An interview with Tim Farrell, senior vice president of New Day Underwriting Managers, a Bordentown, N.J., company that specializes in environmental and construction-related liability products and services.
REMODELING: When it comes to liability insurance, do remodeling contractors tend to be over-insured, underinsured, or have the insurance that they need?
Tim Farrell: Good contractors size up their exposures and adequately prepare for the worst. Then there are other contractors who deem insurance as simply an expense and therefore they buy whatever can get them by. You also have the contractors who elect not to have any insurance, particularly the guys who are sole proprietors. They run very lean and hire on the go. Those are the guys who are taking a big chance.
RM: Are risks greater now than would have been the case 10 or 20 years ago?
TF: The risk has always been there. The level of scrutiny is what has changed. We know a whole lot more about “stuff” now than we did 10, let alone 30 years ago. For instance, asbestos was the greatest thing going in the '60s. Now we know it causes cancer. All that awareness of risks and exposures has led to a lot more scrutiny, and that has led to contracts being a little more insurance-centric.
Contracts between a homeowner and a contractor used to be just for the work. Indemnification wasn't involved. Now it tends to be standard to have various levels of insurance coverage built into contracts, especially with commercial entities.
RM: Could you describe possible risks associated with LEED, building information modeling (BIM), and advanced project delivery methods, such as integrated project delivery, and how contractors would insure against them?
TF: Let's talk about LEED, a hot topic lately. Clearly there's a push by building owners and the political environment generally to have a construction site or a building that's environmentally efficient. To satisfy that, contractors are now employing alternative building methods, including using different materials.
Take bamboo flooring, for instance. Bamboo is plentiful, compared to hardwoods. It grows like crazy. It's almost a renewable resource. But the experience of many contractors with bamboo is limited. They don't know how it reacts to humidity, how it holds up in cold weather, its response to various adhesives. As a material, it hasn't been through years and years of testing. But contractors are nonetheless under pressure to use that kind of material to achieve environmental efficiencies. There are a lot of similar materials, and methods, that are untested. Contractors are jumping on the bandwagon — sometimes willingly, sometimes not — and all are going to have different levels of experience.
RM: When remodeling companies are sued for damages by homeowners, what are the typical reasons?
TF: Generally, faulty work. The project just doesn't work. You were supposed to build a porch, and it's not what the homeowner thought it was going to be. The floors are creaky or the windows leak. You sue starting from the premise that it's not doing what it was supposed to do, or doesn't meet your expectations. Then peel the onion back to determine responsibility or fault. That will remain a constant.
Homeowners should be aware that they need to keep an eye on contractors to make sure they're headed in the right direction if the project doesn't do or look like what you expected, and a contract is in place, then a suit will be the recourse.
RM: What other types of situations might a remodeling contractor find himself in where insurance coverage would be required?
TF: There's a standard array of coverages, such as general liability, workers' comp, and auto. These are a given. It is other coverages — like pollution and professional — that are slowly creeping into contract specifications. We see this now, for instance, in municipal-related work, or work for the Department of Transportation. If you want the job, you have to show up with pollution and professional coverage.
RM: Define what's meant by “pollution and professional coverages.”
TF: Pollution means, for instance, that when a contractor is out on a jobsite and does something that initiates a pollution condition — spills something or contaminates something — there is a separate coverage that indemnifies for bodily injury, property damage, as well as remediation of the contaminant. Say you pulled out an old oil tank and accidentally contaminated the soil. The homeowner sues. You're not going to get any kind of recourse from general liability. If you have a pollution policy, you tender that to the insurance company, which would take it over from there.
RM: What about professional insurance?
TF: Say you have an architect or engineer involved in a project. You go to them and they draw up plans. Or they come to you with the plans. Say you put it up exactly the way the plan says, but the building doesn't work. It's lopsided, there's water coming in, and it's seen as a design flaw. If the engineer or architect is sued, the contractor is going to be named in the suit. Even if he has no design responsibility. That's where professional liability will cover your defense costs. Anybody that's ever set foot on the site is going to get sued.
Subcontractor & Coverage
RM: How would a general contractor protect himself/his company from suits for damages resulting from the actions of a subcontractor? For instance, if a homeowner sues a general contractor for something a sub did, isn't it assumed that the GC approved the work and is therefore responsible?
TF: Good solid contracts require the subcontractor to have various insurances including general liability but also maybe professional and pollution. The dilemma is that when you put insurance requirements into the contract, the pool of available subcontractors shrinks. Say I have a kitchen job and I need an electrician. My contract with the electrician requires pollution insurance, professional insurance, and other things. Chances are that they only have what they're required to have. When you start requiring additional things, the pool of available subcontractors shrinks. Then you may have to do business with an electrician who's way bigger than the guy you'd normally hire, and who charges accordingly, which could blow your profit. So all those provisions tend to get stricken. It happens all the time.
RM: Are design/build companies at greater risk than, say, the contractor who is consistently building from plans created by outside architects?
TF: They're taking on a much bigger exposure. So generally, yes. When its design/bid/build, where there's one contract for the design and one for the construction, and something goes wrong, there is the inevitable finger-pointing. There is no finger-pointing in design/build; there's just you. So if you're a design/build contractor, the [home]owner will sue the person with whom they have a contract, regardless of whose fault it is, whether it's sub A, sub B, or the prime. Because he's responsible. So you need professional coverage because you, at the very least, are going to incur defense expenses.