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The Rough Notes Company Inc.



January 29
13:14 2019



Construction insurance sector keeps pace with the general market

By Lori Widmer

When 2018 began, all signs pointed to increased construction costs. The Trump Administration tariffs on Canada, China and Mexico were poised to raise raw materials costs as each country imposed its own retaliatory tariffs.

Almost immediately, such action had impact. From 2012 through 2015, construction starts increased between 11% and 14% year over year, according to the 2019 Dodge Construction Outlook. How- ever, this decreased to 7% in both 2016 and 2017; last year is estimated to be only a 3% increase from the previous year.

For the construction insurance industry, the opposite appears to be true. “The market in general has grown at a similar pace to the industry, but not as much as the last few years,” says Brian Billhartz, CPCU, senior vice presi- dent at Wrap Up Insurance Services. “It’s followed the construction uptick.”

Billhartz, whose company offers wrap-up products, says there’s been a noticeable increase in general liability wrap-up policies. He says construction defect issues in Western states like Texas, Arizona and Colorado, along with Florida and Louisiana, have fed interest in this area.

Also, he’s seen liability-only coverage increase. The reason: Buyers, Billhartz says, believe the liability-only piece allows for better control over claims and just one point of defense, possibly reducing litigation.

Construction, builders risk, and wrap-up overview

The construction insurance market has an improved economy to thank for its current strength, says Matthew Roselle, executive vice president and head of operations and corporate development for SIS Wholesale Insurance. He’s seen demand increase for new residential and commercial building, as well as for renovation projects. “The aforementioned has necessitated an overall expansion of the construction insurance marketplace, coupled with an increased availability of capital and capacity of reinsurers,” he says.

Michael Thabet, senior vice president and program executive of the Express Business Division at Distinguished Programs, agrees. “Typically, as the market goes so does construction, and we have generally been in an extended economic boom. As such, development growth has followed.”

Yet Thabet adds that the pattern of growth has changed. He says the market has seen increased expansion into lower cost-of-living and higher quality-of-life-index areas such as Austin and Charlotte. “Throughout, insurance capacity has been relatively easy to find, and pricing has remained stable. Traditional big players have maintained market share,” Thabet says.

“[Having the right coverage is] critical. What could be a $1.5 million verdict in one venue could be $4 million in another.”

—Michael Thabet
Senior Vice President and Program Executive
Distinguished Programs

What’s that done to pricing? Billhartz says pricing is competitive in the wrap-up market. “It’s hard for carriers to get rate, even on the larger, multiline wraps that include workers compensation and liability. Across the country, it’s following the pattern of workers comp rates being flat or even being reduced. The wrap-up market usually follows traditional workers comp rates, losses and loss ratios.”

Even with pricing pressures, the construction market is seeing plenty of new business. Roselle says new entrants have “opportunistically sought entry to capitalize upon market growth. Several carriers and MGAs have new programs and products available for contractors, primarily focused on artisan and service and repair trades.”

Roselle sees pricing pressure there, as well. “Given the array of options now available for smaller contractors, there has been market pressure for rate reductions; however, larger construction projects have seemed to face challenges with affording appropriate levels of coverage.”

That’s where Thabet says smaller companies are gaining some traction. “Many smaller and regional companies have carved out specific niches of construction-related insurance where they feel more comfortable. In these limited arenas, many have been quite successful providing competitive alternatives which may provide broader coverage offerings (such as 2/4 general liability options; green coverage for environmentally friendly building materials; high excess liability umbrellas, etc.), lower pricing tiers, and/or are distributed on an easy-to-use technologically driven platform.”

The claims picture

Such niche capabilities could help these smaller entities deal with claims. Thabet says the industry is still seeing the usual claim drivers—water damage, fire loss, and theft. Regionally, Roselle says insurers will see legal and regulatory issues in the employment law arena.

