Look around any big city in the United States. You'll see buildings of all sizes in various stages of completion. The more than 450 construction cranes in operation across the U.S. are clear evidence of an industry that's still booming. The biannual Rider Levett Bucknall Crane Index for North America — July 2019, which tracks the number of operating tower cranes in 13 major cities in the U.S. and Canada, reported its fourth consecutive increase in crane counts in the second quarter, with several cities witnessing more cranes populate their skyline in July 2019 than in January 2019. The U.S. construction industry continues to build on its robust activity from 2018, creating approximately $1.3 trillion worth of structures each year, according to the Associated General Contractors of America. As the construction industry continues to create a more modern, sustainable world, it faces hurdles that have shaped a difficult insurance environment. |

Capacity concerns

Although the construction insurance market remained stable during the first half of 2019, according to Integro Group's "Mid-Year 2019 Market Report," carriers experienced more losses on long-tail liability lines, which affected renewals on existing programs, capacity and retentions. As a result, many insureds faced challenges in coverage availability, capacity, scope and pricing for several lines. Pockets of the segment are hardening, says Scott Jensen, executive vice president at AmWINS Brokerage of Florida. In New York alone, Robert Gibson, executive vice president for AmWINS Brokerage of New York, is seeing an "extremely limited" marketplace with very high premiums. "The single biggest risk facing the New York construction industry is more markets exiting the insurance marketplace, which will result in fewer insurance options for construction businesses, more restrictive coverages, and higher premiums," he notes. Danette Beck, national construction practice leader at USI Insurance Services, has seen firsthand how carriers' capacity has shifted in the past year. "There's always been an abundance of capacity until this year," she says. Notably, she's seeing swings in the umbrella market, where capacity, in some cases, has declined from $25 million umbrella layers to $5-$10 million — the causes: "nuclear judgments" and third-party litigation. "We are seeing judgments, not necessarily in construction, but construction is getting the effects of these substantial judgments that are higher than normal. That's why they're calling them 'nuclear judgments,'" Beck explains. "The second area is that private equity firms have been trying to figure out alternative ways to invest for their investors. So there's been a recent phenomenon around third-party litigation financing. Now more cases are going to court for trial versus being settled out of court, and this is driving up the cost of claims and affecting umbrella layers." Gibson adds that the current environment around "astronomical settlements" is preventing insurers from setting rates that allow them to profit. Auto losses are also causing insurers to cut back on construction risk capacity, with "lead excess tightening due to larger auto exposure," says Jensen. According to Integro, commercial auto liability and physical damage coverage combined generated seven consecutive years of underwriting losses. Factors such as more miles driven, distracted driving, drugged driving in states where marijuana is legal, and quality labor shortages have adversely affected contractors' auto exposure. Due to these risks, many carriers writing stand-alone auto coverage exited the market entirely or started to require supporting lines of coverage, making it difficult for insureds with large fleets, such as major construction contractors or related businesses, to obtain coverage this year. Carriers also are currently unwilling or unable to write above the traditional $1 million combined single limit, says Integro. Concerning builder's risk, U.K. insurers are increasingly pulling out of the construction and engineering markets, resulting in a flood of builder's risk business hitting the U.S. insurance marketplace, notes Grant Chiles, builder's risk expert at AmWINS Group. "The U.S. builder's risk marketplace has been very busy and challenging from the number of projects we are now seeing," he shares. On the casualty side, the days of the soft market may be coming to an end in the near future, as insurers reduce capacity or increase attachment points or both. Although this activity signals a coming hard market, it's not there yet, says AmWINS' EVP Stuart Rae. "A four-layer program 12 months ago can now be a six- or seven-layer program because of people coming out of the space, reducing capacity, or increasing attachment points," he clarifies. For example, 12 months ago, Rae placed a policy with a $140 million limit for a national home builder. If he were tasked to arrange the same policy today, he believes the limit would look more like $75-$80 million. Even so, Rae doesn't believe construction lines are in a hard market yet. "As difficult as things are for people to do things today, I don't think the market is yet hard. I think the hard market comes when you get one quote for one specific layer, and you don't have options. At the moment, we're still able to put up options, but there's incredible volatility between them. You can insure almost any single risk, but there has to be a buyer need to pay the premium," he says. "The hard market exists at almost a premium-to-limit ratio. We're not there yet, but that's certainly the trend." |

Where are the opportunities?

The more than 450 construction cranes in operation across the U.S. are clear evidence of an industry that's still booming.

Not all lines of construction insurance are facing challenges. Professional liability coverage for owners and contractors has been on the upswing, according to Brown & Riding's Chairman and Construction Practice Group Leader Chris Brown. "Contractors have more professional liability exposures than in the past. A big part of that is driven by design-build projects versus the typical, more historic design-bid-build methodology," he says. He's also seeing more contractors pursue new ways to build their businesses, such as offering pre-construction consulting services, expanding their liability exposure. Brown also sees growth in contractor's protective professional coverage. He recognizes that growth as being fueled by the coverage "being a new product line [that's] more cost-effective than more traditional coverages." Looking beyond lines that perform well, Brown has an alternative approach to identifying areas of the market that are rife with possibilities. "Opportunities to me look to be more of the distressed segments in the market," he explains. "Two areas that have become particularly difficult are residential construction for liability coverages and wood-frame builder's risk coverage." Wood-frame business, of course, has been impacted by catastrophic wildfires, which have triggered some insurers to cease coverage altogether. Just in the past two years, the U.S. experienced its five costliest wildfires, costing insurance carriers an estimated $35 billion, according to the Insurance Information Institute. Human error causes about 90% of all wildfires in the U.S., so now many contractors with operational and geographical exposures involving fire risk are experiencing a virtual loss of market, says Integro. However, where one insurer finds a risk too dicey to write, another may find its niche. After one carrier ceased writing wood-frame risk, "There was a $30 million void in the marketplace for wood-frame construction, and no one really stepped up to fill that void. Then, a number of markets agreed to take the [wood-frame] lines," explains Chiles, illustrating how insurers take advantage of a competitor exiting a market. Within the construction industry, modular building is projected to grow from $112 billion in 2018 to $157 billion by 2023, says Marketsandmarkets, which will surely bring new opportunities and risks to construction insurance. "In many sectors, we are seeing a shift towards significant offsite (frequently bespoke) module fabrication that is then transported to site and installed," shares Christopher van Gend, global head of engineering, chief underwriting officer at Allianz Global Corporate & Specialty (AGCS) in Germany. "This has many benefits with regard to keeping activity on site more controlled, but it does broaden the exposure for construction insurers." |

