The General Liability Rubik's Cube for Residential Contractors
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When the 2008 U.S. financial crisis hit – causing economic downturn – general contractors started branching out into different markets looking for new business opportunities. Areas that had an increased demand in construction projects were senior living facilities, student housing, apartment construction as well as many state and municipal approved housing projects.
After decades of building commercial construction projects, many general contractors have quickly embraced these new residential opportunities. It’s kept their business afloat and made up for lost revenues over recent years. However, this new focus has caused heartburn not only for contractors looking for liability coverage, but also for many insurance carriers who traditionally placed exclusions for residential type of work on their general liability (GL) policies.
Now with residential work booming, placing GL coverage for general contractors is not always an easy task. This is especially true for contractors whose scope of operations have shifted from commercial construction to single family homes or large residential projects. Underwriting practices have become extremely stringent and at times feel more difficult than solving a Rubik’s Cube. Some carriers will provide liability for contractors if residential construction is 25-30% of gross revenues, while other carriers will consider underwriting residential contractors if the contractor self-performs 60 to 75% of their own work. The constant change in underwriting requirements, lack of carrier options and high premiums in the market is caused by the fear of construction defect litigation.
Remember not all insurance carriers have the same definition of residential work or the same level of comfort when considering new contractor clients. It’s important to establish what the true residential exposure is. For example, a contractor building all single family homes is a completely different type of risk than one who builds commercial buildings and apartments. Apartments, for example, are not considered to be residential construction by many carriers.
Once you’ve determined your scope of operation, then work with your insurance broker to choose liability carriers with an appetite for that type of risk. Remember general contractors will be viewed more favorably by carriers if proper controls are in place. Preferred general contractors have proper risk transfer, such as hold harmless agreements which transfer liability back to subcontractors. This is one of many controls that can limit liability to a carrier if a claim should be made. Larger general contractors often have quality control programs in place or hire third party quality control firms to inspect projects during the construction process. These types of inspections are attractive to carriers ensuring them of structural integrity and quality workmanship from the general contractors that they insure.
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