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Michael Sivage
CEO, Sivage Community Development, Albuquerque, N.M.
December 21, 2004
HousingZone
Michael Sivage, CEO of Sivage Community Development in Albuquerque, N.M., is a member of the NAHB's General Liability Task Force. He was the CEO of Sivage Thomas Homes before Pulte Homes bought the company in 2003.
Part One | Click Here to Read Part Two
HousingZone: Could you talk a bit about the NAHB's General Liability Task Force and your involvement in it?
Sivage: The first task force was set up in 2002. I became involved because, at the time, I was chairing the Building Product Issues Committee for the NAHB. Our committee focuses on any kinds of issues that we think may be coming down the pipe in terms of products. For example, our committee was focused on the EIFS system a number of years ago. That was actually the genesis of the committee, and what we learned through NAHB was that, from time to time, issues come up largely related to liability or product-liability-type issues, and we needed a way to respond to those issues as they arose. EIFS was the first case of us really saying this is something the NAHB should be monitoring, if nothing else, and hopefully advising builders over time as to what they should or shouldn't do, whether they were building with [the EIFS system] or not, or advising them how to build with EIFS systems. It seemed like the EIFS system had just barely gotten resolved, and then the mold issue arose.
As a committee, we were really focusing our time and attention on the mold issue because we were hearing about mold claims across the country. Of course, the first thing that happened when we were hearing about these mold claims was that the general liability insurance carriers were starting to write exclusions -- pollution liability exclusions -- which, by their definition, included mold. That was debated a number of years ago, but now I think insurers have cleaned up that language, and it's very clear that mold is excluded now. At the time, there really wasn't mold exclusion because there had never been mold issues and, as carriers will when claims are filed, they try to find ways to deny coverage. So many of them opted to try to rely upon their pollution liability exclusions. I don't know that those actually held up. As a result -- and it just happened to be around the same time -- we were starting to hear rumors about builders' insurance premiums also going up significantly.
The first reaction for the insurance carriers was to rewrite their policies. They changed their policy forms to where the actual insurance coverage they were providing was much different than what it had been historically. I think that was their first attempt to make their business model more profitable. They did that in conjunction with raising their premiums. They implemented a number of things, everything from increasing deductibles to spending more time monitoring and instructing builders on what conditions they would write this insurance. They started making requirements for builders to enter certain types of contracts with their subcontractors -- requirements that their subcontractors carry certain types of insurance. It became much more restrictive and much more costly. That by and of itself might have been enough, and so the first task force spent the majority of its time trying to understand what those issues were and then came back with a number of recommendations for the NAHB.
One of those recommendations was that the NAHB should consider developing model legislation for notice and opportunity-to-cure bills for the various states to adopt, because we also learned that part of the problems with construction defect [lawsuits] was that there was a need for some level of tort reform. Many lawsuits, we felt, were being filed frivolously. But the problem is that once a lawsuit is filed, the insurer or someone has to defend it.
It looked as though there may have been instances where that was being abused by the plantiffs' bar, where they're essentially just holding the insurance companies hostage on an economics thing: "We can take it to court, and you fight it. That will cost you $100,000. Or you can settle with us today for $50,000." The notice and opportunity-to-cure legislation takes that away from them, and it says that you can't file a lawsuit unless you've really got a problem. So that we can validate the problem, the number one thing you've got to do is notify your builder and give your builder the opportunity to cure or otherwise resolve this problem before you file a lawsuit. If it doesn't get resolved, then you can go to the courts, but first you've got to give [the builder] a chance. That seemed to be common-sense legislation that might have a chance of reducing the litigation that was out there that seemed to be scaring the carriers.
[The task force] had a number of recommendations for builders in terms of how to manage their business, suggesting to them that it's time for them to examine their own building practices and to be certain that they're doing a good job of documenting their construction processes; making sure they're communicating good with their customers; and making sure that their contracts with the customers are properly written. For example, suggesting to them such things as binding arbitration clauses in the contract. I guess there was some hope that if we did some of those things, the insurance market would take a new look at us as an industry and bring insurance product back into the market.
HZ: What point in time are we talking about?
Sivage: This was still with the first task force, so it would have been in 2001 to 2002. As we rolled into 2003, we realized that what we were hearing from our builders was that there was still an issue. In fact, it ranked as the number one and number two issues on the top 10 issues facing builders -- one of them was cost, and one was availability, I believe. And as I recall, in the top 10 issues, either four or five of the top 10 issues were all insurance-related. So we knew it was still a problem.
