Constructing a Picture of Contractor Defect Claims
We recently tapped a cross-section of insurance claim departments for their take on handling construction defect (CD) claims. Their collective claim wisdom, gleaned from long days in the CD trenches, around types of programs, structuring coverage, policy wording, risk selection and loss control, should strike a few chords with all carriers writing in the contracting space. Here are some highlights.
When we asked about the risk issues around different types of programs – residential or commercial – commercial contracts were deemed more straightforward and having better record-keeping, up-front-diligence and construction practices. High-rise construction is generally thought to have fewer problems due to the sophistication of the design and specialty of the contractors involved.
Insurance Program Structure is a significant factor in risk mitigation and specifically where there is a Wrap policy covering all entities on the job site, compared to a traditional policy issued to a named insured. Wraps generally reduce coverage battles, assuming that the limits are adequate, it is felt. A drawback to Wraps is that any coverage issues at all, regardless of type of loss, would result in a great deal of cost for all the contractors.
Insurance Wordings are critical to coverage outcomes. Depending on the risk type, a self-insured retention (SIR) is viewed as a favorable way to align interests. Deductibles, however, can be an inadequate mechanism for ensuring the insured has “skin in the game” however. Will they be collectible after contractors are beset with lawsuits?
Another important factor raised in our poll is Risk Selection, with many carriers being selective about the types of contractors they underwrite. Foundation contractors and framers, roofers and window installers are the subcontractors that typically draw the most exposure. They are considered more difficult risks due to the scope of their work being inherently more problematic than other subs, making them a more frequent focus of claims.
Risk or Loss Control is viewed by many carriers as a key component to underwriting CD profitably. Verifiable risk control practices seem to be the key with construction contracts and enforceable risk transfer provisions reflecting best practices.
The bottom line is that with good risk selection, program structure and loss control, carriers can reap great rewards!
Read my article for the full 6 key learnings of construction defect claim perspectives.