This may not be the hardest insurance market ever, but it sure feels like it. Almost 17 years of ever-easing terms and conditions erased the collective memory of the last crisis in 1985 and the deep dip in costs since then makes the current market's rocketing rates seem so much steeper.

The roller-coaster ride for contractors and design firms already was starting before the Sept. 11 terrorist attacks as insurers wracked up big losses due to escalating frequency and severity of claims, declining investment income and natural disasters, such as last summer's massive flooding in Houston. Some insurance experts predict that it may be 2004 before the market eases and many years before a soft market reappears.

"The sky is not falling, but it is a lot closer to the ground," says Paul Becker, executive vice president and manager of Willis Construction in Nashville. He says that premium increases for contractors are "wildly all over the board," depending on the size of firm, loss history and type of work and location. Increases of 10 to 30% on renewals are good and there may be some on the magnitude of 50, 60 or 70% for such items as general liability, workers' compensation and equipment coverage, he says.

According to Becker, the biggest problems lie in umbrella coverage. Between the third quarter of last year and Jan. 1, contractors experienced premium increases of between 20 and 25% at the low end and 200 to 500% at the higher end for coverage between $10 million and $25 million, Becker says. He and others in the insurance business say needed reinsurance largely has dried up due to large losses incurred by reinsurers in the World Trade Center disaster, Houston floods and other calamities.

One medium-size heavy contractor in California with a perfect claims record says that its contractor general liability policy has increased one-third over the past three years and the umbrella coverage "had the most significant delta." In 1999, the firm paid $2.34 per $1,000 in revenue for CGL, $2.76 in 2000 and $3.36 presently. The CGL included $10 million of coverage and the firm bought an additional $25-million umbrella for $74,297 in 1999, $69,425 in 2000 and $83,500 in 2001. "We got the big hit last year," says one executive. So far, the firm has been able to pass the cost on to clients because they are increasingly more interested in "best value," rather than lowest price.

"The market, especially in the last 60 days, has turned and it is worse than predicted," says Troy Wagener, senior vice president of broker Stewart-Sneed-Hewes/BancorpSouth, Biloxi, Miss. He says that an average increase of 25% is good for a small contractor purchasing workers' compensation, general liability and auto insurance in his area.

Wagener says that larger contractors are in a better position to deal with the hardening insurance market because they are "risk takers" in the sense that they will be able to assume more risk and higher deductibles. Nonetheless, one client with a Feb. 1 renewal will see its $18,000 premium for a $10-million umbrella policy climb to $52,000.

Scott Trethewey, a vice president with Centex Construction Group, agrees that larger contractors are better positioned. "We saw rates go up, but it was marginal" at 5 to 10%, he says.

"Everyone has been trying to compare this situation to 1985. That was the last serious turn in the market," says Jackie Sirany, vice president and director of risk management for M.A. Mortenson Co., Minneapolis. "The difference today is that there is more capacity in the marketplace...and generally more coverages are available, at a price."

Sirany says that builder's risk insurance, which covers damage to a construction project in progress, "is where we are seeing the most dramatic effects of the change in the market." Mortenson buys a single builder's risk policy, for each project, for the term of the project. "Terrorism exclusions are blanket," after Sept. 11, she notes. Before that, terrorism coverage was included in the all-risk rate.

Builder's risk, like property insurance, is going up from 20 to 100%, says Becker. He says lenders are getting jittery because of severe restrictions creeping in for wind, seismic and residential exposure. "Some lenders are uncomfortable with the restrictions, higher deductibles and lower limits, he says.

On a $100-million building, for example, a $5-million deductible would not be unusual, notes Becker. In most Southeast coastal areas, clients "will struggle to get to the $100-million limit" by using multiple insurers, huge deductibles and lots of reinsurance, he adds. Many insurers are now looking at how much business they are writing in certain high-risk areas, he says.

