Why Our Insurance Is So High

[Dick Seibert]

This article with a huge picture of a defective house in this morning's paper:

Posted on Sat, Mar. 26, 2005

Santa Rosa homeowners win $16 million suit

SANTA ROSA - Hundreds of Santa Rosa homeowners have won more than $16 million from Bay Area home builders, including a Danville company, in three lawsuits over construction defects that allowed rain to leak into walls and damage the homes.

"When it rains, you have to deal with the fact that it's going to leak, just like this week," said Diane Wolmuth, who owns a home in the Woodside Ranch subdivision, which was completed less than four years ago. "It's sad, but it's settled."

The biggest settlement was by Brookfield Bay Area Homes of Danville, which agreed to pay a total of $9.7 million to Wolmuth and 70 other Woodside Ranch homeowners. It was one of Sonoma County's largest settlements ever in a construction defects suit.

Brookfield earlier spent $6 million fixing more than 50 homes whose owners decided not to sue, said Shawn Morris, a San Diego attorney representing the company.

"Brookfield genuinely tried from day one to address these issues and to keep the homeowners happy," Morris said. "Most builders wouldn't do that; they'd walk away and hope some insurance company would take care of it."

The company put the blame for the construction defects on several subcontractors, he said, adding that Brookfield and the homeowners received almost $10 million from the subcontractors in a separate settlement in November.

"There was, I think, a lack of attention to detail by the labor for the subcontractors and they did not properly seal the penetrations in and around the windows, the electrical, the plumbing, etc.," he said.

In the other two lawsuits, four Northern California union pension funds paid $3.5 million to the Stonefield Condominiums' homeowners association in Santa Rosa's Fountaingrove neighborhood,¹ and Masma Construction of Larkspur paid $3 million to the Casa Del Sol Townhomes association in west Santa Rosa.

First of all, these lawsuits were filed prior to the insurance companies refusing to insure tract builders, so these builders only paid their deductibles, the insurance companies paid the bulk of the money, and of course will be passing their losses on to us.

Second, notice that various subcontractors had already settled for $10 million, that's because they had given the builders additionally insured certificates and named the builders on their policies.

Third, notice that most of the damages were related to improperly flashed windows, and they blame the subcontractors who installed the windows, the going rate for installing windows in the tracts is $35 per window paid to illegals picked up off the streets every morning, these guys have to run with the windows to try to make a few dollars a day putting them in at that rate.

Is it any wonder that the insurance companies don't want to insure us anymore, or that they have to charge us huge premiums to make up for what they pay out on the greedy builders that take the money and run? By the way, these builders aren't paying for this, you and I are.

I've received three phone calls today from friends wanting to know what's wrong with this business, I tell them in a nutshell, that it's subcontracting the work to subcontractors who piece the work to untrained individuals.


¹ The pension fund was involved because the builder had financed the project through the pension funds, with these loans the builder is supposed to use union labor, of course the carpenters' union now has a program for lower paid "non-English speaking" individuals who don't/can't fulfill the apprenticeship requirements. I've always thought this was a terrible idea, keeping them at a low rate forever, and never allowing them to advance to journeyman status.

[Allan Edwards]

To me this is a non story. NAHB has said insurance costs for builders averages less than 1% of sales, OK, in CA, because of extreme poor construction, it may be as high as 2%, but it still pales in comparison to other componets of a house. The absolute biggest thing pushing high prices is the tremendous increase in the price of land. Land has increased a lot more in price than insurance.

Also, what does this story mean to me or any other Joe Builder in Anytown, USA, when we go to work tomorrow? We are going to still build and remodel our houses, run our businesses, try to make a living. I doubt anyone will wake up tomorrow and say "GL insurance is really going to effect my day". Life goes on.

Insurance is really simple, based on the concept of pooling, and if insurance companies insure against construction defects and losses exceed premiums received, then premiums will continue to increase. I do think the crisis has moderated, insurance companies are offering less coverage, more exclusions.

I predict that the housing boom will continue for several years, and those that are smart business people and work hard will prosper. There are small builders and contractors just like all of us here building and remodeling new homes at record numbers in every state.

GL insurance is just another line item on a 400 item spread sheet.

[russell120]

Allan has a certain point. An increase in costs that effects everyone equally conceivably could be passed on to the owner. Provided of course that the costs where known at the time of pricing. However, a 1% added cost is a lot in an industry that often works below a 5% profit margin, and as an upfront cost it is particularly hard on the cash flow situation.

However, what I have read about insurance isn't that they are just raising prices, but that they are also excluding or limiting many items that they once covered. I have read in a number of different places that insurers are backing off from insuring architects, engineers, contractors who build condominiums.

