Construction Insurance in 2001 and Beyond: A Wake-Up Call!

David L. Grenier, MBA


Brace yourself for the next seismic event in the construction insurance marketplace. Unlike prior years of a soft insurance market, this year many contractors are getting a wake-up call and are faced with two emerging dynamics. First, some insurers have reviewed the losses on their construction book of business and have decided to pull the plug underwriting construction risks. Other insurers are not only unwilling to write new construction accounts, but are issuing cancellation notices to contractors in the primary construction class codes, predominantly, General Contractors and the Artisan Contractors in trades such as excavation, concrete, carpentry, drywall, roofing, etc.

The biggest SIC code categories affected by these economic changes will be residential homebuilders, particularly builders of multi-family attached housing and common interest developments, e.g., town homes, condominiums, cooperatives, and planned communities. Some insurers have already started putting residential and multi-family / attached-housing exclusions on their General Liability policies. Other insurers who are remaining in the construction risk game, and still offering insurance coverage to contractors, are increasing their premiums, sometimes two and three-fold for similar or less coverage and/or limits. Keep in mind that the losses on many insurers books are not all based on construction defect-related claims. Many have resulted from third-party action General Liability claims, which can be transferred from a contractor's Workers Compensation claims.

Second,with interest rates climbing and a shrinking market for procuring cost-effective insurance, but the contractual requirements for providing adequate coverage and limits on construction projects still existing, contractors are starting to look more stringently at alternative risk financing sources in order to underwrite their construction risks. Guaranteed-cost insurance is no longer an option and loss-sensitive programs are back in vogue, with high deductibles or SIRs. Large contractors may have the option to seek-out the excess financial capacity available in the capital markets and/or consider self-insurance, depending on their financial condition and risk appetite. However, smaller contractors will not have many options other than to enter the residual markets, if approved.

All things considered, with the increasing volatility in the financial markets, hardening P&C insurance costs, and the consolidation and compression of insurers, there will also be opportunities. Contractors will be forced to be more proactive in the evaluation of their insurance professionals and will need to partner with firms that truly understand their construction risks and exposures, can provide practical advice on contractual risk transfer and liability coverage issues, and can add value to their bottom line.

Many construction financial professionals are not going to be very happy about the hardening insurance market and their inability to procure cost-effective coverages, but they will definitely have to be much more proactive in their procurement of insurance and risk management services than they have been in prior years. Many contractors will not only be shopping insurers in 2001 and beyond, but will be shopping for new insurance agents and/or brokers. Insurance agents and brokers will need to be able to differentiate themselves in this competitive marketplace in order to win a contractor’s insurance business.

A good tool for contractors to evaluate the construction knowledge and capabilities of their construction insurance agent and/or broker is the “Insurance Agent/Broker Qualification Form” found as an attachment to an article published in the Construction Company Strategist entitled, “Ask the Right Questions to Get Insurance Agent/Broker that Meets Your Needs”.

Fasten your seatbelt! The next few years may be a bumpy ride. Good luck!


About the Author

David L. Grenier is President of C-Risk, Inc., a national risk management consulting firm that provides risk management strategies and solutions to the construction industry. He specializes in construction risk management, contracts, construction defect mitigation, and wrap-up insurance programs. (phone: 503-228-0884, or e-mail: david.grenier@c-risk.com).


The information in this article, and all other articles provided by C-Risk, is intended for general information purposes only and does not constitute, nor is it intended to constitute, legal advice. For legal advice, you should always consult with the appropriate legal counsel in order to determine the laws that are applicable to your specific circumstances.