CONSTRUCTION INSURANCE
Coverage comes at a price and with a lot of effort
By Joseph S. Harrington, CPCU
The past few years have been trying times for construction contractors and their insurers, and there’s no indication things will get much easier any time soon.
While most sectors of the economy have fully recovered from the pandemic, construction remains hampered by a shortage of skilled labor and rising costs for materials, the latter a function of both general inflation and lingering supply chain bottlenecks.
In short, the problems in construction are structural within that sector, and will not simply go away with economic growth. Targeted innovations are need-ed to address them; that goes for construction insurance as well as building projects.
“Since the cost of doing business is greater, construction companies are charging more, generating an increase in revenue even for a scope of work similar to that during the prior policy period.”
—George Paull
Associate Managing Director
Burns & Wilcox Brokerage
Headwinds
“The construction industry has prevailed against strong headwinds in recent years,” says Tom Murphy, senior vice president of Quaker Special Risk. “Still, supply chain bottlenecks, inflation, and labor shortages remain very significant challenges.
“Seasoned construction professionals are retiring, leaving knowledge gaps within all types of firms,” he continues. “Persisting supply chain bottlenecks result in projects taking much longer to complete and costs rising accordingly.”
Those challenges don’t seem to be deterring insurers from coming into the construction market, but carriers are carefully calibrating their approach, according to Murphy and others.
“We’ve seen more carriers and capacity come into the market with new programs in the past couple of years,” Murphy says. “While usually that would mean a softening market, coverage availability today remains rather tight. Solutions tend to be arising in certain niches of the business, not broadly for the construction sector as a whole.”
John Doherty, director of Nationwide’s middle market national underwriting, prefers to describe today’s construction insurance market as “firm,” rather than “hard.”
“Traditionally, a hard market is characterized by coverage capacity being unavailable,” he says. “In the current market, coverage is still widely available, but in lines under stress we will continue to see substantial rate increases.”
Pricing and rating
According to Doherty, “A structure built today costs about 25% to 33% more than it would have before the pandemic.”
The resulting revenue increases alone lead to substantial premium increases for construction insurance, even without any significant change in rate, coverage, or the nature of the insured operation, according to George Paull, associate managing director for Burns & Wilcox Brokerage.
“It’s important to note the distinction between rate and pricing,” Paull says. “An increase in an account’s pricing can result from top-line revenue growth as well as rate increases.
“Since the cost of doing business is greater, construction companies are charging more, generating an increase in revenue even for a scope of work similar to that during the prior policy period,” he explains. “If an insurer rates coverage on the basis of sales, payroll, and/or subcontractor costs, the premium will go up substantially even without a rate increase.”
Thanks, in part, to cost- and revenue-based premium growth, Paull finds that overall underwriting capacity for construction risk has not declined, even in the problematic excess liability line, where producers have to tap more carriers than in the past to support an account.
“Underwriting capacity as a whole has not decreased,” he says, “but carriers have decided to deploy their capacity more selectively. The days of a lead $25 million excess layer seem to be long behind us. Even a lead $10 million is becoming uncommon for larger risks.”
“We continue to see labor issues and material delays affect project completion times, increasing our risk and reducing the availability of additional account-level capacity.”
—Jen Klobnak
Chief Operating Officer
RLI, Inc.
Liability strains
Doherty finds that liability risk for construction firms, as for other sectors (especially those that utilize vehicles) is compounded by “social inflation” (the increase in jury awards beyond what is accounted for by economic factors) and financing of litigation by third parties seeking to profit from an award.
“While it’s not a truly hard market, the last few years have been firm, with rate increases across most casualty lines,” he says. “Accounts with large or heavy fleets, inadequate loss control, or poor loss experience should continue to expect substantial rate increases.”
Contractors with substantial commercial auto exposure may be facing a different—and more acute—problem in California, where the state insurance department is reluctant to approve rate increases.
“As a result, insurers in California are struggling to keep pricing in alignment with rising clam costs,” says Michael Teng, an assistant vice president for Sentry Insurance responsible for pricing and underwriting of regional products. “Many insurers will reserve capacity based on risk quality, so it’ll be even more important for contractors to ensure their employees are driving safely.”