When insurance is not available at any price on certain items, I think that can be a problem for builders anywhere.

[Dick Seibert]

My quotes are coming in now, $8,000 per million ($8,000 minimum premium) with a 25% subcontract limitation, $50,000 per million (that's 5%) with unlimited subcontracting allowed (I am trying to negotiate for something in-between like a 50% subcontract limitation). These quotes have a 4-year sunset provision (we are liable for 10-years), a subcontractor and design professional exclusion, as well as a new construction exclusion. The result is that most competition is going uninsured (California doesn't require GL insurance, only WC).

The unfair thing is that the paper contractors got us in this mess, and they are going uninsured or are big enough to buy wraps ($500,000 minimum premium). We are being forced to pay for the losses incurred by the paper contractors, like the slime balls named above.

I may well retire, but I pity the poor young guys that have to compete with the bottom-feeding crooks..

[swbuilder]

Dick,

That is so strange that they charge you more for a higher percentage of subcontracted work. Both GL insurers I am considering ( i need to make a decsion in the next couple of weeks) have stated that subcontracting is not a problem. In fact at least one and maybe both of the policies have me paying a higher premium based on MY payroll, so other than office and supervision payroll it costs me way more in insurance premiums to do the work myself. Also, one company stated ( I think I mentioned this before already) that they prefer a larger percentage subcontracted (assuming they are insured) because their insurance can be available for claims.

This brings up an interesting point. Maybe you have an exclusion against using unlicensed subs past the 25% of Total volume of work? It seems to me as I pointed out above, the insurers should be happy there are pockets to go after other than their own.


Randy.

[Allan Edwards]

Randy, I agree, I’ve never heard of any homebuilder having limits on subcontracting, you make good points, and if you think about it, it just doesn’t pass the common sense test, subcontractors give builder’s company another policy to shoulder the risk and losses. I was told by a CA insurance agent that small contractors with low sales are high risk/low premiums, therefore requiring more employees raises premiums. Maybe this is what Dick is referring to.

By the way, in addition to being charged for my employees and myself, and uninsured subs (I have two), I am being charged .1% of sales, last year that alone cost me $4,800. My total premiums are about $12,000 now. But with many exclusions.

Randy, how about fessing up here, are you one of those "paper" builders?

[Rick Westmoreland]

OK, I'm actually cringing at he thought of responding to this thread, but....., I do not have any insurance issues. I'm at a loss as to why Dick has the problems that he has with insurance, but I'm glad I don't. We sub 100% of our work, 100% and have no problems with our GL. Just my 2 cents worth.

Rick

[Dick Seibert]

Well we've had contractors from several other states say that they have subcontractor limitations, here's the exclusion from my current policy. The 25% subcontracting limitation isn't stated in the policy, but on your application form you have to submit documentation as to what your subcontracting amount was last year, and what you anticipate it to be this year. If I estimate that I am going to limit my subcontracting to under 25% and get the $8,000 premium, then at audit they find that I have subcontracted 35% of my gross receipts, I will pay the $42,000 difference. As you can see I am covered for the work of subcontractors if I have certificates from them so my insurance company can go after their insurance companies, but they want to limit that exposure to 25%. Artisan contractors that do everything themselves, or at least 75% of their work themselves seldom do bad work or get sued.

I wish some of the contractors from Florida, Tennessee and some of the other states that have confirmed their problems with subcontract limitations would chime in. I've heard that 99% of the claims made are made on the work of subcontractors', and most all of that is on new residential construction, not new commercial or residential remodeling.

As you can see from the article quoted above, all of the work is new residential construction, and the builders themselves blame their own subcontractors:

The company put the blame for the construction defects on several subcontractors

The question is: Why do subcontractors on residential construction in California, and the other states with this problem, do such lousy work? Don't blame the lawyers, all they are doing is getting redress for the homeowners that have been damaged by lousy construction. Why do you builders in Texas, Arizona, and Missouri get good work from subcontractors, while we get crap from them in most of the nation?

[swbuilder]

Allan,

Paper Builder? I reckon so. :>)


Dick,

We have crappy subs out here as well, but I refuse to use anyone that has a bad reputation no matter how cheap they are. I generally spend alot more time with a new sub to see how they operate and if I am happy with their employees and their workmanship and attitude. If I get a bad one, I won't use them again. A handful of subs have done all my jobs since I started. I went through plumbers like Elizabeth Taylor went through husbands when we first started until I found one with a attitude towards quality work. It's not easy and to be sure my houses are not perfect but I feel they are respectable and judged so by the feedback I get back to me from others.

