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 Two   |   Click Here to Read Part One

HZ: You said one of the goals of the second task force was to try to figure out how to get insurers back. Are they coming back into the market?

Sivage: No. We can't see any real signs of that yet. And that's why the focus of our work now is to develop those markets. We believe that the market can be a profitable market, but the insurers themselves haven't been convinced of that. So that's the job for the NAHB now. We have hired Marsh Inc. as our adviser and as our partner in this program to help us do the statistical analysis that we think is necessary in order to actuarially demonstrate and prove to the insurance industry that indeed we're a profitable industry, that general liability insurance is profitable. If we don't do that, they're just not going to come back into the market. Either that or the premiums are going to increase at multiples that are unrealistic.

HZ: Have premiums come down?

Sivage: No. The best we can tell is that the market is as bad today as it was a couple of years ago. In all likelihood, worse. I think that's by virtue of a few things. Insurance markets go through hard and soft periods, where in a hard period, they can price the way they need to because of the lack of competition or the lack of availability. But more importantly, we believe that it fundamentally boils back down to that they haven't had a real interest in writing insurance for this market. There's a handful that have and that do, yet they're limited in how much they can provide. So for those that are actually writing this business, they still have their own criteria about what it takes for them to get into the market. They're only looking for a certain profile of builder. Some of them are very restrictive. They essentially only want builders that have high net worths. Others are looking for builders that are in states that are not as litigious as others. So, it's a very selective market presently. Our task is to try to bring insurance back into all markets if we can. What we believe we're going to find is builders with good building practices have less losses.

HZ: A number of underwriters are looking for some sort of demonstration that builders have a quality-management program in place. Are builders adopting these, and what are some of the added benefits of instituting such a program beyond just making them more attractive to an insurer?

Sivage: That's something we believe strongly in. We believe that in order to get insurers back into the market, we're going to have to demonstrate to them that we are a good risk. And the only way we're going to be able to do that is to make sure that we're good shepherds of our own business. We're going to have to take the time to self-police ourselves. Intuitively, we believe that builders that focus on quality control, it seems reasonable to believe that they would also have fewer losses. There's really no reason for a homeowner to sue or otherwise make a claim against a builder if they've built a good house. So we don't expect that insurers are ever going to want to get into the business of doing bad business or writing bad builders. They're always going to be looking for good builders.

We believe all builders should be encouraged to re-examine their building practices and make sure that they're putting their very best foot forward and doing a good job. Clearly, there's no harm in building a better house. There's no reason that that could be a bad business decision. I think as builders -- and I can speak personally as a builder -- I never found building something right the first time costs more money. It always costs less. And not only does it cost less, but your customer's going to be much happier.

I think the difference now is this: Because subcontractors are impacted as well, the whole attitude is changing. As a builder, our difficulty in building a quality home oftentimes rested with the attitude of the subcontractor and the quality of his work force. Some are better than others. I've found that in the larger markets, like Phoenix, you have very sophisticated trade contractors. They were as concerned about quality control and callbacks as we were as a builder. They spend a fair amount of their time training and managing their employees to produce the best possible results. They're in business like the rest of us. However, in some of your smaller markets, many trade contractors are undercapitalized. Maybe they're not the best businessmen in the world. They got started in business because they learned and understood a trade, but never have really developed all of the business principles that they really need. They're the ones you have more difficulty with because they didn't have good quality-control procedures set up. As a builder, if you're hiring those smaller firms, you automatically are going to have to take on a new role of helping manage their employees for them.

HZ: How do you do that? Are there resources to help these trades learn more about quality-management programs?

Sivage: One of the things the NAHB has also unrolled through the Research Center is a new quality-control/quality-assurance program for trade contractors. That program -- I think they unveiled it about two years ago -- is meeting with widespread success by all accounts. There are a number of trade contractors across the country who have enrolled in this program. I think they piloted it in several markets. Very large companies that have a concern for building better quality product, that's who they piloted it to see if it worked. From what I understand, after having done so, [they have] been able to demonstrate that indeed these companies' callbacks have been reduced significantly, and essentially they're getting the job done right the first time. Obviously, by extension, the customers are going to be happier. The builder's happier.

We believe that those kinds of programs are really going to take root over the next few years. As builders start hearing word of the success of these programs, then I think you're going to see more builders urging their contractors to enroll in those programs and even paying for them. I know in our last year of doing business before we sold, we had made the decision to pay the cost for our trade contractors to go through the program. We felt like it was that important for us. After a number of trade contractors have gone through that, they become more marketable to the building community. Competition will force their peers to consider similar types of programs. The importance and significance of all of that is that I really do believe there is a new attitude among builders in particular. No question, the smart builders have got to be taking a new look at their own business practices and thinking about how they can do it better. But I also think that there's becoming more of a cooperative spirit between the builder and the trade contractor now to work together to reduce those callbacks, to reduce those claims. We should be working as partners. We shouldn't be working as adversaries. We all want to make money, and part of that formula is doing it right and having satisfied customers.

