New Insurance Fuels Boom In Condominium Building.

After being battered for more than a decade by construction-defect lawsuits, residential developers in Southern California are getting back into the condo business.

"More condos and attached units are being built now than at any time since the late 1980s," said Jeff Masters, who heads the developer risk management group of Cox Castle & Nicholson in Los Angeles.

Sparking the increased activity has been the emergence of umbrella insurance policies for attached-home developments and heightened quality-control standards.

"A lot of contractors are telling me that a year ago, they couldn't get (insurance) coverage to work on attached projects," said Tom McCall, executive vice president of Aon Risk Services in Costa Mesa. "Now, it has become popular enough so that coverage is available to almost anyone who can demonstrate an ability to provide quality work."

At Lennar Homes, contractors actually videotape their work to protect against future construction-defect lawsuits.

"It's part of what we call the forensics process," said Denis Cullumber, division president of Grey stone Homes. "We document everything, not only as legal protection but also to help us improve our production methods."

The company is also turning to a type of insurance policy that has its roots in large commercial and public development projects. Referred to as wrap-ups, the policies cover the work of the builder and subcontractors, and are being underwritten with less exclusions for contractors interested in building attached housing.

A pickup in condo activity would be welcome not only by builders but by many urban planners and other observers who cite a lack of so-called affordable housing as one of the downsides to the area's economic boom. The drying up of the condo-construction market has forced many homebuyers to turn to the Inland Empire for units they can afford.

While detached units are typically built six to eight per acre, attached developments -- everything from condos to apartments and duplexes -- average around 15 units per acre in Southern California, says George Dale, chairman of the California Building Industry Association's construction task force.

"That makes them more economical to develop and less expensive to consumers," he said.

Wrap-up policies, in the past issued almost exclusively for large commercial and public building projects, allow a developer to buy a single policy to cover everyone working on a job. "In a typical subdivision, you might have one policy for the developer and as many as 45 other policies for the subcontractors and the architects," said Masters. "That can make for a very costly and complicated process when someone makes charges of faulty construction."

The wave of lawsuits against homebuilders has caused insurance rates to skyrocket and insurers to balk at underwriting construction of some types of housing.

"Insurance companies pay more money on legal expenses than they actually pay in claims," said Dale, who is managing partner of the Los Angeles law firm of Dale Braden & Hinchcliffe. "Some pay two to three times more to attorneys than they do to plaintiffs."

Whether wrap-up policies will be a significant factor to sustain current increases in attached housing development remains to be seen. "It's still too early to tell -- some of the larger developers have been using wrap-ups for several years now," said Dale. "But not enough (small and medium-size) builders know about all of the changes taking place in insurance coverage."

Education is only part of the problem, argues Mark Kerslake, a principal of Newport Beach-based Province Group.

"The insurance carriers get tricky sometimes in the way they write endorsements," he said. "It's getting better in terms of coverage builders want versus what the insurers are willing to give. But it's still a costly process and a bit of a tug of war."

Because the coverage involves all the contractors working on a project, up-front costs are much higher than charges developers are used to paying. But insurance providers are telling developers that wrap-ups can actually wind up saving money.

Even consumer advocates say they like the new wave of insurance coverage.

"If there's a new product that can pick up all of the risk under an umbrella policy, that's great," said Thomas E. Miller, principal of Miller Law Firm in Newport Beach, who has been involved in condo litigation. "We've seen many cases where developers have gone out of business or gone bankrupt. Then it becomes a fight between the insurance company of the developer versus the insurance company of the subcontractors."

In such instances, homeowners see delays in delivery of checks that can extend the average time frame for resolution of cases, which he says averages 18 to 24 months.

Residential developers don't necessarily look at the situation in the same way. But they agree that the need for more flexible insurance is an important element in rebuilding Southern California's condo market.

"A wrap-up insurance policy makes condo development more viable," said Jon Jaffe, president of western regional operations for Lennar Homes in Mission Viejo. "It doesn't change the risk profile associated with litigation. But it will help attract more developers not (currently) building attached units into the market."