Randy.

[Dick Seibert]

Randy:

Are you able to police your subs so they don't hire illegals? I see that they are finally doing something about the problem in Arizona, I wish they'd do something in California, the bulk of our quality problems come from a cheap, untrained, workforce:

(03-29) 09:39 PST WASHINGTON, (AP) --

The Homeland Security Department will assign more than 500 additional patrol agents to the porous Arizona border, saying they will help keep potential terrorists and illegal immigrants from entering the country, The Associated Press has learned.

The border buildup was to be announced Wednesday — two days before civilian volunteers with the so-called Minuteman Project begin a monthlong Arizona patrol against immigrants crossing the U.S.-Mexico line.

About 155 agents will be immediately sent to Arizona, according to department officials who spoke on condition of anonymity because the buildup was not yet announced. More than 370 additional agents — all new trainees — will be permanently assigned to the Arizona border throughout the year.

Until they are in place, another 200 agents will be temporarily stationed in Arizona during the high immigration season this spring and summer, officials said.

A Senate aide, speaking on condition of anonymity, confirmed Tuesday that more agents would be assigned to Arizona, but could not immediately say exactly how many were involved.

The 370-mile Arizona border is considered the most vulnerable stretch of the 2,000-mile southern border. Of the 1.1 million illegal immigrants apprehended by the U.S. Border Patrol last year, 51 percent crossed into the country at the Arizona border.

Recent intelligence indicates that al-Qaida leaders are likely to enter the country through the Mexico border and "believe illegal entry is more advantageous than legal entry for operational security reasons," former Homeland Security Deputy Secretary James Loy said in written testimony to lawmakers last month.

The new agents will come on top of the 210 that President Bush has proposed for all U.S. borders in his budget last month — a number lawmakers have called inadequate to effectively secure the nation's borders. It also falls far short of the 2,000 new agents mandated in intelligence reform legislation enacted in December.

Hundreds of civilian "Minuteman" volunteers have signed up to patrol a 40-mile stretch of the southeast Arizona border. They say they will merely identify and follow illegal border-crossers and not interact with them. But some of the volunteers plan to arm themselves, although they have little or no training to confront border-crossers.

T.J. Bonner, president of the National Border Patrol Council union, questioned whether the new employees would be enough.

"Right now, things are so out of control, we have no idea who's crossing our borders, and we can't but chase after but a few of the people," said Bonner, whose union represents more than 9,000 agents. "It's going to take more than a couple of hundred agents to seal those gaps."

An estimated 2,400 agents currently patrol the Arizona border — about a quarter of the 10,000 assigned to the southern border. The 155 newly assigned agents will be pulled from elsewhere along the southern border — and not from the northern border with Canada, Homeland Security officials said.

Of the 200 temporarily assigned agents, 26 are specifically trained for search and rescue operations, officials said. Last year, 330 migrants died — mostly from exposure to the elements and lack of food and water — while crossing the southwest border. Officials said Border Patrol agents rescue between 1,200 and 1,500 migrants in the southwest annually.

.

[David Meiland]

Dick, I don't think you can use a blanket association of illegal worker = poor quality. I worked in CA a long time, and honestly, the Mexican workers are some of the best and most diligent. No need to continuously vilify them. The white kids are the lazy ones who don't want to work hard... maybe they'll all be video game experts for a living?? Anyway, the issues are with supervision and anyone who needs to hire enough crews to build a tract for the lowest possible amount will likely get lousy work, regardless of where they are or who does the work. The better guys gravitate towards custom residential or commercial work where the money and conditions are better. There's no voc ed anymore, and the apprenticeship programs have all declined, so where is training happening anyway? Oh, and I live now in an area that is not ethnically diverse, and there's plenty of white guys here doing lousy work. I've seen some exceptionally poor construction since moving here.

[swbuilder]

Dick,

I imagine there might an illegal or two on the landscape and roofing crews. My drywaller recently told me he has gone " all mexican, except for his taper". he said he was sick of hiring lazy white trash.

The borders are impossible to protect. Didn't China try this many hundreds of years ago? The only way to keep out the al Qaida is to offer large rewards to people for turning in potential suspects. Sure some peoples rights may be unnecessarially violated but I think it would be more effective and cheaper than trying to patrol a border as large as the United States.

Randy.

[Dick Seibert]

We are not going to get better tradesmen unless we pay them living wages, and train them! David is right, the apprenticeship was always a function of the unions, I don't even know why California keeps it's Department of Apprenticeship standards anymore. I think builder groups should take over apprenticeship programs now that the union is a shell of it's former self. I agree the Mexican workers seem to be the only group willing to do hard work anymore, but they are untrained.

