While a recovery in residential construction has outpaced
the nonresidential construction sector in recent years, things are finally
looking up in nonresidential, with strong increases being seen in certain parts
of the U.S.—even in the “mega-residential” apartment and condo sectors of
Texas, Florida and California.
According to the Associated General Contractors of America,
in the first two months of 2014 nonresidential construction spending climbed
11.8%, driven by significant growth in the power & energy, manufacturing,
retail, warehouse & farm, and office construction segments. During that
same time period, residential construction spending increased 15.2%.
In 2014, from just about anywhere you stand, construction is
on the rebound.
“We’re seeing an uptick in project starts as we travel
around the country, with a lot of contractors even dealing with building
backlogs,” says Doug Cauti, senior vice president and chief underwriting
officer of Liberty Mutual's construction practice. “The prospects of economic
rebound in construction are promising.”
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.
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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.
Source: Property
Casualty 360
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