California Contractors Confront Liability Difficulties

By Todd J. Wenzel

Due to the significant rise in construction defect claims in California, insurance companies are dropping their contractor insureds. This occurs to large general contractors, as plumbers, drywall installers, roofers and the like.

In many instances, when a contractor tenders a claim to his or her carrier, the carrier refuses to renew the policy at the end of its term. In other instances, carriers offer to renew the policy in exchange for exorbitant increases in policy premiums that contractors cannot afford. In still other instances, carriers cancel the policy upon investigating the claim.

For instance, if a contractor tenders a claim, and their existing policy expires and is not renewed by their carrier, often times the contractor is unable to procure new insurance while the claim is pending. And with the pace of most multi-party construction defect cases, contractors can go without insurance for years until a claim is resolved. Should a contractor be sued while uninsured, they are left with no alternative but to defend it out of their own pocket. These circumstances will continue to have a ripple effect in many areas.

In litigation, it will effect how construction defect claims are ultimately resolved. Construction defect claims are generally resolved after multiple mediation sessions or settlement conferences. Because many of these cases involve many parties (some times 25 or more) mediation is usually the best setting to accomplish complete resolution amongst all parties. When contractors have insurance, insurance carrier representatives are usually present at settlement sessions to negotiate settlements on behalf of their insured contractor, with the insurance company's money. Ideally, the insurance company has collected sufficient premiums from their insured(s) over the years that the settlement payment is accepted as a cost of doing business.

However, if a contractor does not have insurance coverage, any settlement will come out of their pocket. Because individual settlements of construction defect claims can range from $10,000 to $50,000 or more, most uninsured contractors cannot afford to contribute much towards the claim. To escape the prospects of a lien on their (real) property or a court judgment, uninsured contractors often have to beg, borrow and steal to come up with settlement money. If there is no such recourse their livelihood is literally at stake.

In addition to problems for contractors, this scenario presents issues for mediators and special masters who facilitate these complex multi-party settlements. Mediators and special masters establish their reputation on settling difficult cases. When confronted with parties who have no insurance to contribute to global construction defect settlements, or otherwise have no resources to pay a typical five-figure individual settlement, mediators will have to invoke creative ways to somehow resolve the disputes.

There is no denying that insurers have legitimate coverage exclusions in their policies, and it is understandable that carriers want to "stop the bleeding" of excessive settlements created by the multitude of construction defect claims in California. However, there must be a solution that protects contractors and does not hang them out to dry.

Perhaps a pool of funds can be generated from a percentage of all contractor premiums insurance company's collect from their California contractor insureds. If a contractor loses insurance because of a claim, he could tap into the pool up to a certain limit and his personal assets would otherwise be protected from judgments and liens.

Something must change, or it will be the consumers that hire contractors who will ultimately bear the brunt of the current state of affairs in contractor's liability insurance.

Wenzel is an attorney in the San Francisco office of Ropers, Majeski, Kohn & Bentley. His practice focuses on insurance coverage litigation.