Construction Defect Claims
Three myths about which every claims director should know.
Construction defect claims can present many landmines in terms of determining fault and coverage. The severity, complexity, and volume of work from construction defect claims continues to increase, and claims managers need to look to dynamic people and ideas to handle the intricacies of these claims.
Although not meant to be an all-inclusive guide to these complicated claims, this article presents some of the common myths and misperceptions that claims leaders should review with their adjusters and supervisors to ensure proper handling.
A strong technical background is a prerequisite to hiring for a construction defect adjuster desk.
Over the years, construction defect claims have become much more complex due to the coverage issues associated with construction policies moving from the admitted to the non-admitted side of the policy spectrum. Adjusters are now faced with reviewing and understanding many more manuscript endorsements that either limit or enhance coverage.
Having a strong technical background is important, but that has become more difficult to find in the construction defect arena. Many claims people who were provided fundamental training at the outset of their careers are either retiring as adjusters or have moved into management roles.
Case in point: early in my career I spent a year as a trainee, which included four weeks in a corporate home office learning about policies, followed by another four weeks working in claims handling. At the completion of this eight-week training, I had to pass an examination by achieving a combined score of 90 percent or higher. If I or anyone else failed to reach this threshold, the general manager of a branch could and would terminate employment. Today, this type of training does not typically exist at carriers and certainly does not exist in the area of construction defect claims handling.
Typically what is seen in interviews for construction defect jobs are people who have worked their way up from a clerical position and have had very little construction defect training. As a result, many of these people think they know and understand construction defect cases because they have handled them in the past, but that’s usually not enough.
The days of interviewing for a construction defect desk and believing that several years of on-the-job training are good enough to hire someone are long gone. Technical questions in an interview should be detailed and open-ended. “Can you explain joint and several liability?” or “Can you explain strict liability?” are the type of questions that should be asked.
Questions regarding triggers of coverage and indemnity provisions should also be part of the technical interview. A good construction defect adjuster should also understand many of the manuscript endorsements that are common today and how they serve to bar or add coverage.
Beyond the technical side, it is imperative that the candidate is interviewed with regard to their organizational and system skills. Many companies may not need a high-end adjuster and will instead be looking for someone to handle the tier-three subcontractor claims. While there are still coverage and indemnity issues associated with these claims, for the most part the handling of these becomes rote by nature. These are generally considered by a volume desk in many construction defect departments.
With many companies feeling the pinch of the economy, we are now seeing caseloads increase substantially, as carriers are not rehiring when they lose construction defect adjusters. As a result, the volume desk pendings are increasing. Therefore, if you have the opportunity to hire for a volume desk, finding the right person is a must.
Interviewing should focus on time management skills and knowledge of systems. A question such as “How do you organize your day from the moment you arrive until the second you go home?” can provide great insight. If detailed answers are given—such as working the diary first, or new losses first and then moving on through the day—it shows that the adjuster has a good, systematic approach for handling his caseload on a daily basis.
Finding out how new losses are handled will also be helpful in understanding if the candidate will be successful in the position. Questions such as “How do you front load a new loss when you receive it?” will help you understand how the person will handle a volume desk.
Most construction defect volume desks can handle only three or four diaries a day. Asking questions about the number of diaries a person sets each day will give the interviewer an idea if the candidate is being realistic about their organization or not.
Questions about different types of systems and how they work gives the interviewer an idea of how adaptable the candidate may be to the systems used at your company. Again, questions you ask about organization, time management, and systems may be more important than technical questions, depending on the type of desk position being filled.
Finally, if you have a candidate who exhibits average technical skills with an ability to learn technical concepts but has exceptional organizational and systems skills, you may want to hire this person and train and mentor them on the technical areas to be a high-end adjuster for your department.
Excess claims do not substantially affect the loss ratio in a construction defect department.
Over the past several years, the insurance industry has seen an increase in the size of construction defect cases throughout the country. Coupled with such factors as the insolvency of carriers, aggregate exhaustion, and the lack of primary coverage due to policy language, this has triggered the need for excess coverage.
