CONSTRUCTION INSURANCE
Let the tough times roll!
By Joseph S. Harrington, CPCU
Today’s construction market could be compared to a group of athletes or military recruits scrambling up a hill in an exercise. The climb is ever more challenging, and a number of participants fall out, but progress is steady until the summit is reached and new objectives are in view.
As the hangover effects from the 2007 real estate collapse and 2020 pan-demic slowly wane, builders are catching up with increased demand—if only they can get the labor and materials in place to do so. As that happens, they find their insurers are generally able to keep up with demand for coverage.
“There is good news,” says David DeSilva, head of construction for The Hartford. “Construction starts in many regions are stable or increasing, and the backlog of work is generally strong. If contractors can supply the people and the materials, work is available.”
“[Construction firms] are implementing water sensors, onsite imagery, wearables, and telematics. Technology is a relatively new idea in the construction industry and adaption is progressing.”
—David DeSilva
Head of Construction
The Hartford
“We are routinely hearing that many projects are running 20% or higher over their originally estimated budget sdue to added labor costs, as well as inflationary factors,” says John Doherty, national underwriting director for middle market construction at Nation-wide. “These present challenges, but contractors by their very nature are innovative and resilient. They certainly feel the pressures, but are finding ways to thrive in any environment.”
Regarding the shortage of skilled labor, widely seen as a key reason for high costs and long delays, Doherty says construction employment has recovered and now exceeds prepandemic levels in most states, as contractors continue to recruit a younger, more diverse workforce with higher pay and benefits.
That said, the construction sector still relies heavily on an aging work-force, according to DeSilva, a factor he says has “downstream implications” for rates and loss costs. Apparently, the fewer experienced laborers on a jobsite, the better the chances for errors and accidents. “The same trends driving up the cost of construction are also driving increases in the cost of construction defect claims,” he says.
In response, DeSilva finds construction firms “getting creative” in their loss control efforts. “Many are implementing water sensors, onsite imagery, wearables, and telematics,” he says. “Technology is a relatively new idea in the construction industry and adaption is progressing.”
“The limited availability of quality subcontractors is impacting construction timelines and budgets,” says Jason D. Muise, chief underwriting officer for marine at The Hanover. “It’s also impacting delay in completion coverages for job site repairs. What once might have been a quick fix is now taking longer due to labor and materials shortages.”
Insurance impact
Given conditions in the construction market, the cost of insurance is increasing “almost universally” across property and liability lines in the sector, according to Rob Brewer, The Hanover’s vice president and chief underwriting officer for middle market accounts and a colleague of Muise’s.
“The limited availability of quality sub-contractors … is impacting delay in completion coverages for job site repairs. What once might have been a quick fix is now taking longer due to labor and materials shortages.”
—Jason D. Muise
Chief Underwriting Officer, Marine
The Hanover
“Coverage is available, but prices are increasing commensurate with loss costs,” he says. “Capacity remains strong with many carriers offering coverage, and terms and conditions generally meet the needs of building contractors.”
In the area of first-party loss, Doherty says losses from wildfires, water damage, and coastal windstorms are constraining capacity for builders risk insurance despite “dramatically” increased rates for the coverage. “Greater emphasis is being put on risk mitigation and loss control,” he says.
On the liability side, Doherty hesitates to characterize what he sees as “a true hard market,” but the impact of “social inflation” and third-party litigation funding make for a consistently “firm” market with steadily rising rates for commercial general liability (CGL), commercial auto, and excess liability coverage.
Regarding CGL coverage, Doherty says, “The rate environment remains positive but still varies based on geography, operations and loss experience of the contractor.”
He adds that Nationwide is closely monitoring construction defect trends for the impact of increased materials and labor costs for repairing defective construction. In that regard, Doherty says, “We’re watching trends in the use of substitute materials and inexperienced labor to understand how they may be impacting construction defect claims.”
Things are improving in the long-distressed market for commercial auto coverage, Doherty adds, but carriers still struggle to achieve and maintain profitability in the line. On the plus side, vehicle telematics technology, once rare in the construction sector, are now “the norm” for contractor fleets. Weighing against that are double-digit increases in the cost of repairing and replacing vehicles, putting increased pressure on auto physical damage coverage.
“Large fleets, fleets of heavy vehicles, and accounts with poor loss experience or lax fleet control will see commercial auto rate increases substantially greater than the market average.”
—John Doherty
National Underwriting Director, Middle Market Construction
Nationwide
“Large fleets, fleets of heavy vehicles, and accounts with poor loss experience or lax fleet control will see commercial auto rate increases substantially greater than the market average,” Doherty says. He adds that “auto intensive” accounts are under pressure to purchase “buffer layers” of excess liability coverage, where he says rate increases have moderated from the double-digit hikes in recent years.
Indemnification
The availability and cost of liability coverage has a direct impact on a matter of critical importance in the construction sector: the chain of indemnification from a project owner, through its general contractors and on through subcontractors.
In past construction booms, market participants have noticed increasingly systematic efforts by project owners and general contractors to get subcontractors to indemnify them on a broad basis for any bodily injury or property damage arising from the project—regardless of the role of the subcontractor in causing the injury or damage.
“A few states are challenging the definition of a covered occurrence and reviewing CGL indemnification provisions. Developers, building owners, and contractors need to continue to review their contracts carefully and manage subcontracts accordingly.”
—Rob Brewer
Vice President and Chief Underwriting Officer, Middle Market Accounts
The Hanover
Insurance carriers have pushed back with widespread adoption of CGL additional insured endorsements that generally limit coverage for an additional insured to bodily injury or property damage “caused, in whole or in part, by” the actions of the CGL insured. Insurers have drawn a line against assuming liability under an indemnification agreement for damage or injury its insured had no role in causing.
In recent years, “contractual requirements have held steady for the most part,” says Brewer. “A few states are challenging the definition of a covered occurrence and reviewing CGL indemnification provisions. Developers, building owners, and contractors need to continue to review their contracts carefully and manage subcontracts accordingly.”
“Upstream contractors continue to look to hold downstream contractors accountable for the damages and consequences of their work,” says Doherty, “while midstream contractors are looking to pass all risk-transfer requirements from their general contractor downstream to their subcontractors.”
As a result, he says, the players in the chain are either demanding higher limits of liability coverage of their subcontractors, or are seeking higher limits from their liability carriers, or both. Where once a construction project could participate with $1 million in CGL coverage and $1 million excess, limits of $5 million or more are now often needed.
For more information:
The Hanover
www.hanover.com
The Hartford
www.thehartford.com
Nationwide
www.nationwide.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.