Regarding a liability risk unique to construction insurance—construction defects—Doherty says Nationwide closely monitors construction defect claims and rulings, and the impact of increased costs of labor and materials on the cost to repair defective construction. “We’re watching trends in the use of substitute materials and inexperienced labor to understand how those factors may impact future construction defect claims,” he says.
Paull counsels producers and buyers to be “wary” of new exclusions in commercial general liability (CGL) policies barring defense and indemnity coverage for legal liability arising from wildfire events.
“These exclusions are becoming more common in California and other states where wildfires are a major issue,” he says. “Electrical contractors and other artisans who could even be tangentially linked to a fire incident are finding their CGL coverage subject to this exclusion. More premium is often required by markets willing to write coverage that does not specifically exclude wildfire.”
Challenges in the construction market and the evolution of specific risks is prompting reassessments of risk transfer in the sector, according to Jen Klobnak, chief operating officer of RLI, Inc.
“Over the past several years, project owners have often required general contractors to carry project-specific coverage to prevent any erosion of limits from losses from other projects,” she says. “Most carriers are willing to write $1 million or $2 million primary limits, yet excess liability carriers are looking for higher attachment points.
“To lower costs for their general contractors, project owners are looking for insurers that will allow for lower general contractor liability limit requirements on their Owner’s Interest policies.”
“If a location is in a cat-exposed area, we find more carriers need to be involved; deductibles are increased and/or sub-limits are greatly reduced. This will cause project insurance costs to increase significantly.”
—Ryan Hornbeck
Senior Underwriter
Tokio Marine America
Property impact
Regarding the impact of construction market conditions on surety and property risk, Klobnak says, “We continue to see labor issues and material delays affect project completion times, increasing our risk and reducing the availability of additional account-level capacity.”
“Delays in receiving materials and increasing labor costs have made it harder for construction projects to finish on time,” says Ben Tuttle, senior vice president of inland marine for Tokio Marine America. “Because of this, requests for extensions to builder’s risk policies have increased. Home construction projects that typically took five to seven months to complete are now looking at 15 months due to permitting delays, delays in material deliveries, and delays in ordering appliances.
“Both material and labor costs will likely be higher during the upcoming extensions,” he adds, “Due to labor shortages and extended timelines on other projects, subcontractors may not be available in a timely manner for a project.
“In such cases, it is important to have a conversation with your insureds to make sure their soft cost exposure is fully contemplated,” Tuttle continues. “For some projects today, higher interest rates are making the new construction less [affordable], so home buyers may back out, leaving unoccupied homes on the market. A builder’s risk policy may no longer provide coverage. A vacant property policy may be required at a higher cost to the developer or contractor holding the property.”
Delays in project completion also mean that projects are exposed for longer periods to natural catastrophes, a major hazard for builder’s risk insurers, who are covering structures that are still in a relatively fragile state.
“On the property side, we are seeing shrinking catastrophe capacity,” says Ryan Hornbeck, a senior underwriter with Tokio Marine America. “Sub-limits are shrinking on coverage for named storms and flood damage, and large pro-jects need shared and layered coverage.
“If a location is in a cat-exposed area, we find more carriers need to be involved; deductibles are increased and/or sub-limits are greatly reduced. This will cause project insurance costs to increase significantly.”
Adapting
There’s a “new normal” in construction, and conditions in the business will likely be constrained for at least several more years by challenges in acquiring labor and materials.
One thing we can count on is that contractors and their insurers will be resilient and proactive in making the most of the opportunities available.
“Contractors, agents, brokers, intermediaries, and carriers see the immense value brought by insurance professionals who are also construction experts,” says Doherty. “The benefits of specialization include increased retention, the ability to tailor custom risk management solutions to reduce the total cost of risk over time.”
As for his accounts, Doherty says that “contractors are resilient and innovative. They feel the pressures but are always looking for ways to thrive in any environment.”
“Ultimately, I don’t see major changes in insurance risk,” says Teng. “Contractors should continue to prioritize the fundamentals of risk management, including training, jobsite safety measures, and promotion of safe driving.”
For more information:
Burns & Wilcox Brokerage
www.burnsandwilcox.com
Nationwide
www.nationwide.com
Quaker Special Risk
www.quakerspecialrisk.com
RLI, Inc.
www.rlicorp.com
Sentry Insurance
www.sentry.com
Tokio Marine America
www.tmamerica.com
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
