With the start of a new year, the construction insurance market is showing signs of ambivalence from most insurers. Insurance underwriters will likely focus on keeping existing clients happy (through pricing flexibility, broad coverages and service commitments), while simultaneously trying to grow business. With the overall construction industry showing signs of optimism, there are growth opportunities for insurers—payrolls are increasing and larger projects are finding financing.
While investment returns continue to lag, insurers will have a defined agenda on profitable underwriting. Expect existing underwriters to work very hard to keep current clients, which will likely force rates downward with existing competitors. New entrants help to drive the rates downward as well. Unless there are loss history problems, rates are not expected to increase by large margins due to the competitive nature of the marketplace. Though there is ample capacity for both commercial and residential projects, key areas to watch are discussed below.
New York Labor Law
The insurance market for contractors and projects remains strained in the state of New York. Many insurers have vacated the market due to litigation challenges and court awards. Project-specific general liability coverage remains tentative with many contractors and owners struggling for such placements. While standard insurers stand mostly on the sidelines, the project liability space is filled with surplus underwriters capitalizing on sketchy terms and high rates. Many contractors and owners are turning to controlled insurance programs (CIPs) to provide adequate coverage for exposures. This trend will likely continue during the 2015 year.
Coverage Gaps on Project-Specific Placements
The contractor must be engaged in the marketing and coverage/limit review of the CIP arranged by the owner. The same holds true for owners who are relying on the contractor to provide insurance limits and coverages for the project team.
Communication and transparency are critical to understanding the risk, coverage and terms of the CIP. Keep in mind the following key questions.
- How will limits be treated for projects that last longer than one year? Will the annual aggregate reinstate and how will the completed operations limits be applied?
- How will repair and warranty work be covered under the liability policies?
- Under a residential project, how will potential exposures be managed for condo conversion activities?
- Will the project team have deductibles applicable to subcontractors, and how will those be managed?
- How are the bidding process and subcontractor deductions integrated in the project contract and CIP manual?
- Will staging areas be included or excluded from the CIP?
Additional Insured Endorsements
The latest insurance service office endorsements contain several revisions:
Additional insured (AI) coverage will only apply to the extent permitted by law. There are questions about whether the AI benefits will apply if the contractual indemnity found in the construction contract is null and void under state law. There have been court rulings whereby the anti-indemnity provisions will apply to the AI endorsement.
The additional insured endorsement will be no broader than that required by contract. The AI benefit will track the underlying construction contract, regardless of the scope of the AI endorsement.
Limits afforded the AI are the lesser of the amount required by contract or the limits shown on the declarations for the named insured. This provision is a significant modification, and requires contractors to examine their insurance requirements.
Contract requirements continue to be vague regarding the additional insured provisions. Many contractors have not updated their agreements to be specific for on-going and completed operations.
Rates and Underwriting
Construction defect claims remain a concern, and residential projects will not enjoy the same market dynamics as expected on commercial projects. The residential underwriting community will continue to be challenging for both terms and rates, with a significant share of the market staying with the excess and surplus lines community.
The excess market will be stable and follow the terms of the underlying liability pricing to a large degree. A few new entrants to the excess market will keep rates stable for excess placements. Expect the lead excess underwriters to remain sensitive to the terms of the underlying, with rate fluctuations mirroring those of the underlying general liability and auto liability. The number of power units and the composition of the fleet will receive attention from the underwriters, who have a tendency to want more rate for larger and heavier fleets.
Worker's compensation rates will linger behind any softening of other lines of coverage. Medical costs are high, investment returns are nominal and many contractors are seeing their experience modifiers increase with the new National Council on Compensation Insurance (NCCI) rules regarding EMR calculations. Loss history and large claims will be viewed carefully in the market, with underwriters requesting up to eight years of loss data for pricing consideration.
Larger contractors will have more room for program and rate negotiations, although the market reports that fixed cost increases on high deductible plans are not uncommon. Contractors leaning toward guaranteed cost plans or low deductible programs will likely see 5 to 10 percent rate increases, excluding any experience modifier impact.
Commercial property rate reductions are expected as the year progresses. Traditionally, catastrophe risks have not enjoyed the benefits of improved rates, but that is changing with new windstorm modeling released in 2013.
Insurers have aggressive new business goals for property, and this competition could drive rates down by 10 percent or more. Contractors with loss problems should be prepared to shop the business and begin that process earlier in the renewal cycle. Coverage expansions are available for negotiations, and we expect more creative solutions from the underwriting community in the area of property and builder's risk.
In 2014, wage and hour class actions exceeded all other types of employment filings and produced more decisions from federal and state courts than any other area of complex employment litigation. State law claims were more heavily concentrated in plaintiff-friendly states, such as California, Massachusetts, New Jersey, New York and Pennsylvania.
Employment practices liability rates experienced single-digit increases on average, with the exception being companies with employee concentration in California, which leaned toward double-digit rate increases. Premium reductions were scarce, except for assumption of materially higher self-insured retentions. This line of coverage has experienced significant losses, with rates expected to rise in 2015. Wage and hour actions make up a large segment of the reported claims, with coverage restricted to mostly defense.
The surety market remains relatively optimistic on the continued growth in the construction sector. While a cautious stance remains on the recovery from an underwriting standpoint, the market as a whole is very aggressive from both a pricing and capacity perspective for well-managed construction firms. There is significant competitive pressure in the middle market arena, particularly as it relates to new carriers entering the marketplace and vying for market share. This is a prudent period to make certain that contractors do a thorough job of prequalifying project partners in order to protect the balance sheet from default risks. Those contractors that have taken the proper measures to protect the financial integrity of their respective companies will be poised to take advantage of improving market conditions and weather any market challenges that the recovery may throw at them.
Alternative Market Growth
2014 saw continued growth in the alternative market (captives) for contractors, and further growth within existing established captives is anticipated in 2015. Although construction underwriters are working hard to retain their existing clients, contractors are still actively evaluating captives as a strategic option to a traditional market. Some recommendations for 2015 include the following.
- Future rates will be driven by historical losses and will be the basis for any increase from the underwriting community. It's important to present the market with accurate and updated historical losses. Eight years is suggested to provide a longer term view of losses and payrolls.
- Underwriting submissions should center on operational risk and safety management protocols, with an emphasis on fleet risk, including motor vehicle record, driver selection, education and training.
- Relationships will continue to make a difference. The past few years have seen a redistribution of talent from insurance company to insurance company. Now is the time to build stronger relationships at the broker and underwriter levels.
- Education is important to understanding the dynamics of any market change. There are numerous venues for contractors to get educated on the challenges. For more information on risk and insurance education, visit irmi.com.