The artisan contractors market on the rise

As the United States’ total population creeps up on the 300 million mark, no one can call the residential construction industry a dying breed. The continuous need for housing is apparent in the nation’s fastest growing states, where new residential subdivisions and vast apartment complexes seem to pop-up overnight.

Nevada, which has been the nation’s fastest growing state for 18 consecutive years, is without question in a construction boom.

The U.S. Census Bureau ranks Arizona as a close second in fastest-growing population, followed by Florida, Idaho, Georgia, Texas, Utah, Delaware, North Carolina and New Mexico. The nation’s most populous state, California, was knocked out of the top 10 fastest growing state rankings just last year.

Nearly half of the national growth rate in 2004 came as a result of the 10 fastest growing states.

For the artisan contractor, or specialty trade contractor, work is plentiful in today’s construction boom but insurance availability is not always as plentiful. With a construction market that seems to change on a daily basis, artisan contractors must call on artisan agents to address their insurance coverage needs.

The construction industry remains one of the nation’s largest job producing industries, accounting for 6.7 million wage and salary jobs and 1.6 million self-employed and unpaid family non-government jobs in 2002, according to the U.S. Department of Labor, Bureau of Labor Statistics.

Artisan contractors represent almost two out of three wage and salary jobs in the U.S. construction sector, primarily plumbing, electrical, and masonry contractors. Out of the 792,000 construction companies in the United States in 2002, 496,000 were specialty trade contractors, reported the BLS. Most of the companies tend to be small, the majority employing fewer than 10 workers and about four out of five workers are employed by small contractors.

While the number of smaller artisan workers may sound appealing in terms of possible accounts to be written, Charles Comiskey, of Houston-based Brady Chapman, Holland and Associates, and chair of RiskProNet International Inc.’s construction group, says insuring small artisan workers come with a risk.

“There are still a lot of small artisans,” Comiskey said, “but they have unavailability of insurance, and or cost.” It’s a tough market to insure, he said. “There’s always going to be a plethora of those guys but they are the ones that tend not to have the right equipment, training or insurance.”

“It is a very trying and difficult segment of the insurance industry,” said Suzanne Patton, president and chairman of the Artisan Contractors Association. Patton, who also operates a retail insurance agency specializing in contracting business, says the market is in constant flux. “We see changes from our various markets we access right now probably daily.”

The need for the artisan agent

The complexity of the construction business calls for a unique specialization when insuring contracting risks, and the artisan workers market is no exception.

“This is not something where someone says, ‘Gee, I’m going to start in the construction area,'” Comiskey added. “It’s a very involved area. It’s more complex today than it ever has been, because of the numerous risk reduction issues taken by insurance companies due to the construction defect issues.” Comiskey himself has been working in the construction insurance specialty for 35 years. “Construction is an area where agents have to be extremely knowledgeable about their risks,” he added.

The shear number of players involved in a construction project makes insuring the industry extremely complex, noted Darwin Lucas, senior vice president of programs for Dallas-based RISC Inc.

“Certain classes of business are more innocuous than others just because of the contractual issues surrounding construction,” Lucas said. “It becomes increasing more important to have expertise on every level.”

Expertise that spans across three folds: from the agent, to the underwriter, to the claims adjuster, he said.

The need for expertise is of greater importance for artisan risks that are deemed riskier in nature, such as those with roofs, frames, fire sprinklers, street and road repairs, sheet metal, air conditioning and heat, plumbing, land improvement, and excavation, to name a few. “Those are the more difficult classes from a liability perspective, nationally but more specifically in the ‘Fab Five’ states,” Lucas said.

The ‘Fab Five’ states, as Lucas calls them, are the nation’s most difficult states in terms of availability for the liability risks of artisan contractors working in residential construction. According to Lucas, those states are: Arizona, California, Colorado, Nevada and Washington. “That’s really based on the legal environment and the number of alleged construction defect claims,” he said.

Taming the lawsuits

Paul Norman of Dayton, Ohio-based Norman Spencer McKernan Inc., agreed the most difficult line for artisan contractors coverage is general liability.

“For some time with the exception being 24-36 months after 9/11 those ‘pain states’ are U.S. coast states: California, Nevada, Arizona, Oregon and Washington, Colorado, Texas, Florida, and for other reasons portions of New York and Illinois. The definition of pain is derived from the litigious environment in those states-it is construction defect or the fear of construction defect,” Norman said.

“The underlying theme for construction defect is risk transfer and an attempt to define who is liable for the destruction of property,” Norman said. “Part of that risk transfer is the indemnification clauses, hold harmless clauses, wavier, subrogations and things of this nature.”

The legal environment and claims for construction defect have plagued California’s marketplace for years.

“Construction defect liability is worse in California than most other states partly because we have a longer statute-the time with which you can file a lawsuit from the time you purchase the house,” said Mark Scott, president and CEO of Sacramento, Calif.-based TransCal Associates. “In most states it’s two or three years for construction defect, but in California it’s 10 years.”

Up until recently, firms in residential construction in the Western states have been hard to place because of the legal environment, said Oscar Perez, commercial underwriting manager for U.S. Risk’s Houston office. “It has even extended into the artisan contractors exposure,” Perez said. But Perez noted that in the last 12-18 months things have begun to ease up, slightly, because of recent legislation aimed at curbing tort issues for construction.

The most aggressive state to try and tame the litigation beast has been California, Norman said.

Scott said that for many years there was a lot of defective construction in the state during the boom and bust cycles but since the statute of limitations is so long it took a long time for claims to begin coming in.

