The recent recession has been devastating to home builders and the subcontractors who work for them. The U.S. Census Bureau reported that the number of new homes built dropped by 59% between 2005 and 2009, a decrease of more than 1 million homes per year. This huge shortfall in work has left those residential contractors that are still in business looking to reduce expenses. Because insurance premiums can be a significant cost, many contractors have considered dropping coverages. Some coverages, such as Workers Compensation, are often required by law and cannot be cut. However, some Liability insurance policies, including Umbrella policies, are not required, and some contractors might consider reducing their Umbrella coverage or dropping it altogether. However, doing so could have some serious consequences for the future of the business
Umbrella policies perform two important functions. First, they cover many types of losses that the insured business’s primary Commercial General Liability insurance does not. For example, many insurance companies that provide CGL policies have added terms that eliminate coverage for claims arising out of the use of “Chinese drywall.” This material allegedly rots, causes health problems for a home’s occupants, and damages sensitive property such as electronics and high-value jewelry. Suppose that a contractor installed this drywall in 20 homes in a year and half of the homeowners made claims. The contractor would be facing 10 lawsuits, none of which the primary CGL policy would cover. However, the Umbrella policy could conceivably “drop down” and cover these claims.
More commonly, Umbrellas provide additional coverage when catastrophic claims exhaust the amounts of insurance available under the primary liability policies. Because catastrophic claims are relatively rare, insurance companies are willing to provide higher amounts of insurance for fractions of the cost of the primary coverage. However, when these claims happen, the amounts involved can be staggering. Suppose a contractor’s worker at the site of a new development of a dozen homes flicks what he thinks is an extinguished cigarette into a pile of trash. The trash ignites, spreads to the home on which he is working, and the wind carries the sparks to adjoining homes, damaging every one of the new units. The contractor might be legally liable for all of that damage, and the costs could quickly eat up the coverage available under the CGL policy. The Umbrella would pick up the balance, saving the contractor from financial ruin.
Injuries to other contractors’ employees on a job site can also be a source of large losses, particularly if an accident kills an employee. Unfortunately, job site deaths are common. The U.S. Occupational Safety and Health Administration reported the following incidents that occurred between May and July of 2010:
- A roofing worker in Georgia died after falling 13 feet off a roof.
- A roof collapse in Ohio killed one worker and sent two others to the hospital.
- An Ohio worker was crushed to death when a dumpster shifted forward off a forklift and fell on him.
A general contractor or a contractor responsible for safety precautions on the site will probably become the target of lawsuits stemming from incidents like these, and the ensuing settlements will probably overwhelm the primary Liability insurance coverage.
The insurance industry does not have a standard Umbrella policy, so it is important to review each one with our professional insurance agents to determine how it will apply to different types of losses. Also, a self-insured retention (similar to a deductible) will apply to losses the primary policy does not cover. However, having an Umbrella policy could mean the difference between surviving a large loss and going out of business.