When I was young the bulk of our tradesmen were the Southern Whites that escaped the poverty of the south, but we put them in unions and trained them, their children are now doctors and lawyers. I can remember working with many of them, and they would tell of escaping Texas "riding the rails" and arriving in California with pennies in their pockets, within a few years they were homeowners and driving new cars. If we treated the Mexicans the same way we treated the "Grapes of Wrath" Southerners, we would have competent tradesmen within a few years.

We would have to pay $100 an hour plus provide health benefits and pensions if we want to pay the equivalent of what tradesmen received in the '40s and '50s, that's not going to happen if the bottom feeders are setting the bar down at $15 an hour.

Don't you guys that deny the problem exists ever read the "Trade Talk" Forum? This morning's post from John Larson, from my area. He was paying the $50,000 a year that I am being asked to pay, and he's being put out of business:

John Larson
Regular Contributor
Default Re: I just got dumped!
Certificates always cost me. The one my agent insists I get (and other GCs require from me) is not simply a "certificate of insurance" but one that names me/them as an "additional insured". This puts me/them on the actual policy and costs $50.00 a pop. It is all going to be moot for me in the future though, as I will be canceled and unable to get replacement insurance. I built and completed a nice 4,500 SF/$1.5M house in the Oakland fire zone in October 1995. The house has a 700 SF convoluted deck that faces SF Bay and all the bridges. The deck membrane is Enduro Deck and was installed by a GL insured CA licensed roofer, also a certified installer by the manufacturer of the membrane who complied with all installation specs in effect at the time of installation. The short version is that Enduro deck has changed the specs for this type of configuration by requiring a fiberglass matt be epoxied down on the deck surface prior to the coating to control cracking. You guessed it; this deck has developed cracks and leaks. This condition was unknown to me and the first I heard of it was when the lawsuit was delivered to my home. The HO I built the house for sold it last year and the new HO is suing the seller and the RE agents for failure to disclose the problem, in addition to the architect and myself for negligence in the construction of the deck. My ins. co. plans to cross complaint(?) the roofer and the membrane manufacturer. This should take at least two years to sort out and cost several times the actual repair costs in attorney fees. My agent has informed me that I will be the victim of a "numbers game." If I cost my ins. co. more than 300% of my annual premium, my policy will be cancelled and as there are only FOUR carriers in the state of California writing this type of coverage, I will be "unwritable" and out of business without GL insurance. When I used to pay $50K/YR for GL insurance, this would be a relatively painless experience (as it will be for the roofer who does $250K/MO volume). Now that I am a trim sub paying $2,500./YR, I will exceed the 300% rule ($7,500. buys very little lawyering) and be blackballed out of existance. Sweet justice for a guy licensed since 1984, with over $15M in completed work and never had a claim till now, eh?

[swbuilder]

Sure we could pay everyone $100 an hour, but we would have to match everyone elses wage too, so they would be able to afford the houses that are built. The only problem with that is US goods would be deemed "expensive" to the global economy, thus affecting our trade deficit further. Also, some bright young person would realize that he could ship a whole house over here from China for way less than it would cost to stick build one over here. This is a basic law of economics. You can't do much to change it without tipping over the apple cart.


Randy.

[Dick Seibert]

Randy:

So what's the solution? We can't keep building and getting sued. Notice that John's lawsuit hit at 10 years? That's our statute of limitations, most all new home buyers sue before the expiration of the statute. Don't you think that the lawyers in Arizona, Texas, and Missouri are going to take a page from the California lawyers' book within 10 years? This started with the condo associations suing at 10 years on entry level housing, and has spread to new homes. If we built defect-free houses we wouldn't have the problem, how do we build defect-free houses if we are using untrained help? This is particularly true in California where the subcontractors have a "Bill of Rights" wherein we have to pay them whether their work is defective or not, if we want to take any draws on our progress payments. It's possible not to pay them if we are building specs, or if we build for customers and don't take any progress payments. I guess it would be possible to go to the construction lender and say: I've got a $200,000 draw coming, I don't want to pay my framer the $50,000 he is due because his work is defective and he hasn't fixed it yet, so pay me $150,000 and hold the framer's $50,000 portion until I tell you to disburse the $50,000 to me. Since banks usually pay on a 5-pay draw plan on new houses, I doubt that they would go along, I think they would just withhold the entire $200,000 until you told them that all work was satisfactory. BTW, this legislation came in the late '60s sponsored by the ASA (American Subcontractors' Association), not the California Subcontractors' Association!