Contractors advised on avoiding suits

Alana Roberts

Thursday, Jan. 22, 2004 | 11:14 a.m.

Although 18 states, including Nevada, have legislation allowing home builders time to repair construction defects before homeowners can sue, insurance for home builders remains expensive and difficult to find because it's a sure bet they'll get sued, said a panel of home-builders' insurance experts.

"One can't talk about the insurance crisis without talking about litigation," Stephen Mysliwiec, a partner at the law firm of Piper Rudnick LLP, said during a panel discussion Tuesday at the International Builders' Show in Las Vegas.

"When a builder builds a home, they can count on being sued. They take that into account when they price the homes. That's why you can't get housing in certain areas. Builders are often unable to get insurance. Builders are paying higher premiums with lower deductibles," Rudnick said.

The panelists discussed ways for home builders and contractors to make themselves more attractive to insurance companies, to lower their risks of litigation and to self-insure if necessary.

"We believe the creation of quality-assurance systems is one of the key steps in avoiding expensive litigation," Dean Potter, director of quality programs at the National Association of Home Builders' NAHB Research Center, said. Potter moderated the panel discussion entitled "Strategies for Dealing with the Homebuilders' Insurance Crisis."

Mysliwiec said the best way for a home builder to make itself more attractive to an insurance company is to make itself less likely to be the target of litigation. He said insurers are looking for companies that have few claims against them and have strictly enforced and documented quality-control programs.

He said certain states have more litigation and home builders have a harder time getting insurance companies to insure them in those states, including Florida, California and Texas. He also said states such as Nevada, Arizona and Colorado have had a lot of litigation.

"Las Vegas is the perfect place to talk about underwriting," Mysliwiec said. "The insurance companies are betting on the builders. Insurance companies look at home builders and decide which ones to bet on."

Ric Glover, of Marsh Inc., a large liability insurance provider, said the few insurance companies who will provide insurance for home builders do some guess work when it comes to calculating the costs. He said that is because there isn't much data available that is specific to the homebuilding industry.

"As an industry, because of the lack of numbers out there, there's a lot of assumptions made," Glover said. "The question is, 'Does the (insurance) industry have it right?' From the results we probably don't."

He said insurance companies lose money on home builders, but he said how much isn't certain.

"The losses don't look good. Without documentation we have no way of knowing. That's why we're here," Glover said, adding that the insurance industry is interested in working with home builders to get the data.

During a question and answer session, Glover said that insurance companies won't pool information about home builders because of confidentiality issues and because the insurance companies don't want to share their information with their competitors -- and they don't have to.

"Until we build a credible database, we can't move in the direction we want," Glover said.

Jim McErlean, of HBW Insurance Services, said since insurance is getting to be more expensive with less coverage, home builders need to find alternatives.

"Insurance is one aspect of risk management. It's more like death coverage; you have to get away from that thought process," McErlean said. "The courts have done a good job of listening to insurance companies. The courts and insurance companies are not your friends today."

McErlean said home builders should consider self-insurance because, in some cases, an insurance policy's premiums will approach the costs of litigation anyway. He also said home builders should find ways of reducing risk, such as implementing quality control programs that the home builder and its subcontractors adhere to and making sure jobs construction sites are safe. He said home builders should also consider avoiding high-risk areas for building, such as places near hills and bodies of water.

Scott Canepa, a local attorney who represents plaintiffs in construction defect cases, said home builders have themselves to blame for the high occurrence of lawsuits and high insurance rates. He agreed with the panelists that quality assurance is the best way to ensure that builders aren't sued for construction defects.

"The crisis was based completely on their substandard workmanship practices," Canepa said. "When the day comes that the builders start self-insuring, that's the day you'll see them making sure there's quality assurance."