In 2020, it sometimes seems like no segment of society is untouched by COVID-19. Builders, contractors, architects and engineers, however, are rarely linked to the pandemic's most painful economic punches. "In the last six months, we haven't seen that much of an impact," says Audrey Lau, vice president and product head of the architects and engineers line at Hiscox. "We're going to see it more in the last quarter of 2020 and early 2021." See also: A look at 2020's construction risk, insurance market An ongoing labor shortage, the need for more skilled laborers, increased risk of fire and water damage, commercial auto accidents spurred by distractions, and increased cybersecurity exposures are all trends that played out in the construction insurance market prior to this year. COVID-19 exacerbated those exposures, which is certain to be a hot topic Oct. 19-20, 2020, during the virtual Construction Risk Conference hosted by the International Risk Management Institute, Inc. "The pandemic didn't change the fact that the market was going into a different cycle," says Danette Beck, national construction practice leader at USI Insurance Services. "We were already moving into a harder market." In some areas, construction projects slowed this year, particularly large municipal projects that were sensitive to local government shutdowns to stem the spread of COVID-19. But there are few instances in which construction projects completely halted. "I don't necessarily think that contractors are opening themselves up to any additional liability than they already had," Beck says. "What they are opening themselves up to is the potential for additional delays in order to get the work done in a manner that is safe and healthy." Her push now is to make sure clients know the timelines and benchmarks outlined in each project's contract. "They need to understand the obligations that they signed up for," Beck says. "There are a lot of questions around who's going to pay for cleaning between shifts, or who's going to pay for a new staggered work schedule so that there's social distancing." She adds that the pandemic's economic impact on construction projects varies depending on geography. "New York stands out to me, because New York went through a longer cessation of work," Beck says. "Some of our contractors there are challenged and looking for some premium accommodations, especially since it's so expensive to do business in New York anyway." In other parts of the United States, however, "contractors are growing by leaps and bounds and have more work than they can handle," Beck says. If anything, brokers who service architect and contractor liability accounts are tired of talking about COVID-19. "There are a lot of projects going incredibly well, because contractors don't have to deal with the public," says Gary Kaplan, president of the construction practice at AXA XL. Most construction projects were deemed "essential," so work continued. "They slowed down at the onset to try to figure out best practices and (navigate) all the new regulations and this new work environment, wearing masks and continually cleaning," Kaplan says. In turn, productivity is down in the construction market as 2020 comes to a close. And this slowdown is what may begin to trigger various coverages. None of this means the construction industry is immune to the pandemic's economic troubles. Supply chain disruptions late last year, for instance, marked the earliest economic impact on construction projects. "Before the pandemic even came to the U.S., we were having disruptions due to China being shut down," Lau says. "China obviously supplies a lot of physical materials to the U.S." Getting equipment and people across borders is more complicated now than it was before the pandemic, adds Chris van Gend, global head of energy and construction in the Chief Underwriting Office at Allianz. "Any project that either needs workforce or labor to come across borders or overseas has absolutely seen delays," he says. "That's going to take some years to wash through." The longer a project takes to complete, the higher its exposures, and the more likely there will be claims. "That adds a lot of uncertainty from an underwriting perspective," says van Gend. "Add COVID uncertainty on top of that and it really is driving a much closer focus, from an underwriting perspective, on individual risk and topics like solvency." He says the expectation is that insolvency problems will rise in the construction business going forward. "We're in a phase of uncertainty, and we're just adding layers and layers of uncertainly on top of that," van Gend says. The pandemic also spurred jobsite evolutions in all industries, and some of these changes have touched construction. For instance, project managers are now more likely to embrace risk-mitigation technologies such as wearable devices that track and manage worker physical distancing, or smart devices that detect water leaks. Smart project management, drone usage, robotics and telematics are all being applied to construction work to reduce losses. "Emerging technologies are impacting the (construction) space more than ever before," John Doherty, staff leader for Nationwide's Middle Market Practice Group, and Jerry Flibbert, senior technical underwriting consultant for Nationwide, wrote in a July blog post titled "2020 Construction Industry Outlook." The pair concluded that the key trends to watch in this year's construction market are: |

• Economic uncertainly;
• Labor shortages;
• Recruiting young workers;
• Technology;
• Substance abuse;
• Defect claims; and
• Prefabricated and modular builds.

