Artisan Contractor

Class Strong Despite construction Defect Litigation, Hardening Market and Slowing economy

The building boom across much of the country resulting from nearly 10 years of economic expansion has also resulted in a business boon for artisan contractors. As individuals in some of the country’s hottest markets can attest, construction projects are often delayed because there is simply too much work for the existing companies to handle.

The result has been a growing number of mom-and-pop artisan contractor services entering the market to fill the need. While it has spurred an increase in the number of companies that need insurance, it has not always resulted in increased business or premiums for insurance agents and companies.

Some of the factors determining whether agents are writing a lot of artisan contractor business include the region in which they do business, which companies they work with, what those companies consider artisans and whether they write admitted or non-admitted coverages.

In Texas and California, artisan contractor coverage is dominated by the non-admitted market, with only a few companies writing significant amounts of admitted business.

According to Paul Van Wagoner II, president of Van Wagoner Cos. in Plano, Tex., the second-oldest general agency in the state, large admitted companies simply aren’t attracted to the market.

“Big companies won’t write artisan contractor because it’s often too small,” he said. “Here in Texas there are lots of small family businesses that employ a lot of itinerant labor, so most of it is written through surplus lines.”

The same holds true in California. Dan Ho, a senior broker with Gray-Stone & Co. in Thousand Oaks, said the propensity of itinerant labor in the artisan contractor field has some affect on admitted carriers not wanting to write the coverage, but it is mostly the nature of the business that keeps them away.

“The main thing is exposure, what the company does,” he said. “It’s just because of the class of business that you don’t find a lot of admitted carriers in California.”

The E&S safety valve
Non-admitted companies have deemed the coverage desirable, however, and have gladly reaped the rewards, seeing increased business and steady premiums in most states. And while artisan contractor coverage has remained competitive, particularly in California and Texas, the market is slowly hardening.

“The market is tightening in California, but it seems that artisan contractor coverage…is not tightening as quickly as some other areas,” Ho said.

The hardening is slow and steady in Texas, as well. And for some general agencies, the growth over the last few years has been phenomenal. Van Wagoner said his general agency has experienced an increase of nearly 500 percent in artisan contractor business over the last three or four years, jumping from a few hundred thousand dollars in written premium to roughly $1 million last year.

While it has been a solid class for Van Wagoner and others, the potential for uninsured employees is high, he said, as is the potential for large claims, particularly with roofing companies. Also, Van Wagoner said the expansion of the class among some carriers to include exterminators and even horizontal boring companies, has led to diminishing profits.

“This class has become a catch-all for small contractors of all sorts,” he said. “As a result, claims have increased.”

At Delta General Agency in Houston, the story is somewhat different. Dave Van Tiem, director of programs at Delta General, said the company maintains the traditional classification of artisan contractor.

“We have kept ours to mean the small, less-than-10-employee contractors who are specialized in plumbing, drywall—skills such as these.” That could be why Delta has not seen the monstrous growth Van Wagoner reports. “We’re seeing smaller increases,” Van Tiem said. “We realized about a 20 percent increase in business over the last year.”

That figure is keeping more in line with other general agencies around the country which have experienced steady growth in the artisan contractor class, but have also had to deal with some pretty nasty claims issues, particularly on the West Coast.

“Aside from the western state restrictions, [artisan contractor] is a pretty desirable class,” said Ken Laderout, special risk department manager for Farmington Hills, Mich.-based Burns & Wilcox. “Artisan contractor is still pretty much a class that most carriers want to write except in one case…new residential construction on the West Coast, which has a lot of restrictions because of the Montrose ruling.”

Ho, with Gray-Stone & Co., agreed, saying while multiple residential contractors are hardest hit, Montrose has affected all lines of contractor coverage. And it’s spreading eastward.

The Montrose decision
In 1994, the case of Montrose Chemical Corp. vs. Admiral Insurance Co. focused national attention on construction defect. The California Supreme Court ruled that in third-party liability cases in which damage occurred over a period of years, any policy in effect during any part of that period could be liable for damages.

“Montrose basically extended the occurrence timeframe that the insurance policies became responsible to respond to,” said Bill Cooper, president of W.K. Cooper & Co. International Insurance Brokers Inc. in Encino, Calif., in a July interview with Insurance Journal. “Before Montrose, everyone thought that an occurrence should be within a 12-month policy timeframe; an occurrence was one point in time. With Montrose, you can actually have many occurrences over a long period of time. The decision had to do with pollution, but it quickly overlapped into long-tail exposures.”

One growing trend in the market involves the additional insured status, according to David Golden, director of commercial lines for the National Association of Independent Insurers. “We’re seeing the additional insured status exploited to where a subcontractor can end up having to pick up the liability of the general contractor for whatever is wrong, even though it may not be directly related to the work that the subcontractor was doing,” he said.

“This is what, from an insurance coverage standpoint, has now greatly expanded because of the additional insured and contractual relationships between subcontractors and general contractors, or subcontractors and developers—it really depends on how the whole project was set up, who’s really at the core of it.”

Outside of California the situation is fairly new, and not something, according to Golden, that insurers are prepared for. “The premium charged for additional insureds never really contemplated taking on the responsibility of another contractor in any specific case,” he said.

A bitter taste
After getting a taste of these long-tail exposures, many of the standard companies pulled out of the West Coast market, including Maryland Casualty, which was later acquired by Zurich. More recently, First Financial pulled out of the California artisan contractors game. On a national level, Travelers has been tightening up or trying to get out of the artisan contractor market because of what Ken Laderout called the potential for Montrose-type rulings in other regions.

“We’re getting more restrictive, too,” said Laderout, whose company, Burns & Wilcox, writes artisan contractor coverage in 45 states including Texas and California. “I think that could spiral across the country.” Still, as contractor coverages go, artisan contractors are perhaps the most desirable class, Laderout added. Alex Karsanidi, whose general agency, Karsanidi Group in Ridgefield, Conn., offers artisan contractor through the standard market only, agrees.

“There’s still enough markets doing the artisan contractor, though there are certain areas that are drying up faster, such as carpentry,” Karsanidi said. “At least [on the East Coast] some of your major guys won’t write it anymore.” Unlike Texas and California, the East Coast market is dominated by the admitted market, Karsanidi said.

Back in Texas, general agencies are feeling confident that the non-admitted market will remain strong, providing plenty of coverage options for what Delta General’s Van Tiem sees as a potentially bottomless market of artisan contractors in an area that is steadily hardening.

“I think there may be a slight transition in the market,” Van Tiem said. “It’s definitely hardening some, but I think the Texas economy will stay pretty strong. There will still be plenty of artisan contractors needing coverage.”

Ho is somewhat less optimistic about artisan contractor coverage in California. “It’s been steady, but it depends on the economy,” he said. “It also depends on catastrophic perils…those are destructive, so once you get a catastrophe of any magnitude, the artisan contractors are going to be in business.”