Businesses Balk At Paying High Liability Prices
By HOWARD FINE
Brett Maurer got quite a surprise when he opened up an envelope with his new quote for liability insurance coverage. Instead of a modest 5 percent or 10 percent increase like he was used to, the premium for his Irwindale roofing company shot up more than three-fold, to $31,000. As far as he knew, no liability claims had been filed against his company to prompt the huge markup.
"I was in total shock," Maurer said. "What was even more shocking was the reaction from my insurance broker: 'Just be glad you were even offered a quote,' he told me."
Maurer, president of Highland Roofing, is on the front lines of another insurance crisis brewing for L.A. area employers. The sharp rises in workers' compensation and health care insurance premiums are well documented. But the explosion in general liability insurance costs now hitting several industries in L.A. and throughout the state has caught nearly everyone off guard.
It's the most difficult liability insurance market for businesses since the mid-1980s.
"Companies in high-hazard industries are just getting killed in this market," said Fritz Mutter, a Monrovia insurance broker. "Since it's not mandated by law, many small outfits are going without liability insurance."
While increases are being felt mostly in the roofing and general contracting industries, virtually every company has seen rate hikes for the same amount of coverage. Nationwide, liability insurance premiums are up, on average, 40 percent over last year, according to Jay Wesley, managing director and casualty manager for Marsh, the risk and insurance subsidiary of Marsh & McLennan Cos.
Some industries are seeing doubling and tripling of rates.
The problem is not limited to cost increases. Over the last three or four months, insurers have not been renewing liability policies, even in lower risk industries.
"All of a sudden, at the last minute, three or four days before the policy expires, companies are getting these non-renewal letters from their carriers," said Earle Greenberg, executive vice president of LBW Insurance and Financial Services in Van Nuys. "That's when I get these panicked calls from companies desperate to find insurance before the 60-day termination deadline. Under those circumstances, it almost always costs a lot more to sign up with another company."
Greenberg said last week he received a call from a company that rents out arcade games to businesses.
"They've had $200 in liability losses over five years, which makes them a very profitable client for any insurance company," Greenberg said. "Yet their insurer still dropped them."
Effects of 9/11
The market is being driven by a "perfect storm" combination of factors:
>A falling stock market that has sapped much of the profit margin for insurers, already weakened by years of underpricing premiums.
>A steady increase in big lawsuit verdicts. While many of these have been reduced or overturned on appeal, the average final verdict has tripled from $7 million to $20 million over the last decade, according to Marsh.
>Rising health care costs, which have raised the cost of treatment for claims.
Then came the final blow: the Sept. 11 terrorist attacks that resulted in billions of dollars in insured losses and led to some criticism that the insurers used the event as a cover to recoup losses from the stock market and its recent underpricing.
The final tally from Sept. 11 may not be known for another three or four years, but preliminary estimates are between $40 billion and $70 billion, easily outpacing Hurricane Andrew or the Northridge Earthquake as the costliest disaster in U.S. history.
In California, large numbers of construction defect and toxic mold lawsuits have made the liability market even worse, especially for construction-related industries. Several years ago, there were at least a dozen major insurance carriers writing liability policies for construction and roofing contractors; now there are only three in the state and even they tend to shy away from small premiums under $20,000.
As a result, doubling or tripling of liability premiums for firms in these industries has become commonplace after Sept. 11.
"I just got my quote the other day and for the same coverage, my premium would nearly quadruple, from $6,500 to $25,000 a year," said Guy Crater, owner of D & G; Roofing Co., a small contractor in La Verne.
Crater said he briefly considered dropping liability insurance altogether, but decided against it because of the risk of a claim. Instead, he's looking at getting a slimmed-down policy for $15,000 that excludes any damage that might be caused from the use of torches.
Many insurers are reducing their coverage. For example, damage allegedly caused by mold is now routinely excluded from most insurers' policies.
Insurers are also charging more for the same coverage limits (a combination of deductibles and caps on dollar value of claims covered). This has resulted in companies seeking lower limits to keep their costs from rising too much, according to Wesley. Marsh last week released a survey showing that businesses nationwide reduced liability limits on their policies by an average of 6 percent.
Faced with exploding costs, many small residential roofing contractors are skipping coverage altogether. (Commercial contractors are almost always required to show proof of insurance.)
"There's no question that many contractors are now choosing to go without," said Johnny Zamrzla, president of Palmdale-based Western Pacific Roofing Corp. and a board member of the Roofing Contractors Association of Southern California. "So that they can't be tracked down if a claim comes in, they are operating on a cash-only basis. They're in effect part of the underground economy.
"What these operators do, of course, is drive down prices for the industry as a whole, making it that much harder for legitimate companies that have all their insurance to make ends meet," he added.
Roofers and residential construction contractors may be hit the most severely so far, but firms in the health care, pharmaceutical and chemical sectors have also been hit hard, Wesley said. Even the traditionally low-risk food manufacturing sector is seeing increases in liability insurance after years of flat or declining premiums.
"We've been very careful on the liability side and our rates still went up 12 percent, said Bill Perry, president of Los Angeles-based GFF Inc. (formerly Girard's Fine Foods), which makes salad dressings and sauces. "They will likely go up even more next year."
Perry said that the Sept. 11 attacks stoked fears that terrorists might go after the nation's food supply, and that in turn drove liability rates higher.
"If they could hit our transportation network, then they could poison our water or sabotage our food supply," Perry said. "That undoubtedly drove some of the increase. The rest comes from Southern California being a hotbed of litigation."
Perry said his rates would be even higher except that his workforce is unionized and tends to be stable.
"We have well-trained workers who speak English and who make competitive wages," he said. "They stay with us a long time, which makes them less of a risk."
For some, the real impact of the hardening market has yet to hit.
"Our policy is up at the end of September and I've been told to expect at least a 20 percent increase, if not much more," said Gary Pietruszka, vice president of Woodworking By Degree, a custom cabinet shop in the San Fernando Valley. Pietruszka said that last September his liability premium went up about 10 percent.
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