Doherty and Flibbert continued: "For nearly a decade, the construction industry has experienced strong and steady growth. 2019 was no exception to that trend. According to the U.S. Census Bureau, construction spending in 2019 topped $1.3 trillion." They added: "While this is good news, it's important to remember that each year, new trends, innovations and issues emerge to affect construction. As a result, construction companies have an incentive to keep their ear to the ground when it comes to examining industry trends and challenges." |

Problems compounded

Smart project management, drone usage, robotics and telematics are all being applied to construction work to reduce losses.

Danette Beck says that umbrella insurance coverage for construction projects was already "going a little bit haywire" because of three dominant trends impacting P&C insurance: Social inflation, nuclear judgments and third-party litigation. "Those trends have been really challenging to the umbrella market," Beck says. "That wasn't caused by the pandemic." One trend that is a result of the pandemic, and that's impacting professional liability exposures and coverage, is that insurers are now adding more communicable-disease clauses or COVID-19 exclusions to their coverage. "But that's not yet compulsory," says Chris Brown, Brown & Riding's chairman and Construction Practice Group leader. "On the builders' risk side and the property side of the projects, you're pretty much stuck with it. But on the liability side and professional liability side? There's still coverage available without those exclusions." |

Broker tips

The insurance pros contacted for this story were uniform in their prediction that the construction market is likely to experience a slowdown in the year to come and that will propel insurance market hardening. "The builder's risk and general liability markets are definitely seeing big increases in pricing and reductions in capacity, particularly in the excess liability marketplace," Brown says. As a result, contractual wording is being more closely scrutinized, and some architects and engineers may opt for lower coverage limits. Brown believes professional liability coverage to be "the least understood segment" within P&C insurance. "There are a lot of potential pitfalls that we see brokers falling into because of a lack of understanding or lack of knowledge," he says. Brokers can underscore their value in this market by helping engineers, architects, builders, contractors and even real estate developers to read the fine print on their project contracts as well as their insurance policies. That would be a shift from tradition, in which many professionals in the construction business breezed past this vital verbiage, Brown says. |

Looking ahead

The conflation of existing construction insurance market challenges with economic uncertainties will likely drive up construction costs, according to the Q2 2020 U.S. Construction Market Overview from Cumming: "With the instruction of new working means and methods, social distancing regulations, loss of time for health checks, and difficulty in moving around sites, it is currently estimated that productivity in the workforce will drop between 10% and 20%. This, in turn, will increase costs by roughly the same amount." Cumming concludes that although insurance premiums, materials pricing, unemployment and labor costs are all likely to increase, the effects on the construction industry will not be as harsh as those experienced during the 2008 recession. Cumming also says the economy will rebound faster than before. Audrey Lau says the industry may see a rise in alternative building methods. For instance, larger portions of construction could be completed offsite. She adds that the housing market may see the introduction of more prefab and modular construction options. There may also be a shift in demand as other industries move to permanent remote workforces and vacate commercial space. The pandemic is already impacting housing trends as more people look to leave crowded cities. How will these trends impact professional liability insurance? "If there's a reduction in the amount of work being done, it creates more competition and drives prices down for the remaining insurance companies," says Chris Brown. By early to mid-2021, the forecast for building-project rates and capacity will be much clearer. He has seen projections indicating construction projects could shrink between 25% and 40% between now and then. Finally, there's one more unpredictable factor that could drastically impact the economy: The U.S. general election in November. "We'll just have to see what happens and how that impacts things," Brown concludes. Keep reading... |

• Challenges and opportunities in the 2019 construction market
• 7 trends making engineering, construction claims bigger and costlier
• What we can learn from construction industry challenges