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Insurance Changes for Home Contractors

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Contracting is a tough, competitive business and recent events in the insurance industry won’t make things any easier. This is especially true for those contractors who specialize in home, apartment or condominium construction. This effects us all because, obviously, as the contractor’s costs rise, so does the price of everything they build.

    One caveat I need to insert right at the start. I am speaking here of insured contractors. There are contractors who operate without liability insurance.  Since their overhead costs are lower, I suppose they might be able to offer a lower quote than the insured contractor. Everybody’s happy until that new garage collapses on your $25,000 pickup under the first wet snow. You may then find that getting compensated for the damage without the help of insurance is like getting blood from the proverbial turnip.  This is not to infer that an uninsured contractor is necessarily a bad contractor. That would be illogical. The fact is, however, that everybody is capable of a mistake and when that mistake causes damage to someone else’s property you’d better hope they have insurance. So, words to the wise, next time you hire a contractor, ask him or her to provide you with a Certificate of Insurance.  

    Those contractors who do carry insurance are seeing rate increases and closer scrutiny of their operations by the insurance companies. In some cases, those companies may be deciding to stop insuring certain types of contractors altogether. And the contractors under the closest scrutiny right now are those building what are called “habitational risks.” That’s any structure someone lives in, be it a single family dwelling, an apartment or a condominium complex. 

    The reason for all this is a dramatic increase in claims and lawsuits involving a category of damage called Deficiency in Construction. Simply put, this means damage resulting from bad workmanship. The sad thing is that most of these claims are occurring in big development projects or large condominium complexes in places like Arizona and Nevada, although the Seattle area has been hit as well. The result is that even the builder who puts up a couple homes a year is being effected by the problem because the insurance companies still see that contractor as part of a problem industry.

    Here’s how the typical claim works. Let’s say a general contractor erects 100 homes in a new subdivision. One of the subcontractors, a window installer, fails to properly seal some of the large bay windows on the front of each home. The first bad storm sweeps through the area and wind-driven rain is forced into a few of the homes, damaging drywall, flooring and more. Several claims are filed for the damage. 

    If that were the extent of the problem, it would be relatively simple. However, some legal firms have found it quite lucrative to step into such situations and file a class action suit on behalf of all 100 homeowners. Their premise is that since a few of the homes have inferior workmanship, it is logical to assume all homes in that development are likely to have similar problems and will suffer damage at some time in the future. Many courts have agreed, and that’s how a few claims suddenly mushroom into 100 claims.

    Now, these claims go first against the general contractor since he or she is primarily responsible. The general contractor’s insurance company is obligated to defend the client until they can pin the responsibility on the subcontractor. If the subcontractor was uninsured or cannot be located, then the general contractor’s insurance pays all the damage. If the subcontractor does have insurance, then that policy will pay, although the general contractor’s insurance company will still have racked up attorney’s fees up to that point.  

    Sound expensive? It is and it involves almost all the trade contractors involved in what is called the “envelope” of the house or building: roof, windows, framing, siding and concrete. Even the grading of the land for the subdivision has become a focal point for damage claims. If, for instance, an improper grade allows water to flood homes, who is responsible? 

    It is unfortunate that our area contractors, large and small, are being painted with the same brush as huge contractors in other states but the insurance companies have no way of knowing where these claims will appear next. Compounding the problem is the fact that all commercial insurance clients are being examined more closely since the occurrences of September 11, 2001. The loss of approximately $50 billion out of the insurance industry represents about 20 percent of the insurance cash reserves worldwide. Until some of that money is recovered, commercial insurance will remain in what is known as a hard market.

    So, the next time you get a quote from a contractor, bear in mind that they are at the mercy of a lot of factors over which they have no control, one of which is the cost of insurance. That knowledge won’t make your new home any less expensive, but I hope it will give you some insight into some of the costs involved.


    Mike Mahoney is the managing agent of North Idaho Insurance in Sandpoint.


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Mike Mahoney

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