If you’re a contractor looking for coverage, there are three factors that determine what obstacles you will encounter: location, location, location. The real question is whether it will stay that way or whether contractors will find themselves wrestling with coverage problems imported from other jurisdictions that have little or nothing to do with the loss exposures they face. Although residential contractors face the most acute coverage restrictions, reports producers suggest that the problems are spreading to the entire construction industry.

Despite some common themes, the changes in policy terms and conditions that contractors are facing in today's market are very dependent on where the contractor does business. Builders in California, Texas and Florida are finding it all but impossible to obtain coverage that is readily available anywhere in the country except along the gulf and west coasts.

As executive vice president with Willis Construction, Paul Becker deals with the coverage problems that face contractors nationwide. Although he acknowledges that coverage problems vary by region, he expects many problems that are currently local to spread from coast to coast by the end of the year. He believes that as insurers renew their reinsurance treaties, new treaty exclusions will compel them to go along with the crowd. Effective July 1, he points out, virtually every reinsurance treaty will have come up for renewal since Sept. 11, 2001.

One aspect of the market changes contractors are experiencing has already spread across the country. Admitted carriers are abandoning the contracting market to excess and surplus lines insurers. "We're seeing a lot of the standard markets, particularly on the residential side of things, coming out of the marketplace," commented Misty Nunez, a vice president at Crump Insurance Services Inc. in Dallas. "We're seeing even the excess and surplus lines carriers becoming more restrictive with the coverage." The shift in carriers is bringing contractors higher prices, stricter underwriting and more restrictions on coverage.

The change that has been grabbing the headlines, and not just in the trade press, is the introduction of mold exclusions.

They have become so common in general liability policies covering contractors in California, Texas and Florida that producers have come to regard this coverage as unavailable. Nunez reported seeing absolute mold exclusions from all insurers offering coverage to contractors. A few carriers, she added, will provide general liability coverage for mold but with sublimits that are "miniscule." Although agents and brokers have encountered mold exclusions in some policies issued by E&S carriers, that development has not yet spread to the admitted market.

From this vantage point at a national broker, Becker sees that changing before the end of this year. "I would say that mold is going to be a big issue everywhere," he cautioned. "The feedback that we're getting is that in general when there's a mold exposure, or even when there's not, they're going to get exclusions on primary general liability programs."

Becker believes that very few underwriters will be content to live without a mold exclusion, a development that he attributed to changes in reinsurance treaties. "I don't think that the reinsurers are going to let most of the front-line carriers provide that coverage to any meaningful extent," he explained. Underwriters, Becker added, are taking their cue from their reinsurers and declining to provide mold coverage even at limits that are within their net retentions.

Agents, brokers and wholesalers across the country are reporting that dealing with the mold exclusion has become even more challenging because no standalone market for mold liability coverage has developed.

"What does appear to be emerging is coverage for liability related to mold within environmental impairment liability forms. The coverage is so new that even the best informed producers are not in a position to comment on it. Nunez reported that she had not yet seen a copy of the forms that add mold coverage to Ell policies, and Becker described the market as "gestational." Coverage is becoming available, he continued, under contractors pollution liability forms, usually with a sublimit.

Because of the potential for water damage and subsequent mold claims, agents and brokers have also encountered difficulty in placing any coverage for exterior insulating finishing systems (EIFS), the stucco-like exterior finishes that have become popular.

"Most underwriters are excluding any degree of EIFS," Becker reported, adding that the exclusions extend to window and door contractors because poor seals at wall openings contribute to damage to the exterior finish. Nunez, on the other hand, contended that EIFS problems are starting to abate, a development that she attributed to improvement in technology and contractor qualifications Contractual liability coverage has become an issue nationwide, but the severity of the problem varies considerably by region.

In other parts of the country, contractual liability coverage continues to be available, but underwriters are taking a hard look at the exposure. "Contractual liability is still very, very tight," Nunez reported. "Carriers are actually) wanting to see the contracts. They're a bit more strict now than they've ever been in the past."

In other parts of the country, finding contractual liability coverage is even less of an issue. Jim Hippard, president of Yates & Associates Insurance Services Inc., a wholesaler and managing general agent (MGA) with three offices in California, said that he has not encountered serious problems when placing contractual liability coverage.

Underwriters are getting even more selective when adding additional insureds to policies covering contractors. Contractors have been accustomed to obtaining coverage under the Nov., 1985 edition of CG 20 10, which covers the additional insured's liability arising out of the named insured's work. Later editions of the form restrict coverage to liability arising out of ongoing operations, effectively eliminating the completed operations exposure from the scope of coverage extended to the additional insured. Nunez also reported that some carriers have introduced their own additional insured endorsements to reinforce the limitation on coverage.

