The insurance market: no easy answers

The economy finally is beginning to improve; roofing contractors are seeing more bid activity than they have in several years; and there is, at last, a general tone of optimism in the industry. Yet many contractors have discovered, painfully, the insurance market has become as tight as it is complicated.

There are a number of reasons the current situation has reached a near-crisis level. These include the continuing aftereffects of Sept. 11; insurance losses in areas—most notably falls and fires—where progress to limit claims has been slow; consolidation in the insurance industry; the crush of construction-defects litigation; and state-specific issues that have driven national carriers out of some key markets.

The aftermath of 9-11

One of the many devastating outcomes of the terrorist attacks of Sept. 11 is its effect on the insurance industry. Loss estimates have been placed at $70 billion or more, and the attacks occurred at a time when the market was just beginning to harden as part of its natural cycle. The attacks caused a rapid market hardening and put some smaller reinsurance companies out of business.

Not surprisingly, insurance costs to employers began to rise rapidly, and roofing contractors experienced a two-year period of premium increases that averaged about 25 percent annually across all lines. At the same time, the insurance industry was forced to limit its liability and reduce costs, and the roofing industry, similar to all other industries, saw lower coverage limits and new exclusions to accompany the price increases.

The events of Sept. 11 by themselves do not account for the ensuing consolidation in the insurance marketplace, but surely they played a role. Some recognizable names exited the business altogether, such as Reliance Insurance Co. and Kemper Insurance Co. Others, such as Zurich American Insurance Co., Schaumburg, Ill., tightened their underwriting requirements so much that they no longer have significant market shares in the roofing contractor market. This activity was followed by the merger of The Travelers Property Casualty, Hartford, Conn., and The St. Paul Cos., St. Paul, Minn., into The St. Paul Travelers Companies, effectively eliminating one of the industry's competitive forces.

Roofing industry issues

The roofing industry always has been a high-risk proposition for insurance carriers. The industry experiences a relatively high loss frequency, and the severity of losses can be staggering. As jury awards continue their steady march upward, the situation becomes even worse.

Falls continue to account for a disproportionate amount of insurance loss dollars—mostly, of course, in workers' compensation programs. Yet we still don't have the type of specific data needed regarding falls to implement more efficient loss-prevention strategies. We know, of course, that some roofing workers fall from roof edges; some fall through roof openings; and others fall from ladders. We don't have data about how those falls break down nor do we have reliable information about the circumstances surrounding the falls, such as whether they were attributable to high winds or rotted roof decks.

In 2003, NRCA commissioned the National Safety Council to conduct a prospective (forward-looking) study of falls related to roofing by asking NRCA members to report details about falls when they occur. More than 100 NRCA members have agreed to participate in the study, and we hope to have valuable information within the next several years.

In the meantime, we know the frequency of falls related to roofing has not abated significantly despite Occupational Safety and Health Administration requirements and the best efforts of most NRCA members. We also know a few other things, which follow:

• A disproportionate number of accidents and injuries involved new hires who had been on the job less than six months.
  
  
• Companies that put safety as a priority generally have better safety records than those that do not.
  
  
• Crews with safety-conscious foremen generally are safer than those without such foremen.
  
  
• Continual training is a crucial component of any fall-prevention program.

Another significant insurance-related roofing industry issue is fires involving the use of torches. In 2003, fires accounted for 30 percent of the losses in the NRCA/CNA Group Safety Program and probably would have accounted for more except for the fact that umbrella insurance policy limits were reached on several losses.

The losses tend to have the same characteristics: A smoldering piece of combustible material (usually wood) ignites long after a crew has left a job, and the fire spreads quickly before alarms are sounded.

In response to these losses, CNA Insurance Cos., Chicago, is imposing new restrictions intended to control this exposure. As a general underwriting guideline, contractors who use torches on work that accounts for more than 25 percent of their annual sales no longer will be eligible for general liability insurance or umbrella coverage. In addition, language will be added to all policies excluding coverage for fires caused by applying roofing materials directly to any combustible substrate or surface with torches and torch work that does not comply with industry best-practice guidelines.

Part of the best-practice guidelines will require all torch applicators to be certified in the proper use of torches. Thanks to the help of the Midwest Roofing Contractors Association (MRCA), the program will be based on MRCA's existing Certified Roofing Torch-Welding Applicator Program and offered by NRCA and other industry organizations.

Construction defects

Beginning in the early 1990s, attorneys in California began bringing suit against contractors involved in condominium projects. In California, there is a 10-year statute of repose for construction-defects claims, which allows homeowners and building owners to seek damages up to 10 years after the completion of a construction project. (This is not, by the way, unique to California; most states have extended statutes of repose.)

Typically, an attorney meets with a condominium association's board of directors and offers to hire a construction expert to find defects—at the attorney's expense. The attorney then, typically, sues the general contractor and/or developer who, in turn, sues all his subcontractors. Under this scenario, CNA Insurance has paid more than $900 million in construction-defects losses just in California during the past 10 years.

Construction-defects claims are on the rise in other states, notably Arizona, Colorado, Florida, Nevada and Texas. In addition to condominiums, attorneys have begun targeting apartment buildings and single-family homes.

The average construction-defects claim paid by CNA Insurance for its roofing contractor policyholders has increased steadily and now is about $70,000—regardless of whether a roof system was defective in the first place.

