As we shuffle past 2018’s holiday season and look through the tunnel of a new year, now seems a good time to pause, reflect and consider some of the risk management and insurance challenges that construction contractors (and others in the industry) are likely to face in 2019. The following are five such challenges, in no particular order.
1. Labor Shortage
With the unemployment rate continuing at an all-time low, labor and staffing will remain an increasing challenge for all parties involved on a contract. In an effort to meet project staffing demands, contractors have had to bring in labor from other regions, reaching beyond their traditional staffing channels. When it takes longer than usual to replace employees who have left the workforce for various reasons, business owners face additional challenges and increased risk.
When it comes to workers’ compensation, while the ultimate loss ratio may be trending up only slightly, the indirect “soft costs,” resulting from on-the-job injuries, will continue to plague the industry. The opioid epidemic has been fueled by a workforce trying to manage chronic pain—particularly in industries with heavy physical demands, such as construction. The addictive properties of these heavily prescribed drugs have caused injured workers to continue their use beyond the acute pain period, prolonging disability and causing injuries and deaths.
And now, the issue of cannabis is front and center. Workers’ compensation carriers will be facing the dilemmas of whether the use of medical marijuana is an alternative to opioids and if there is an acceptable method of legally prescribing it. It is commonly known that the construction industry employs a large number of illegal immigrants. Facing an already significant labor shortage, the current focus on immigration laws poses a unique unknown for contractors, even more so than for many other industries.
2. Tariffs & Trade Wars
Recently imposed tariffs are having a significant impact on the construction industry. The rising cost of steel and aluminum is driving increased material costs, thus raising questions about who will assume these cost increases. The tariffs on steel came on top of demand-driven increases in the cost of steel. Stack this on top of increases in the cost of lumber, and material costs become one of the most significant issues contractors had to tackle both upstream and downstream in 2018.
Unfortunately, this challenge will continue well into 2019, and projects facing budget difficulties may have to be pushed from the drawing table to the back burner. You’ll also need to be diligent in ensuring that your subcontractors aren’t at risk for default as they struggle to manage their own rising costs of materials.
3. Auto Insurance Market
Insurance carriers have been facing a rise in both frequency and severity of auto losses year over year, making commercial auto one of the worst performing property casualty lines. As a result, underwriters have continued increasing rates and premiums to offset tighter margins, reevaluating and often restricting their underwriting.
According to Moody’s insurance market analysis, commercial auto rates increased approximately 9.5 percent by the date this was penned in December 2018, on top of an approximately 7-percent increase in 2017. With an anticipated increase of another 4 to 5 percent in auto losses across the balance of 2018 and 2019, carriers continue to tighten underwriting guidelines and requirements, taking a much closer look at individual construction risks.
Fewer carriers are willing to write auto policies on a monoline basis, and accounts with a distressed loss history are having to seek options in the surplus lines market. Enhancing and strengthening fleet safety programs is critical to managing auto insurance premiums going forward.
4. Excess Liability Capacity & Pricing
In conjunction with the increase in severity of auto losses, excess liability carriers are experiencing greater claims frequency, rising claims costs and higher loss ratios. While this has driven rate and premium increases, it has not reached the same level as rising auto insurance premiums. To limit their exposure and offset their losses, excess liability carriers in some states are starting to implement a requirement that the primary auto liability policy carry a liability limit of $2 million—up from the traditional, standard primary limit of $1 million.
Another issue being faced is the lowered capacity of excess liability insurance carriers. Many of the same carriers that insure general contractors and subcontractors for excess liability are the same carriers that are insuring the wrap-up policies on large projects. It is not uncommon that a carrier providing a $50 million owner-controlled insurance program/contractor-controlled insurance program policy could also be carrying a $25 million excess policy for the contractor’s off-site exposure.
As a result, carriers are beginning to reduce the coverage limits they are willing to offer. This means that where a contractor may have traditionally placed a $10 million limit with one carrier, they may now find themselves having to layer their program with multiple carriers to secure the same $10 million limit, which adds complexity and difficulty to program structure and management.
It’s not uncommon for a contractor to believe they have little or no exposure when it comes to cyber threats or liability. While some of the larger and more publicized breaches have involved technology companies, banks or large retailers, the exposure for a cyber attack or breach is not limited to those industries. Any business with an internet connection is a potential victim, and contractors are no exception.
In fact, the construction industry has unique vulnerabilities that don’t typically exist in other target industries. At any given time, your network can house owners’ plans, specifications and details concerning both the physical and security designs of their projects. Construction company databases are also home to a significant amount of sensitive employee information.
The frequency of social engineering (cyber deceit) and cyberextortion continues to rise, and contractors should be having discussions about how to protect against and prevent such attacks that extend beyond simply purchasing a cyber liability policy.
When the risk management process is properly employed and insurance coverage is placed correctly, contractors can partner with the carrier to create safer incident response policies and communication protocols, as well as third-party vendor management practices.
Understanding the exposures to risk you face; identifying and analyzing options for mitigating, controlling and managing those risks; and partnering with professionals who can properly advise upon and deliver comprehensive, cost-effective products, services and solutions are a must today, next year and beyond.