The US construction insurance market is in a tight bind. Like much of the property & casualty (P&C) market, the construction sector is experiencing significant rate increases across primary, umbrella and excess, and specialty lines, as well as some reduction in market capacity and widespread restriction of risk appetite. The reasons behind this market tightening are multi-faceted, but one of the primary culprits is the increase in claim severity caused by social and medical inflation.
Social inflation has led to an increase in nuclear jury verdicts and significantly higher settlement values than those seen over the past few decades. It has also resulted in new concepts of tort and negligence, as well as more liberal treatment of workers’ claims, which has a significant impact on the manual labor-intensive construction industry.
“It’s putting an increased burden on general contractors to provide the ‘perfect job site,’” said Britt Sellers (pictured above), Greater Atlanta Area - regional vice president, US E&S Primary GL, Ironshore Insurance. “Plaintiff attorneys are routinely attacking general contractors with very slim theories of liability on job site safety, and juries are taking sympathy with the plaintiffs across all liability lines, saying: ‘The general contractor should have done this, or could have done this to prevent an injury.’ That’s leading to some pretty substantial verdicts on behalf of the plaintiffs.”
The dark clouds of social inflation and greater construction claim severity have been brewing for a number of years, according to Ben Beauvais (pictured immediately above), construction executive, distribution, for Liberty Mutual Global Risk Solutions (GRS). He said the particularly challenging area from a P&C perspective has been in the lead umbrella market. Liability claims started trending upwards as early as 2014 or 2015, when a number of carriers noticed an uptick in losses in the $5 million to $10 million range. As a long-tail line of business, many of the losses that emanated from the accident years of 2014 and 2015 only started to manifest in 2017, 2018 and sometimes 2019, hence why the momentum for a market correction in the lead umbrella space has only reached its peak more recently.
“Back in 2016, $25 million was the nominal limit deployment that we saw on a lead umbrella, but by 2019, we saw that get pulled back to somewhere between $10 million and $15 million. Now we’re seeing the limit pulled as low as $5 million in the lead umbrella space – all depending on the type of risk,” said Beauvais. “There’s been a substantial pullback in limit, and the availability of capacity in the lead space has dramatically altered. Once you get above $15 million to $25 million, there is more discipline in the pricing, and more availability of capacity, but it’s definitely a much more challenged market in both the lead umbrella space and in the full-form excess space that sits above the lead.”
The leading cause of loss in the construction space, which ties in with the trend of social inflation, is worker injury. Loss-causing incidents like falls, strikes by objects and over exertion cost the US construction industry around $7 billion every year, and that figure is only trending upwards. On the builders’ risk side, the most common claims involve water infiltration and water damage during the course of construction. That water damage can cause direct physical loss, it can delay the completion of a construction contract, and it can lead to downstream construction defect claims.
“We’ve also seen an increase in design-related challenges,” Sellers added. “Our claims group has identified two factors that are resulting in greater frequency and severity of design-related claims. The first is when architectural plans or project specifications lack sufficient detail in some respect. The second factor involves inadequate communication between design professionals and general contractors and subcontractors. This has resulted in an increase in what we call ‘value engineering claims,’ when parties use alternate means and methods for projects in order to save cost, but those cost-saving measures sometimes create failure points that lead to large construction defect claims. Oftentimes, the proposed resolution is to return to the original means and methods that were in the plans, which is what should have been done all along. Unfortunately, we’re seeing dangerous signs or trends to shift those additional construction costs and risks over to the insurance carriers.”
Beauvais added: “We’re also seeing an increased reliance at all levels of construction, from the general contractor level to the developer or project owner, and right down the contractual liability chain, for at least portions, if not the entire project, to be delivered under design/build contracts. This shifts the design onus - a legal liability - back on to the contractors and away from the designers, and that trend is also contributing to the increased challenges around design-related risks.”
With all of these challenges in mind, it is essential that insurance brokers communicate clearly with end-clients and carrier partners so that all parties have realistic expectations. With the market trending the way it is, it’s a safe bet that some, if not all construction clients will experience some rate increase, limit reduction or coverage alteration in their next portfolio renewal. The best thing that brokers can do, according to Sellers and Beauvais, is “get out in front of it”.
“If you leave executing a tough message until the eleventh hour, people will start pointing the finger, but getting out in front of it definitely helps,” said Sellers. “As for the broker-carrier partnership, another way that brokers as distribution partners can set themselves apart is by elaborating on the risk management and loss control that they have addressed with the client – the value they have added. That lets us know as a carrier that not only are we partnering with this particular client to write their insurance, but we’re also partnering with this broker to write the business for this client. We’re looking to build more comprehensive client relationships, which can span single brokers or multiple brokers depending on the size of the client, so that we gain a more holistic view of the risks.”