Umbrellas for Residential Contractors in Uncertain Times
Residential construction is and has been an extremely important class of business for surplus lines insurers and agents. In recent years, however, demand for residential work in this country has dropped dramatically. According to the U.S. Census Bureau, 1,931,400 homes were completed in 2005, whereas only 794,400 were competed in 2009 – a staggering 59 percent decrease over just four years. Clearly, a huge number of opportunities for residential contractors have vanished, and with them opportunities for insurance agents to win the home builders’ and artisans’ business.
Umbrella policies have become especially tough sells, as many contractors might well view these policies as the most expendable piece of their insurance programs, when money is tight. However, now more than ever, and in spite of the downtrodden condition of the economy, umbrella policies are important for the financial well-being of residential contractors.
As opportunities in residential construction become fewer, many contractors will be unable to survive. The builders who do continue to stick around will be better prepared financially than their competitors for the uncertainties that go hand-in-hand with their trade. Such unknowns include how much work will be available to them, and how they could be hurt by lawsuits if their insurance programs provide incomplete coverage.
Best Selling Points
The best selling point of an umbrella policy is its versatility to cover unanticipated losses that primary insurance coverage may exclude. It is worthwhile for a contractor to spend a little bit of extra money on an umbrella (usually, umbrella limits are available at a small fraction of the cost of primary limits), which could save the day should a gap suddenly appear in the contractor’s general liability coverage.
Tainted drywall is one example of an unexpected hazard that has arisen and caused insurance coverage controversy. The bad drywall, imported from China and installed in thousands of homes in Gulf Coast states and elsewhere, has been known to rot, destroy wiring, electronics, jewelry, and may contribute to health problems, as reported by CBS News in its special report, “Feds: Gut U.S. Homes with Chinese Drywall,” on April 2, 2010.
Following significant claims activity, many primary insurance carriers are now specifically excluding tainted drywall, or any drywall imported from China, on primary policies for contractors and manufacturers. Some insurance carriers argue that the pollution exclusion on their policies implicitly excludes tainted drywall.
Suppose your client installed tainted drywall in 10 homes before it was a known hazard. If a court found that no coverage was provided for tainted drywall claims on the general liability policy, because of a pollution exclusion or for other reasons, a true umbrella policy could potentially drop down and pay the claims, saving the construction firm from bankruptcy. Gutting 10 homes could get expensive. Of course, whether either policy would pay would be up to the court’s interpretation of policy language. Even if the umbrella policy had its own pollution exclusion, its language could be ambiguous with regard to this particular unanticipated case, whereas the general liability policy’s language might exclude the drywall loss more explicitly.
Unfortunately, the average contractor installing the tainted drywall was probably not aware that he had a pollution exclusion to cover. As an umbrella policy can cover unanticipated losses, it can also cover unknown exposures.
For another example, a contractor could have a professional exposure when he casually gives a client some do-it-yourself construction advice. The contractor’s primary policy might contain a professional exclusion, where the umbrella policy may well be silent or ambiguous.
Catastrophic Claims
Umbrella policies protect against far more than drop-down losses. Residential contractors are also vulnerable to catastrophic claims. Whether your client is a roofer with $40 million in annual revenues or a drywall artisan with $500,000 in revenues, shock losses can happen. For instance, if your client is a general contractor, an injury to or death of a subcontractor could easily snowball into a multi-million dollar loss. It is easy to imagine circumstances under which a home builder could be hurt by a large loss. However, the umbrella form excels where other coverage forms fall short in its flexibility to deal with the circumstances that one cannot imagine or anticipate.
A lot of excess and surplus lines carriers have recently shied away from the umbrella form because of its drop-down potential. Many surplus lines insurers now write excess liability policies exclusively in lieu of umbrella policies, as contractors and other business owners tend to be far less concerned with good coverage than they are with good pricing. This is another by-product of the economy. Even though it is rarer than it has been in the past, you can still find the umbrella form in the excess and surplus marketplace, if you know where to look. The umbrella form holds a clear coverage advantage over the excess form, and will give you a sales edge when meeting with your client. Usually, when an E&S carrier is willing to use an umbrella form, it is no more expensive than the excess form.