As the United States construction market heats up, there is a renewed focus on improving operational efficiencies and embracing risk management strategies that could offer a meaningful financial impact.
The construction insurance market is responding positively to these efforts, rewarding owners and builders that are operating their businesses efficiently and managing their risks properly with lower insurance premiums, broader coverage and higher limits.
Still, in today’s post-recession construction industry, not all trends have a positive effect on the market overall. Difficulty finding skilled labor, evolving construction delivery methods, numerous cybersecurity failures and increased litigation are creating a host of new challenges for construction insurance buyers.
1. Labor Shortage
The recession caused many construction workers to leave the industry, resulting in contractors struggling to meet labor demands. According to a survey of 1,386 companies conducted by the Associated General Contractors of America (AGC), more than 80 percent of construction companies are faced with challenges acquiring qualified workers, such as carpenters, sheet metal installers and concrete workers. Companies are also struggling to fill salaried positions, such as project managers, estimators and engineers. This shortage is having a direct impact on workers’ compensation claims and premiums, since fewer workers are carrying a greater portion of the workload and newer workers are less skilled or in need of
Certain companies facing labor shortages could see losses increase on average by 30 percent, which, in turn, could result in a dollar-for-dollar increase in the workers’ compensation experience modification. Additionally, these companies are also at risk of:
- Lost revenues due to increased costs
- Inability to bid on new projects due to experience modification rate (EMR) qualifiers
- Lost time and expense
- Project delays
2. Evolving Construction Delivery Methods
Recent data from RSMeans shows the design-build delivery model has gone from being used in only a small minority of large, nonresidential construction projects to being the market leader in all types of construction projects over the last decade.
Compared to the traditional, design-bid-build contracting method, in which an owner is obliged to negotiate specific, separate contracts with multiple specialists, integration of the design and build functions under a single entity or team, fosters collaboration and increases productivity. However, the move to a design-build model has exposed more contractors to professional liability risks.
Many contractors have insurance policies that do not provide protection that is reflective of their activities and exposures, especially as it relates to design work done. This exposure remains even when the contractor subcontracts the work to another entity.
The increased use of joint ventures and the integrated project delivery method (IPD) in the construction industry are also creating some unique challenges. For example, often companies fail to list the joint venture itself as a named insured on the policy—a mistake that could lead to potential uncovered losses and a breach of contract exposures.
Regarding IPDs, a type of project agreement where all entities agree to waive their rights to subrogate or sue any other entity and all claims become part of the construction budget, many carriers will not agree to waive their rights of subrogation. This can cause a breach of contract for any entity that has agreed to be part of a project’s IPD agreement but has not received a waiver from the carrier.
3. Increased Cybersecurity Risks
As construction delivery methods evolve, general and trade contractors are staying competitive by embracing technologies, partnerships and new business arrangements that inadvertently expose their operations to a wide range of cyber risks, including hacking, social engineering, cyber extortion and data breaches. Construction firms are discovering costly cyber-related vulnerabilities daily, and this trend is likely to continue as the industry pursues growth opportunities and efficiency improvements.
According to Symantec’s 2016 Internet Security Threat Report, cyberattacks targeting businesses with less than 250 employees represented 43 percent of all attacks in 2015, an indication that companies of all sizes remain at risk. Attacks on employees via spear phishing, a fraudulent email that appears to come from a familiar source and is directed at specific individuals or companies, increased 55 percent in 2015.
In addition, more than half a billion records were lost or stolen in 2015 due to data breaches. The Federal Bureau of Investigations (FBI) reports that between October 2013 and February 2016, law enforcement agencies received reports of business email compromise scams, also known as social engineering fraud, involving 17,642 victims. According to the FBI, complaints involving these kinds of fraudulent schemes have risen in every state and 79 different countries, resulting in over $2.3 billion in losses. The costs associated with all of these events have escalated and can be financially crippling for a construction company that is not adequately protected against this type of exposure.
4. Heightened Claim Environment
Although contractors continue to improve their focus on risk management, accidents happen daily at construction sites all over the country. These events, along with many common claim types against construction companies, are inevitable. However, off-the-shelf solutions to manage these liability risks are frequently inadequate. For instance, take lawsuits alleging inferior workmanship against a contractor or subcontractor. They are among the most common construction claim types, but they can be unusually complex, given the numerous parties typically involved in a project.
In addition, many construction companies do not have a deep knowledge of their organization’s claims history. Most companies need professional help analyzing claim trends that adversely impact loss experience and total cost of risk. Doing so enables management to develop a risk control plan that is based on the review, and clearly details the financial improvement to be expected through the implementation of the recommended plan.
5. Environmental Liabilities on the Rise
Regulators and the courts are increasingly holding construction firms accountable for environmental mishaps, including legacy contamination of which they may not have previously known. At both the state and federal levels, aggressive enforcement of environmental protection laws and an increase in awareness over health and natural resource concerns has led to a rise in the frequency and severity of claims triggered by environmental incidents.
In particular, cleanup costs of pollution events have increased dramatically in recent decades. For example, the cost to remediate 126,000 polluted groundwater sites monitored by the U.S. federal government—due to contaminants from underground storage tanks, military installations and industrial facilities—could range from $110 billion to $127 billion. Also, as environmental legislation and case law continue to change, companies are finding it even more difficult to stay abreast of the environmental risk landscape. As such, today’s construction firms have an urgent need for comprehensive environmental risk management that fully addresses their complex and evolving exposures.
6. Expensive Equipment Leading to Costly Exposure
The latest generation of construction machinery, such as loaders, rollers, backhoes and cranes, boast sophisticated capabilities designed to deliver better efficiency, productivity and safety than earlier versions. However, the new capabilities have added to the costs of construction machinery and created new risk exposures as more contractors consider alternative cost-reduction strategies for the acquisition and maintenance of equipment. For example, rather than pure ownership, some contractors now prefer rental or leased equipment, which helps to free up cash while allowing them to meet their contractual obligations. One of the biggest exposures contractors face at jobsites is accidents that end up damaging expensive equipment and delaying projects. As with all the major trends impacting the construction insurance landscape, working with construction risk managers with proven industry experience is crucial. Often, it makes all the difference.