Now It’s Personal
Contractor Faces Paying Defect Claim Out Of Own Pocket
by Joe Wheeler

When George Jaglom bought insurance, he thought he was buying protection from being personally liable for claims.

Then why is he being asked to pay $40,000 out of his own pocket?

Thanks partly to September 11, Jablon faces what many contractors have long feared: Their personal assets being tapped to pay off construction defect claims. The drywall contractor, owner of GRJ Construction, has had three insurance carriers in the last decade: Fireman’s Fund, Reliance Insurance Company, and Zurich. He was insured by Reliance Insurance Company from 1996 to 1999.

When he was notified of Spanish Gardens HOA V. Tiberti-Blood, filed in October of 2000, his company was defended by all three insurance companies, including Reliance. The suit was settled this year for a fraction of the amount originally sought, with the insurers paying their share. The portion due from Reliance was $40,000.

Reliance Insurance Company, however, suffered in the wake of the terrorist attacks on the World Trade Center September 11, 2001, and become a casualty of the day that changed America. The company, already in financial straits, was declared insolvent and ordered to be liquidated on October 3.

That left the HOA’s attorneys, chasing down Jablon’s insurance dollars to settle the Spanish Gardens V. Tiberti-Blood suit, unable to collect the settlement from Reliance Insurance Company.

Instead, they want it from him.

Jablon’s problems with Reliance Insurance Company started in October of 2001, when Pennsylvania Insurance Commissioner M. Diane Koken ordered the company liquidated. Reliance had been financially struggling for months prior to the move; it had failed to reorganize under a prior order and was in a negative surplus position of $1.1 billion.

Part of that deficit was due to slow payments from their reinsurers. The events of September 11 was the final blow to Reliance’s shaky position. The huge losses suffered by reinsurers made it impossible for the company to continue, since what had been slow payments were slowed to a crawl.

While contractor Jablon had idea that one of his former insurance carriers was out of business, and that he would be asked to personally pay a claim that Reliance should have covered, the liquidation sent millions of dollars in outstanding claims seeking guaranty funds across the United States.

The Nevada Insurance Guaranty Association handled the Reliance failure by pooling all claims, and assessing that amount to all insurance companies licensed to sell property/casualty insurance in Nevada. The bill came to $7.5 million, and the insurers were assessed earlier this year.

"Everybody who is licensed in the state was assessed against net written premium," said Richard Houck, manager of the Nevada Insurance Guarantee Association, "That’s what the assessment is based on."

The insurance companies have paid their assessments, according to Houck, and it appears that the $7.5 million will be sufficient to cover the submitted claims. So far. It is not enough, Houck will assess the insurers again in August.

The Guaranty Association is designed to avoid exactly the kind of situation George Jablon finds himself. There is a $300,000 per-occurrence limit on all claims, which is more than enough to cover Jablon’s exposure in this case. So why is Jablon being personally asked to pay a construction defect claim? What went wrong in the case of Reliance Insurance Company?

There are two possible explanations.

Jablon could have obtained coverage from one of Reliance’s numerous subsidiaries. One of them writing in Nevada was a surplus lines carrier, which are companies not covered under the Guaranty Association. That would leave Jablon exposed to the lawsuit without an insurance company picking up the tab.

The other explanation, according to Guaranty Association Manager Richard Houck, is much more likely: The claim has yet to be filed.

Houck said that the Reliance liquidation sent Third Party Administrators (TPAs) around the country scrambling to send claims into organizations like his. The TPA is charged with forwarding all claims to the appropriate entity. That process takes time.

"Reliance had something like 200 TPAs around the country," Houck said. "We’re still getting claims, but not that many. The cut-off date is April 2003."

If a claim came from another source, such as a lawsuit, there was an excellent chance that it had yet to be processed for payment. The law firm handling the case may not be aware that Reliance claims are being paid. Once informed, they should seek payment there and leave insureds out of it.

All of which doesn’t keep George Jablon from sweating a little. If no coverage is extended from the Guaranty Association, he will become the first contractor to pay a construction defect claim out of his own pocket.

Even in the event the Guaranty Association pays the claim, Jablon may still be on the hook for attorney fees. He was forced to hire his own counsel after Reliance’s failure, a bill that may not be covered by the fund.

From The Construction Zone

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