With rising premiums and shrinking coverages, owners and contractors have described the current general liability insurance environment as the “perfect storm.” But this is by no means the first perfect storm. The fact is, over the past 20 years the construction industry has seen some tumultuous times in both cost of insurance and in scope of insurance coverage.
As you may recall, in the mid 1980’s the insurance industry introduced a whole new general liability coverage format that contained numerous changes. This new general liability coverage format was developed in response to the “perfect storm” of the early ‘80’s. Two new emerging areas of significant losses for the insurance industry caused this storm: asbestos and pollution claims. The cost of these claims had never before been priced in the cost of insurance for the insured. In response to the losses from asbestos and pollution claims, the insurance industry reacted by doing two things. First, they raised premiums dramatically to cover the losses they were encountering. Second, they severely restricted the coverage afforded in their policies by issuing endorsements to the general liability policies that essentially excluded any coverage for losses arising out of an event that involved their insured where pollution or asbestos was the source of the claim.
Today, we are experiencing an event similar to that which we saw in the ‘80’s. It is the same type of “storm” but with more and different ingredients. In metaphorical terms, instead of wind and rain, we have stronger elements like lightning, thunder, smoke and fire. The components in today’s insurance market storm are EFIS, mold, terrorism and construction defects on residential buildings (i.e. condominiums, apartments, homes, town homes, etc.). This storm, like the one in 1986, is being caused by the substantial losses the insurance industry has suffered on risks that the insurance underwriters never anticipated and, therefore, had not adequately priced in the cost of insurance to their insured. This, in turn, has not only increased premiums but has also reduced the number of companies willing to write insurance. But, most importantly for building owners and contractors, it has eliminated some important insurance coverages.
As a result of this “perfect storm” current insurance policies may look the same as their predecessors on the surface, but they are indeed quite different. As a certificate holder you can no longer trust fully certificates of insurance to fairly represent the coverage depended upon in the past.
These changes are of particular concern in regard to existing construction contracts. Some of the changes in coverage will likely not be in compliance with the contractual terms of work currently under contract and in progress. Additionally, since standardized contracts and remedies contemplating these changes have not yet been developed, it is likely there will continue to be gaps between contractual requirements and actual coverage provided. Obviously, any gap between these two could work to the detriment of the owner - contractor relationship. Eventually, standardized contracts and remedies addressing these changes will emerge. Until then, owners and contractors alike need to draw upon the resources of their insurance agents, attorneys, and other counselors to identify potential problem areas and develop creative solutions.
The following table identifies common exclusions and limitations in use today on general liability and umbrella liability policies. Almost all insurance companies are mandating their use as a condition of underwriting a particular account or class of business. It is important to note there is wide variation of the definitions in the endorsement from the various insurance companies. Additionally, depending upon whether you are an owner or contractor, exclusions can apply differently. When evaluating risk and risk management solutions, owners and contractors alike must be aware of the impact these coverage limitations have on the overall operations of both parties.
Exclusions Made in the 1980s:These exclusions are uniformly attached to general liability and umbrella liability policies for owners and contractors. |
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| Absolute Pollution |
Excludes coverage for injury or damage connected to the treatment, transportation, disposal, storage, monitoring, or clean up of a pollutant. |
| Absolute Asbestos |
Excludes coverage for injury or damage in any way connected to asbestos, or manufacturing products containing asbestos. |
Exclusions Resulting From Present Day Issues:The following exclusions and limitations apply primarily to residential owners' and contractors’ general liability and umbrella liability policies. |
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| EFIS – Exterior Finish Insulation Systems (Synthetic Stucco) |
Excludes coverage for injury or damage connected to the manufacture, sale, distribution, installation or service of an EFIS system. |
| Mold |
Excludes virtually all coverage for claims arising out of presence of, exposure to or inhalation of fungi, including all varieties of mold and bacteria. |
| TRIA – Terrorism |
Excludes coverage for liability or property losses arising out of terrorist acts. This is of particular concern for large property owners in perceived target areas. Coverage buy-back is usually available. |
| Residential Construction Defects |
Excludes coverage with respect to liability arising out of the completed operations hazard in connection with property intended for habitation. *Note: There is little standardization on what types of structures are to be considered habitational. Most include single-family dwellings, apartments, condominiums and townhouses. Some variations may provide limited coverage if claims are brought within a specified time limit. Other variations may include coverage for completed operations, but only for work initiated after the inception date of the policy thereby effectively excluding completed operations for all previous work. |
Considering the volatile and mercurial nature of the insurance industry today, it is absolutely critical that all parties to a construction contract fully understand their obligations and the extent those obligations can be transferred to an insurance carrier. Some of these obligations i.e., construction defect, EFIS, and mold can have catastrophic, economic ramifications to the party assuming these liabilities in the event they cannot be transferred to an underwriter. Involving your insurance agent and legal counsel in the initial negotiation of a construction contract is more important today than ever before. With the current “storm” brewing, the expression “buyer beware” is definitely in vogue in today’s insurance environment.
In addition to serving as President and Partner of Bowen, Miclette & Britt, Inc., Mr. Britt is the President of both Camden Capital Mortgage, Inc. and Foster Insurance Services, Inc. He has more than 30 years experience in the insurance industry and holds a Bachelor of Science Degree in Economics.