Gilbert Rivera is paying more for less.

These are unfamiliar times when it comes to buying insurance. Just ask Gilbert Rivera, the owner of AMG Waterproofing, a contractor who has been doing business in New York City for 23 years. He sends workers to the tops of the city’s ornate old buildings to seal and restore them.

Two years ago, the tab for his insurance took off like a space probe and it shows no sign of returning to earth. He is paying much more for less coverage.

Until 2001, Rivera paid about $300,000 in annual premiums for liability insurance and $20 million for excess/umbrella coverage, he says.

Now Rivera’s new insurer, AIG, charges about $1 million dollars for similar kinds of insurance, but the excess/umbrella policy is only $10 million. AIG takes a big bite by requiring Rivera to prepay in cash about $500,000 to cover the cost of deductibles for four or five accidents anticipated during the year.

With profits down, Rivera has cut managers’ pay and bonuses and has made a few layoffs. He also wonders how long he will keep the doors open. "I will not work for the insurance companies," he says.

But that is what many more contractors and designers feel they are doing these days.

Losses have driven once easy-going insurers , such as Liberty Mutual, CNA, Zurich and AIG, to raise prices and restrict coverage since 2001. That has sent waves of anxiety through parts of the construction industry, while leaving other parts undisturbed. Depending on the companies involved, the restricted coverage may include residential work, groundwork, completed operations and additional insured provisions. So, along with spiraling premiums, falling coverage limits and climbing deductibles, new exclusions and scope changes are punching truck-sized gaps in policies that are costly or impossible to fill.

"In the old days, a hard [insurance] market was when the price went up and you waited 18 months and the price went down," says Matt Cashion, a Little Rock, Ark.-based insurance agent and president of the National Association of Surety Bond Producers. The current situation "is a hard market none of us have ever seen," he adds.

Insurers portray the situation as a time of adjustment. "It’s always the less-stated portion of the hard market," says Bob Hartwig, chief economist of the Insurance Information Institute, an industry organization in New York City. "There is a narrowing of terms and conditions of contract" aimed at avoiding claims that might come back to haunt insurers three to seven years from now, he says.

The changes have stirred subtle and far-reaching responses. One is the spurning by general contractors of more subcontractors with low bids because the subs’ insurance is found lacking. Insurance certificates cannot be trusted as proof that coverage exists, say contractors. "You don’t know what it means anymore," says one.

Another sign of change are reports that sureties on a few government megaprojects have convinced contractors and government agencies to adjust the terms to lower the sureties’ exposure. In one instance, sources say, the public agency agreed to accept early a portion of the completed work in order to free the surety credit for a later stage of the project. Surety industry sources say they are unaware of any projects where terms have been changed.

For contractors, the changes also include carrying less liability coverage; bidding on more private, unbonded projects; changing or being forced to change carriers; and forming more captive insurers or risk-retention pools.

The future probably holds more of the same. Although property and casualty insurers turned a profit in 2003 following four to five years of losses, insurance executives still speak often of "rate adequacy" or higher prices as a goal. Price increases of 15% to 40% on policy renewals will remain common, industry sources report. Overall, the commercial property and casualty premium increase for construction risks–almost 60% in 2001-2002, according to one survey–appears to be slowing. Some new capital has arrived as insurers such as Arch, XL Insurance and ACE USA have beefed up their construction practices and partly replaced, in some markets and types of coverage, what was lost to insurer consolidation.

But when it comes time for agents to quote prices to a small or mid-size contractor in lawsuit centers like New York or California, it can get pretty lonely. Seven or more carriers have in some places dwindled to three or fewer.

Not surprisingly, contractors as well as other types of companies are buying less coverage. Policy limits for insurance in all industries declined 9.4% in 2003 and 14.5% over the last three years, according to a survey by broker Marsh & McLennan Cos., New York City. Construction insurance costs are near the top for all industries, with $1 million of coverage priced on average at $20,620, according to the survey.
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SOURCE OF WOE Las Vegas courthouse needed surety intervention.

Among sureties, the red ink continued to flow in 2003, with $5 going to expenses and payouts for every $4 of revenue, according to industry sources. Unprofitable projects may have helped push some underwriters, like Fireman’s Fund Insurance Cos., to leave contract surety altogether. It sold its surety renewal rights to the St. Paul Cos. in December 2001. Fireman’s Fund had to bring in The Clark Construction Group Inc., Bethesda, last May to help oversee completion of a long-delayed courthouse project in Las Vegas. Its original completion date under contractor AF Construction Co., Las Vegas, was February 2002.

The court project was not a major influence in the company’s decision to pull out of the surety business, says Fireman’s Fund spokesman John Kozero. He says the company needed a "certain critical mass" to be a national player in surety with a strong bottom line and did not have it.

Reinsurers swallowed many of the early surety losses and they now have set tough new terms for participation. Partly as a result of the need to spread risk, projects over $250 million routinely require two sureties. Sureties are poking into contractors’ finances in ways that were ignored for years, checking on assets and cashflow. At least one major surety reportedly has doubled its rate, which had been the common 1%, to 2%.

Despite the trouble, no projects have failed to move forward because contractors could not get a bond, says Lynn M. Schubert, President of the Surety Association of America, Washington, D.C.

