The insurance market can be a tough place for Florida’s residential subcontractors working on new construction. While there are
still sufficient standard markets on the commercial side for small subcontractors, those working on new residential construction
such as condos, tract homes, and townhomes are finding it’s more difficult to obtain coverage. This makes it challenging to meet the insurance requirements often set by general contractors or lenders.
The marketplace has recently seen some insurers choose to exit the space. In addition, several underwriters that traditionally wrote the business have transitioned to carriers with a smaller appetite for this specific line of business. Florida is also home to many smaller subcontractors generating less than $10M in annual revenue, and from an underwriting perspective, the size of such accounts can make it difficult to generate the premium needed to match the level of risk. While MGAs have begun popping up, there are approximately 5 markets willing to offer residential subcontractors coverage for new construction. On top of fewer market options, the cost of coverage can sometimes be a barrier, especially for smaller accounts.
The difficult market for residential subcontractors is driven primarily by continuing losses. The market began to change slowly about 5 years ago, but the 2021 Surfside Condo collapse accelerated the transition as many carriers fled the market immediately following the tragedy. Carriers that remained in the market often now employ a height restriction of 8 – 10 stories. For subcontractors working above that level, obtaining coverage is even more challenging.
Florida is also known as one of the top three most litigious states when it comes to construction defect claims, also known as 558 claims.3 As claim frequency and severity have risen, insurers have been forced to raise rates, shift portfolios, or exit the space entirely, especially when it comes to South Florida. Common culprits include multi- claimant scenarios and water damage claims that drive up defense costs. While it’s generally difficult across the board, the most challenging residential subcontractors to insure are those that touch the envelope of the house or have the greatest potential for water damage. Florida sees an average of more than 50 inches of rainfall each year, with the majority of precipitation falling during the warmer months of June through September.4 That precipitation plays a big role in many construction defect claims for homes with roof issues, façade leaks, and window or HVAC problems. Poor construction that fails to adequately protect a home against heavy rains, storms, and hurricanes—not to mention hot Florida weather—can lead to substantial water damage as well as mold and mildew, which can be expensive to remediate. Residential subcontractors that install windows, doors, roofing, siding, or handle any waterproofing or exterior shell work will undergo more underwriting scrutiny and find coverage more expensive. Residential subcontractors that excavate, landscape, or handle interior needs such as painting or electrical may be slightly easier to place, but few carriers differentiate between those that handle structural aspects of construction vs. non-structural.
The fact that subcontractors working on condos, tract housing, or townhomes are struggling to obtain insurance to work under a standard practice policy, means more projects are being covered by wrap programs. Unfortunately, many carriers have discovered over the last several years that subcontractor claims couldn’t be paid because companies were out of business by the time the claim was filed or never carried their own coverage. At this point, there are some carriers that will only provide residential subcontractor coverage if it’s written as a wrap.
When possible, coverage for a specific project will take the form of a wrap because carriers cannot assume that all subcontractors will maintain adequate insurance coverage. It’s also a popular solution because it reduces finger pointing if a claim arises. However, when a construction wrap is used, additional legal issues can come into play for either the owner or the general contractor depending on if it’s a Contractor Controlled Insurance Program (CCIP) or an Owner Controlled Insurance Program (OCIP) because the wrap covers the entire project for the length of the Statute of Repose for construction defect claims. The lead excess required in a wrap program is also problematic. While the excess limits needed can vary depending on lender requirements, there are limited carriers willing to play and they’re offering short limits that can often cost 100% - 125% of the primary because there is no ability to transfer the risk.
Historically, insurance coverage in this space has been underpriced, which is why losses have outpaced premium to the point that many have exited the sector. Even so, it’s unclear if this area will see a true hard market again because of the continued influx of capital and proliferation of MGAs. In a traditional hard market the capacity of a carrier starts to shorten. Those that may have put up $15M in a softer market are often only willing to put up $5M in a harder market, and as the limits go down the price per million typically goes up. However, in Florida, as long as capital continues flowing in, prices will likely remain below the threshold needed to match losses even as some carriers attempt to make up profits through more disciplined underwriting or choose to leave the business behind. In this case, when an insurer exits, it isn’t necessarily driving up prices, it just removes an option from the marketplace.
There is no light at the end of this tunnel for better terms, conditions, or prices from a primary perspective, but new MGA and MGU capacity is available to provide coverage for Florida residential subcontractors. With that in mind, it’s smart for retailers and brokers to know who MGA/MGUs are and make sure they understand their background and track record to strategically utilize them most effectively. Not all MGAs and MGUs are equal. There can be concerns around MGA claims handling or long-term viability, but similarly, many insurance companies utilize third party administrators for claims handling. Carriers can also dramatically adjust their appetite or abruptly leave a class of business, which can mirror an MGA losing its ability to write business, and ultimately has the same effect for the broker and insured, at least in South Florida.
