Most full-year forecasts predict a 5% to 7% increase in nonresidential construction in 2014. Although this is welcome news after a flat 2013, the increase is proving a doubled-edged sword for contractors due to new exposures that have resulted.

For one, “Contractors report to us that a shortage of skilled labor is starting to manifest itself, which will only get worse as the construction economy picks up,” says Michael Campo, senior vice president and team leader in construction at Lockton.

And that could spell claims trouble. “As you hire lesser-skilled employees, they have a higher injury frequency, particularly in their first six months on the job,” says Cal Beyer, vice president of large account sales and development in the construction solutions division of Murray Securus—a Lancaster, Pa., insurance broker serving the Mid-Atlantic and Eastern States Regions of the U.S. that provides risk management, insurance, employee benefits, wealth management, third-party administration and human resources solutions for its clients.

“The insurance industry has definitely seen an increase in claims due to inexperienced construction workers,” Cauti says. “Falls from heights due to forgetting to tie off, tripping over material that could have easily been moved—the type of things that more experienced employees typically don't do.”

But even hiring or re-hiring experienced workers who have been off the job for an extended period of time can create additional risk. Brokers and carriers need to counsel construction accounts on the need for refresher training and proactive loss control.

“We've had multiple clients tell us that many of the workers now coming back into construction have not done any skill work during their absences. They are discovering the need to retrain and ease those workers back into the workplace,” Campo says.

Long-absent employees, he explains, may exhibit drop-off in both technical skill and physical conditioning. “Our clients are telling us that many workers simply haven't been physically active while they were unemployed. They are heavier, out of shape,” says Campo, adding that one construction client experienced a jobsite fatality from heat exhaustion involving a worker who had been back on the job for just two days after an extended absence.

“We're learning that you just can't throw returning employees back into a heavy workload,” he adds.

Another potentially worrisome claim trend is construction defect. “The industry will see an uptick in construction defect claims given the increase in residential construction we've seen in recent years,” Cauti predicts.

Although the definition of what constitutes a construction defect varies by jurisdiction, a defect generally occurs when problems in design, workmanship or building materials result in property damage or failure of the building to perform in an expected way. Common claims include cracks in floor slabs and foundations due to improper site preparation, roof leakage—particularly on flat roofs—due to faulty construction and structural shifting caused by errors in design or construction that leads to any number of interior problems ranging from sticking doors and windows to countertops that pull away from walls.

Defects also are categorized as “patent” (something found through a reasonable inspection) and “latent,” something that manifests itself over time. For example, a patent defect causing water damage could involve leaky pipes, which should have been detected during an inspection and repaired. A latent defect causing water damage may involve freezing pipes due to inadequate insulation, which isn't easily noted once walls are enclosed.

Originally a California phenomenon, construction-defect litigation has spread across the U.S. More and more court jurisdictions are finding coverage for defect claims in the completed operations coverage of CGL policies or E&O policies of architects, engineers, or contractors.

Construction-defect claims also are likely to tick up as the economy continues to improve; in a down economy, the demand for apartments is higher, while a stronger economy encourages more people to own rather than rent.

“With a condo, an individual owns the space, so there is a higher sensitivity to things being wrong compared to if the space were rented,” says Gary Kaplan, president of construction at XL Group. “It's hard to price for the added risk of a contractor 'flipping' a project from apartments to condos.”

The insurer sets the rate based on the type of construction that is done: a road contractor will pay a different rate than a homebuilder, as will a condo-builder versus apartment-builder. If an apartment-builder with a low rate decides to “flip” a project mid-stream to a condo builder, for example, the insurer gets stuck charging the lower rate for the increased exposure.

PRICING, CAPACITY FAVOR BUYERS

The good news is that rates remain competitive across all major P&C lines.

“Through the first quarter of this year, I don't see much difference from the past year. In fact, we see barely enough rate increase to cover the industry claims trend experience over the past two to three years,” Kaplan says.

Campo has seen rates flat to slightly declining for profitable accounts, and 3% to 5% increases for average accounts. The one exception to this trend among P&C lines is lead excess, the primary layer of excess coverage in a stacked umbrella. “The first $5 to $10 million of coverage has firmed up faster than other lines of coverage,” he says, with a 10% increase typical on the primary layer.

