Questions and answers about the impact on insurance rates for small builders

Will SB 6385 drive up the cost of insurance builders are required to carry?

First, we have to look at what insurance builders are required to carry. RCW 18.27 requires builders to provide $250,000 in liability insurance to cover claims made for personal injury or property damage caused by the builder. All builder policies exclude coverage for defective work and breach of contract. More recently, to avoid having to cover water damage claims, insurers have excluded coverage for any form of water intrusion, wet or dry rot, mold, mildew and decay. SB 6385 does not add any additional requirements to carry insurance.

It is hard to see how insurance premiums will rise when the insurers do not provide coverage for the types of claims that might arise from these warranties.

Have mandatory warranties driven up the costs of insurance in other states?

At least ten other states require home builder warranties, including California, which has had a mandatory 10 warranty for years. No one, not BIAW or Master Builders has shown any impact on residential building following the enactment of warranty legislation. Until the end of 2006, most homebuilders, including California and Oregon builders, enjoyed record profits. This may change now due to the nationwide bursting of the housing bubble, but not because of laws holding builders accountable for shoddy construction.

According to the Master Builders Website, at least 19 states require builders to have liability insurance. These programs have been in place for many years. Master Builders does NOT report that these states have seen huge increases in insurance premiums. In fact, they offer no information or evidence of any insurance impact.

Won’t the bill increase insurance premiums?

Even if the liability policies covered claims for breach of warranties, or are offered in the future, all such insurance is experienced-based. That means the insurers will look at the experience of the builders in terms of prior lawsuits, and claims against them. It’s no different than obtaining auto insurance, which is also required by law. If you have repeated traffic violations, your premiums will go up. If you drive for five years without a violation or accident, your premiums decline. It is and has been the same for builders. Even without the warranty bill, insurers have charged builders various rates depending on the number of accident claims filed against them.

Can’t homeowners get their own insurance?

No. Every homeowner’s insurance policy specifically excludes damages due to construction and design defects, including latent defects. Those policies also exclude damages arising from water intrusion, mold, wet and dry rot. Homeowners cannot buy coverage to protect them from construction defects.

What effect will the warranty bill have on overall quality of construction?

Our society operates on principles of personal responsibility. If you act recklessly and insure either a person or his property, the common law requires the responsible party to pay the other party for his damage.

Builders have never had to compensate injured homeowners for damages to their homes. The warranty bill would, for the first time, impose responsibility on the builders. This is no different than other industries, including doctors, lawyers, pharmacists, salon operators, and dog trainers. If you are negligent, you can be held responsible. If you want to minimize those risks, you find ways to cut down on your exposure. You send your employees for new training, you attend continuing education courses. Maybe, you hire a consultant to look at your operations. The point is, when you know you can be held accountable, you respond in a business-like way.

Builders will send their key people to waterproofing seminars to learn from experts how to avoid these problems. In fact, commercial builders and condominium builders hire experts to oversee the construction. All subcontractors on condominiums have to prove to the developers that they have the expertise to perform the required work. There is no doubt that builders will train themselves and their subcontractors to minimize the risk by improving the quality of their work.

Builders who try to cut corners, who refuse to adjust their work, will and should suffer from performing shoddy workmanship, the same way other businesses suffer from negligence. If some unscrupulous builders go out of business, that may be a good thing. Their futures are in their own hands.

If insurers do not currently insure construction defects, is it fair to require that they be held accountable?

Right now, it is the homebuyer himself who is acting as the builder’s insurer. If the builder builds a shoddy home, the buyer not only has to pay to buy it, but then has to pay again to fix it. The homebuyer is in effect offering free insurance to the builder. Is that fair?

To answer this question, we have to remember that builders are already required to comply with all building codes and ordinances. The Warranty bill does not add any requirements. Also, with most new home purchases, buyers have no ability to verify that the homes were built properly. So, as between the builders and the buyers, the builders are the only ones capable of preventing the defect in the first place.

As a society, we have decided to require minimum building codes, minimum standards for food production and safety, labor standards, and many other regulations. We do so without regard to whether the responsible party can obtain insurance. Government’s job is to protect people from unreasonable risk of harm to persons and property. We cannot base decisions on whether to protect ourselves on whether insurance is available or not.

Is there anything contractors and insurers can do to minimize any impact from the new warranties?

The bill does not take effect until July 2009, more than 16 months from now. During that time, builders and insurers should get together to discuss what they can do to minimize any impact. For example, insurers could provide coverage for ordinary construction defects if builders agree to undergo training and certification. The industry could offer waterproofing classes, superintendent classes, and subcontractor certification.

Hospital insurers routinely audit hospitals to verify compliance with health and safety standards. They compare a hospital’s surgery results with other hospitals. They require administrators to certify that all surgery centers meet minimum quality standards.

Builders and their insurers could do the same thing. If hospitals can run efficiently, if space programs can operate effectively, home builders can learn to build homes without major defects. Doing so will result in better homes, and lower costs of both construction and insurance. Those builders who go through the appropriate training could use that as a marketing tool. Maybe the industry would offer a certificate course and builders who participate would qualify for lower cost of insurance.

Builders committed to high quality construction, and not the highest possible profit, will prosper. Those whose only goal is to maximize profit will eventually suffer the consequences, as they should.

Is there anything small builders can do to minimize the effects on their businesses?

They should ask their associations, the BIAW or Master Builders, to offer training courses and establish quality standards. They could also self-insure through BIAW. Imagine that BIAW would offer high quality training programs throughout the state. If a builder obtains the BIAW certificate of Excellence, it would become eligible for self insurance through BIAW.

During construction, BIAW could send its own inspectors to inspect their Excellence members’ work, to identify any problems and protect both the builders and the homeowners. This program would bring down the costs of construction in the long run, and the number of construction defect claims.

They should be doing this now, but they have no incentive because they have immunity from lawsuits and can’t be held accountable. Bills to hold builders accountable have been offered in Olympia for a decade, but they have been defeated by the industry. Builders will not have any financial incentive to improve their practices unless they can be held accountable.

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