Accordingly, CNA Insurance has made the decision to change its underwriting strategy and requirements to limit exposure to these types of claims.

As of Jan. 1, contractors whose residential work exceeds 10 percent of annual sales no longer are eligible for general liability insurance or umbrella coverage (though they still may be eligible for other lines of coverage). In addition, all roofing contractors with general liability and umbrella policies will see residential exclusions being attached.

Until May 1, an existing form applied that excluded work on multifamily-owned units, tract housing and condominiums. As of May 1, a broader exclusion became effective that extends to single-family homes, apartments, dormitories, military housing, nursing homes and assisted-living facilities. The exclusion is subject to state approvals and also will apply to residential service work.

What's a contractor to do?

CNA Insurance and NRCA have been working diligently to find reasonable insurance solutions for the many roofing contractors who are or will be facing a difficult insurance market. As of press time, a new program is in the final stages of development—one that will address the coverage gaps that result from CNA Insurance's new underwriting requirements for residential work and buildings of human residence.

In the meantime, the best advice for any roofing contractor is to stay informed and work closely with his insurance professional at the earliest opportunity. The market is difficult and complex, and choices may be limited.

If you have questions about your insurance coverage, contact Tom Shanahan, NRCA's associate executive director of risk management and education, at (800) 323-9545, Ext. 7538, or tshanahan@nrca.net.

William Good is NRCA's executive vice president.

Steps contractors can take

by Stephen M. Phillips

As the insurance industry undertakes significant changes that may affect your coverage, you will want to ascertain, as soon as possible, whether your carrier will continue to offer general liability insurance to you. If so, you will want to learn whether there is a residential exclusion and review the text of the residential exclusion to evaluate how the exclusion affects your work.

CNA Insurance Cos., Chicago, has indicated that for contractors whose residential work does not exceed 10 percent of their annual volume, it will offer general liability coverage with a "Residential Construction Defect Products/Completed Operations Exclusion." Per the terms of this exclusion, there will be no coverage for bodily-injury claims and property-damage claims that are reported to CNA Insurance more than 12 months after work is completed on a residential structure. Residential structures are defined as any structure intended for human residency, including single-family homes or multifamily housing, apartments, condominiums, townhouses, and any buildings where 30 percent or more of their square foot area is used or intended for human residency. (Editor's note: This information is intended to provide a general overview of the products and services described and is not a contract. Copyright 2004 Continental Casualty Co.)

Once you know the types of buildings for which you will not have general liability insurance coverage, you will need to decide how to address future residential work excluded from your coverage. There are several options, including no longer performing residential work for which you do not have insurance coverage; continuing to perform residential work without having liability insurance coverage; finding a carrier who is willing to provide such coverage; being far more selective of what residential work you will perform so you no longer perform residential jobs that are more likely to result in claims; working with a building owner to see whether an owner-controlled insurance program can be arranged for the job; if a general contractor is involved, seeing whether a contractor-controlled insurance plan can be put in place for the job; or forming a separate company, such as a limited liability company, subchapter S corporation or limited liability partnership, to perform residential work.

In any event, to reduce liability, you should include provisions in contracts and warranty documents to reduce liability exposure. Some specific suggestions follow:

• If you are required to hold harmless and indemnify other parties, make sure your indemnification obligation is limited to the extent that a negligent act or omission by you is the cause of a claim, damage, loss or expense.
  
  
• Inform customers that reroofing an existing building may cause dust or debris to fall into the building's interior or lead to leakage until a new roof is in place and personal property directly below the area being roofed should be removed or protected to minimize the risk of damage. Include a contract provision stating you will not be responsible for disturbance, damage, cleanup or loss to interior property.
  
  
• Ask property managers to notify tenants of reroofing work and the need to provide protection underneath areas being reroofed and include a hold-harmless provision in case tenants were not so notified, did not provide protection and asserted a claim.
  
  
• Educate owners that various roofing products emit fumes and vapors that may bother some people. Discuss with customers which products should be used and the days and hours of operation to minimize the likelihood of a personal-injury claim based on exposure to emissions from roofing materials. Once a decision has been made, include a hold-harmless provision so you will not be liable for claims relating to fumes and vapors emitted during typical roofing processes.
  
  
• Arrange to ensure vents; openings; heating, ventilating and air-conditioning units; louvers; and similar intake points are closed or sealed during roofing operations to minimize entry of fumes and vapors into the building.
  
  
• Address the mold issue before entering into a contract. If there are any indications mold may be present, inform the owner. Exclude from your contract and warranty liability arising from the presence of mold and mildew.
  
  
• Because of the unavailability of insurance coverage for property damage to residential buildings, limit your liability to making repairs to the roof caused by a defect in your workmanship. Seek to make the roof warranty the sole and exclusive remedy. Disclaim liability for claims for consequential and incidental damages.
  
  
• Include an arbitration clause in your contracts so if there is a dispute, the dispute will be resolved through arbitration. For construction disputes, arbitration is more likely to result in a decision based on a claim's merits in a shorter time period and probably with less expense than a jury trial.

Because of the changes and limitations concerning insurance coverage, contractors need to evaluate their business planning and step up their efforts to minimize uninsured liability. Careful selection of construction projects, using well-established roof systems, increasing commitment to safety and inserting liability-limiting contract provisions are steps contractors can take to reduce liability.

Stephen M. Phillips is a partner with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.