Completed operations has also become a problem for insured contractors. Underwriters have begun adding prior work exclusions that eliminate property damage liability coverage for projects the insured completed prior to the effective date of the policy, or for losses that were in progress on the inception date. Agents and wholesalers familiar with the market for contractors perceive this as a reaction to a 1995 California Supreme Court decision (Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal.4th 1995) that introduced the concept of a continuous trigger of coverage. The court ruled that when a loss occurs over a prolonged period, coverage is available from every liability insurance policy that was in effect while the loss was in progress.

This has produced an aggregation of policy limits that underwriters contend they never intended to provide, and the so-called Montrose exclusions address that effect. "What the carriers are trying to do is limit damages to the date the occurrence was first discovered," Becker explained. "They do that by modifying the property damage trigger on their general liability policies so that this policy won't cover any loss that was occurring prior to the date this policy became effective."

For contractors who have maintained continuous coverage, Becker asserted that the effects of the exclusion might not be entirely bad. Limiting coverage to a single policy may also limit the insured's exposure under deductible provisions. "That may not necessarily be a terrible thing for insureds," he argued. "Many of them are taking large deductibles. All of a sudden you have four or five policies come in and they're going to prorate the damages. They might not prorate the deductibles."

A construction defects exclusion is another issue that started out locally but may spread across the country like a computer virus. This has raised concern that contractors may believe that they are buying more coverage than their policies actually provide. "There is a certain carrier that will evidence completed operations, and then there is a very broad endorsement they will put on it which excludes construction defects," Nunez said. "I think that's a scary thing."

Despite fears for her clients' welfare, Nunez has her doubts that the very broad construction defects exclusions will hold up in court where the underwriter charges a premium for completed operations. The intent of the endorsement, she maintained, is to take away all completed operations coverage. Nunez indicated that she doubts that judges will permit underwriters to write liability insurance for contractors with policy forms that eliminate all coverage for the most significant exposure. She described a standalone coverage to buy back this exclusion that provides defense coverage for excluded losses. The insurer, she explained, will then subrogate against the general liability carrier that used its construction defects exclusion to disclaim coverage.

Becker agreed that some contractors, especially smaller operations, may be unaware of the extent of limitations in their liability insurance policies. "I think a lot of it is they're just whistling by the graveyard," he asserted. "They may not be fully aware of what their restrictions are." Some contractors, he warned, may discover that they do not have coverage only after a loss occurs.

Construction defect litigation, a hot issue in California and Texas, has spawned another breed of exclusion, one that seeks to limit coverage to the underwriting criteria applied to the account. Policies for contractors have started to appear with endorsements that eliminate coverage for any development above a certain size, typically 15 units. The intent is to eliminate coverage for developing large tracts or constructing condominiums.

Hippard and Becker view this as a response to class action litigation over construction defects. They explained that the smaller developments do not provide a sufficient number of potential plaintiffs to attract attorneys who are interested in filing a class action lawsuit. "Numbers are very important for a lot of our contracting companies," Hippard commented. He reasoned that underwriters are seeking to limit their exposure to condominiums and tract developments because they provide a ready source of a large number of plaintiffs for class action litigation.

Construction defect litigation, and the exclusions it has spawned, have been a significant issue for builders in California, Arizona, Nevada and Colorado, states that Becker called "the big four."

Although the problem has been localized, Becker said that he expects it to become a nationwide issue, in part because of the importance of California to the market. He estimated that California accounts for about 30 percent of nationwide premium volume, and argued that underwriters do not want to establish separate underwriting criteria for each region.

The situation is somewhat brighter on the property side. Across the country, producers have reported that property coverage for contractors has become harder to place, but that it remains available. Specialty coverages, on the other hand, have begun to disappear. Coverage for mold and terrorism has become problematic, but mold has been an exclusion of long standing in commercial property forms and a standalone market for terrorism coverage has emerged. Becker explained, however, that contractors are no longer able to obtain specialty coverages to which they have become accustomed. Rip and tear coverage, which insures the cost of removing and redoing defective work, has disappeared from the market. Obtaining adequate limits for losses that have catastrophic potential, including windstorm, flood and earthquake, is another problem that Becker identified.

Although standard property coverages remain available, producers agree that they have become harder to find. Underwriters have become more selective, and concentration of risk has reappeared on their radar screens. The result, Becker said, is that underwriters are paying considerably more attention to the amount of property exposure they take in relatively small areas. In urban areas, he added, this has gone beyond limiting total exposure within a single zip code but stopped short of measuring exposure in a single city block.