A Guide to Liability Insurance for the Construction Industry

By Dan Dias

With the recession looming, Commercial clients have been asking what they should be prepared for in 2023?  Will the Infrastructure Bill keep construction strong through the next couple of years or will it create other rate challenges in the marketplace.  How does inflation and wage pressure work into this analysis? The following addresses these questions and concerns.

1. What are the big liability insurance issues facing the construction industry in 2023? What is/are the potential impacts?

Large Auto Liability losses that go into the Umbrella continue to plague the industry. Cavignac is seeing similar and related loss activity in large infrastructure projects and that have pushed some of the commercial insurers to back away from supporting Heavy Construction. A comprehensive risk management program, that includes Human Resource Management, Claim Management, Field Site Safety and Training, and Contractual Risk Transfer will help mitigate these issues. Without strong risk management engagement, clients will find that they will be pushed out of the standard admitted markets and possibly not qualify to bid some projects that require “Admitted” coverage.

2. With big construction problems looming large, due to massive government spending programs, will the construction industry have to turn to relatively unskilled labor to fill its labor force? Does that scenario mean higher liability insurance costs for construction firms?

Quality labor retention, strong training programs, and a safe workplace are the hallmark of a “Best in Class” commercial contractor. The Great Recession saw a huge flight of talent from the Construction industry to other industries and retirement. The best contractors have just begun to dig out of that 15-year drought for labor, but still have a long way to go. It takes constant Human Resource focus to not fall behind in the hiring process. The relationship to unskilled labor and insurance rates can be seen on the residential side of the construction business. Where the construction industry will see an increase in cost is related to increased pay and benefits to keep the best workers, which will drive up cost of projects and the corresponding relationship of premium to Revenue. Working with a broker that understands these relationships can help clients explain how higher paid personnel drive lower claim activity will help mitigate the increase in rates.

3. What construction sectors (i.e, design build, engineering/procurement/construction, for example) may see bigger liability insurance rate hikes in 2023 – and why?

As the industry gets bigger, insurance liability rates tend to flow in an inverse relationship to Revenue. None of the above sectors are immune to this relationship. If public spending starts accelerating to help moderate any potential 2023 recession in the construction industry, liability rates will remain stable. However, red-tape, and rebids tend to slow the public agency procurement process, thus making any lift volatile. Cavignac is seeing larger public projects being released to procurement which requires higher bonding capacity and more sophisticated cash flow techniques to qualify. Larger projects drive the number of bidders down, thus allowing the most qualified Contractor to win these projects.

4. What questions should construction company decision makers be asking their commercial insurers regarding liability issues heading into 2023 – and why?

Through our strategic partnership with our 600 Building Industry clients, Cavignac provides services to support Best in Class practices for Human Resources, Safety, Claims, Contractual Risk Transfer, and Financial Management to lower our client’s Total Cost of Risk. Effective implementation of these practices consistently produces loss ratios that are in the 20-30% range, which is less than half of the industry. Owners that have spent the time and money to undergo this process should push the commercial insurers to differentiate pricing and find ways to provide cost sharing that allows owners to share in the higher ROE, and improved cash flow on the underwriting of their account.

5. What is the estimated demand for different types of products in Construction Liability Insurance? What are the upcoming industry applications and trends for Construction Liability Insurance market?

As more public agencies push green building design and LEED (Leadership in Energy and Environmental Design) measures, there will be a need to provide coverage for Exterior Insulation Finishing System (EIFS) into their projects, which is excluded by most General Liability policies. The industry will need to get it hands around how EFIS can be used safely to enhance these LEED requirements. Also, frame construction is still a viable building type for single and two-story public agency buildings. However, the industry has backed away from covering the builder risk on this design type due to increases in severity loss thus significantly driving up costs of projects. There needs to be a product that can delineate between safer public works projects and the larger residential construction that has driven losses.

6. What Are the projections of US construction liability insurance industry, considering capacity?

Cavignac sees still ample capacity in the market as carriers jostle for growth. That said, a moderate increase in rates (0-7%) due to continued severity losses on large public works projects should be expected. Best in Class contractors with strong safety processes and clean loss histories can still see flat rates.

7. Who are the major players operating in the US construction liability insurance market? Which companies are the front runners?

Travelers, Zurich, and Liberty continue to top the Liability insurance market ranks, with The Hartford, CNA and a handful of other markets a close second tier. However, many markets are feverishly adding staff in front of the major budget spend from the government.

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