Construction industry risks change.
Brokers seek out wholesalers to cope.
Members of the construction industry suffered severe and in
many cases irreparable damage during the recession, and a look
at the numbers provides some insight into just how drastic the
changes were and what the industry is left with today.
The value of total construction projects dropped from $1.1
trillion in 2006 to about $800 billion in 2010, says the U.S.
Census Bureau. Carrying the lion’s share of the blow is
the private residential construction sector, plummeting from
just north of $600 billion to $238 billion.
The same period saw an unprecedented reduction in
employment, with the industry shedding close to 3%, or 2.2
million people, from the workforce.
Obviously, these reductions dealt a tremendous blow to
insurers and brokers, many of whom lost large amounts of
premium across all property and casualty coverage lines.
Construction specialists with whom I have spoken have agreed
that capacity remained abundant during the plunge, with rates
staying competitive and plenty of carriers battling for market
share. Quite simply, as one wholesaler said, “there just
weren’t that many folks [in the construction industry]
around to give it to.”
At least that was the case.
After speaking with several wholesalers specializing in
construction risks, the consensus is that hardening rates and
high catastrophe losses in 2011 will reduce the availability of
coverage for the construction sector. Consider also that many
insurers are tightening underwriting standards throughout the
construction industry for other reasons. For example, many
insurers are pulling back in response to the added exposure
resulting from moves by some state legislatures to limit
coverage available through additional insured endorsements.
Insurers are also skeptical of adequately insuring
construction risks due to changes in the traditional financing
process. For example, projects such as infrastructure
improvements historically funded with property tax or other
government dollars are seeing that funding reduced. Private
consortiums consisting of engineering firms, architects and
builders are becoming partners with public entities to fund
these projects. This is creating confusion among traditional
construction insurers. How do they adequately cover the
exposure of each of these parties?
The industry has also seen an uptick in professional
liability litigation, an exposure not traditional to the
construction industry. Wholesalers specializing in professional
liability coverage say interest in this insurance for builders
has grown more pervasive in just the last few years. A growing
number of project owners are beginning to require proof of
professional liability insurance as a condition of contract.
This is due in part because many project owners have begun
including the builder in the design process, intending to
reduce cost and delays. Some builders have also retained design
professionals on staff or by contract to gain a competitive
advantage, convoluting the once seemingly clear line that
existed between designers and builders.
As the construction industry adapts for survival and
eventual recovery, complex contract language will continue to
evolve, exposure will continue to change, and claims that fall
outside the scope of traditional general liability cover will
Further, states are expected to continue legislative efforts
such as those passed this year in Texas and California designed
to limit an additional party’s (such as a developer or
general contractor) ability to impose hold harmless agreements
and access a subcontractor’s coverage.
These factors coupled with changes in market pricing and
availability should serve as evidence to retailers of the
dangers of navigating the construction marketplace without the
assistance of a specialist. Many wholesalers possess the
capability to step in and play that role, staffing offices in
various regions throughout the country to assist retailers with
needed expertise and local knowledge.
Some specialist wholesalers offer resources extremely
valuable to retail partners, such as access to staff counsel
for questions and contract review, risk management and
information services. Additionally, as some markets inevitably
react by choosing to no longer write certain accounts, the
brokerage capability offered by a wholesaler will become
imperative in retailer efforts to secure and retain
Experts predict that 2012’s overall construction
spending will be flat at best and most likely be reduced even
further. While the majority of recent construction industry
data can certainly be described as bleak, there were signs of
growth in certain segments in 2011 that are expected to
continue throughout 2012. Many wholesalers are seeing an
increase in activity involving healthcare facilities and
projects for multifamily housing construction.
Growth is also expected in sectors championed as job
creators by the federal and state governments, such as energy
and power infrastructure. If insurance market capacity for
construction risks tighten, specialty markets accessible
through wholesalers are likely to pick up traction among
retailers hoping to follow the growth.
Amrhein is wholesale editor.