CONSTRUCTION INSURANCE

Finding stability in a sector

beset by rising claims costs

By Joseph S. Harrington, CPCU

 No news isn’t necessarily good news for construction contractors and their insurers, but it’s not bad news either.

For the better part of the past two decades, contractors have been dealing with a shortage of skilled labor, after many artisans abandoned the sector during the real estate bust and never returned. Today, contractors strive to recruit younger people into the trades to keep up with a steady stream of retirements.

Contractors continue to adapt to the tight labor market, as well as to the impact of higher interest rates on construction finance. These challenges affect both liability and first-party property exposure (builders risk), principally by extending the time and cost needed to complete projects.

In 2025, however, contractors are being hit with news on two fronts: stepped-up immigration enforcement, which impacts the availability of unskilled laborers, and the imposition of tariffs on foreign components, which is aggravating supply chain problems and adding to the cost of materials.

Still, with all that, contractors and their insurers tack to the winds and sail on.

“The construction industry is robust,” says Michael Teng, assistant vice president of regional products, pricing, and underwriting for Sentry Insurance. “The number of permits and loan amounts continue to grow, although rate of growth has slowed down due to economic and political uncertainty. The high-interest rate environment over the last few years has not measurably impeded construction activity.”

That said, “the construction sector is facing a range of challenges,” according to Lisa Uzzo, principal, Inland Marine at Falvey Insurance Group. “Cost overruns and cash flow management issues are common, and communication breakdowns between stakeholders frequently lead to project delays and inefficiencies.”

Persistent labor shortage

Recruiting and retaining skilled labor continues to be a major preoccupation for contractors, as many experienced artisans retire, Uzzo says. To cope with the problem, she says, contractors are partnering with vocational schools to develop apprenticeship programs while advocating for legal pathways for undocumented immigrant workers to stay on the job.

At the same time, Uzzo notes, contractors are offering better pay, benefits, and career opportunities while aggressively integrating new technologies for managing work and executing repetitive tasks.

“The construction industry is robust. The number of permits and loan amounts
continue to grow, although rate of growth has slowed down due to economic and political uncertainty.”

—Michael Teng

Assistant Vice President, Regional Products, Pricing, and Underwriting

Sentry Insurance

Teng is witnessing similar efforts to cope with a prolonged shortage of skilled craftsman, a situation that prolongs projects and increases the chance of claims for constructive defects and faulty workmanship.

“Skilled laborers are hard to come by,” he says. “Contractors are looking to fill the gaps and develop a pipeline of workers by providing training, subbing out work, investing in technology, and re-engineering their supply chain.

“While competitive wages and retention bonuses are the most direct ways to keep workers, so far we have not seen a significant upward pressure on wages,” he adds.

“The labor shortage is not new,” says Marc Gantar, head of verticals for The Hartford. “The industry has been dealing with this challenge for a while, as only a small number of young people are considering construction as a career. A main concern is how to get construction to appeal to a younger generation.”

Interest rates

High interest rates in recent years may have tapped the brakes on construction activity, but apparently they have not reduced it significantly.

“The construction industry has weathered the higher interest rate environment rather well,” Gantar says. “For now, our portfolio of mostly commercial projects hasn’t felt much of an impact from higher interest rates.”

Teng with Sentry shares that observation. “Construction loan activity has grown at a slower pace since the Fed significantly increased interest rates to combat post-pandemic inflation, but construction spending overall has not slowed down,” he says.

The longer rates remain elevated, however, the more they will complicate planning for developers and contractors. “Coupled with persistent supply chain issues that drive up the cost of building materials, high interest rates have produced a high level of uncertainty in both residential and commercial construction markets,” says Uzzo.

Tariff talks

Uzzo adds that recent announcements regarding trade tariffs compound the uncertainty by triggering shortages and price volatility for construction materials. “These factors increase costs and delays that impact project financing and lead to budget overruns,” she explains. “The cumulative effect is a ripple of disruptions throughout the construction lifecycle.”

“Tariffs would definitely have an impact on construction,” says Gantar. “You immediately think about increases in material costs, and broader supply chain concerns. Whenever you have supply chain issues, it delays projects, which drives up costs. It is still too early to feel the impact of the potential tariffs, but it is something we are closely monitoring.”

Teng notes that it remains to be seen when and how tariff announcements will be followed with actual implementation. “On the positive side, some believe tariffs may incentivize businesses to bring manufacturing back to the U.S., which may increase construction opportunities.”

Sector impact

While people commonly hear about a housing shortage and a glut of unused office space, it may be surprising to hear these observers say that they see greater opportunity for growth in commercial rather than residential construction.

 

“The labor shortage is not new. The industry has been dealing with this challenge for a
while … . A main concern is how to get construction to appeal to a younger generation.”

—Marc Gantar

Head of Verticals

The Hartford

“The construction sector is facing a range of challenges. Cost overruns and cash flow management issues are common, and communication breakdowns between stakeholders frequently lead to project delays and inefficiencies.”
—Lisa Uzzo

Principal, Inland Marine

Falvey Insurance Group

As Teng tells it, this repurposing entails significant work to bring older structures up to code, upgrade fire protection, install “green” energy features and telecommunication infrastructure, and improve handicapped accessibility.

Expanded liability exposure

The novelty of commercial-to-residential conversions vastly expands potential exposure to construction defect claims, according to Steve Parker, executive vice president for excess casualty for Westfield Specialty. “Contractors should be wary of converting commercial buildings to apartments and condos,” he says. “They were not originally designed for habitational use. The building infrastructure, the plumbing and wiring, has to be redesigned and re-engineered.”

Expanded exposure to construction defect claims aggravates already difficult conditions in the market for construction liability insurance, Parker says.

“The sector is challenged by liability claims,” he says. “Due to social inflation, liability loss costs have dramatically increased, leading to increased rates and decreases in limits.” He finds the problem to be most acute in commercial auto coverage, where huge jury awards have contractors deeply concerned about “who to put behind the wheel of even a light truck.”

Apart from the shock of huge auto and bodily injury judgments, Parker finds that general inflation in the cost of labor and materials, as well as delays in securing these resources, extend project timelines and exert upward pressure on smaller but more frequent property damage claims.

Twenty years ago, it was common for carriers to write limits of $25 million, so building a $100 million tower of limits may have only taken four carriers. Now, the $100 million may take 10 or more carriers to fill out the full $100 million limit tower.

“Contractors should be wary of converting commercial buildings to apartments and condos. They were not originally designed for habitational use. The building infrastructure … has to be redesigned and re-engineered.”

—Steve Parker

Executive Vice President, Excess Casualty

Westfield Specialty

Cost-shifting

Project owners respond to these liability exposures by seeking to shift them onto their general contractors, who in turn seek protection from their subcontractors.

“More and more project owners are demanding high insurance limits from their contractors,” says Teng. “While insurance carriers are generally reluctant to quote high liability limits on a blanket basis across all projects, there are exceptions for specific projects where high limits are requested by the project owner.

“There may be opportunities to expand coverage by requiring subcontractors to name the general contractor as an additional insured,” he adds. “Generally, the more a contractor can pass liability exposure onto its subs, the more its own insurance carrier will be willing to quote high limits.”

Teng reminds construction risk professionals not to “forget the obvious.”

“The more a contractor can demonstrate a record of jobsite safety and quality workmanship, the more it’ll be able to get favorable terms when it comes to securing liability coverage.”

For more information:

Falvey Insurance Group

falveyinsurancegroup.com

Sentry Insurance

sentry.com

The Hartford

thehartford.com

Westfield Specialty

westfieldspecialty.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.