Construction insurance trends – what's happening in the market?

A landmark case could shape how underwriters think about risk

Construction insurance trends – what's happening in the market?

Construction & Engineering

By Nicole Panteloucos

From the impact of COVID to labour shortages and supply chain issues, the construction insurance market has been awash with challenges in recent years. But how is the market shaping up in 2024?

In an interview with Insurance Business, Allan Hetz, senior vice president and National Centre of Excellence manager at Aon, pinpointed Q2 trends steering the sector.

Describing the industry as being in a “state of flux”, Hetz pointed to major insurance syndicates exiting and re-entering the arena as a contributing factor to current conditions.

“At the end of 2019, they were a few major syndicates that exited the construction industry because it was no longer sustainable for them,” he said.

“Now the markets are in flux because players that exited have come back to take advantage of pricing and technical underwriting but are not doing anything differently. So, the market is no longer hard, but it’s got the semblance of a hard market that is trying to hold on.”

LEG 3 exclusions

Hetz emphasized that the recent case, South Capitol Bridgebuilders v. Lexington Insurance Company, could have a significant impact on Canadian underwriters’ perspectives on risks and influence policyholders’ rights and obligations.

In September, the US District Court for the District of Columbia provided its first detailed review of the LEG 3 exclusion, which typically denies coverage for property damage caused by faulty workmanship, materials, or design.

In this instance, the court ruled that voids in concrete due to contractor negligence could be considered “damage”, challenging previously accepted interpretations of the LEG 3 exclusion.

“LEG 3 has always been the most contentious clause under builder’s risk policies,” stated Hetz, who added that among LEG exclusions, LEG 3 provides the broadest cover.  

New technology shaping the construction industry

On the heels of Axis Insurance’s recent investment in insurtech firm BeniPlus, Hetz also highlighted the growing influence of the Internet of Things (IoT) and how the rise of insurtech will impact the construction market.

He pointed to the use of water sensors on construction sites, explaining how they help determine the rate of concrete curing.

While insurtech offers an additional layer of protection, Hetz stressed that underwriters must understand these technologies to effectively mitigate associated risks.

“As underwriters and as brokers, we’ve got to get to grips with what enhances and mitigates risk exposures,” he said. “It’s about how [the technology] has developed in the market and have underwriters seen trends that say, ‘this is a better, or worse risk than we thought’.”

Impact of electric vehicles on construction

Last month, Statistics Canada released a report stating zero-emission vehicles exceeded 10% of new motor vehicle registrations.

Hetz noted that with moves towards sustainability, the rising popularity of electric vehicles will drive the construction of more battery plants. As a result, underwriters will need to ensure they fully understand the risks associated with developing technologies and building trends.

 “We’re going to have all these battery plants and the construction of battery plants,” Hetz said. “While underwriters may theoretically understand the engineering behind these buildings and how the risks could play out, it can be a challenge articulating to underwriters that this technology is not prototypical.”

Amid market uncertainty about the right coverage for specialty projects, Hetz emphasized the need for a growing technical understanding to stay competitive.

“Ultimately, nobody wants loss, because once you’ve got a loss, you’ve got insured loss and you’ve got economic loss,” he said. “And you know, not every part of a loss is insured - that’s the unfortunate truth of it.”

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