Design professionals appear to be in the same boat, but a little higher in the water. A survey conducted last fall of professional liability carriers by the American Institute of Architects, the American Council of Engineering Companies and the National Society of Professional Engineers found insurers poised to increase rates from 10 to 15%, or even higher this year.

AIA suggests that design firms review their records to separate low-risk services, like master planning and feasibility studies, from high-risk services, like preparation of construction documents and construction administration. "If the broker understands how you do business, he can negotiate a better rate with the underwriter," says Cara Hall, a managing principal for Tulsa-based gh2 Gralla Architects and chair of AIA's risk management committee. Another key, if obvious, way to keep premiums down is to practice careful loss control, say sources.

Kansas City, Mo.-based HNTB has seen only a "negligible" increase in its professional liability rates, says Bob Fogle, senior vice president. He attributes the firm's relatively low rates to its proactive policy toward disputes. "We get parties together to resolve disputes amicably before they become claims," says Fogle.

Despite worries about insurance contracts up for renewal at the end of 2001, Congress failed to pass legislation providing insurers with a backstop for catastrophic terrorism-related claims.

The House approved its version in November. Under that bill, insurers would divide costs of terrorism-related claims totaling less than $1 billion. The Treasury Dept. would pay claims between $1 billion and $20 billion, but would be repaid via assessments on all property-casualty companies. If claims exceeded $20 billion, Treasury would pay 90%, up to $100 billion, and be repaid through assessments on property-casualty premiums.

But things bogged down in the Senate, apparently over whether to limit terrorism-related punitive damages in court. The House bill sets limits. With Congress just back in session, there's been no further action on terrorism insurance.

Perhaps nothing better symbolizes the post-Sept. 11 insurance industry paranoia than the difficulties and uncertainties that World Trade Center cleanup contractors face in obtaining extensive coverage. The project, estimated to cost between $750 million and $1 billion, has a wrap-up insurance policy awarded last September to Boston-based Liberty Mutual Group through competitive bidding. It offers some coverage for general liability, workers' compensation and errors and omissions claims, but offers little or no protection against the anticipated slew of lawsuits firms fear they will face for years because of their role at Ground Zero.

The wrap-up policy is worth only between $50 and $75 million, sources say. A contractor would have $1 million in protection and indemnity coverage for any one accident or occurrence and general liability coverage of $2 million per accident or occurrence. There is also an "excess coverage" policy that provides as much as $500 million in additional coverage, contractors say.

But it's what's not in the policy that has trade center firms concerned, from possible ramifications of emergency engineering decisions to exposure to suspected toxic materials and tainted air on site.

"Our main issue is that the wrap-up policy has an asbestos exclusion and no third-party protection," says George Wittich, senior vice president of Weeks Marine Inc., the Cranford, N.J., firm that is managing debris disposal and recycling of 1.2 million tons of structural steel. "Any individual or group that sues in the future will name the city and every single contractor on the site. I could see hundreds of suits down the road, and even if a suit has no merit, every contractor will incur legal costs."

While Ground Zero has had a fairly good safety record considering the risks involved, companies are also fearful of litigation from among the thousands of early site volunteer workers or even current employees. "The irony of the law is that a person could work for five different employers, but only has to prove asbestos exposure at the one he's suing," says one contractor executive. "It could put companies out of business."

A coalition of insurers has attempted to bolster the coverage, but so far their executives and city officials have been unable to agree on price. "The minimum coverage needed would be $1 billion," says Louis J. Coletti, CEO of the Building Trades Employers Association. "That's why the city can't get any insurance company to write coverage." But one insurance executive says, "There's no lack of interest from some people to step forward to be responsible to the city, but it won't be cheap."

Sources say city officials and contractors are pinning their hopes on a more successful outcome in this congressional session for legislation that would provide indemnification similar to that already provided to the state, the Port Authority of New York & New Jersey and others hard hit by the Sept. 11 attacks. City officials are reportedly sympathetic to contractor concerns, but did not respond to requests for comment.