Jobsite risks

The most concerning risk affecting the construction industry remains its labor shortage, says Beck, which has resulted in heightened worker-related exposures for construction companies. "In 2008, when the economy went down, many companies let go of their less-experienced workers but kept supervisor-level and above workers because they were more skilled. Now, ten years later, those individuals are age 55 and older. So the industry is recruiting and bringing younger professionals into the industry." With an aging existing workforce and new talent coming into the industry, injuries can quickly occur on a job site. If an older worker gets injured, they're potentially going to be off the job longer because of their age, Beck explains. On the flip side, she says, injuries have the likelihood to be more severe with younger, newer workers because of their lack of experience. Construction firms in New York have to be especially vigilant when implementing worker safety protocols. In the city, where skyscrapers rule the skyline, the increased gravity-related work exposures for construction workers have created liability insurance rates five to 15 times higher than the national average, says Integro. "New York Labor Law Section 240 (also known as the Scaffold law) was designed to protect workers from falls or injuries from falling objects," Gibson says. "New York Labor Law Section 241 requires companies to provide a safe place to work for workers. Both these provisions provide strict liability for owners and contractors employing workers, regardless of any negligence on the part of workers." Because the law places liability on the policyholder, carriers have struggled to form a defense around claims, resulting in many leaving the New York market. With the advent of technology and smartphones, distracted driving has become another top concern for construction firms. After years of significant auto losses, contractors are shifting their focuses to behavior-based safety around auto, frequently with the help of technology, says Beck. "Back in the day, the auto side was more focused on the maintenance of trucks and keeping equipment working efficiently, not necessarily about the behavior of the individual operating the equipment or vehicle. Now there's a lot of behavior-based safety on the auto side," she shares. For instance, telematics is helping construction companies with fleet management and worker safety by tracking driver behaviors. For Gibson, technology is a means "to educate construction companies regarding safety procedures that they can implement to help prevent liability losses and make their companies more attractive to insurance carriers." Chiles has seen this practice used successfully, with project management technology helping insurers mitigate losses and protect job sites. |

The cost of claims

There's a lot that goes on at a construction site — a single project could have dozens of workers, equipment, and materials scattered around one area. Not only are new construction sites busy — they are expensive and could take years, if not decades, to complete. "Construction sites today are much larger than in the past. Whether it's a power plant, refinery or car manufacturing plant, projects are now typically much larger and higher value. And with more technology and sophisticated machinery in factories and offices, values per square meter have also increased significantly," says Raymond Hogendoorn, global head of property and engineering claims at AGCS, in the company's report, "Engineering and Construction Claims and Insurance Trends." According to the AGCS report, fire is the sector's most significant cause of loss, followed closely by natural catastrophe loss "due to the high values associated with engineering and construction projects today." Although fire and catastrophes can cause severe loss, the most frequent source of loss for construction clients is defective products. "We're seeing an increase in claims related to defects and quality control across the board," says Dr. Martin Eckel, senior general adjuster, global claims key case management at AGCS. "For example, we recently have had two major power generation claims — $200 million events — caused by defective welding." Business interruption (BI) risk is also a top concern. Thirty-three percent of global construction and engineering firms named business interruption as the second most concerning risk in the Allianz Risk Barometer 2019 — second to natural catastrophes. More firms are purchasing BI coverage, especially delay in start-up (DSU) insurance, which covers delays to construction or engineering projects following physical damage, says AGCS. "We see more large delay in startup claims as demand for DSU cover and limits have increased as projects have grown larger and as operational values have increased. As the stakes have gotten higher, DSU limits have increased, and so have claims. At the more extreme end, DSU claims can now be as high as $2 billion," says Hogendoorn. Eckel adds, "Brokers have sought to build in cover to speed up repairs, which can drive up the cost of engineering claims. In a bid to mitigate BI, construction and engineering firms are seeking to speed up repairs for property damage, but this can double the cost of a property claim." |

What brokers can do

Construction insurance coverage can vary greatly, leaving many opportunities for error. "Brokers that are placing construction insurance should do it in conjunction with somebody who's very experienced if they aren't themselves because there's a lot of room to make mistakes," says Brown. For Brown, the key to successfully servicing construction clients is structuring broad programs and guiding buyers away from overly restrictive policy forms. Furthermore, the line where construction risk ends and operational risk starts is not always clear to some insurers. In recent years, there have been several misunderstandings when a construction insurer thinks they are off a risk, and a property insurer thinks they are on a risk, van Gant explains, which can lead to coverage gaps — something brokers should be mindful of when arranging coverage. And when faced by capacity challenges, brokers are more pressed than ever in ensuring construction clients are protected, and purchasing increases in liability limits should always be an option. Van Gend has a final recommendation: "Buying more rather than less is a prudent step." See also: |

• Construction insurance continues to see double-digital growth
• 7 trends making engineering, construction claims bigger and costlier
• What we can learn from construction industry challenges