3 Key Trends Impacting Construction Contractor Liability in 2024

This post is part of a series sponsored by IAT Insurance Group.

The construction industry faces a new set of challenges each year, and 2024 is no exception. Although 2023 saw a 19.7% surge[1] in spending for nonresidential buildings, many experts believe that construction spending will slow in 2024.[2] This is largely attributable to fewer loans for new construction projects due to skyrocketing interest rates.

This could affect how many in the construction industry approach protecting their assets. Fortunately, there are ways to mitigate the coming year’s potential challenges. Here are three trends and best practices that can help propel you and your organization into 2024 with confidence.

1. Purchase limits required by contract

Many smaller construction companies are currently buying the minimum limit of insurance coverage required by contract to keep operations afloat in efforts to preserve cash.

Subcontractors to larger general contractors will attempt to purchase lower limits when possible, but most contracts with developers require between $1 million and $2 million in coverage. Uninsured subcontractors who specialize in a specific area are typically getting only the minimum coverage that their contracts require.

Cost increases for coverage, labor and materials are a major driving force for these shifts. A lack of skilled workers is also making it harder for smaller companies to compete with larger entities for jobs, and projected slowdowns in new construction may further contribute to this trend.

Best practices

Less insurance coverage can mean greater potential liability for construction companies. The best way to approach this trend is to enforce measures that ultimately lessen potential risks.

Implement safety plans to reduce liability risks. If you have a risk manager, engage them in this goal. If not, a more accessible method of managing potential risks is to use warranties, which guarantee your work, or promise to fix customer complaints should they arise within the warranty period. This can help manage exposure and costs and reduce the likelihood of claims.

2. Greater construction project repurposing

In 2024, there will likely be repurposed types of projects commissioned in the construction industry.

With hybrid and remote work now the norm for about 41% of full-time employees,[3] there’s less of a need for formal office space and a greater need for residential space. This demand is dictated primarily by population changes, which are less prone to large, sudden shifts, while the demand for office buildings is subject to inevitable technology-driven innovations in how people work.

That’s why vacant condo or apartment buildings are a rarity, but many cities are experiencing office building vacancies. A rising number of developers are taking advantage of this change by converting old office buildings into residential spaces to meet the housing demand, a trend that’s likely to heighten in the coming year.

With increased cost and competition for financing and changing in the way we work and live in the last few years, a rising demand for repurposed projects could replace some of the current market for new construction.

Best practices

Much of the risk in this trend lies in whether a repurposed residential building has one owner or multiple owners. A rental apartment complex, for example, generally has a single owner for the entire building, which can keep construction defect-related risks low. When each unit has an individual owner, such as in the case of condos or co-ops, construction companies have a greater risk of construction defect claims. This is particularly likely when larger claims arise, like those involving leaky windows or a leaky roof.

Insurers are aware of this increased risk, so insuring a building that will be repurposed into condos typically costs more than insuring the construction of a rental apartment building. However, insurers also look at the construction company’s reputation and track record — the skillset developed in different types of buildings — when determining premiums.

If your company plans to pivot to construction or reconstruction of a particular building type, take some time to understand your risk. It may cost more to find insurance for new ventures due to inexperience in that type of construction, which translates to greater risk for underwriters. Underwriters who don’t have a loss history or reputation of quality to reference during their decision-making process, will default to offering more expensive coverage to make up for the risk of insuring your company.

3. Rising costs

From supplies to labor to insurance premiums, costs have risen on just about everything in recent years. The rise in inflation has driven up the cost of liability insurance. The costs of medical treatment and lawyers’ fees has increased the total cost of claims. Also to blame for rising liability insurance costs is social inflation driven by changes in the general population’s sentiment around settlements and verdicts.

Labor issues may also contribute to rising costs in 2024. Shortages of skilled laborers with job-specific experience can lead to more injury incidents at job sites. This increases a company’s volume of workers’ compensation claims, which drives up insurance costs. It also results in longer project completion timelines and could lead to an inferior product. For companies that do manage to find skilled labor, it will come at a greater cost due to greater demand.

Rising interest rates may further affect costs. The cost of borrowing money is the highest it’s been in many years,[4] making it more difficult for construction projects to get the necessary funding to move forward. Many construction projects will likely face delays if interest rates remain high through 2024.

There’s also the cost of materials. The supply chain problems brought on by the COVID-19 pandemic drove up the cost of materials significantly, and it has yet to stabilize.

Best practices

While the rising cost of goods and services is largely unavoidable, there are some insurance-related strategies that can help protect your construction company’s bottom line in 2024.

If you run a larger construction company, a loss-sensitive program may be the key to cutting costs. This is a type of self-insurance that allows your company to pay a lower premium and cover its losses up to its deductible. You could enjoy reduced insurance premiums with this strategy if your company’s losses improve over time, which may help manage the cost of insurance.

For small businesses, exposure management is vital. You’ll also want to evaluate the potential effects of your coverage costs. Many smaller construction companies buy only what the state requires to take on a job to keep costs lower, but this can backfire if a costly claim arises.

Smaller construction companies may consider self-insuring or “go bare” with coverage — before doing so, take some time to understand the risks. For instance, if you have a claim that settles for $3 million and you only bought $1 million in coverage, your company is on the hook for the remaining $2 million.

Navigating the effects of construction insurance competition

The construction insurance marketplace is increasingly competitive — and likely will continue to be through 2024 — due in part to an influx of new entrants into the construction insurance space. At the same time, nuclear verdicts and social inflation are on the rise and the cost of claims is rising accordingly. Many carriers have reported an increase in property and CAT-related claims as well, so there’s an allure to the longer-tail nature of construction claims.

What can you do?

Keep coverage continuity in mind when navigating this landscape. After working with an insurance carrier for a while, you will get to know its terms, conditions, exclusions, staff members and claims-handling practices. Continued coverage also ensures that the carrier understands your company’s industry and unique needs, which can go a long way in resolving claims promptly. Furthermore, if you have a good loss history with the same carrier, you may have the opportunity to gain reduced coverage costs. Continuing coverage with your carrier also helps ensure there’s no gap in coverage.

Additionally, it’s wise to implement a risk management and safety program. Having a full-time safety/risk manager can help your company develop a formalized and actionable safety and risk program. A successful risk management program may include measures such as maintaining facilities or equipment, checking subcontractor certificates of insurance (COIs) and having safety teams help your business reduce its risk.

Above all, be sure to look beyond just the price and see the coverage when considering switching insurance carriers. Comparing coverages requires an apples-to-apples assessment of what is being offered; it’s not simply a price-to-price comparison.

For guidance on how to manage risk across your construction projects and portfolio in 2024, reach out to IAT Insurance.

[1] Building Design + Construction “Leading economists call for 2% increase in building construction spending in 2024,” July 2023.

[2] American Institute of Architects “Nonresidential construction spending expected to moderate through 2024,” January 2023.

[3] Forbes Advisor “Remote Work Statistics And Trends In 2023,” June 2023.

[4] Investopedia “Federal Reserve Holds Interest Rate At 22-Year High,” November 2023.

Topics
Trends
Contractors
Construction