On a larger scale, Roselle says builders risk has been impacted by what he calls “significant unrest,” stemming from floods in Europe, hurricanes, and the California wildfires. “The London market in particular has disruption within property, especially in CAT-exposed areas and frame construction; this has led to difficulty obtaining capacity for new and even existing programs.”

Closer to home, he says catastrophic events and legal and regulatory challenges have already taken their toll. “We have seen several extraordinary jurisdiction-specific settlements (E&O) against carriers, TPAs, and brokers that create challenges, even extending beyond coverage language restrictions.”

For Billhartz, the biggest issue in construction remains post-construction claims, especially in areas with strict construction defect laws. He’s seen claims ranging from water to settling to sound complaints.

Yet an outlying concern he has is a market ripple effect stemming from San Francisco’s Millennium Tower project, a 2015 mixed-use property that is plagued with post-construction issues, including sinking and tilting. A permit application to shore up the 58-story building was recently filed by the residents. The cost of remediation: close to $100 million. Billhartz is waiting to see what coverages will respond or not respond, and how that will set precedent for future projects.

Market response

Thabet is keeping his attention focused on other emerging claim drivers. “The first is action over settlements that happen to be prevalent in New York and are partially a byproduct of absolute liability driven by state labor laws. While not entirely new, it is becoming increasingly severe in its impact on entities associated with a building project. It is also a prime contributor to the significantly higher insurance premiums for a contractor in New York than in other parts of the country,” Thabet says.

The second area of concern for Thabet is the question of whether buyers are purchasing the appropriate levels of liability coverage. He points out that all venues are not the same, and having the right coverage is “critical. What could be a $1.5 million verdict in one venue could be $4 million in another.”

Thabet has also seen umbrella and excess liability verdict amounts increasing. It’s an issue that agents and brokers need to be on top of, he says. “Between the venue disparities and rising frequency and settlement amounts of excess liability litigations, it is extremely important that an agent assess the two in concert to provide the most comprehensive and informed guidance on purchasing high excess liability limit amounts.”

Despite the issues with the Millennium Tower project, Billhartz says the market has managed to put effective quality controls in place, which he says has kept pricing steady. “Contract quality control by the contractors has really improved over the last five to ten years, as opposed to  fifteen years or so ago when there wasn’t much attention being paid to that,” he says.

Thabet, like Billhartz, says agencies and insurers have put drone and smart technologies in place to aid in project and claims risk management and response, which improves offsite monitoring and response. Another way technology is helping quell claims is through monitoring of employee movements. “Builders are also beginning to have employees wear smart wearable devices,” says Thabet. “These wearable devices provide valuable insights into biometric data that can prove helpful in predicting and preventing future claims.”

Advice for agents and brokers

Agents and brokers can assist their clients in preventing those claims by becoming more informed about the risks within the construction industry, says Thabet. That, he says, can help in two ways. “The more informed they (agents and brokers) are, the more they can distinguish themselves from their competition by providing adequate insurance protection that keeps up with market trends. It also allows them to suggest new ways for their clients to protect themselves from the claims themselves (e.g., safety training programs).”

Roselle agrees, saying agents and brokers should be well-educated on the products they offer and ensure that their E&O programs have sufficient limits. He also suggests that agents and brokers “thoroughly review all of your clients’ needs for commercial and personal lines, even if certain coverages are not perceived to be necessary for that insured’s immediate situation.”

That means being proactive, says Billhartz. He says agents, brokers and insurers should be offering safety programs alongside coverage. Plus, be actively involved in the customer’s business. “Put more eyes and ears on the ground for construction clients. And reactively, after an incident, get as much information as possible on what’s going on. Stay involved on a regular basis and engage all the carriers, even if it’s potentially not their claim, just for their input.”

For more information:

Distinguished Programs

SIS Insurance Services

Wrap Up Insurance Solutions

The author

Lori Widmer is a Philadelphia-based writer and editor who specializes in insurance and risk management.

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