The Construction Industry And Liability Insurance

The U.S. construction industry is on a post-pandemic rally, with the sector spending $1.7 trillion in October 2022–that’s 9.2% better than in October 2021. Furthermore, the entire insurance liability market is expanding significantly, projected to grow from $252.3 billion in 2021 to an estimated $432.8 billion in 2028, according to Allied Market Research.

With more government money and more building projects in play going into 2023, one area where the construction industry is finding firm footing is liability insurance, albeit with some major risks in play.

“The introduction of new construction materials coupled with a renewed emphasis on modular building, artificial intelligence, 3D printing, and wearable and drone technologies is not only expected to ease existing cost burdens but also speed construction processes while completing projects on time and within budgets,” says insurance analyst Jeff Slivka in a 2022 research report by RT Specialty Environmental & Construction Professional Liability Practice.

Another boost is expected to come from President Joe Biden’s $1.2 trillion infrastructure spending plan, which says it “will deliver $550 billion of new federal investments in America’s infrastructure over five years, touching everything from bridges and roads to the nation’s broadband, water and energy systems.”

There is downside risk for construction firms seeking the best terms on a liability insurance deal.

“Current optimism should also be tempered in at least the near term by the effects of an environment filled with greater governmental scrutiny and regulatory guidelines,” Slivka says. “Contractors are also facing double-digit increases in insurance premiums experienced in many lines of business, tighter underwriting standards, and new exclusions covering the scope of communicable disease exposures.”

“Even though these factors are slightly less impactful on the contractor’s professional liability insurance products, they’ll influence liability insurance deals nonetheless,” Slivka says.

Price-wise, sector liability insurance premiums rose 18 quarters in a row through mid-2022, with costs rising by 6.6% in the first quarter of 2022. On the upside, more liability insurance firms have entered the marketplace in 2022, which seems to be moderating premiums heading into 2023 as insurance firms compete cost-wise with each other in an expanded market.

Even so, key premium influencers like high inflation, soaring interest rates, ongoing supply chain issues, and rising economic volatility continue to drive construction industry liability insurance costs, and those costs likely won’t decline until those issues finally recede.

AREAS OF COVERAGE (AND AREAS OF CONCERN) IN THE LIABILITY INSURANCE MARKET

Thanks to more construction industry property and casualty insurance players in the past few years–the market has seen 20 new insurers since 2020–good deals are easier to come by for construction companies.

Yet, even as prices may abate in 2023, there are other potential downside issues for firms to contend with as they raise project capacity and undergo federal regulatory scrutiny. These liability insurance realities make the top of that list.

• Lack of skilled labor. The biggest area impacting construction insurance from a liability standpoint is the lack of skilled labor available.“The availability of highly skilled and specialized workers is difficult right now and these types of employees are essential,” says Matthew Parsons, vice president of real estate and construction at the insurance service firm Woodruff Sawyer.The lack of skilled labor, which is a known issue, is putting pressure on employers to train new employees, and putting pressure on safety programs, Parsons says. “If these areas aren’t addressed, they can lead to significant costs in terms of the frequency and severity of claims, which impact insurance programs and their rates,” he adds.
• Higher rates. While rates have moderated somewhat in late 2022, higher liability insurance costs are still a fact of life for construction companies.“Design-build has been on the rise in popularity, and this area will likely see a slight increase in insurance rates due to economic conditions and also increased litigation, from owners/developers in post-construction,” Parsons says. “Quality assurance and quality control will be key for the contractors in that space.”Other areas that will probably experience higher than average rate hikes would be the residential and the habitational sectors, as well as anyone involved in hospitality-type construction.

“These contractors will likely see an increase in construction rates in those segments because those segments are not expected to perform to the level they have in the past,” Parson says. “And, as the economies of scale drop, we typically see insurance rates increase.”

A third group that may experience a slight increase above the average would be modular and prefabrication contractors.

“This is a relatively new type of construction,” Parsons says. “It has a lot of advantages from a project delivery standpoint; however, this space has many unknowns for insurance carriers because it is new. Additionally, there’s not a lot of claims history data. The insurance carriers may be a little more cautious in their pricing of this segment.”