A number of carriers got into the business of writing general liability on residential construction projects and ended up paying huge losses from construction defect claims, Scott said. “One of the state’s largest companies that we wrote for in the mid ’90s wrote about $150 million in premium with developers and artisan contractors; when all was said and done they ended up paying $600 million in claims,” Scott said. “So you can see there is a tremendous incentive for most insurers to get out of that business.”

Legislation was signed and passed in 2003 with the support of the California Building Industry Association, called the ‘Fix it Law,’ which gave developers and artisan contractors the absolute right to repair a defect before somebody calls in a claim. This year, another piece of legislation is expected to be signed by the governor that will provide added tort relief, Scott said.

While the artisans contractors liability market may be dominated by the surplus lines sector throughout the ‘pain states,’ in the northeast, it’s a much different market, said Mike Cassidy of Colemont Insurance Brokers in Hartford, Conn.

“Outside of New York state, artisan contractors is typically a standard market piece of business,” he said. “Standard markets are not overly concerned with construction defect issues.” Cassidy said the exception is in New York, where most carriers in the standard market will not write construction risks primarily due to legal issues concerning the state’s labor laws.

In a state of constant change

With the construction market booming and the litigation climate severely limiting capacity in most of the nation’s fastest-growing states, artisan contractors and the agents servicing their accounts must stay on top of a quick-to-change marketplace.

“Every day the carriers are finding ways to cushion themselves from the contractor environments that are out there,” Patton said. “This segment really changes rapidly.”

Construction defect, or the fear of construction defect litigation is a primary driver for coverage change and restrictions.

“A lot of carriers are removing coverages especially in the residential area for construction defects,” said Jim Dennison of AH&T Insurance in Leesberg, Va. “I can’t name names but it’s a moving target and changes almost daily.” Dennison said that less than 10 percent of the carriers he works with in the District of Columbia, Maryland and Virginia regions write construction defects.

Dennison agreed that agents and brokers writing construction risk should have a good understanding of the construction market itself.

“I’ve focused on construction for the past 15 years, but I’ve known construction for a long time because my Dad was in construction,” he said. Dennison serves on construction-related safety committees, including the local chapter of the American Subcontractors Association, as well agent committees that discuss construction insurance problems so members and his insureds are more aware.

“Artisan contractors for the most part, especially the better artisan contractors are knowledgeable people,” Comiskey said.

Comiskey said today’s risk management climate for the artisan contractors market is a good example.

“Artisans a few years ago would have paid no attention to business continuation or disaster recovery. A few years ago they would not have paid attention to human resources,” he said. Today, agents and brokers specializing in construction risks often provide risk management assistance as a value-added service.

“Our goal is to help our clients to see these risks and control the risks as best as we can,” Comiskey said. “If we can, we help our client firms see how they can control their own risks first so they aren’t reliant on insurance as their risk management program. Those that rely on insurance as a risk management program are the ones that pay through the nose for insurance.”

What the future holds

While insuring artisan contactors continues to be a troublesome market in some states, the growth in population and the subsequent construction boom has pushed the insurance market to find solutions.

“We think the artisan contractors do represent desirable risks,” said Norbert Hohlbein, president and CEO of Builders and Tradesmen’s Insurance Services in Roseville, Calif. Hohlbein said that while the construction industry continues to be problematic, recent legislative efforts to curb construction defect litigation claims has helped some and will continue to help in the future.

RISC’s Lucas said that state laws, including California’s recent ‘Fix It’ law, might help availability, but “not until those laws are tested will carriers begin to loosen up their appetite.”

Despite the nation’s pain states and construction defect concerns, rates for the artisan market have been declining, if only slightly.

According to Richard Kerr, chairman and CEO of Dallas-based MarketScout, in the Aug. 22 issue of Insurance Journal, smaller artisan contractors are seeing premium decreases of 7 percent to 10 percent, but only if they employ their own staff and limit their use of subcontractors to 20 percent or less.

Kerr noted that exposures related to completed operations and other risks inherent to the residential construction market continue to concern underwriters. As a result, residential contractors, including artisans working in the residential field, are seeing flat renewals and are not securing any rate reductions.

“Generally speaking, rates have softened this year,” Colemont’s Cassidy said.

Hohlbein said he has also noticed a slight movement to softening in the construction arena. But “it’s ever so slight,” he said. “I would hope and pray we don’t get into a softening of the price because it again causes problems for everyone down the road.”

TransCal’s Scott said he is hopeful that California’s recent tort reform legislation will turn the tide. “And as goes California so goes the nation,” he said. “We can’t afford to let this construction business wither on the vine because of the unavailability of casualty insurance and I’m optimistic and I do believe that we will get companies back writing that class of business under good terms and conditions.”

U.S. Risk’s Perez also remains optimistic about the construction market. “I would like to think that availability for the coverage will expand in the months to come,” he said, “particularly with the changing market situation as carriers look for other sources of business counter the softening market place.”

Comiskey added that because the industry and its artisan specialists are becoming more skilled and providing more value-added service opportunities for artisan clients, the industry has a bright future. “Because they (artisans) are becoming so much more professional at what they do, I think there is a wonderful future for the artisan market,” he said.

Cassidy added that he wishes he knew where the artisan market would be in just a few years.

“The reinsurance marketplace is taking a big hit on the property side however whether that’s going to factor in on the casualty side of the business is something that everyone is pondering and no one really knows,” he said. “Whether it would affect artisans or not, I couldn’t guess. In a couple of years, I’ll let you know.”