Building liability products.

Risk retention groups not only are filling a void in the medical world, they also are satisfying a need in the construction industry. For the past few years, West Coast contractors in particular have had a difficult time finding liability coverage in the standard market. And if they have managed to find a writer, they have also wound up paying much more for that coverage. The hard market in property/casualty has only made the situation worse.

Contractors hit the hardest have been builders of multiresidential units, such as townhouses and condominiums. These dwellings have become "magnets for class-action lawsuits--making them uninsurable," according to the California Building Industry Association.

"The residential problem on the West Coast and other defined areas of the country is huge--it's virtually impossible to buy any kind of risk transfer on the general liability exposure because of the construction-defect issue," said Rick Shamis, managing director of Aon's property/casualty operations, central region. Smaller home-building companies have been most affected, he noted.

Carriers that were in this market providing a traditional product to residential contractors only three or four years ago now are either insolvent, out of business or just not writing this line anymore, Shamis said.

"So you've got a shrinking number of carriers, a hard market and surplus being diverted in other areas than to write residential contractors on the West Coast and other parts of the country," he said. "These are the perfect ingredients to form a risk retention group."

And that's just what Aon has done. "We take our fully integrated platform, try to leverage our retail-wholesale brokerage units as well as our reinsurance and underwriting capabilities to try to bring these solutions to bear where the problems are," he said.

In another area, Aon is creating a product with a risk retention group model to make warranty insurance avail able to smaller road-building companies, he said.

"In recent years, state DOTs have cut back on their maintenance budgets, and they have diluted themselves of manpower," Shamis said. Previously, departments of transportation would require road contractors to meet certain performance criteria over an extended period of time, and then have their own crews take over the road maintenance. Now, DOTs are starting to transfer this exposure back to the contractors, asking them to provide warranty insurance or bonds up to five and sometimes, 10 years, he said.

In order to bid on a public road contract, he added, contractors have to have a surety bond, which normally will be extended to cover the warranty period up to a year without any complications. "However, it is extremely difficult to get surety companies to provide a five-year warranty on that bonded work," Shamis said. "So this has literally left the contractor, especially the smaller guy, out. There just isn't a product for him out there."

By and large, Aon represents larger construction companies which presumably could create their own captives offshore and provide a warranty insurance solution for those contracts requiring long-term warranties, he said. "A smaller guy can't do that, so our developmental product will be a way for a small guy to meet specifications so he qualifies to bid the job and get the work."

The major advantages of a risk retention group are rate stability and coverage availability, which are "huge" to some of these contractors, Shamis said. On the other hand, membership in a risk retention program is not without risk and, to participate, contractors must clean up their loss control, their safety, their customer care and their quality control, he said.

But this alternative-market vehicle is not a bad thing, Shamis emphasized, noting that risk retention groups give contractors a way of gaining a product for particular solutions when traditional markets fail. "They've proven they can't do it," he said.