Las Vegas Sun

August 29, 2014

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Builders’ insurers leaving Nevada

Major insurance companies, burned by construction defect lawsuits, are abandoning the Nevada market and homebuilders say they're facing a crisis similar to that faced by Nevada doctors losing malpractice insurance.

Republic Insurance, Chubb Insurance, Travelers Insurance, the Hartford and the AIG Cos. are just some of the big-name firms that now refuse to insure valley home builders, an insurance broker said.

Only three companies still insure local builders and subcontractors -- Clarendon American, the St. Paul Cos. and Zurich Insurance Services, said Greg Pike, vice president of McFadden Insurance.

Pike said St. Paul is leaving the market May 1, and Zurich will only insure builders with more than 200 employees and no history of construction defect issues.

That dwindling number of insurance companies compares to six firms that offered construction insurance to local builders a year ago, and a dozen firms providing such coverage three years ago, Pike said.

This is an emerging crisis, builders say, and is remarkably similar to the state's medical malpractice insurance crisis in which many Nevada doctors were left without coverage in recent months when St. Paul, the biggest player in that market, abandoned the business.

Builders and subcontractors blame the problem on frivolous lawsuits that spend years unresolved in the courts. But plaintiffs' attorneys say builders and subcontractors have no one to blame but themselves.

The explosion in construction defect litigation cases in Southern Nevada -- plaintiffs' attorney Scott Canepa estimates there are as many as 175 defect cases pending -- has "completely changed what insurance companies anticipated they might have to pay," said Jim Wadhams, a lobbyist for the Southern Nevada Home Builders Association.

"(Insurance companies) had anticipated that if a builder made a mistake, they could fix it. The builder wouldn't be sued, and the insurance company wouldn't have to pay those fees. In reality, there's no opportunity or right to repair. As soon as litigation starts, the subcontractor can't fix the problem. They're ordered off the property.

"Insurance companies are now paying lawyers three to four years to work on these cases, and they had not anticipated that."

The insurance situation is especially critical for subcontractors who contribute to the structural integrity of a home -- framers, roofing subcontractors and concrete companies, for example, are harder hit than painters.

Pike said he handled a costly renewal proposal for a framing subcontractor earlier this week.

Pike called the 300-employee subcontractor a "fairly substantial" company that does detached, single-family housing work for major home builders such as Astoria Homes, KB Home, Signature Homes and Sunrise Colony Co.

The company's premium was just under $150,000 per year last year; as of midnight Wednesday, that premium will rise to $425,000, Pike said.

And that's for a subcontractor with an unblemished record and no defect claims against it, Pike said.

Allen Kaercher, of Kaercher Insurance Agency, said he handles construction insurance policies for other subcontractors who have no construction defect claims against them, and their best-case premium scenario is a rise of 30 to 60 percent.

For those with claims against them, Kaercher said, premiums are up anywhere from 200 to 300 percent.

"The reality is, contractors with problems are finding it impossible to buy insurance, or their quotes are getting very expensive because (insurance companies) know there'll be future claims against them," Pike said.

Bruce Heffner, chief insurance assistant in the state's Division of Insurance, said it's difficult to quantify how many companies are actually insuring builders because a company can be licensed to offer a line of insurance, but may stop offering that insurance at any time.

Heffner said the problem appears bad enough that the division will schedule hearings on the matter sometime this summer.

Bruce King, a board member of the Nevada Subcontractors Association and the owner of subcontractor Pete King Corp., said his own construction insurance premiums have gone up 120 percent in the last year, and said he knows subcontractors who are facing premium increases of nearly 450 percent.

"It's gotten to where when you build a house, it's not if, but when, you get sued," said King, whose 550-employee firm does subcontracting work for Del Webb Corp., American West Homes and Pardee Construction Co. of Nevada.

And rightly so, said plaintiffs' construction defect attorney Scott Canepa.

"They have no one to blame but themselves," Canepa said of builders and subcontractors facing higher insurance rates.

"There is no construction defect lawsuit without a construction defect. To the extent it's even true that there is an unavailability of insurance, it's due to the fact that right now, Las Vegas is in a crisis. The crisis is not construction defect lawsuits, but construction defects, which are being caused by flat-out negligence."

Canepa, who said he thinks the insurance crisis for builders has been "overstated," said some subcontractors have as many as 60 defect claims against them.

"After a while, you say, 'Guys, build a roof so it doesn't leak,"' he said. "The homeowner who pays for the home deserves a product that's not defective."

