The construction recession is killing off numerous smaller companies and surety losses are growing, said insurers at the International Risk Management Institute's construction conference in San Diego. But bigger, better-managed companies continue to win jobs and the surety losses overall will be manageable.

At the same time, say risk managers, brokers and insurers at the conference, the never-ending legal wrangling over scope of coverage has led lawmakers in four states to attempt to assure that construction defects are covered under contractor liability insurance. As a result, a few insurers reportedly are steering clear of writing liability coverage for contractors in those states.

Insurers say they see two kinds of contractors as the construction recession reaches its bottom: strong companies with enough cash and backlog from the good times to ride out the trouble and win new work, and smaller, marginal prime contractors and subcontractors who to stay alive are switching markets and submitting overly competitive bids.

Those companies regularly default on work in progress or shut their doors.

Surety losses are rising, but won't go so deep as to erase profit margins, says Roland Richter, vice president of Liberty Bond Services, a part of Boston-based Liberty Mutual Group.

For the most part macroeconomic matters remained in the background at the IRMI conference, which concluded Nov. 17. That allowed the risk managers, brokers and insurers to turn some of their attention to sessions involving the kind of legal hairsplitting that one construction CEO not in attendance described as a "two-coffee" seminar.

Some of them were worth staying awake for, especially the session that concerned the question embodied in lawsuits in several states about whether a construction defect is an "occurrence" under a general liability policy.

Insurers and brokers at the conference generally agreed that 20 years ago construction defects were what you bought liability coverage for. But recent cases in Hawaii, South Carolina, Colorado and Arkansas have thrown the matter into doubt.

Contractors in those states convinced lawmakers to pass new statutes defining an occurrence or trying to clarify the issue, and a few insurers, according to scattered and unconfirmed comments at the conference, have stopped writing general liability policies for contractors in those or other states.

But such reported "carve outs" remain unusual.

In South Carolina, the courts couldn't produce consistent rulings.

Attorney Patrick J. Wielinski said that because consecutive rulings in South Carolina had gone "covered, not covered, covered, not covered" on defects it had become "hard to plan and you can't predict." Meaning, neither insurers nor contractors could be sure what coverage they were getting and paying for.

To settle the matter in Arkansas, lawmakers adopted a statute that requires all commercial general liability policies to contain a definition of occurrence in the form of an endorsement.

In general, in order for a defect to be classed as an occurrence, it has to be unintended and unforeseeable.

While some insurance executives say such coverage was always intended for and priced to include defects, attorneys for insurers don't see anything strange in challenging definitions of such basic concepts because, as one insurer's lawyer said, each must be decided within its own context "and every project is unique."

"We don't want to be providing coverage for something we didn't intend to cover and didn't price into the premium," he said.

Even so-called manuscript endorsements, which are non-standard and negotiated by the parties, can be troublesome in trying to fix the occurrence issue if the wording isn't sound, says Jeffrey J. Vita, an attorney who has represented contractors against insurers. "Be careful in creating manuscript endorsements that you aren't creating more problems than you solve."

Contractor general liability in most policies would cover injuries or property damage caused by a contractors' work, including damage to the property.

Builders risk coverage, on the other hand, would insure against losses from events such as fires or storms while a contractor is working on a project.

However, even the definition of what is a subcontractor can end up in court.

One case involving a business risk exclusion came up at the conference involved the difference between a subcontractor and a supplier.

The issue came up several years ago over Mosser Construction's work on the backfill foundation of a wastewater treatment plant at Port Clinton, Ohio.

A supplier had provided Mosser a fill material that contained gypsum, which expanded when it was exposed to water and caused cracking in the structure above. When Port Clinton sued Mosser for the damage, Mosser turned the matter over to Travelers Indemnity Co., but it declined to cover the damage and lawsuit defense because it argued the defective fill was provided by a material supplier, not a subcontractor. Mosser lost the initial case but prevailed against Travelers on appeal in July.

The lesson was not lost on panelists at the conference. Sometimes subs and suppliers are engaged with a simple purchase order as a way to bypass insurance requirements.

That can be a mistake, noted Steven D. Davis, senior vice president of McGriff, Seibels & Williams Inc., a Birmingham-based broker. As much as possible, he said, purchase orders should mirror a company's subcontract agreement.