Mike Tappe, president of Tappe Construction, Eagan, Minn., talks with HousingZone.com Web editor Erik Gabrielson about how his company is handling a huge increase in its 2003 insurance premiums. Tappe Construction won a Silver National Housing Quality Award in 2002.
Gabrielson: When did you first see that your insurance rates were starting to increase? Was this at the last renewal period, or did it happen before that?
 |
|
 |
| Mike Tappe |
|
Gabrielson: How was your workers' comp affected?
Tappe: It went up. And this is true of both [our liability and workers' comp policies]: Most insurers moved out of our marketplace. So for both workers' comp and liability, we lost many insurers. In fact, in liability we had only one person that would quote us. So it wasn't only that our premium went up, but many insurers pulled out of the market. So we were left with only one person who would quote us liability, and of course they wanted [to provide our] workers' comp, too.
Gabrielson: So you have an umbrella policy with the same carrier, correct?
Tappe: That would be true. Both our workers' comp and our liability are self-funded, where we're paying a flat fee for somebody to administer our claims, and then we're paying for all the claims. We're paying Zurich a flat amount, and what happens is when a builder has a claim or a worker is injured … they notify Zurich, and Zurich notifies us. If there's any payment that has to be made to an employee as far as workers' comp benefits, or to a builder, they do all of that. But then they just get a flat fee of so many hundreds of thousands of dollars a year for doing that, and then they charge us for all of the expenses. So whatever wages they pay out in workers' comp claims, I pay them.
Gabrielson: What types of exclusions are attached to your liability policy?
Tappe: The big thing that's hurting us right now is that they excluded mold coverage. It's water intrusion and mold. The big thing for us, from a mold perspective, is that we don't know what the potential consequences are of mold.
Gabrielson: Do you have a specialized policy for mold, or are you just on your own?
Tappe: We're on our own because nobody will provide it. The Catch-22 for the trade contractor is that all of the general contractors who we work for, their insurance companies are saying, "Pass on the responsibility." The general contractor's liability companies are [also] forcing us to indemnify and defend them.
That means if the Centexes of the world have a claim, my insurance company has to pay for the cost of defense in defending me out of it and them out of it. So their insurance companies are saying, "Make sure you get the subcontractors to indemnify you." Zurich writes Centex, and Zurich writes us, and Zurich is saying [to us], "You can't indemnify anybody." But yet they're telling Centex, "You've got to get the trade contractors to indemnify you." ( 
Listen. )
Gabrielson: They're trying to transfer the risk to you, but then you have nobody to transfer the risk to in turn.
Tappe: Right, because they won't allow me to do it. That's our Catch-22 — those people want you to include coverage for mold, and they want you to indemnify them, but we can't buy insurance that covers us for mold. I can't buy insurance that will allow me to indemnify and defend them. That's new for this year. Up until last year I could get that included in a liability policy.
Gabrielson: How are you handling all this risk?
Tappe: I'm in the punt mode, actually. Mold — I don't know how to handle that. The indemnification thing, I'm trying to meet with my builders, the larger ones, and tell them that I just can't do it anymore. I just got [my renewal] January 1, and what is it today, the 7th? I'm trying to figure out what I'm going to do.
Gabrielson: How has that affected your operations for the first six days of the year?
Tappe: The renewal notices have been sent out with the other builders'. I haven't gotten feedback from my builders, but I've got meetings set up with them.
Gabrielson: One of my questions was, "What do you expect for the next renewal period?" but I guess you're not even worrying about that at this point.
Tappe: That would be true. I'm just trying to get past where we're at right now. I hear that in the marketplace that a lot of builders can't get liability insurance, and if they can it's at the same 300% price hike that I'm up against.
Gabrielson: What types of quality assurance and risk-management programs do you have in place?
Tappe: Our quality initiative follows the Malcolm Baldrige criteria, which means that you have to have quality standards for your work, and then you audit to those standards. So we have quality standards, and we audit to them. To that extent, we're able to handle the risk better than people who don't have standards in place and check on their standards. They're producing work that can be a huge liability to them in the future, and [they] don't know it right now. ( Listen. )
Gabrielson: Why don't you think the insurance underwriters took that into account? Why would you get only one quote when you have these quality assurance programs in place?
Tappe: It goes back to the fact that most of the insurers just pulled out of the market. As much as we value who our company is, they're pulling out of the whole state, maybe even the whole region. So it has nothing to do with us, it has to do with the building industry, in that there's a lot of litigation going on with exterior envelopes and EIFS and all of those things. And they've had a lot of claims in the past. Even though they may perceive us as a good risk, they're going to get out of that whole market.
Irregardless of who we are, they look at the marketplace as what it will bear. You'll see that in the insurance market, is that it's what the marketplace will bear, not always what the risk is out there. When the dot-coms were really going strong and they were able to invest money and make 20% on it, they were actually taking business that was good, bad and whatever — just pulling in money so they could throw it into the stock market. They were making a lot of money that way.
When the stock market went down, a lot of insurance companies had a lot of business out there, and they were afraid to raise rates. Once September 11 came along, it allowed them a vehicle to justify raising their rates. And they did a little bit of it in January 2002, but they took the big jump in 2003 because there was a climate out there that [because] enough companies were raising their rates, they were forced to. All of that money they invested in the stock market was gone, and they had premiums that performed very poorly because they took in bad business to pull in money for the stock market. That was a big factor in why rates went up. Even though I've got a quality initiative, I wasn't able to survive all of that. I felt I got some breaks, or they've told me I did, but the break mainly meant that I was able to get a policy, where I've heard that other trade contractors are struggling to even get a policy written. ( Listen. )
Gabrielson: Are you seeing quite a bit of litigation in Minnesota?
Tappe: It's growing rapidly. We've usually got 10 to 15 cases going on at a time. What they do is they use the shotgun approach. They name everybody, and you're guilty until you prove yourself innocent. You get named whether you've done anything or not. If we've just framed the house and we haven't set the windows, haven't done anything [else], we get named, and we have to prove our way out of it.
Gabrielson: So it adds up for your company.
Tappe: Yes. It's about $7,000 to prove yourself out by the time you answer all the claims.
Gabrielson: How many of those cases do you usually win?
Tappe: I've never lost any. What it amounts to is that sometimes you settle the case for less than it costs you to answer the claims.
© 2009, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.