But builders say many plaintiffs' attorneys are filing frivolous lawsuits over aesthetic and cosmetic issues.

Former Lewis Homes principal Robert Lewis, whose home building company was sold to KB Home and who now builds commercial projects and apartment communities, attributes higher insurance premiums not to construction defects, but to trial-averse insurance carriers.

"Some of the initial issues were probably real, legitimate problems in that houses weren't built well," Lewis said. "Attorneys went after the low-hanging fruit. In those cases, you did have legitimate horror stories.

"What's happened, though, is we had some opportunistic attorneys coming in from California, seeing this as a business opportunity rather than just defending a client. They started making a lot of claims."

Rather than risk a jury trial, where a defendant might face jurors who "have no concept of money or fairness," said Lewis, insurance companies began to settle before cases made it to trial.

"These cases get settled ahead of time with insurance companies," Lewis said. "(Insurance companies) just add up all those costs and raise premiums later."

Lewis said many builders, rather than going out of business altogether, are surviving simply by changing their business models. They're abandoning especially litigation-prone and increasingly hard-to-insure attached housing, such as condominiums and townhouses.

Pike, of McFadden Insurance, agreed.

"A lot of subcontractors out there have had to make the decision to not do multifamily (housing)," he said. "They cannot afford the insurance, or it's no longer available in the marketplace."

Dennis Smith of Home Builders Research Inc. said local builders constructed 3,759 attached-housing units in 1995, compared to 3,123 attached-housing units in 2001. Attached housing's market share went from 21 percent in 1995 to 14 percent in 2001.

The problem for consumers, say builders, is that attached housing is generally a market's most affordable product -- an entry point into homeownership.

Though Wadhams acknowledged many pressures have propelled the median new home price in Las Vegas to nearly $180,000, he cited builders' abandonment of attached housing and the liabilities such housing seems to attract as a part of the problem.

"This market doesn't have any new houses at $80,000," Wadhams said. "Those houses that used to keep prices down are just flat not being built."

Canepa denies construction defect litigation has played a role in the disappearance of attached housing. He said as long as interest rates remain low -- and consumers' home-buying power remains high as a result -- single-family homes will be in favor.

King said competition has checked any major pass-through of higher insurance premiums to homebuyers -- for now.

"What might begin to happen is (builders) will all be squeezed down, and maybe the consumer begins to feel a small part of it," said King, who considers himself "pretty fortunate" to be involved in only 12 lawsuits. "But eventually, people won't be able to afford being in business. Ultimately, (premiums) will get passed on."

Dave Beck, vice president of construction for Pulte Homes of Nevada, said that's already beginning to occur.

"For some of our subcontractors, insurance premiums have almost doubled," Beck said. "In some cases, these costs are passed on to the buyer, because ultimately (higher premiums) increase our costs."

Beck said though Pulte hasn't abandoned certain housing submarkets yet, the company is considering rising insurance premiums "as a factor causing us to look at the product we build in the future."

The state Legislature is likely to get into the issue in 2003, though it has attempted to address construction defect litigation in past sessions.

For example, NRS Chapter 40, passed in 1995, was designed to limit the number of construction defect lawsuits by giving a home builder the opportunity to respond to a defect claim before a homeowner filed suit.

Canepa said builders have three options under NRS Chapter 40: They can deny the defect or refuse responsibility for it; they can offer money to a homeowner for the hiring of a contractor to fix the problem; or they can repair the defect themselves.

Lewis, Wadhams and King all say allowing builders to remedy problems prior to the filing of lawsuits -- they call it the right to repair -- would provide some relief from spiraling insurance costs.

That's just what Canepa said the law was crafted to accomplish.

It's failed in practice, though, say builders.

"What I've heard is that if you read the law, there's a right to repair," Lewis said. "But practically, once you get into a lawsuit, attorneys refuse to let people in and make repairs."

Lewis also said the adoption of uniform performance and quality standards would help, as well. Currently, it's up to each municipality to state in its building code what constitutes a construction defect.

Lewis said an alternative dispute resolution process would also limit both construction defect litigation and rising construction insurance premiums.

"Before somebody could sue, an impartial board could review claims and at least try to mediate things or say whether a claim has merit."

Canepa said better builders are already reducing their liability by undertaking better quality control.

"The truth of the matter is, a developer is only as good as its worst subcontractor. As soon as (builders) recognize that and become more proactive in training their people," the defect litigation and insurance crises will ease, Canepa said.

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