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Specialty Lines Markets
Heavy construction shows signs of life
Insurer specialists see opportunities among infrastructure contractors
By Dave Willis
“It has been a very difficult year for the heavy construction sector,” explains Bill Teed, president of Travelers Construction, “following two tough ones before that.” Still, while many states are cutting construction projects to meet budget shortfalls, hopeful signs are emerging. “Some of the federal initiatives are starting to produce benefits,” he notes.
American Recovery & Reinvestment Act money finding its way through state legislatures in certain parts of the country is driving some of this. “We’re starting to see some fairly good-sized road projects, and contractors are getting re-engaged,” says Michael Farrington, CRIS, program underwriting director in CNA’s construction group, “but it’s in different segments of the country.”
Increased regulatory requirements follow some of this federal money, Farrington adds. “We’ve heard from some contractors that they’re reluctant to take on some of these projects because they’re squeezing already tight margins,” he notes.
Tom Grandmaison, senior vice president, construction and professional liability at Lexington Insurance Company, is seeing increased activity in projects such as schools and hospitals, airports, rail systems, dams and levies and power and utilities. “Probably half of our production is coming from the infrastructure-type arena,” he explains. “Residential and all other commercial sectors are still heavily affected by the economy and the credit market.”
In some cases, projects being funded now have been in the pipeline for a year or two but got pushed back because of funding delays, Grandmaison adds. “We’ve seen a nice uptick from FEMA money moving in New Orleans,” he explains. “They continue to go through levee improvement, so that region has benefited.”
More contractors are bidding on the same jobs—often for survival. “You might find contractors from Illinois, Arkansas, Texas or Colorado bidding on a federal road project in Virginia and vice versa,” explains Farrington. Adds Grandmaison, “Two or three years ago, contractors were competing with three or four others for heavy construction jobs; now there are 15. In some cases, smaller contractors are facing much larger ones that never competed in their niche.”
“At the same time,” says Teed, “smaller and mid-sized contractors are bidding larger jobs, expanding outside their territory and maybe even the type of work they are doing.” However, it’s not always an easy undertaking, Farrington notes. “Quite often, because money from the Feds carries with it regulatory requirements, smaller contractors have more difficulty going after bigger projects because they don’t have the margins nor the resources to take them on.”
Insuring exposures
In the midst of contractor market issues, the insurance arena continues to be heavily competitive, says Grandmaison. “A number of markets are trying to write a lot of the same business,” he notes.
Teed sees this, too. “There is still a lot of capacity right now,” he explains. “While a more limited number of carriers are willing to insure the heaviest exposures—bridges, tunnels, power line contractors, for instance—that part of the business continues to be active, perhaps more active than others.”
Insurers face certain marketplace challenges. “In a tough economy, contractors stretch a bit in terms of territory and even type of work,” he explains. “If a contractor has always done streets and roads, or perhaps paving and parking lots, and wants to expand beyond that, we stay very close, making sure they understand the different risks and exposures.”
Insurers are paying close attention to claims, as well. “Any time you have an economic downturn, you see increased claim activity,” Farrington says. “Whenever layoffs occur, workers compensation and other claims go up.” These are in addition to everyday claims. “In road contractors, we see a lot of automobile claims and, of course, general liability,” he adds. “A lot of the GL is driven by completed operations claims; again, some of that is a function of the economy, as well as the litigious environment in the states.”
“Insuring these businesses poses a number of challenges,” Teed explains, “but these are opportunities, as well. It all comes back to what we deliver to customers from a risk control and claims standpoint, and making sure we’re doing everything we can to help them.”
Serving risks
Promoting safety is one way to help. “We work with our contractors and our risk control team to make sure that we visit job sites, consult on projects and make sure they’re doing everything they can around safety,” Teed explains. “But it’s not just safety. We pay attention to equipment maintenance because the reality is that in tough times, it’s sometimes easy to cut back there.”
