It was a very short list.
Weber said that homebuilders' insurance is getting very hard to come by. "And when you do find it, the costs have increased dramatically. I've heard some real horror stories," she said. Scared by the growing number of construction-defect class-action suits and the high legal costs of defending or settling them, many of the major insurance companies are no longer offering protection to residential home builders.
"This is a statewide crisis," said Aletha Langham-Godwin, president and CEO of Mark Twain Homes Inc. in Fort Collins. "The coverage costs more and more and covers less and less. It's to the point that everything you need it for isn't covered, but you still have to shell out the money for it."
Trouble areas excluded
The few remaining companies that are offering coverage in Colorado are excluding coverage of trouble areas, such as molds and expansive soils.
But even if an insurer excludes certain areas, they are still required to defend their client through the lengthy, expensive litigation process. As coverage shrinks, prices for that coverage are rapidly increasing.
When Langham-Godwin began Mark Twain Homes seven years ago, she built about 75 houses and spent roughly $40,000 on liability insurance or roughly $535 per house. Now she pays nearly 10 times that, about $5,000 per house.
So what's changed in the past few years? Those in the business say the problem stems from two familiar scapegoats: California and lawyers.
"It started out in California about 15 years ago," said Kevin Trechter of the Van Gilder Insurance Corp., an independent insurance corporation based in Denver. "Lawyers found they were successful bringing class-action suits against home builders out there. "Now a lot of those attorneys are setting up shop in other Western states, including Colorado." The consequences of construction-defect litigation are "reduced housing values, a chilling effect on construction and shortages of affordable housing," according to a white paper on the issue by CNA, the leading provider of insurance to the construction industry.
Defects not new phenomenon
The occurrence of defects in newly constructed residential property is not a recent phenomenon, the CNA paper points out. But in the past, major defects in home construction occurred infrequently and were generally identified shortly after construction. When defects were discovered, a builder typically remedied the problem in accordance with the terms of the contract with the home owner. As a result, insurers generally found that predicting potential liability from faulty construction or the use of defective materials was a relatively straightforward process.
Then, in the mid-'80s, there were major changes in the economics of home construction. Most developers used to build only a few homes at a time, paying attention to every detail of the construction process. As demand for residential properties built en masse rose, building quality deteriorated. As home owners discovered defects in construction, they began filing claims for damages with the insurers of the contractors and/or subcontractors. Ultimately, this led to an explosion of litigation, primarily in California. Lawyers in a handful of other states are now poised to concentrate their efforts on construction-defect litigation.
Litigation hot spot
"Because of the laws we have in effect here in Colorado, we're a hot spot for litigation," Langham-Godwin said. One such law is the Colorado Consumer Protection act, which allows consumers to sue for triple damages for defective products. "As is often the case, this law has been stretched beyond what it was intended for," Trechter said. "It was
originally designed for home appliances and that sort of thing, now it's being applied to real estate. It's a very punitive situation for insurers."
Also punitive for insurers are class-action suits. "One person in a neighborhood finds out there's something wrong with their house and suddenly everyone in the neighborhood is joining a class-action suit," said Carole Walker, executive director of the Rocky Mountain Insurance Information Association, a nonprofit trade association for the insurance industry that acts as a clearinghouse for insurance-related information. "All of a sudden there's an entire subdivision suing and that really affects the contractors, especially the small
Home buyers impacted
In the end, the cost of home-owner-initiated lawsuits are paid by other home owners.
"If we have to pay $5,000 for insurance, that's a price that's getting tacked onto the price of your house," Langham-Godwin said. Steve Spanjer, Spanjer Construction, agrees with Langham-Godwin that insurance is one of the costs that pushes housing out of the "affordable" category. "What's happening is that a lot of people can't get their policies renewed," he said. "And if they do, they end up paying considerably more. It has a big impact on the price of housing."
The home builder's liability-insurance issue is a hot topic in the industry. "I just received an e-mail today from a home builder who was cancelled in January and has been having a tough time finding coverage," Spanjer said. "Just days before his coverage was to run out he found an insurer. His new policy will cost him $105,261. He paid $20,000 last year."
At this point the industry seems to be in a lose-lose situation, with no relief in sight.
"At some point in the future, underwriters will see that these premiums are viable and they'll be back," said RMIIA's Walker. "But that doesn't do much good for the home builders that need affordable insurance now."