Not all sureties posted losses in recent years, and one relatively new surety, Houston-based SureTec Insurance Co., sat out the last years of the soft market when big sureties and their reinsurers wrote bonds that led to their big losses. SureTec specializes in smaller contractors, keeping its maximum project bond to $5 million and maximum credit for one company to $10 million, says Chairman John Knox Jr. He also requires every contractor to pledge personal assets as a way of making sure they are determined to finish projects and run their businesses well. "If they are not willing to sign that assurance, I’m not willing to bond them," says Knox.

Keeping a surety happy depends partly on keeping your construction business profitable, but also stopping trouble on a project before it blossoms from an unpaid change order into a full-blown stand-off and dispute, agents say.

Sureties also are now much more curious about gaps in a contractor’s insurance coverage that could kill the contractor and leave the surety holding the bag. The problem is finding out what a particular big insurer, even one that has a big book of business and promotes its service to construction, will do from year to year. "This can be frustrating to contractors as it can be very difficult to compare different offerings," says an assessment of the market by Willis Construction Practice, New York City.

One place where this lack of uniformity crops up is in additional insured provisions that cover a completed operation. Insurers prefer to do substantial underwriting and charge separately for it, says Willis.

It is clear what spooks insurers about completed operations. Eye-popping jury awards involving building products have come many years after projects were finished. One lawsuit that was settled involved a forest-products company whose siding installed from 1981 to 1999 warped or buckled. Health-related lawsuits involving asbestos, including last year’s $53-million award to the family of a worker who died of cancer, also involved many years of exposure.

To head off future big damage awards years after a policy expires, insurers have been subtly altering the language of their policies, says one contractor.

One example is switching coverage from occurrences to a claims-made basis. An insurable event worded as an occurrence means the insurance applies even if the occurrence is discovered long after the policy expires. A policy written on a claims-made basis will cover only claims made when the policy is in effect.

Originally thought to be mainly a homeowners’ issue, concern about mold has spread to commercial real estate, says Marsh & McLennan. Over 9,000 mold-related claims alleging personal injury, property damage or other losses now are pending in U.S. courts.

"The biggest problem is the mold exclusion because we have to go out and buy the coverage elsewhere," says Eric Wilson, general counsel and vice president of Hensel Phelps Construction Co., Greeley, Colo.

Previously, Hensel Phelps had a $25-million pollution liability policy that included mold and had no exclusion under its general liability coverage. "Now, we’re buying a separate mold policy and the highest limit we get is $5 million," he says.

Every contractor has different buying power and a different profile in the eyes of insurers, who themselves have differing appetites for risk. One endorsement concerning mold or defects can force an agent to move a contractor from one carrier to another, who has no problem with the same type of risk. And an insurer may say no to a contractor doing high-rise condominiums in Florida but yes to one building a wastewater treatment plant in Oklahoma, says agent Cashion.

Finding out what you are getting isn’t necessarily an orderly process. With busy insurers often waiting until the 11th hour at renewal time to inform a contractor of the scope of the coverage, contractors often have to scramble to replace refused coverage, says Richard Usher, a partner in broker Hill & Usher, Phoenix. Contractors "find out later [about] the missing elements," says Usher.

That is partly because big insurers are responding to recent damage awards or settlements, many of which involve building materials or construction. As a result, if you are an excavation or waterproofing contractor in one of the more litigious states in the country, such as New York, buying insurance is an adventure and, some say, a curse.

With 75 years in the excavating and groundwork business and 20 years with the same insurer, Kilby Bros, Delmar, N.Y., could be thought of as a stable business. But because it is a small contractor that works in the ground, the $4-million-a-year company does not fit the profile of an ideal risk and it has had to change liability and workers’ compensation insurers since 2001.

Even now, however, the firm’s work is limited partly by what its insurers are willing to venture. For example, the company was preparing a bid for a project that involved working on two sides of a stream with a bridge on it. New York State has an old provision, Section 240 and 241 of the state labor code, that has been interpreted by courts in ways that expand the liability of anyone involved in an accident involving gravity. It is considered nectar by personal injury lawyers, but poison by insurers.

As a result, Kilby Bros.’ insurer refused to sign off on the project because a bridge was involved. "Once we knew we couldn’t get the coverage, we stopped working on the bid," says human resources manager Mike Bates, who handles risk control for the company.

New York contractors have been trying to amend the labor code and tie much of their hopes for insurance relief to it. The temptation of a rich court settlement encourages injured workers to forego workers’ compensation benefits and try for the bigger payoff possible in a personal injury lawsuit. That drives Gilbert Rivera crazy because he has devoted his career to building up a business and says he pays attention to safety. New York contractors say their best hope for insurance relief is amending or repealing the law in a future legislative session. Earlier attempts have come close, but failed.

L A to Z10. Sundt and Zurich are trying to restore subs’ insurance.

In other parts of the country, relative peace prevails. When everyone’s prices go up, no one loses a competitive edge. And some welcome the discipline demanded by insurers and sureties. The Insurance Information Institute’s Hartwig suggests that the construction industry quality problems contribute to the crisis as well.

Nevertheless, few have seen an insurance market in such a state of flux and one general contractor is taking steps to bring some order to it. J. Doug Pruitt, chairman of Tucson-based Sundt Cos. Inc., and his insurance carrier, Zurich, are experimenting with a new contractor-controlled insurance program called Z10 that fills subcontractors’ insurance gaps and lowers costs. Sundt prequalifies subs, makes them a named insured and bills them for the coverage, says Pruitt. "We know what the coverage is because we are buying it."