The construction recession is killing off numerous smaller companies and surety losses are growing, said insurers at the International Risk Management Institute's construction conference in San Diego, which ended Nov. 17. But bigger, better-managed companies continue to win jobs, so surety losses overall will be manageable.

At the same time, risk managers, brokers and insurers in attendance at the IRMI event said the never-ending legal wrangling over scope of coverage has led lawmakers in four states to attempt to assure that construction defects are covered under contractor liability insurance. As a result, they added, a few insurers reportedly are steering clear of writing liability coverage for contractors in those states.

Insurers said they see two kinds of contractors as the construction recession reaches its bottom: strong companies with enough cash and backlog from the good times to ride out the trouble and win new work, and smaller marginal prime contractors and subcontractors who stay alive by switching markets and submitting overly competitive bids.

Those in the latter group regularly default on work in progress or shut their doors.

Surety losses are rising, but won't go so deep as to erase profit margins, said Roland Richter, vice president of Liberty Bond Services, a unit of Boston-based Liberty Mutual Group.

For the most part, macroeconomic matters remained in the background at the IRMI conference. That allowed the risk managers, brokers and insurers to turn some attention to sessions involving the kind of legal hairsplitting that one construction CEO not in attendance described as a "two-coffee" seminar.

Some of them were worth staying awake for, particularly a session that touched on the current legal question in several states as to whether a construction defect is an "occurrence" under a general liability policy.

Insurers and brokers at the conference generally agreed that, 20 years ago, construction defects were the reason for buying liability coverage. But recent cases in Hawaii, South Carolina, Colorado and Arkansas have thrown that rationale into doubt.

Contractors in those states convinced lawmakers to pass new statutes defining an occurrence or trying to clarify the issue, and a few insurers have stopped writing general liability policies for contractors in those or other states, according to unconfirmed comments at the conference.

But such reported "carve outs" remain unusual.