• More restrictive coverage terms. One of the biggest liability insurance issues facing the construction industry in 2023 will be a continued hardening of the market.“That’s particularly the case for Type III and Type V construction in OCIPs/CCIPs,” says Greg Econn, managing director at Los Angeles-based Venbrook Insurance Services. “Carriers will be requiring more restrictive coverage terms which in turn will render manuscripts–or offering individualized, non-standard agreements–more and more difficult to achieve.”Construction companies will also see shorter terms in 2023. “For example, five-year terms were the norm. “Today, four years is the maximum term from the majority of the viable players,” Econn says.
• Risky business will cost you. In 2023, construction sectors that engage in activities with a heightened risk of property damage and personal injury may experience bigger liability insurance rate hikes.“These include design-build, engineering/procurement/construction (EPC) projects, as well as more specialized areas such as demolition work and hazardous materials handling,” says Linda Sanchez, founder, and chief executive officer of Seniors Life Insurance Finder in Los Angeles.

The primary reason for these anticipated rate increases is the fact that these sectors involve more complex processes and higher levels of risk. Sanchez points to several key “high-risk” liability projects.

• Design builds. “Design-build projects, for example, require a high degree of coordination between multiple parties in order to complete the job on time and within budget,” Sanchez says. “Any mistakes during this process may cause costly delays or even damage to property.”
• EPC projects. These builds are even more complex, involving a high degree of technical skill and risk management. “The presence of hazardous materials may also increase the potential for liability in these types of projects,” Sanchez says.
• Demolition work. Any work with explosives carries an elevated level of risk due to its inherently dangerous nature. “Any sort of unexpected accident or injury could have serious consequences for all involved, resulting in a need for increased insurance coverage,” Sanchez says.
• Hazardous materials. Hazardous materials is another sector that may see higher liability insurance rates due to its potential for environmental damage or personal harm. Even with all the necessary safety precautions, accidents can still occur and lead to costly litigation expenses.

QUESTIONS CONSTRUCTION COMPANIES SHOULD ASK OF INSURERS

What questions should construction company decision-makers be asking their commercial insurers regarding liability issues heading into 2023–and why? Insurance experts say these issues should on the “Q&A” table.

• Coverage terms. The first question construction firms need to focus on is coverage amounts and limits.“It’s important to understand what kind of coverage is included in the policy, as well as the exact limits coverage of coverage,” Chavez says. “This helps ensure that any potential claims are not underinsured.”
• Premium calculations. Another good question relates to how premiums will be calculated for different types of construction projects, such as design-build, engineering/procurement/construction (EPC), demolition work, or hazardous materials handling.“Again, it’s important to understand how the insurer will determine rate increases due to changes in risk levels associated with these projects,” Chavez says.
• Any needed “add-ons.” It’s also essential to ask about additional coverage options and endorsements that may be available.“These could include environmental liability insurance, which can provide protection against costly clean-up costs resulting from an accident,” Chavez says. “In addition, it may also be worth considering business interruption insurance or cyber liability insurance to protect against unexpected losses due to a disruption in operations.”
• Workplace safety issues. Construction companies should also be asking their insurers if they have incentives in place for workplace safety.Consumers should also make sure that the liability claims they’re most likely to file are covered by the policy. “For example, if a construction company needs coverage for accidents with nail guns, it should make sure its insurer doesn’t exclude nail gun accidents,” says Melanie Musson, a commercial insurance specialist with Clearsurance.com.
• Ask about inflation. High inflation will cause those who already purchase liability insurance to increase their limits just to cover the same risks.“The insurance market has the capacity to take on additional risk as long as they charge premiums high enough to cover that risk,” Musson says. “So, all consumers should expect a premium increase, but companies without a proven track record should expect an even more significant increase in premiums.”

That’s why it’s a good option to look at the larger, more experienced insurers when researching property and casualty insurance issues. “Chubb and AIG will likely continue to lead the market as commercial liability insurers,” Musson says.

THE TAKEAWAY ON THE CONSTRUCTION INDUSTRY AND LIABILITY INSURANCE

Construction decision-makers should work with their insurance broker, and carrier to discuss their insurance program, including the program’s flexibility and retention levels to help mitigate any rate increases.

“Decision makers should also check with their broker and carrier about access to helpful resources carriers have for clients in safety, loss control, and claims,” Parsons says.

This is an often-underutilized resource for construction companies, as there are many policies and features construction company executives can leverage in 2023. “For example, there are tools to help prequalify subcontractors, as well as new tools to help risk management departments with their contracts and risk transfer,” Parson says.