Navigating the perils of the booming Construction industry
By Joyce Anne Grabel
"The construction market is booming, with total project values approaching the high-water mark set in 2007 shortly before the financial crisis," says Rob Brewer, vice president of industry solutions at The Hanover Insurance Group. From an insurance perspective, he adds, "there is ample capacity to take on well-managed risk."
Brewer adds a cautionary note, however. A shortage of skilled labor and experienced management, combined with the stresses of working to meet the shifting needs of the construction economy, will continue to have an impact on losses. Whether it's residential buildings, commercial and institutional structures, or improving infrastructure, "underwriters need to be aware of the past, watching for signs that their customers may be taking on more work than they can effectively manage," he notes.
"It's highly competitive, regardless of region of the country and segment of the construction industry you're dealing with," says Andrew Murray, chief underwriting officer for Starr Companies' construction unit. Renewal rates, he says, are generally flat to low single-digit reductions for accounts with acceptable loss history. Early renewal targets and commitments have become more prevalent over the past year, he adds, "making new business even more difficult to obtain."
While the market is generally stable, Murray adds, "there appear to be outliers on almost every third- and fourth-quarter deal we see, where the rest of the market will be within 5% of each other but then there will be one that is 20% lower or more."
There are several key contributors to claims in the construction insurance space. One of the most significant is auto-related losses, notes Rick Keegan, president of construction at Travelers.
"We see a significant amount of large losses in construction as the result of auto accidents. Because many auto accidents also involve injuries to a contractor's employees, accidents are a significant cause of workers’ compensation claims for a contractor," Keegan explains.
One of the biggest causes, Kaplan points out, is distracted drivers talking or texting on their phones. To reduce risk, companies can employ software that can, say, shut down a phone while a vehicle is moving. “We’ve been able to show through loss history how much of an impact that can make in terms of decreasing losses,” he adds.
Bodily injury claims are still the largest category of loss in construction, whether the injury is to an employee or possibly another contractor on the job, says Brewer. "Another significant exposure is property damage claims," he notes. "These can trigger coverage under General Liability, either for premises and operations or, in the case of construction defect, completed operations." He adds that there can also be significant defense costs associated with liability claims, as construction claims can be complicated and it can be difficult to establish financial responsibility.
“In New York, bodily injury claims alleging violations of the Labor Law drive significant general liability losses, with the average claim ulti-mately costing between $3 and $4 million dollars,” Murray points out. “Construction defect is always a concern, and is especially so in particular classes of construction and geographies.”
One of the most significant contributors to claims is increased risk for on-the-job injuries as a result of shifting employee demographics, says Keegan. He has seen a clear increase in construction workplace injuries and workers’ compensation claims due to inexperienced workers.
"The changing workforce and need for skilled construction labor is a top concern we continually hear about from our customers," Keegan says. "The issue for contractors is twofold: There is a shortage of skilled labor, requiring contractors to sometimes hire workers who don't have as much experience, while at the same time there is an aging construction workforce. The combination substantially changes the risk profile for a contractor."
The issues contractors are dealing with include an aging workforce and a lack of skilled labor. (Photo: Shutterstock)
Industry data also show that more construction workers are working longer before retirement. An aging workforce presents additional challenges to contractors. "It often is more difficult to rehabilitate older employees post-injury, and they may be less likely to return to work. The result can be extended disability periods, increased medical costs, and added pressure on a contractor's workers' compensation costs," Keegan adds.
"The shortage of skilled labor and experienced project managers may cause the cost-to-build to rise, delivery to slow and job sites to become harder to control and to run safely," Brewer cautions. "With the rebounding economy, the commercial construction market is growing, which requires higher skill than many residential projects. Enhanced onboarding and skill development programs will be critical for contractors, as well as identifying ways to keep their more experienced workers."
With the immediate need for rebuilding the damage caused by recent hurricanes in Puerto Rico, Texas and Florida, there is a spike in demand for labor to get people where they need to be. "Many companies will be adding new people on the fly as demand surges, and they need to make sure they get it right," says Kaplan.
Best practices include conducting pre-hire medical exams to make sure new people are physically capable of doing the job; creating an in-house "mini-university" that teaches all the necessary safe work practices (using personal protective equipment or fall protection, for example); holding a two-week orientation period for new hires; and having experienced employees mentor new workers.
Obtaining sufficient coverage for environmental exposures is critical but can be difficult, because every piece of property is unique. On the other hand, most projects do have several factors in common.
"Construction sites are different, but they all have exposure to air and surface water or soil and ground-water," says Keegan. Frequent exposures include contaminated runoff from construction sites, accidental striking of an underground pipeline or tank, exacerbation of current conditions at a site, and mold resulting from water intrusion.
As a result of increased awareness around construction-related environmental risks, more construction contractors now include a requirement to maintain pollution liability coverage for jobs, Keegan adds.
The key is understanding the building site, Kaplan says. Is it a greenfield (never developed) site or a brownfield (formerly developed and possibly contaminated) site? Knowing what's underground is really important to calculating risk. For example, there may be underground storage tanks that hold hazardous chemicals that must be removed and disposed of properly.
There must always be a thorough pre-construction review, says Murray. "The primary exposure on major new projects is the condition of the site pre-construction. With this exposure being so significant, virtually no project is going to be able to obtain financing without having had full environmental due diligence conducted — including, at the least, a full Phase I study."
The Phase I results, as well as any Phase II remedial efforts, ongoing monitoring requirements, and ability or lack thereof to obtain EPA or other governing body notices of release, drive the extent to which specific coverage is warranted — including needed terms and conditions as well as advisory limits.
Regardless of the labor marketplace, type of project, and particular environmental risks they're dealing with at the moment, contractors must constantly ask how they can reduce exposures. It's a process of continuous safety improvement.
"One of the questions I am asked most frequently by contractors is how they can make themselves a 'better risk,'" Keegan says. Having a robust safety culture, he adds, is essential for any contractor that wants to be successful in the long term. And that begins at the top.
"The culture needs to start at the senior levels and always be on display, backed by a system of accountability and reward that is consistently applied," Keegan stresses. "It should be an integral part of every hiring decision, to help ensure that workers have a personal commitment to protecting themselves, their co-workers and the company's reputation. The best contractors are never satisfied and are constantly analyzing their internal controls, operations and decisions to ensure they are always improving."
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