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Construction Industry

Insurance Implications from the Rising Costs Facing the Construction Industry

By: Brian Polino, CPCU | Senior Production Underwriter, Vice President | Halcyon Underwriters

 Thu, July 20, 2021
Construction planning
Construction planning
Emerging from the post-lockdown world, the nationwide real estate and construction boom have inflated construction input costs and exacerbated supply imbalances for project materials and skilled labor. As insurance is a major component of the construction industry, this article examines how the current supply/demand imbalances and insurance inflation trends impact both claims and premiums for the construction industry. By studying these trends, we can better advise our construction insureds to successful insurance and risk management outcomes during this changing time.

Labor Shortage Effects on Claims

Foremost and probably most notable, the post-lockdown labor crunch is affecting the construction business more than most industries. Referencing a June 8th Wall Street Journal article reviewing the May 2021 US Department of Labor Jobs Report, “The mismatch between labor supply and demand was especially acute in construction, where hires declined by 107,000 even as job openings increased by 23,000.” Moreover, per the 2021 Construction Outlook Survey by the Associated General Contractors of America, 81% of construction firms reported having difficulty filling open positions.

These labor shortages are inflating project costs as construction firms are raising wages to attract more workers while also hiring less-than-qualified workers to meet the increased demand. Hiring poorly qualified workers can be a recipe for disaster when it comes to insurance claims. As a result, insurance advisers can assist their clients across various lines of business by advising on proper hiring risk controls.

For example, for Auto, reminding insureds to maintain proper MVR standards for new hires and current employees is the simplest method for improving or maintaining good auto loss experience. Even though finding qualified drivers during this labor shortage may be difficult, patiently waiting for the right driver far outweighs the benefits of putting an unknown behind the wheel. A driver list with poor driving records undoubtedly leads to higher claims frequency and opens the door for negligent entrustment lawsuits for the employer. To ensure best practices are followed for fleet management, agents can assist their insureds in establishing formal, written fleet safety programs for medium and large accounts, acceptable MVR criteria for small accounts, and even safety incentive programs to reward good driving behavior.

In terms of worker’s compensation insurance, more inexperienced workers at the jobsite can result in higher frequency and severity of workplace injuries. More claims mean higher workers comp mods, translating into higher premiums down the road. Assisting contractors with establishing formal employee safety programs, bringing carrier loss control to conduct jobsite safety training, and establishing routine safety meetings can assist in reducing worker injuries. Medium and large construction firms might also consider bringing on a full-time jobsite safety manager to assist with risk management efforts.

Moreover, hiring less qualified workers can also translate into a greater probability of construction defect claims affecting general liability insurance policies. A good risk management practice would be establishing clear quality control and quality assurance programs operated by senior-level employees.

Material Shortage Effects on Claims and Underwriting

According to the May 2021 survey for the National Association of Home Builders / Wells Fargo Housing Market Index, more than 90% of builders report shortages of concrete blocks, lumber, and other basic construction materials. With the lack of materials necessary to finish projects, projects often sit idle while materials are awaiting delivery. Empty jobsites can increase theft of equipment and supplies, especially during this time of material scarcity. Advising insureds to maintain proper jobsite theft controls can prevent a costly project overrun or delay due to material theft.

Project delays are also resulting in increased requests for builder’s risk policy extensions. As the supply of underwriting capital for builder’s risk is tightening, underwriters are becoming reluctant to offer extensions. Hence, presenting underwriters with a detailed reasoning for extensions, ample time to underwrite extension requests, and including a margin of safety in case of further delays (i.e., adding a few extra months to the extension period) can assist in getting extensions underwritten for the proper length of time.

Insurance Inflation Trends Effects on Construction

Adding to the mix for contractors right now is the current hard market for insurance rates. Per the Q1 2021 The Council of Insurance Agents & Brokers’ Commercial Property/Casualty Market Report, this year’s first quarter was the 14th consecutive quarter of increased premiums, with respondents reporting an average annual increase of 10% across all-size accounts. Capacity also contracted for contractors, especially for the umbrella line, with nearly 80% of respondents reporting a decrease in capacity. Moreover, per the survey, commercial auto averaged a 9% annual increase, GL a 6.2% annual increase, and umbrella a 19.7% annual increase. Altogether, premium trends continue to increase due to social inflation, litigation financing, and the higher frequency of liability claims severity.

In conclusion, the current supply imbalances and input cost inflation facing the construction industry bring insurance implications to the forefront. By assisting our Insureds in quantifying their risk and recommending loss-reduction strategies, we can help reduce claims activity and, thus, better moderate the rising premium cost trends currently facing our construction insureds.

This content is strictly informational and should not be used as specific advice on insurance products, legal, accounting, and/or tax related matters. Insureds should always contact the appropriate licensed professional for their insurance, legal, accounting, or tax needs.

Contact Us

Halcyon Underwriters

Attn: Compliance Dept.
555 Winderley Place Ste. 420
Maitland, FL 32751

Telephone
(407) 660-1881

Toll Free
(800) 393-9090

Fax
(407) 660-0525

Email
compliance@halcyonuw.com


Should you wish to file a customer service issue, compliment or complaint, you may do so by emailing
the Compliance Officer at compliance@halcyonuw.com or contacting verbally at (321) 527-2180.


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