WHEN SENIOR MANAGEMENT FROM ASTORIA Homes, the biggest privately owned builder in Las Vegas, approached Zurich America in 2002 about the insurance provider's Home Builder's Protection Policy (HBPP), they felt their ability to qualify was a sure thing. After all, the Astoria reputation was all about a superior product, established quality control (QC) procedures in the field, and a solid track record of minimizing losses over the previous several years.

So when Zurich informed Astoria that the company didn't meet the insurer's strict requirements—mainly because Astoria's paper trail of documentation fell significantly short of the mark—Troy Smith, Astoria's vice president of construction, put his team to the task of overhauling all the company's policies and procedures. “We knew we were building a quality house,” says Smith. “We just needed to be able to prove it without tearing the house down. We didn't have the design and construction peer reviews they needed.”

In hindsight, it's actually not a surprise that Zurich turned Astoria down, considering Smith was unaware that the rules of the games had changed. While underwriting models of the past focused on a presentation of basic financial information—expected revenues, number of units, type of construction, and recent loss history—builders are finding that today, underwriters want much more sophisticated backup. In response, builders are expending the energy and resources to get their ducks lined up like never before—particularly for the most highly regarded policies.

Insurers, for instance, require that builders disclose how their operations are structured; also reviewed in the process are a company's risk management and customer service philosophies as well as staffing requirements for customer service positions. Many insurers now want to analyze 10 years worth of loss runs instead of the traditional three to five. Proof of alternative dispute resolutions being in place—binding arbitration in consumer sales agreements and Covenants, Conditions, and Restrictions (CC&Rs), for example—is imperative as well.

“Qualifying for liability insurance has become similar to doing an initial public offering,” says Jeffrey Masters, partner and co-chairman of development for the risk management group at Cox, Castle & Nicholson in Los Angeles. Masters should know. He helps builders prepare for face-to-face meetings with insurance companies to present their “risk management story.” Says Masters, “It's a lot like the steps a company would take to woo a potential investor.”

Soul Searching For Astoria, which closed 784 units in 2003 and focuses primarily on the first-time and move-up market, the rejection by Zurich led to an in-depth evaluation. First, the builder took a hard look at whether such a wrap policy (under which contractors, architects, and so forth are insured under one policy) was the best option for the company in the first place.

Astoria certainly didn't want to invest the necessary resources and effort simply to mark off items on some other organization's checklist. “We wanted to make sure that the additional money we were going to have to spend would transfer directly to the quality of our home,” says Smith. For six months, the company researched all its options. “Third party peer review and inspections have a cost associated with them,” says Smith. “We wanted to be sure that extra supervision in the field or upping the spec levels of certain things wouldn't be a better use of those dollars.”

After undergoing a diligent examination, Astoria felt confident that it couldn't spec-in many changes. “So it came down to a decision to invest more on internal supervision or to hire a third party,” says Smith. “For us, it just made sense for us to bring in the independent consultant who could look at us in an unbiased way and document what we were doing.”

Along the way, the firm explored similar wrap policies from other insurers such as AIG and Travelers. Unfortunately, the company couldn't find anything that adequately matched its needs. “Most of them write only on a per-project basis, which might be fine for someone who builds condos or for someone who builds huge projects with thousands of units per project,” says Jennifer Mullen, Astoria's general council. “But Zurich offers an all-ops wrap. For us, an annual policy based on closes of escrow in that year is ideal.”

Hoop Jumping For many builders, in fact, the Zurich HBPP wrap policy is the most coveted in the current difficult climate. Yet in some respects, it's also the due diligence model that epitomizes how complicated things have become. To qualify, builders undergo intense scrutiny of their entire business and culture. But for those who can get the policy, it's worth the trouble. “It's just the best you can get right now,” says Smith.