Building Is Risky Business
Create a plan to protect yourself from unnecessary insurance claims and skyrocketing premiums
As we opened the renewal notice for our liability insurance policy, we took bets on how grim it would be. Despite the fact that we hadn’t made a claim in 23 years, our $22,500 premium had jumped to $34,800. A $12,300 increase! The more we read, the worse it got. When we reached the list of exclusions, we realized that we would be paying 35% more in the upcoming year for less coverage than we had previously.
Sound familiar? Join the club. Though the premiums and exclusions felt out of our control, the insurance crisis prompted us to take a long, hard look at how our company operates. And we realized that there are some things we can do to reduce the risk of a claim and to make our company more attractive to underwriters. Here are the goals we set for reducing and managing risk:
- Prevent homeowner complaints that potentially can turn into a builder-defects claim.
- Improve response times and procedures for homeowner-complaint resolution.
- Become more attractive to the insurance carriers at renewal time.
- Create job documentation that is so tight, it could scare off a hungry attorney at the onset.
Here is our three-phase plan for implementing our goals:
- Phase One: Immediate action items
- Phase Two: Homeowner education
- Phase Three: Long-term goals
Don’t get overwhelmed. Take it in small manageable pieces that make sense for you. Tackle Phase One first. Commit to adopting the easiest three items over four weeks. Give yourself another four weeks to set up the rest of this group. If you already have these covered, move on.
Warm up to Phase Two by setting a realistic date for gradually working these items into your procedures. Any change is challenging for a busy operation. Once you make the commitment, you will find the time. Delegate someone in your office to track your progress each week. Small steps will get you there.
Phase Three obviously will take more planning and time to implement. It also will have enormous paybacks. In a year’s time, these systems and procedures could be routine for you and raise your professional standards in many significant ways.
A surprise benefit of implementing these strategies was that the process made us a more productive and efficient building company.
Phase One: Immediate action items
1. Make complaint response a priority.
Keeping customers happy is the name of the game, not just a legal obligation. Respond to homeowner concerns or complaints immediately (See How do you respond to a homeowner complaint?). Create a warranty procedure in the office with a method for tracking homeowner complaints or claims until they are resolved. Assign a person to all warranty matters and make timely responses a high priority.
2. Create a daily field log.
A consistent written daily field log is a must. If you already keep a log, make sure your job supervisor includes any activity related to recommendations for corrections and the implementation of their completion. Accident reports are vital, too. The site www.BuilderBooks.com is one good source for daily field logs. Often a CD will be included so that you can customize and reproduce these forms easily. However, you may need a permanently bound book to be credible. Ask your lawyer.
3. Use photo documentation.
Photos and videos of your construction methods and materials are a good defense should you be challenged. Document everything thoroughly, particularly water intrusion and drainage areas. Digital cameras on-site are big now. Get a camera capable of clearly reading a tape measure. If there are any red-tagged inspection items, take before-and-after photos to show that it was remedied. Digital images may not be admissible as legal documentation in all jurisdictions, so find out. In the meantime, take lots of photos. You also can use the photos for discussions about ways to improve what you do.
4. Review trade contractor’s insurance and written agreements.
Time to tune up these items. Study your trade contractor’s liability policy to make sure the dollar limits are high enough for your jobs, and check for their exclusions in coverage. For example, if your policy excludes soil movement, then be sure your subcontractor has this particular coverage. Obtain certificates of insurance on each job.
All jobs should have a written and signed trade-contractor agreement, preferably one which includes “hold harmless” indemnity clauses, waiver of subrogation, warranty provisions, insurance requirements (that you request), and a provision for binding arbitration for dispute resolution. In simple terms, you want to transfer the risk to your subs, making them the primary insured. This agreement establishes which policyholder’s insurance will pay first and who is responsible in a claim. This part is best left to your contract lawyer, particularly one specializing in builder defects. Give your subs a heads-up if you intend to make these changes so that they are not put on the defensive in case the agreement is new to them.
5. Improve job-site safety.
Presumably, you already conduct safety trainings for your workers and follow preventive safety procedures. That would include posting signs at all access points of each project declaring “Private Property — Unauthorized Entry Prohibited.” That takes care of workers and the public. But how are you protecting your homeowners?
To protect your clients’ safety, make it clear that the site is off-limits except with a company escort both during and after work hours. Also institute a policy that they wear hardhats, eye, and ear protection when they visit the site. And kids should not be allowed on the site at any time. Make this a written policy in your contract that your clients initial specifically to show that you have reviewed it together and that they understand it. This policy may not prevent them from wandering around unescorted after hours and on weekends, but at least you have attempted to protect them and have gone on record with your safety policy, which counts in the legal world.
We decided to make all safety-related issues a high priority in our company, as it creates the foundation of our risk-management program. Partially it is just good business policy. But we also wanted to be more appealing to underwriters by taking a proactive role in managing our own risk. In the near future, we may be requiring our trade contractors to conduct safety trainings for their workers as well.
How do you respond to a homeowner complaint?
In a word: quickly.
The five steps below are by no means a substitute for legal counsel. There may be more you can do, but make this your minimum response to a complaint, and it just might prevent a time-consuming and costly lawsuit from developing.
1. Respond immediately by phone.
Acknowledge their concern. Set up an appointment to inspect the problem within five days. A quick response shows your concern and willingness to remedy the problem. One study found that homeowners expect a return call within an hour. If you receive a written claim, send a copy to your lawyer and insurance broker immediately. A joint strategy may be necessary.
