Builders' insurers are cutting water and moisture damage coverage

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http://www.startribune.com/stories/462/1629052.html

Builders' insurers are cutting water and moisture damage coverage

Donna Halvorsen and Youso

Star Tribune

Published Feb 16, 2002

Some Minnesota home builders have lost their insurance coverage because of

water and mold problems -- or the potential for such problems -- in homes

built here and across the country. Builders could pay significantly more for

insurance, and higher home prices could result.

" We have a real crisis situation in Minnesota where the builders' insurance

companies don't want to insure the builders anymore, " said Coover,

director of the Minnesota Homeowners Alliance, a consumer advocacy group.

In the past decade or so, homes throughout the country have had increasing

problems with water intrusion because of a combination of newer construction

materials and faulty workmanship.

" I think in terms of numbers of claims, clearly water intrusion is the

biggest single problem in construction defects, " said Markman, chief

executive of Zurich American Insurance Company's construction division,

based in Edina.

While there may be many contributing factors to problems in new homes,

Markman said, " If you've got water inside your house that came from the

outside, you have a construction defect. "

Recently there have been multimillion-dollar verdicts returned against

builders and their insurance companies by people alleging their houses were

being destroyed by water damage and that they became sick as a result of

exposure to mold.

There have been no such verdicts in Minnesota. But developments elsewhere

have sparked concern over what could happen here. " We're very concerned

about liability issues that builders in Minnesota are facing, and we want to

do everything we can to protect the builder but also the consumer, " said Pam

Perri Weaver, executive vice president of the Builders Association of

Minnesota.

Two large insurance companies are pulling out of Minnesota. Jim Bernstein,

state commerce director, called those decisions significant because the

companies -- Zurich American's construction division and Federated

Insurance -- are among the state's largest insurers of builders.

Bernstein said he's optimistic that builders will be able to obtain other

coverage. But that coverage is likely to be more expensive, Weaver said. She

said she's aware of one outstate builder whose premium is slated to jump

sixfold, to $60,000 from $10,000.

Choosing to exclude

Some insurers are simply excluding mold and water damage. Rossez, a

Little Canada remodeling contractor, said Zurich will continue to insure him

but will not cover water damage. He estimated that as many as 100 Minnesota

remodelers will be affected by that exclusion.

Mark Kulda, spokesman for the Insurance Federation of Minnesota, said

class-action lawsuits alleging mold and water damage throughout the country

are partly responsible for builders' insurance problems. As large verdicts

are returned against builders, insurers pass along those costs to builders.

Kulda added that the insurance market is " hardening, " meaning that certain

kinds of coverage are becoming more difficult to obtain and therefore more

expensive.

Defending builders against claims also is driving up insurance costs.

Builders typically turn homeowners' claims over to their insurance

companies. When cases go to court, insurers pay for attorneys, expert

witnesses and other court costs. Taking a claim through the process can cost

as much as the claim itself, Markman said.

Homeowners, on the other hand, must pay their own legal fees. Even if they

win in court, the money they get to repair their houses can be less than

they owe attorneys. A bill to allow them to be awarded attorneys' fees has

been introduced into the Legislature but hasn't been scheduled for a

hearing.

Zurich stopped issuing new policies for builders in November and will not

renew existing policies. As a result, about 400 Minnesota builders who

construct 50 homes or fewer a year are being forced to look for new

insurance. Zurich also is pulling out of California, Colorado, Louisiana,

Massachusetts, Nevada, New Mexico, New York, Washington and West Virginia.

Tougher codes

Weaver said builders in other states seem to have greater margins for error

than Minnesota builders because those states have " looser " building codes.

" One little mistake [here] turns into, not a $3,000 fix, but a $75,000 or a

$100,000 fix, and they certainly don't do it intentionally, " she said.

Weaver also said the state should spend the money it takes in from building

permit surcharges to help the building industry. " I think there's a case to

be made this year that this industry is in a crisis, " she said.

Federated, based in Owatonna, will not renew existing builders' policies but

will continue to insure specialty contractors such as plumbers and

electricians.

Federated did not cite Minnesota losses as a reason for pulling out but said

it was influenced by claims for faulty work and mold infestation in other

states. In a prepared statement, Federated said potential losses from faulty

work and mold " could be compounded in multifamily and tract home

construction where the same defects in workmanship could be repeated several

times over, leading to class-action lawsuits by residents of those

structures. "

Building specialists are searching for causes and cures for the problem of

water intrusion. Most agree that the fundamental problem is an

incompatibility of construction methods and modern building materials.

Unless houses are built watertight, any water that makes its way into a

home's structure will encounter building materials that aren't meant to get

wet. Once water infiltrates walls, ducts or attics, it can lead to rot,

health problems and expensive repairs.

Policies little help

The devices that homeowners think will protect them -- their homeowners'

insurance and warranties -- usually provide no protection. Homeowners'

policies don't cover construction defects or the slow seepage of water into

houses that leads to mold. Many policies that might be construed as

providing coverage now are being tightened to specifically exclude both

water damage and mold. Home warranties cover construction-related water

damage only for one year.

Coover, the homeowners' advocate, said the tightening of the builders'

insurance market won't have much effect on consumers because most homeowners

" aren't getting money there to repair their houses anyway. "

But she said consumers could benefit in the long run if builders learn how

to avoid water problems in houses and woo insurers back into the market.

It's a matter of sitting down with builders and insurers " and saying,

'There's been a problem in the past. What can be done in the future?' " she

said. " 'What can builders do in terms of changing their methods, in terms

of education, in terms of increased licensing [requirements]?' . . . I hope

the Homeowners Alliance is encouraging that conversation to take place. "

-- Donna Halvorsen is at dhalvorsen@... .-- Youso is at

kyouso@...