Navigating a Complex Construction Insurance Market

The construction industry continues to face the challenges of supply chain snags, inflation and persistent labor shortages—a situation that has become all too familiar. Amid these challenges, the construction market has never stopped growing. 

Data from Deloitte indicates a significant surge of 7.4%  in total construction spending in Q3 of 2023. Additionally, Reportlinker's forecast suggests a robust compound annual growth rate (CAGR) of 17.2% for the global construction market from 2023 to 2028. In this prosperous construction market, it's crucial for contractors to grasp the trends and risks in construction, along with how insurance can protect them from potential losses. 

Construction Insurance Market

Given ongoing inflation, uncertain interest rates and a record year of losses from natural catastrophes in 2023, insurance rates will continue to go up at a moderate rate, according to Alera Group’s 2024 Property and Casualty Market Outlook. 

In 2023, the global insured loss from natural catastrophes reached an estimated $123 billion, marking the fourth consecutive year in which natural disaster losses surpassed $100 million. As a result, construction businesses in catastrophe-prone areas will continue to experience stricter underwriting scrutiny, increases in pricing and limited capacity.   

For small to midsize contractors, the Market Outlook reports that carrier interest is increasing in this category. Rate increases are slowing, and underwriters are reducing minimum premium requirements as some insurers look to grow in this space. Insurers will underwrite the business carefully and have clearly defined parameters for what fits their risk appetite. 

Nuclear Verdicts

Safety is the highest priority in the construction industry. However, with potentially dangerous conditions that come with some jobs and personal injury liability cases that may come with these, the construction industry finds itself at the center of nuclear verdicts. 

Simply put, nuclear verdicts are a relatively new trend in the litigation arena. The term refers to legal judgements that award plaintiffs sums of money beyond what many people would consider to be reasonable. In 2021, for example, a jury issued a $74 million verdict against an asphalt company for a death resulting from a faultily paved road. Particularly in the state of New York, the “Scaffold Law” unequivocally subjects employers to liability for injuries resulting from a fall rather than classifying falls under Workers’ Compensation, leading to a recent $102 million verdict for a construction worker.

Insurance companies are struggling with the financial burden of costly jury awards, leading them to reduce their capacity to underwrite policies, particularly in the Excess Liability space. These significant verdicts compel insurers to distribute the costs of these cases to all their policyholders, irrespective of actual loss experience. This challenging scenario creates obstacles for businesses in obtaining adequate coverage.

New Technology

Technology is playing a pivotal role in reshaping both the construction industry itself and the insurance market for coverage of the industry. We’ve started to see that contractors are investing in technology to mitigate loss, relying on data analytics and key performance indicators to better drive performance outcomes and create a more favorable risk profile.

For example, adopting artificial intelligence (AI) helps contractors predict potential project risks with remarkable accuracy, while Internet of Things (IoT) devices offer real-time construction site monitoring and reduce the chance of accidents and delays. As the industry embraces AI, IoT and additional technologies such as drone surveillance for risk assessment and management, it allows insurers to provide more tailored and cost-effective policies, benefitting both contractors and insurance companies. 

Repurposing Commercial Buildings

The trend of repurposing commercial properties into residential buildings has gained significant popularity in recent years due to the increasing number of people working from home and the rapid shift from brick-and-mortar retail to digital storefronts. Undoubtedly, repurposing properties saves money over building from the ground up and also enables real estate owners to continue to obtain value from an asset in which they’re already invested. However, repurposing properties requires far more work than meets the eye and comes with its own set of risks. 

A change in occupancy or purpose is a significant shift in the contractor’s risk profile and may even necessitate a different insurance carrier. In addition, repurposing property can lead to unforeseen challenges, such as hidden defects in the original construction. Construction defect claims—typically stemming from deviation in promised construction standards, such as leaky plumbing, cracks in the foundation, mold and more—are among the most prevalent the industry faces. 

In the face of these potential challenges, it is imperative for contractors to partner with the right broker. Contractors must consistently communicate with their brokers at every stage of a project to address the changing risk profile and coverage needs during building repurpose. This strategic partnership will enable contractors to effectively navigate the complexities of risks associated with repurposing commercial real estate. Partnering with an expert is a crucial component of solid risk management. 

John Babson is a Sales Executive at Propel Insurance, an Alera Group Company. During the mid-1980’s John began his career in the insurance industry while working at a small insurance agency in Newberry, SC, while attending college. Since then, he has focused his practice on large accounts in need of loss-sensitive and captive options in the industries including construction, manufacturing/wholesale, and retail. John was inspired to pursue this profession because of the ability and opportunity to help his clients with cash flow management, asset management, and risk transfer. He finds it rewarding to know that his clients trust the advice and guidance.