Agents and brokers often find themselves in the risk management mix. “Medium-sized and larger contractors in this niche often have a dedicated risk manager or risk management department,” Grandmaison explains, “but smaller, family-owned shops may have one person wearing several hats—maybe CFO, HR and risk manager. They depend more on their broker and carrier to help them with risk management issues.”
“Agents need to be able to quickly provide educational materials on any risk management topic,” says Teed. “They need easy access to material through the carrier rep or Web site.” Insurers offer more than just risk management resources, though. “The carrier’s account executive is a great source for identifying prospective customers,” he adds.
Some brokers offer in-house safety and risk management expertise. “These are experts in construction,” explains Farrington. “They understand construction from A to Z and they know what the companies offer in terms of value after the sale—risk control, claims services and more.” Sharing this expertise benefits everyone. “By adopting certain safety practices, they’ll keep loss ratios down and keep the experience mod competitive. Plus, they can get great quotes and the right coverage.”
Resources exist to help agents and brokers develop expertise. “A great source for any agent is the Insurance Risk Management Institute, IRMI,” Farrington says. “They have a tremendous amount of information on construction and construction insurance. If I were an agent interested in getting into construction, I’d look there first.”
State and local contractor organizations can help, as well. “For road builders, the American Road & Transportation Builders Association offers a wealth of information,” he adds. But building expertise takes time. “The industry is getting more and more sophisticated,” he notes. “It’s not like it used to be, where you could just go out and start banging on doors. It’s much more complex.”
Agents and brokers need to share their knowledge and understanding with markets. “It’s the age-old advice: Keep it simple,” Grandmaison explains. “Learn everything you can about the exposure and provide a good, clear understanding of the risks and exposures to your underwriters. Make sure they have a good sense of projects and keep them informed.”
Building success
Agents and brokers looking to do well in heavy construction can follow advice from the experts. “First,” says Teed, “is to make sure they’re working with a carrier that specializes in the construction industry. It’s a complicated business, so not only will they get a responsible proposal cost-wise, but they’ll save themselves and their customers time and effort negotiating terms and conditions.”
The second piece of advice involves construction claims, especially GL claims. “These are very complex and almost always involve multiple parties,” he adds. “For instance, with construction defect claims, it’s sometimes impossible to tell when the accident occurred. It takes many years to develop the knowledge necessary to settle these claims quickly and affordably.
“Third, be very familiar with state legal and legislative issues—their own and those of surrounding states,” he advises. “Many times, contractors cross state lines to work and each state has its own set of laws, which can differ quite a bit.” Brokers who don’t have such knowledge in-house need access to someone who does have it—perhaps the carrier or state agent association.
Finally, Teed suggests, it’s important to gain—and maintain—construction industry expertise. “Get involved,” he says. “Attend industry-related functions. Serve on boards or as an advisor” to any of a number of trade groups that serve heavy construction firms. “Attend their meetings, get to know what issues they face,” he adds. “It’s an ever-changing industry, so it’s important to stay abreast of all the topics—from local and national economic issues to cost of materials and technologies and practices.”
Adds Farrington, “The agents and brokers who retain business are those who have built the strongest relationships with their clients, not the ones who show up once a year with a renewal quote. Work closely with clients in all aspects of their business, from providing the right carrier to doing all of the necessary follow-up to make sure they take advantage of available services.”
Strong carrier relationships are important, as well. “The agent or broker who educates and shares openly with an underwriter is the one who gets the best results for the customer,” Grandmaison believes. “When underwriters have questions or where there are unknowns, their position may be a little more conservative. Make sure the relationship with the underwriter is open and honest.”
Doing these things can deliver real rewards. “Contractors are smart individuals,” notes Farrington. “They’re real professionals, just like an architect or an engineer or a doctor. They are putting up the structures and building the infrastructure we all use every single day. They are absolutely great to work with.”
The author
Dave Willis is a New Hampshire-based freelance writer and regular
Rough Notes contributor.
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