As a result, we are seeing many more excess claims that are hitting first- and second-layer excess policies, depending on the nature and extent of the claims. The law in particular venues on exhaustion of primary policies also affects the potential for losses hitting the excess layer. In many states horizontal exhaustion is the law; in others, the law can be vertical exhaustion or can be a “pick-and-spike” state.
In vertical exhaustion and “pick-and-spike” states, excess policies can be triggered much earlier than in a horizontal exhaustion state, where all primary policies must be exhausted before the excess policy is exposed. Moreover, the trigger of coverage in the state also may affect how many primary and excess policies can be triggered.
In addition to the above, more excess and umbrella policies are being exposed due to exclusionary endorsements encompassed in primary policies. While straight-line excess policies may be following form to the primary policy, the industry is seeing primary carriers (especially on the non-admitted side) disclaim coverage in situations where the excess carrier may believe that the disclaimer of coverage will not hold up to scrutiny.
Since the cases are so much larger now in these situations, the excess carrier has a much bigger exposure than the primary carrier. As a result, many excess carriers find themselves in the unenviable position of having to settle the case and go after the primary insurer. Large cases that involve class actions for construction products such as Chinese drywall and PEX piping are also causing primary policies to erode quickly, exposing several layers of excess coverage.
Early intervention by the excess carrier through the use of coverage and monitoring counsel can help in assessing these cases early on in the life of the file. Excess carriers need to be extremely persistent and diligent about obtaining information from the primary file carrier and making sure that the primary carrier is taking a proper coverage position. If the carrier has written an umbrella policy with no exclusionary language under Coverage B, it must be very aware of the potential for a large construction defect loss to hit its layer.
As a result, excess losses are having a significant impact on carriers’ loss ratios that they have never had before related to construction defect cases. Claims directors need to be cognizant of this change in the severity increases that they will see in their departments as a result of excess claims.
It is best to have adjusters handle only additional insured claims.
While there are certainly a good number of adjusters who would rather do nothing else than handle additional insured claims, this is clearly the exception rather than the rule.
Many carriers have made additional insured desks a simple volume desk for construction defect adjusters. In reality, for an adjuster to really handle an additional insured desk properly, they should have 50-75 cases pending. Excellent handling of additional insured cases should involve extensive bill review coupled with follow-up on risk-transfer issues to bring other carriers to the table.
Over the years, the number of additional insureds on a case has dwindled. This means that if you are one of only a few additional insured carriers, you could be paying huge legal fees defending a developer on a case. The actual oversight of that case should be extensive to make sure the developer is doing the proper work to get the case litigated and evaluated as soon as possible. Unfortunately, carriers usually give adjusters handling additional insured desks large caseloads, and all the adjuster really does on these cases is pay bills and negotiate a better share of the defense costs.
Getting back to the myth, prospective employees who are handling additional insured claims want to get out of the rut. They believe—rightly so—that the handling of additional insured claims does not serve to move them forward in their careers in the area of construction defect claims handling.
In fact, the “pigeon holing” of adjusters into additional insured claims serves to stop or stunt adjusters’ growth technically in construction defect claims. Adjusters who have handled additional insured claims for several years can lose touch with the real coverage issues in construction defect claims. Moreover, they can lose much of their technical acumen in the area of litigation management and defense of a construction defect claim.
Ultimately, as a manager, if you lose a standard construction defect adjuster and then try to replace them with an additional insured adjuster, you will in many cases have to re-train this adjuster on how to properly handle construction defect claims.
By reviewing these items with adjusters and supervisors, claims leaders will help ensure proper handling of these complicated claims while also helping educate their staff.
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Lawrence C. Beemer is the national claim director for Fireman’s Fund Insurance Company. He is a member of the AIA subcommittee on construction, a member of the Southern California Construction Defect Claims Managers Association, and on the Advisory Board for the CLM since 2007. He may be reached at firstname.lastname@example.org, www.firemansfund.com.