If you work in one of 13 states with a “Notice and Opportunity to Repair” law, check on the exact response times required for each step, as they are very specific and critical to protecting yourself. Contact the National Association of Homebuilders (email Sam Leyvas at [email protected]) to find out if your state has such a law.
If it does, it would be a good idea to huddle up with your lawyer and insurance broker and do a dry run together, prior to receiving a claim. Without the heat of a real claim and a potential 30-day sprint process, ask yourselves, “How would we handle a claim together?” It will make you feel more prepared and less emotional should the real thing ever arise.
2. Send a written follow-up.
Respond to the homeowner confirming that communication has been made and an inspection date has been set. Copy any related subs, design professionals, and suppliers on your letter. If you received a written complaint, attach a copy of it as well to send to the subs. Let these other parties know they also must attend the site inspection.
3. Show up and be on time.
Few things aggravate homeowners more than failure to show up with no notice. If you will be late, call ahead. Following the inspection, there typically are three possible actions:
- Make a written offer to remedy the complaint at no cost to the homeowner. Include the scope of the problem, repair, and timetable for repair.
- Make a written offer to compromise and settle with a monetary payment to be made within 30 days after acceptance of the offer.
- If you disagree with the complaint, your lawyer needs to advise you how you should respond. This option could mean the next step is arbitration or court, depending on your state.
4. Schedule the repair work.
Send a letter reviewing the repair plan and schedule. Again, meet the appointed time. Confirm a day ahead with the sub that is scheduled to make the repair. Call the homeowner on the appointed day and time to make certain the sub has arrived as scheduled.
5. Keep a paper trail.
Have the homeowner sign the completed work order at the time of the repair. Document all agreements and communications. Send a final letter to the homeowner when the repair work is completed. This paper trail helps support your case in the event of a continuing dispute.
Phase Two: Homeowner education
6. Prepare homeowner expectations.
Surprises make homeowners very unhappy. They need to know what is covered, what is not, when the warranty period begins, and how long it lasts. Review your warranty policy and procedure with homeowners before signing the contract and include these written documents with the signed contract. Make sure the homeowner knows whom to call during and after the warranty period. Include a contact list for all relevant trades and suppliers at the close of the project. If you don’t have a written warranty policy, now is a good time to create one. You don’t have to hire a warranty service or consultant to accomplish this. Start with the templates in home-warranty construction books and set up an automatic reminder system for scheduling warranty visits.
7. Offer home-maintenance service.
One way to avoid problems caused by lack of proper owner care after the warranty period has ended is to offer a maintenance-service contract. If manpower is short, team up with a specialty firm. The idea here is to keep an eye on the maintenance of the house. We send out a seasonal newsletter to past customers to educate them on how to maintain their homes. Think of it as becoming the guardian of your projects. Track projects for about eight years, the statute of repose for builders in many states. Showing our customers that we still care after the sale is complete, we maintain our relationship for future work and referrals, and the insurance underwriters appreciate our commitment.
8. Have a lawyer review your contracts.
Consult a construction-contract lawyer for review of all your sales contracts. Make sure they, too, contain binding arbitration provisions in the event of a dispute.
Phase Three: Long-term goals
9. Create a project-manual archive.
Create and maintain a project manual for every job that includes the following:
- Construction plans, notes, and specs
- All contract documents, including your warranty
- Signed change orders by both homeowner and builder
- Soils tests and reports
- Daily field log with all inspection sign-offs
- Photo and video documentation, certificates of insurance from trade contractors
- Signed trade contractor agreements and change orders
- Copies of all correspondences with homeowners by fax, letter, or email
- Notes of phone communications with homeowners, subs, architects, engineers, inspectors, and vendors
- Project Web-site data (stored on a CD)
Sound like a pain to gather these items on your current project? Then just think of how hard it will be to track down all these pieces a couple of years from now, should you need them for defense. And good defense they are. As a rule, we maintain these documents for the given period of the statue of limitations, plus five years.
10. Develop a loss-control program.
Eliminating construction defects is the best thing you can do. Generally, this is about paying more attention to quality control and workmanship in the field. Training and managing site supervisors well is the key to quality control. Third-party inspections are on the rise. Some builders are hiring engineering-service companies not only to inspect and document their jobs during construction, but also to provide some teaching and training of proper construction techniques to employees and subs. Insurance carriers increasingly are trying to predict their losses with builders. You can take a more proactive role in a changing insurance climate by doing your own in-house examination for loss prevention.
11. Consult a building scientist.
Since moisture-related problems are the source of so many complaints and claims, the new hero on the construction scene is the building scientist. These professionals are technologists whose whole-systems approach addresses the building’s design, construction, and operation. If water, moisture, and mold-related issues are hurting the homebuilding industry and contributing to more expensive liability premiums, here is a great resource that can help prevent these problems. Buying some consulting time with a building scientist may be some of the best insurance a builder can get these days. Preventing a problem is the first order of business. Before you can perform your best work, using the best materials available, it makes sense to have the most effective engineering going for you. A good resource is the Energy & Environmental Building Association at www.eeba.org.
A last word from an insurance professional
“Underwriters want to see that builders are capable of consistently identifying, controlling, and documenting the risky areas of their profession,” says Clayton Sharkey, a consultant with Insurance Management Associates in Denver. Identifying and managing risk these days requires a real commitment to new ways of doing business. The good news is that we end up becoming better builders in the process.
Valerie Walsh is a construction manager in Boulder, Colorado.