Contractors, along with their insurers and brokers, are coping with big challenges in two of the nation's largest and most active construction markets--California and New York--which have traditionally been "very difficult, [but] for very different reasons," one leading insurer contends.

California is the more complicated of the two, with a number of factors contributing to problems there, according to Richard Aldorisio, vice president in charge of primary casualty at Investors Underwriting Managers, a Red Bank, N.J.-based subsidiary of Markel Corp.

First, there was the state Supreme Court's decision in the case of Montrose Chemical Corp. vs. Admiral Insurance in 1995, which greatly increased the liability faced by contractors--a problem that is only compounded by what Mr. Aldorisio called the state's "active" plaintiffs' bar.

Trial lawyers in California, he said, have found contractor liability to be a "profitable business model."

There are, however, some positive developments. Among them is legislation passed by the state legislature that took effect in 2003, requiring that property owners notify contractors of construction defects and give the contractors a chance to repair damage before filing suit.

However, while insurers had high hopes for the bill, known as S.B. 800, insurers have not been reporting any benefits so far, said William Newton, president and chief executive officer of Lemac & Associates, a Los Angeles-based broker.

Part of the reason for this, he explained, is that the bill only affects those construction projects built after the bill was enacted. Typically, Mr. Newton noted, construction complaints don't surface until four-to-six years after a project is built.

Despite the problems in California, Mr. Newton sees the market as "certainly getting better." Although he noted that most of the commercial construction market is still being placed in the surplus lines market, in general, he said, "there's decidedly more competition [and] rates are definitely coming down."

Among the more positive developments, Mr. Newton said, is the evolution of "wrap-up" policies into a more common product for residential construction in the state. Wrap-up policies provide coverage for the developer, the general contractor and any subcontractors involved in a specific project under one policy.

Initially used to provide general liability and workers' compensation to very large construction projects, Mr. Newton said that around five years ago, the product began to be used for midsized projects--those generally costing between $25 million and $100 million. And the trend has been moving steadily into smaller and smaller projects since then, he said.

Although wrap-up policies have been available for many years, Mr. Newton said that Arch Insurance has been at the forefront of expanding the products horizons, and other companies are following. Mr. Newton said that as many as 10-to-12 companies are offering wrap-up policies, rather than just the two or three doing so a few years ago.

"It certainly is the way to do business in California," he said, adding that wrap-up policies are used for the construction of virtually all condominium developments in the state.

Wrap-up policies include a number of financial benefits for the policyholder, Mr. Newton noted--not the least of which is the peace of mind that comes from knowing that all subcontractors on a project are insured, and what coverage they have.

From a financial perspective, wrap-up policies also allow general contractors (or developers, when they purchase the policies) to reduce their premium costs by spreading them to the other participants in the project. Depending on the policy, Mr. Newton said, a general contractor can reduce its costs by 40-to-60 percent.

"When you do a wrap-up, one thing it does is take a big burden off the general contractor," he said.

For insurers, bringing all those involved in the construction project under one policy can also have serious financial benefits. Between 40 percent and 60 percent of all construction defect claims expenses are related to litigation and defense costs, Mr. Newton noted, adding that wrap-up policies can help reduce those costs because an insurer is less likely to face a situation where one contractor on the project is suing another.

Mr. Newton and Mr. Aldorisio both agreed that the California market is drawing increased capital and competition, but take different views regarding what the future for the market may hold.

Much of the new capital moving into the California market, Mr. Aldorisio noted, is coming from new companies that have not had the experience in underwriting that Markel does and have not seen the full costs of writing insurance. "They have not yet seen the tail of this business," he said.

Although the state has undergone a housing boom in the past few years, Mr. Aldorisio noted that most major construction firms have said they had record years in 2005 and are expecting less from 2006.

"They may be fighting over less business," Mr. Aldorisio said of the insurance market in California, adding that the state "could quickly become an unattractive market."

From Mr. Newton's perspective, however, any increase in competition among insurers is a benefit for those buying the policies. "If the number of projects stabilizes or goes down, prices go down," he said.

However, Mr. Newton said he remains unconvinced that any such slowdown will occur, noting the continuing massive flow of new residents to California. "We cannot keep up with the housing demand," he said.

While the California market may have found a new way to deal with the problems in the state, contractors in New York--and their insurers--continue to experience a difficult market caused by the state's labor laws. Specifically, Mr. Aldorisio said that New York's "Scaffold Law"--which places absolute liability on the property owner and contractor to ensure a safe workplace for workers--is a major source of the problem.

In addition, the state's courts have significantly broadened the definition of the term "fall from height," allowing such claims to include falls of only a few feet that can commonly happen at a jobsite.

"Workers' compensation does not become the absolute remedy" for injured workers in the state, he said.

Some general contractors have tried to include language that transfers the risk to their subcontractors, but Mr. Aldorisio noted that the state also prohibits such transfers of sole risk--meaning that there are no guarantees that general contractors will not find themselves held liable as well.

As a result, according to Robert West, a representative of the New York State Builders Association Management Services, admitted insurers are staying away from the market.

"The traditional market has basically vacated New York State," he said, noting that in cases involving the labor law, "an insurance company really has no defense." Many of the nonadmitted insurers, he noted, are being careful about underwriting and have exclusions in their policies.

Although the NYSBA represents only residential builders, Mr. West said commercial builders faced the same conditions and problems. One potential advantage for some commercial builders, he noted, however, could be an economy of scale. For the larger companies, he said, "it may not be so bad."

Although a recent court decision has stemmed the expansion of the "fall from height" term, Mr. Aldorisio said there does not appear to be any effort underway to overturn the "scaffold law."

In an effort to deal with the situation and to help contractors and homebuilders find coverage, Mr. West said the NYSBA has been working with Marsh to develop a reciprocal insurance company that would be owned by the association's members.

Although such a company would still be subject to the state's difficult labor laws, Mr. West said the fact that it is owned by the association's members provides a "powerful incentive" to policyholders to maintain the highest safety standards and risk management practices.

NYSBA has been working on the project for over a year, Mr. West said, after having used several temporary programs.

"We had a couple of more traditional programs in place over the years," to help builders, Mr. West said. Those programs, however, would only be in place for a "couple of years" before the insurer running them would pull the plug. As a result, he said, "NYSBA decided to create a program where they had more control."

With state photos:

Calif. Jury Still Out. California's S.B. 800 seemed promising, requiring that contractors get notice--and an opportunity to repair defects--before suits are filed, but complaints can take six years to surface, and the bill only affected projects built after it was enacted.

Is N.Y. Fall Risk Uninsurable? "The traditional market has basically vacated New York State," according to Robert West of the New York State Builders Association Management Services, who blamed state labor rules such as the "Scaffold Law."

Aldorisio mug supposed to come from Matt Brady or Susanne Sclafane.