Capitol Hill

Contractors are in a wilderness of litigation and rising insurance premiums. And one reason is certain attorneys, always hunting new sources of revenue, have set their sights on the nation's construction industry. With annual revenues of $750 billion, 5 percent of the total U.S. work force and nearly 500,000 firms, the construction industry is simply too large a target to ignore.

Unfortunately, the media and federal and state governments have paid little attention to the construction industry's predicament. A dramatic increase in construction litigation, coupled with an insurance market hit hard by the Sept. 11 terrorist attacks, has landed the construction industry in rough territory. Insurance premiums have skyrocketed, and availability has dwindled.

To help quantify and shine some light on the problem, The Roofing Industry Alliance for Progress teamed with the Electrical Contracting Foundation and other groups to fund a study that would assess construction litigation and its effect on the availability of reasonable insurance coverage. In August, Ducker Worldwide, Bloomfield Hills, Mich., released the study, "The Contractor Liability Insurance Cost and Coverage Problem—Solutions to Improve," and the findings confirm the pernicious influence of tort activity.

A harsh environment

Ducker Worldwide found the overwhelming response from contractors was they are "paying more for less." Policies are written with substantial exclusions, and insurance companies are simply dropping certain types of coverage, such as mold, asbestos and water leaks. To cope, many contractors are abandoning work in areas in which they can't obtain coverage and reducing liability coverage.

As contractors wrestle with increasing premiums, their customers are feeling the effect of inflated construction costs—nearly $25 billion annually. Construction industry premiums increased more than 50 percent during the study period (1998-2003).

Much of the driving force behind the premium increases is the dramatic rise in construction tort activity. The survey found "contractors have had little to no success defending themselves against claims made against their businesses." Because attorneys have a vested interest in large settlements, insurance companies prefer to settle suits instead of proceeding to trial. Given some of the punitively large settlements that have been awarded in cases such as mold exposure, the decision might make financial sense, but it only serves to encourage frivolous litigation.

The path out

Survey results suggest a combination of tort reform, insurance industry partnerships solutions and action by individual firms will have the most durable effect on liability cost and coverage for the construction industry.

Although much reform occurs at the state level, a federal responsibility exists to provide guidelines and direction toward improvements to the tort system. These include limiting damage awards, eliminating the collateral source rule, replacing joint and several liability with proportionate liability, and allowing periodic payments of damage awards. At the state level, the study urges the creation of a model state reform package, which would include the federal recommendations, as well as a statute of repose of less than 10 years and notice and opportunity to repair rule.

A second component involves a partnership between the construction and insurance industries. Key measures include providing education about contractor risks, developing insurance policy training for firms, leveraging company safety records, promoting the recovery of the reinsurance industry and joint support for legal reform.

Contractors also can contribute to the development of a sustainable solution. Ducker Worldwide advises contractors to perform contract, project and legal reviews annually; educate owners and principals about risk management; increase communication and documentation regarding risk, project performance, improvements and claims; provide reports to insurance providers to represent the full picture regarding performance and risk; create an open dialogue with construction end users; and investigate insurance underwriters and their financial ratings.

NRCA is supporting tort reform legislation to benefit the construction industry. Without sensible restraints on infectious litigation, powerful disincentives will inhibit the continued prosperity and growth of the construction industry.

R. Craig Silvertooth is NRCA's director of federal affairs.