Impacts on the Industry. The liability insurance crisis is having several impacts on the building industry. First, builders are forced to contend with huge premium increases, which can make certain projects uneconomic. Second, the difficulty insuring construction of attached product (condominiums and townhomes) for the builders, and the design professionals and trades, means that fewer attached projects will be built, despite the urgent need for such product. Third, we are seeing a trend toward larger deductibles and self-insured retentions. This factor, combined with the narrower coverages available, effectively means that builders will be forced to retain more construction-related risk than in previous years.
Importance of Quality Control. We are working closely with the state and national builders associations on this issue, but there is no quick or easy solution to this problem. Rather, we believe strongly that builders must be more proactive in taking defensive steps to reduce their risk of construction defect liability and thereby take greater control of their own risk and insurance destiny.
Effective quality control ("QC") programs are more critical than ever in this environment. We strongly encourage our builder clients to pursue a QC program that includes at least some, or all, of the following components (each of which is part of your firm's industry leading core expertise):
- Up-front consultant review of proposed products and materials.
- Peer review of plans and specifications and construction details.
- Forensic inspections of construction in progress, with documentation tailored to allow the builder later to demonstrate correct as-built conditions and blunt the plaintiff's ability to extrapolate defects in a few units into a project-wide "problem".
- Training of superintendents (and, in some companies, project managers and operations executives) on how to work effectively with third party QC consultants and implement QC programs.
- Educational
meetings with trade contractors so that the builder and the trades
are working together, rather than at cross purposes, on quality issues.
In
our view, there are at least three
reasons
why this kind of QC program is essential. First, it
reduces the risk
that the product will have unbuildable details, inappropriate products
or materials, and workmanship errors, resulting in higher quality and
lower probability of claims. Those claims that are made should be less
threatening, because the most costly major construction problems are more
likely to have been avoided or minimized.
Second, the builder will have documentation
of correct as-built conditions
to use in defending construction defect claims.
Third, and perhaps most timely, builders
must implement QC programs of this type,
and demonstrate consistent follow-though, in order to
qualify for liability insurance coverage.
Two of the most prominent insurers remaining in the market today require
a demonstrated commitment to QC programs. We believe this is the wave
of the future and that only builders with advanced QC programs will be
able to obtain liability insurance coverage, even at higher prices.
Need
for Comprehensive, Integrated Risk Management Approach.
We strongly believe that QC programs like those described in this letter
are an essential part of a comprehensive, integrated risk management protocol
for builders. The protocol also should include care in entity structuring,
sophisticated land acquisition due diligence, protective provisions in
construction documentation and in consumer sales documentation, updated
homeowner warranties, homeowner and homeowners association maintenance
manuals, aggressive customer service and other similar tools.
Beth, for several years our respective firms have been predicting a tightening
of the builder liability insurance market. Unfortunately, we have been
proven correct. On the positive side, however, this means that sophisticated
QC programs, like those designed and implemented by Pacific Property Consultants,
increasingly will be a required part of successful builders' philosophy
and operations.
We look forward to continuing to work with you on insurance, QC and other
risk reduction strategies for builders in the challenging months and years
ahead. Best regards.
Very truly yours,
Jeffrey D. Masters, Esq.
Co-Chair, Development Risk Management Practice Group
Cox, Castle & Nicholson LLP
Web Development by: carterdesignworks