HZ: Some firms weren't able to find general liability insurance at all, no matter what cost. How does that affect entry into the market? Is it really posing a barrier to entry to new firms starting up?

Sivage: I think what's happening is -- and this is a scary thought -- there are a number of them that are building and they're just working without insurance. I've heard firsthand accounts of builders that have hired trade contractors that they know don't have insurance. But if they want to get the house built, that's the only way they can get it built.

HZ: What sort of liability does that put on the builder?

Sivage: It puts all the liability for that particular phase of the construction on them. It's guaranteed that their general liability policy requires that they have properly insured trade contractors beneath them. If they don't, then they risk not having coverage themselves. There's this unknown risk that builders are assuming out there. Probably the most troublesome thing I see in the market is how many cases we have of builders that have inadequate or underinsured subcontractors on their job sites. I think that problem's probably even larger than we recognize or know.

Traditionally, general liability insurance for a builder will require that their contractors maintain certain types of coverage and certain levels of coverage. The question is: Are those builders really monitoring that? Are they really double-checking to make sure that those trade contractors indeed have those kinds of policies in effect? My guess is that compliance in that area is pretty weak. The issue is you never really know about those things typically until a claim is filed. That's a little too late at that point. But in some of these markets, I don't know what other choice some of these builders have. They would either literally have to stop doing business or assume that risk, and in many cases they're just taking that risk.

And I'm sure there are many examples of businesses buying whatever coverage they can get. That coverage may be very poor coverage to begin with, so there's a certain amount of risk they're probably automatically taking now. It's like back to mold exclusion, settlement. Subsidence coverage is very limited or not available in many cases as well. If you look at the places where there's been the highest exposure, the highest losses for builders, by and large those elements of coverage have been excluded. So they're taking that risk anyway because those pieces of coverage either still aren't available or they're priced so high that they're just too cost-prohibitive. They just don't make sense.

That's really the issue: To a large degree, builders are assuming -- even knowingly -- much more risk today than they were a few years ago, and one event could literally break a company. Catastrophic losses occur from time to time. Your bigger question and issue is: Will that be a barrier to entry? Certainly, especially if you start finding credit institutions that really start monitoring insurance coverage from their builders. I don't know that that's really on the radar screen for most institutions presently. They generically say, "You need to have general liability insurance coverage of $1 million." They just throw out a number, but nobody really examines the quality of the coverage. If those kinds of things start getting mandated by banks or otherwise, it would serve as a huge barrier to entry because there just flat-out would be builders that wouldn't be able to comply.

There are other risk-management tools. I've talked to a number of builders who are trying different things. Some are setting up separate LLCs for each development that they build, trying to encapsulate the risk into smaller entities, so that way they can protect their total assets. You've got a builder that's worth maybe $10 million. He carves up his $10 million into 10 different entities and, even though he may be underinsured in those projects, he's at least minimized his risk to that $1 million as opposed to the full $10 million. So there are a number of other ways that builders can spread that risk or otherwise try to reduce it.

There are some that would say that once the plantiffs' bar realizes that there's no money, that they'll quit coming after it. I don't know that I necessarily prescribe to that theory. There are clearly some builders who say, "If I don't have enough insurance, then the insurance company's probably not going to come after me because they know that there's no money there." That's a big chance you're taking there, and I wouldn't suggest that's good business practice. But at least there is that thought out there that if the plantiffs' bar realizes that it's not this pot of gold that they thought it was, they may be less aggressive. >HZ: The task force was studying the viability of the NAHB providing insurance product to its members. Has anything come out of that?

Sivage: I gave a report at the Builders' Show. What we announced was our partnership with Marsh, which is specifically to develop insurance product. Whether or not NAHB will actually be an insurance carrier is to be decided. My guess is that it probably will not be. But what we do believe is that we will actually develop new insurance product that will have a sponsor of some sort, that there will be a carrier and that there will be an insurance market for it. That policy may be something brand-new, something that hasn't been in the market before, or it may be inscribed onto a different kind of builder profile than what's been out there before. The plan is that there may be a product that's actually endorsed and maybe even marketed and distributed through our local, state and national home builder federations, but the actual underwriting risk itself and such probably won't be.

HZ: What sort of time frame are you looking at for that?

Sivage: Our plan presently is to roll out the data request -- we're going to be surveying our membership -- to try to get the data we need to crunch the numbers. We're going to roll that out at Spring Boards with the expectation that we would have new product to sell by sometime next year, the first half of 2005.

Click Here to Read Part One

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