Location also matters. Lockton reports that GL rates have increased in New York due to its labor law. Large-project rates in the state have had GL rates increase from 5% to 7% of overall construction cost two years ago to around 15% today.

Labor law 240—the so-called “scaffold law”—holds owners and general contractors responsible for elevation-related falls. The problem for insurers is that the scope of the law has broadened over time, and attempts to repeal or reform it again died in 2013.

“Rates in New York will continue to be high for general liability due to the labor law,” Cauti says. “It's at the point where it's absolute liability on the employer and [plaintiffs' attorneys] have found ways so that if you trip over your shoelace and fall, the owner is liable. It has really gotten to the point where because of the additional [insurance] cost in New York, you could build three public high schools in New Jersey to every one you build in New York. It usurps the idea behind workers' compensation.”

With contractors' receipts and payrolls expected to grow, brokers and carriers have seen corresponding increases both in deposit and audit premium in general liability. Automobile fleets have been growing as well.

“Clients have increased their auto fleets significantly over the past few months,” Campo says. “Because construction in general is picking up, companies are hiring people and giving them vehicles. Also, any company connected to the fracking industry is gearing up into sizable and heavier fleets.”

“Where we're seeing the most growth in construction is in the energy sector, driven by fracking and the cheap natural gas we now have access to, compared to other countries. We're seeing growth in energy construction everywhere from building construction pipelines and processing plants to office buildings and everywhere in between,” says Kaplan, who reports that XL has doubled its construction book in each of the past two years.

“We're also seeing growth in construction related to shipping as import facilities on both coasts gear up for the impact of the Panama Canal expansion,” Kaplan adds. The canal project is scheduled for completion in 2015, inspiring a need for deeper ports, higher bridges and new facilities to unload the “mega-ships” that will now be able to traverse the waterway.

GROWTH DRIVES COVERAGE TRENDS

The evolution of the construction sector is also having an impact on the varying types of coverage being sought by contractors. One significant change has been the growing popularity of alternative delivery methods including integrated design-build projects, in which both services are provided by the same contractor.

“As the lines of delineation between design, build, and deliver blur in the construction sector, we're experiencing an increased demand for professional liability coverage in particular,” Campo says.

“Due to education and awareness, a lot more contractors are carrying professional liability coverage either on their own or due to the demands of the project owner,” says Jeff Slivka, COO and executive vice president at New Day Underwriting Managers LLC.

As the scale of construction projects grows, contractors are also exploring the purchase of subcontractor default insurance (SDI). Typically sought by only the largest of construction firms, SDI provides an added first-party protection above subcontractors surety bonds.

“Subcontractor default insurance has been our biggest growth line over the past few years, with about one-third of our growth coming from first-time buyers,” Kaplan says.

Market conditions in construction insurance are expected to continue into the foreseeable future, and capacity across all lines remains strong.

“We've seen no substantive pullback among regional carriers,” Beyer says. “Aside from restrictions in New York exposures, overall appetite among national carriers remains strong. Construction insurance continues to be a business that companies want to be in.”

TRENDS PUSH PROFESSIONAL LIABILITY COVERAGE INNOVATION

As more contractors offer design-build services, they look to cover an exposure to professional liability that the CGL policy is not designed to address. Contractors professional liability policies fill that gap and also typically provide pollution and an array of added coverages.

Jeff Slivka, COO and executive vice president at New Day Underwriting Managers LLC, says that a significant recent change in the professional market has evolved the coverage to extend beyond purely third-party liability.

“Previously, first-party protective coverage was not readily available in the market. Over the past few years, the market has significantly expanded to the point where now almost all the major carriers offer it, either through new products or updates of their existing liability forms,” he says.

Whereas basic professional liability coverage responds only after a claim has been made by a third party, the addition of protective coverage provides the contractor with first-party coverage excess to professional liability insurance carried by subcontractors. For example, if design errors lead to additional costs incurred to bring a project to completion on time and the limits of the design professional's policy are not high enough to cover the increase, protective coverage will pay the contractor for the difference.

Closely related to the expansion of protective coverage is the growth of rectification or mitigation coverage, which provides primary insurance subject to a self-insured retention. As the name implies, rectification or mitigation coverage covers costs to remedy design errors discovered during construction that would lead to a liability claim if left uncorrected.

“Up until about four years ago, mitigation coverage wasn't available. Today, there are about eight markets offering it,” Slivka adds.