insurer with a C-rating, watch out." They may not be around when you need them.
* Assess their financial condition. You may want to ask your broker about the prospective insurer's ratio of liabilities to assets, the quality of reinsurance they use, the insurer's profitability, and the quality of its management. Be wary of a fast-growing insurer. If they're growing extraordinarily quickly, they may be more exposed financially than you want.
* Get the scoop on their claims history. Do they have a pattern of paying late or not at all? Ask your local HBA or subcontractors what they've heard about the insurer you're considering.
* Call your state's insurance department. They may have some information on the company.