By Donald S. Malecki, CPCU

If there were any insurance people or contractors at the 21st International Risk Management Institute's (IRMI) Construction Risk Conference who didn't know we are in a hard market, Michael Markham, chief executive officer of Zurich North America Construction, quickly removed any doubt. "The insurance business is a low-margin business with lots of tightening," Markham told the nearly 1,000 attendees in New Orleans.

He then proceeded to scold the contractors for failing to properly manage risk. "The core issues are poor project construction, inadequately trained workers, more unskilled workers today than ever before, and lack of supervision," Markham stated. He added that lawyers also are part of the problem.

Contractors need to do some things differently, such as mitigating their losses, Markham said. "Quality work and safety" need to be centermost in the minds of contractors. "That is what Zurich is looking for." He also suggested that contractors should make sure their brokers have all the information they need to go to the market. Improper submissions will fall on deaf ears, he said.

Contractors also should consider meeting directly with the underwriters, Markham added, since it gives contractors the opportunity to promote what they have to offer to become partners with insurers. He also said that larger deductibles will become increasingly more prevalent.

What Markham omitted in his talk, however, was the other part of the equation that led to the hard market. It was and continues to be a mindset of insurers to litigate coverage even when insureds' positions obviously have been legitimate, to say nothing of the fact that insurers voraciously competed for business during the extended soft market, ignoring losses and making it quite easy for their customers to do so as well.

Broad range of subjects

One of the more attractive features of this annual conference was the broad range of subjects offered based on various levels of complexity. Among the advanced level of subjects discussed was the intricacies of design-build, which continues to gain popularity in construction.

At the other extreme was the risk management boot camp, which was designed for those new to construction risk management. The first part of this all-day seminar examined how to identify risks in a construction setting, with the rest of the day focusing on how to manage those risks through a combination of loss prevention, contractual risk transfer, and insurance.

From an intermediate level of complexity, an environmental insurance specialist pointed out to contractors how they could better identify their exposures to loss and whether their current insurance policies protect them against these risks.

Construction defects--mold issues

With mold and mildew sickness and damage so prevalent today, it was not surprising that the session on mold--hosted by Patrick J. Wielinski, an attorney with the Dallas, Texas, firm of Haynes and Boone--was extremely well attended.

According to Wielinski, the lion's share of the headlines is being grabbed by homeowners cases. He offered the example of a recent Texas case where the jury awarded homeowners, who were seeking $100 million, a judgment of $32 million against their homeowners insurer. Because of a series of plumbing leaks, he explained, a massive infestation of a toxic mold developed, requiring that the home be razed and rebuilt.

The reason for the high damages, Wielinski said, was that the insurer failed to timely and adequately respond to the claims of the couple. While the award included damages for mental anguish and punitive damages, it did not include damages for the health problems the couple also alleged: headaches, dizziness, fatigue and respiratory problems.

From a commercial and industrial context, insurers are still unsure whether mold litigation will become as serious a problem as is the case with homeowners, Wielinski said. Nonetheless, insurers do expect that the increased awareness, together with the increasing media attention, will lead more employees to fear mold-related health problems in the workplace, he said.

Those fears, Wielinski went on to say, can translate into lawsuits against their employers, property owners and landlords, as well as contractors and design professionals. At this point, he added, the insurance industry may be overly optimistic.

Wielinski explained that mold and sick building syndrome litigation is not necessarily new, but it obviously is becoming increasingly common. "Newer buildings appear to be more prone to mold and sick building problems, since they are more air-tight, with air-conditioning and heating systems recirculating contaminated air," he said.

Complicating matters, Wielinski said, are new building materials such as synthetic stucco products (EFIS), and other construction materials, which trap moisture behind the walls and provide an environment for the growth of mold and mildew.

The wide disparity of court decisions as to what constitutes a "pollutant" under the pollution exclusions of liability policies makes it very difficult to hazard a guess as to how the mold issue eventually will be resolved, Wielinski said. Factors that support coverage under these circumstances, he said, include the fact that mold infestation usually results from an innocuous source, e.g., water, rather than toxic or poisonous chemicals.

Moreover, he added, "mold is a micro-organism" and does not readily fit with the substances that are defined as pollutants under standard exclusions, including irritants, contaminants, smoke, vapor, soot, acids, chemicals and waste.

Maritime exposures

Sometimes overlooked in relation to construction projects are the exposures of liability having to do with maritime work. One of the regular presenters at the IRMI conference, William H. Perkins, an instructor for the Florida Association of Insurance Agents, addressed the insurance aspects of maritime exposures.

When the possibility of a maritime exposure exists, three coverages are necessary: Federal Longshoremen's and Harbor Workers' Act, Jones Act, and state workers compensation coverages, Perkins said. The reason for this is that each covers a separate and distinct work-related exposure, and there is a potential for gaps in coverage if all three are not purchased.

In light of the fact that the workers compensation policy of the National Council on Compensation Insurance (NCCI) excludes maritime exposures, it is necessary to consider the addition of the Maritime Coverage endorsement, he said. When this endorsement is attached to the workers compensation policy, or written as a stand-alone policy, Perkins explained, it amends employers liability coverage to encompass injury to a master or member of the crew of any vessel.

One must be careful, however, to describe the nature of the work very carefully in the endorsement schedule, he said. "And be especially careful about the territorial scope," he said.

While the maritime coverage endorsement specifically excludes coverage for transportation, wages, maintenance and care, they can be covered for an additional premium. Don't forget to request that coverage, he said, or "your errors and omissions policy will become your maritime coverage policy."

Perkins stated that protection and indemnity (P&I) policies, which provide many of the essential maritime coverages required by vessels, are written by approximately 20 clubs comprising 95% of the P&I business today. All of these policies expire on February 20 of each year and provide unlimited liability, except for pollution exposures.

Additional insured status

Without question, the most common topic on the minds of attendees every year is additional insured status: what those who demand such coverage should request and what many insurers are willing to provide.

The most commonly sought after additional insured endorsement in the construction arena, known as "CG 20 10," is being withdrawn by a growing number of insurers, explained Pete Ligeros, executive vice president of D.S. Malecki & Associates, Inc., Newport Beach, California.

The reason for its withdrawal, said Ligeros, who also is co-author of the Additional Insured Book, is that it covers the additional insureds for their sole fault and for damages following completed operations. Some insurers still offer the endorsement subject to an administrative charge, he added.

Because the demand for that endorsement is so fierce, the Insurance Services Office has introduced a new additional insured endorsement that adds completed operations coverage, Ligeros said. The problem is that it must be purchased in addition to another endorsement that limits coverage for additional insureds to liability arising out of the named insured's ongoing operations.

This means, Ligeros said, that the insurer must issue two endorsements instead of one. What is particularly disadvantageous to this new setup, he added, is that both endorsements are on a scheduled basis--that is, a separate endorsement must be issued to each additional insured. That will not be taken lightly by underwriters who are overwhelmed with requests, he concluded. *

The author

Donald S. Malecki, CPCU, is chairman of Donald S. Malecki & Associates, Inc. He is chairman of the Senior Resource Section of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.