BNC: Construction Insurance Coverage Trends

Construction insurance rates have trended upward as claim values have increased, fueled by recent workforce upheaval, supply chain shortages, and record-high inflation. According to MarketScout Barometer, the contracting industry class experienced an average insurance rate increase of 6.2% in Q2.

Across all industry segments, property insurance was up 8.3%, general liability was up 5.3%, auto was up 9% and inland marine was up 3.7%. Excess liability rate increases have been even higher.

What Is Driving Construction Insurance Rates Upward?

Inflation. Rising inflation and increasing fuel and labor costs have resulted in high construction project-specific insurance rates, particularly property (builder’s risk) and casualty coverage. With project-specific coverage dependent on a project’s estimated contract value (ECV), rates rise if ECVs exceed any initial underwriting estimates by the insurer.

High Material Costs and Supply Chain Issues. According to an April 2022 report by the National Association of Home Builders, building materials for residential construction ex-energy projects shot up 33% since the start of the pandemic versus 20.4% year over year. These include pricing for software lumber, gypsum products, ready mix concentrate, and steel products. In addition, rising material costs puts tremendous strain on construction insurance rates.

A separate report by the U.S. Chamber of Commerce (Commercial Construction Index Q4 2021) saw an overwhelming number of contractors experience a shortage in at least one material.

Labor Shortages. Another cause of rising construction insurance rates is labor shortages. According to an Associated General Contractors of America survey, 91% of construction firms have experienced issues staffing job sites. Staffing instability may increase liability issues due to new & untrained personnel, forcing insurers to increase premiums.

What Changes Are We Seeing With Construction Insurance Policies?

One way insurers are responding to increased uncertainty is tightening up their Cessation of Works clauses. Policies may have shorter periods (e.g., 30 or 60 days) for coverage in the event that no construction work occurs.

Another change to many policies is the addition of communicable-disease clauses and COVID-19 exclusions. These could exclude damages or losses caused by infectious diseases.

Lastly, with rising costs, claims are reaching policy limits faster and in some cases, coinsurance clauses are triggered. It’s important to make sure your projects are adequately insured.

To minimize risk, construction owners should be mindful of policy limits, construction timelines and contractual wording.

How Do I Take Control of Rising Construction Insurance Rates?

There are many actions you can take to take control of your total cost of risk.

Understand Policy Language. Work with your insurance advisor to see what protection clauses may apply to your organization. For example, cost escalation and inflation protection may be available on some policies.

Monitor ECVs. Keep your insurance broker updated on estimated contract values, especially with newly awarded contracts. They can help you update existing policies and insurance limits.

Reinforce Safety Practices. With staffing challenges, safety is more important than ever. Review all your practices, communicate and monitor compliance with safety policies. Document your actions. This will help us present a good case to underwriters.

Work Closely with Your Broker. If you’ve been experiencing negative loss experience or you anticipate any complications with your renewal, reach out to us early so we have ample time to shop the market and identify the best options for you.

Contact the team at BNC Insurance for guidance on how to protect your company against rising construction insurance costs.