The then-president, Kent Conine, formed yet another task force, of which I became the chair. We had a little different goal. Our goal this time was specifically to investigate ways of bringing insurance carriers back into the market and, alternatively, the feasibility of the NAHB developing its own insurance product. Again, we were stuck with a situation where what we were hearing was builders in certain markets just flat-out weren't able to get insurance. It had gotten to a point where it wasn't just a cost or quality issue anymore. It was a complete lack of availability at any price.
HZ: What sort of premiums were those who could get insurance seeing?
Sivage: Let's just take the pollution exclusion as an example. Now they exclude mold. Well, you can buy mold coverage. But if you buy mold coverage, it's on a claims-made policy versus an occurrence policy. But again, the price to buy mold coverage in our example at Sivage Thomas was more than $100,000 a year. That was coverage that used to be built into the policy that we didn't have to pay anything for. So, irrespective of the policy increase itself, then you get another $100,000 a year for mold coverage. When you add up those kinds of incidentals, you're easily looking at 200% to 300% increases.
The other thing that we noted was that the deductibles were way up. I think in our final year [of business], we had gone to a $100,000 deductible as a measure of keeping the premiums down -- $100,000 from [about a] $2,000 deductible. So you can see the significance of how much more risk the builder was taking on to keep their premiums in check. I would venture to say most all of the large builders are probably self-insuring a significant portion of the risk in order to keep the premiums down. A number of them are also using construction wraps. Because the other real problem here -- and what is probably as big a problem now as anything -- is actually our trade contractors' ability to get insurance.
HZ: Why is that?
Sivage: The way insurance used to be written, the builder writes a general liability insurance policy, and he has the right to segregate his claims -- or the insurance carrier has the right to segregate the claims -- to any of their subcontractors. Because the theory is that the builder doesn't really build the house himself; it's the subcontractors that build the house. Say a builder hires an electrician to wire its house. They have a fault in the electrical, which causes the house to burn down. The homeowners will obviously sue the builder, but the general liability policy also allows the builder to segregate that claim to the electrical contractor. So in theory, although the builder was engaged in the lawsuit, they're going to recover their claims from the electrical contractor because the electrical contractor was actually at fault. That was really the way the insurance business was written.
But the problem is that the insurers now have looked at that and said, "Wait a second. The real risk out there may very well lie in some of these trade contractors. The builder's a risk, but the trade contractor may be the larger risk." To the extent that they were writing those policies as well, where they were actually covering the builder and trade contractors, they were maybe more exposed than they had planned to be. So they developed these wrap programs that essentially said, "Now the builder will write the general liability insurance for the whole project, and it will be one policy for all of the work that's done there, and that way there will be no one party suing the next. Instead, they're jointly in the project together." That theory is that the builder will be more motivated to monitor quality control, etc., because it's under his name. So that's one alternative that some have looked to. Trade contractors are sort of the current issue.
The other one -- really the big issue -- was for the attached-unit builders. The reason that was such a problem is because it was easier for the plantiffs' bar to form a class. Of course, the damages are much higher -- they get a much bigger lawsuit -- if they can form a class than if there's just one individual homeowner. The reality is that most of the attorneys that are specializing in that business are looking particularly at the attached situation because you've essentially got the same house being built multiple times. If they can find a defect, they can extrapolate and make the suggestion that that defect exists in all the units, and therefore they could threaten them with a huge lawsuit.
Is a construction defect really a defect if there's no real problem? Because what these attorneys were starting to do was they were forensically going into houses looking for code violations. It could be easy to have a code violation. Let's say that your Sheetrock is supposed to be nailed off at 6 inches on center. Well, they could go in and find maybe one place where the Sheetrock was nailed off at 6 1/2 or 7 inches on center and not 6 inches on center. There may not actually be any physical defect, or there may not be any problem, but because they can find that code violation, they would threaten you with it and say, "Here's a code violation, and it's logical to assume that if there's one wall that wasn't nailed up properly, more than likely, that exists in all of the units that you built. And who knows whether a defect is going to occur because of that? Just because the Sheetrock hasn't cracked today doesn't mean that it won't crack tomorrow. Our client has suffered a loss that they can't calculate. Therefore, we're going to demand $30,000 because we've lost this value." That's the way the plantiffs' bar sets the stakes of these lawsuits. As a result, the first response of the general liability insurance market was to quit insuring those types of builders.
© 2009, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.