HOW AGENTS CAN HELP
In Florida’s current environment, some residential subcontractors are tempted to purchase stripped-down coverage that is less expensive, but doesn’t actually fit their needs and can be costly when it comes to claims. Agents can help clients better protect themselves by understanding that construction is a long-tail business and structuring insurance programs accordingly.
- Proactively communicate expectations. Developing a high-quality submission starts with proactively counseling insureds regarding information needed to achieve better results. It’s also important to set appropriate expectations around the cost of obtaining the kind of coverage a residential subcontractor needs to operate confidently in Florida.
- Provide a detailed, accurate submission. Florida is a 10-year Statute of Repose state for construction, and claims often don’t develop until near the end of that timeframe. Underwriters want to see a completed supplemental application as well as a minimum of 5 years of currently valued loss runs. However, 7 - 10 years of loss runs is preferable due to the long-tail nature of the business. It’s also helpful to provide information about quality control programs in place, what subcontractor agreements actually cover, and how potential subcontractors are pre-qualified in order to obtain a more reasonable quote. Copies of contracts for subcontractors are often needed along with a detailed breakdown of residential exposures, including how much of the business is new construction, what percentage is custom home construction, and how much is made up of new townhomes, condos, or tract homes, which is where the majority of issues occur. If a wrap is being utilized, underwriters like to see a geotech report as well as a site plan in addition to 5 years of currently valued losses.
- Check subcontractor certifications and insurance. No business owner wants to put their business in jeopardy because of a lack of insurance. Florida general contractors would be wise to confirm residential subcontractors carry appropriate certifications and insurance. This improves contractors’ submission quality and pricing by verifying that subcontractors have risk transfers in place to tender claims back if an issue arises. Doing so protects both subcontractors and general contractors because even if a claim is denied, the insured may still be held liable. General contractors that fail to verify subcontractors’ coverage can end up paying for the losses of uninsured partners, which can impact their premiums for years to come or result in non-renewal.
- Allow sufficient time to prepare for renewal. Smaller accounts may not require an extended timeline, but it’s smart to touch base on renewals 90 days out. Larger accounts can take longer. Submissions that are thorough and accurate will take priority as underwriters are busier than ever. They all receive more submissions than can actually be written. Particularly for smaller accounts, success often depends on being a “one-touch” submission that is complete, including key information about price and coverage targets.
- Find the right wholesale partner. Not all wholesalers possess the right combination of industry knowledge, proprietary market intelligence, and carrier relationships to get the job done. Retailers will be best served by collaborating with a wholesale partner with extensive market reach, deep knowledge of Florida construction issues and trends, and an effective strategy for placing the business.
New residential construction is as tough as it gets for those building condos, tract homes, or townhomes in Florida. Terms and underwriting are tight and there are limited markets available, so providing a thorough submission is vital to obtaining a positive outcome. Small and medium size subcontractors often don’t employ risk managers. They rely on retail agents to help them satisfy contractual obligations by partnering with savvy brokers highly skilled at providing the coverage they need. CRC Group is home to brokers with the kind of Florida construction expertise, product knowledge, and underwriting relationships retail agents can depend on to achieve the best results for their insureds. Contact your local CRC Group producer today to discuss how we can help you navigate the marketplace.
- Nick Calabro is a Casualty Broker with CRC Group’s Boca Raton, FL office where he specializes in Construction, Real Estate, and Hospitality exposures.
- Nathan Levine is a Vice President and Casualty Broker with CRC Group’s Boca Raton, FL office where he focuses on Construction, Real Estate, and Manufacturing business.
- Walker McKenzie is an Assistant Vice President and Casualty Broker with CRC Group’s Atlanta office where he specializes in Habitational and Construction risks.
- Craig Nettles is a Vice President and Casualty Broker with CRC Group’s Atlanta office where he handles a large portfolio of General Liability, Casualty, and Environmental Insurance business.
About Navigators, A Brand of the Hartford
In 2019, Navigators joined The Hartford. Navigators works to provide best-in-class customized wholesale and reinsurance solutions that protect businesses with hard-to-place risks. Matt and his team leverage deep expertise to ensure brokers and their clients benefit from highly-responsive service and timely decisions that deliver maximally effective coverage.
- Florida Started Penalizing Bureaucratic Delay. Housing Permits Spiked. The Washington Post, July 25, 2022. https://www.washingtonpost.com/opinions/2022/07/25/desantis-florida-reform-home-building/
- Average New Home Uses 24 Different Subcontractors, National Association of Home Builders, December 2, 2020. https://www.nahb.org/-/media/NAHB/news-and-economics/docs/housing-economics-plus/special-studies/2020/special-study-average-new-home-uses-24- different-subcontractors.pdf
- Florida Construction Defect Statute Chapter 558 Legal Update 2020, Fisher Rushmer Attorneys at Law, December 22, 2020. https://www.fisherlawfirm.com/blog/florida-construction-defect-statute-chapter-558-legal-update-2020
- State Climate Summaries 2022: Florida, NOAA National Centers for Environmental Information, 2022. https://statesummaries.ncics.org/chapter/fl/