Keeping Up With Construction Insurance

Brokers who specialize in the construction industry love their clients and are very committed to keeping up with their needs. Ask them, “So what’s new?” and the conversations inevitably veer off in various directions: risk management, pricing, hot areas, technology, coverage questions and more.

Here are just a few of the directions that emerged from recent Insurance Journal talks with construction specialists who love their construction clients.

Construction Continues to Grow

It is a good time to be in the construction insurance business. U.S. construction spending grew by 7.6 percent from April 2017 to April 2018 with employment growth in the sector increasing in 256 out of 358 metro areas, according to the Associated General Contractors of America (AGC). For the same timeframe, the AGC reported that private residential construction spending soared 9.5 percent, private nonresidential spending grew 5.3 percent, and public construction spending jumped 7.7 percent.

While building hasn’t hit the peaks of the housing boom prior to the Great Recession, construction overall is in good shape.

“It’s a healthy construction market outlook,” says Danette Beck, national construction practice leader at USI, an insurance brokerage and consulting firm. “There aren’t any projections right now that there is going to be a slowdown.”

Beck still sees apartment and residential construction on the rise — another positive sign for future growth in the broader construction market.

“I always look at that growth (in apartments and residential) as a positive — if homebuilders are buying land and still building buildings, that’s a positive.” What follows is more building in other sectors — for roads, schools, shopping centers — other infrastructure projects that support communities.

Construction specialist Marc Kaplan, an agent and broker for San Diego-based Michael Ehrenfeld Co., said his builder clients are still seeking out available land for new buildings. That’s a good sign for his book of business, which includes a mix of both builders and contractors.

“So as long as my builders are looking for land, that’s going to mean that my trade contractors are going to continue to have work,” Kaplan said. “There’s just a lot of building going on right now in residential, although some of it is segmented,” he said. “Some price points are just flying out the door while others [higher-end homes] are sitting a little longer.”

Paul Hohlbein, president of Builders & Tradesmen’s Insurance Services Inc. (BTIS) based in Rocklin, Calif., said BTIS is seeing substantial growth in its large book of what Hohlbein calls the “micro-contractor” space.

“There’s a lot of growth because the economy is good and there’s a lot of new start-up businesses,” he said. Small contractors, or those with one, two or three employees, are busy building small projects in just about every area of the country, he said.

BTIS writes “micro-contractors” in 45 states. Hohlbein says his firm, which writes more than $330 million in premium, has new business coming in from all over. “We are seeing really nice growth in the New Jersey, Pennsylvania area, and in the Midwest states, Illinois, Wisconsin, Minnesota.” He said the Southeast is growing as well in the Carolinas, Georgia, and Florida. “Texas is always good to us just because of the sheer size of Texas.”

Meaningful Risk Management

Another area that is evolving in today’s growing construction market is risk management, the experts say. If they are to capitalize on new business opportunities, agents and brokers serving this market need to understand more than insurance; they also need to know how risk management needs in construction are changing.

“Contractors are taking on more risks today than they were yesterday,” USI’s Beck said. With so much construction work going on right now, “it’s incumbent on contractors to be diligent about their risk management philosophy and plans and be careful to not take on more risk than they are prepared to handle,” according to Beck.

Professionals insuring contractors need to be thoughtful when managing risk. “You have to sit down and understand what their goals are and consider that insurance is only one piece of risk management,” said Beck.

She sees risk allocation continuing to shift as contracting structures and projects become more complex. “Owners are asking contractors to do more and more,” she said. “The risk allocation shift puts added pressure on contractors to manage risk effectively and efficiently.”

In addition, the industry is still experiencing heightened merger and acquisition (M&A) activity as contractors continue to find ways to grow and capture more market share. With M&A, additional risks such as geographic nuances or vertical integration present themselves, she says.

“You hear ‘insurance and risk management’ and you think ‘OK, we’re going to put together an insurance program that manages all the risks,’ and it doesn’t. There are other things that contractors can do to manage risks,” Beck said. She advises insurance professionals to be well-versed on “meaningful” risk management practices in construction.

“It’s a much more thoughtful conversation about how you structure a meaningful risk management program,” Beck said. “You can’t just walk into a construction client’s office and expect that since you understand the concepts of insurance, that you’re going to understand the risk issues.”

For example, sub-contractor pre-qualification is one area that general contractors and large trade contractors are always worried about due to sub-contractor defaults. Construction insurance professionals must help clients create a better risk profile for underwriters, she said. “The better adept that you are at understanding who your partners are, the better you can manage their risk profile,” Beck said.

Technology Helps the Process

As contractors are increasingly turning to technology and analytics to help them with risk management, construction brokers are also turning to technology.

“We utilize technology to really help them as they take on more risks,” Beck said. “When you look at insurance brokerage firms, you look at the platform and what they have from a value-add standpoint on what they give to their clients.”

USI’s tech investment in construction was one reason Beck joined the brokerage earlier this month from Marsh. “The investments that they’ve made in technology to help clients make informed decisions are really powerful. It helps our teams to be better and be extensions of their clients, so they can help them make decisions to do what they do best, which is build buildings, or build infrastructure. And they can make decisions that can help them take on more risks while protecting their balance sheet.”

BTIS’s investment in technology is helping it reach its goal of being a $1 billion firm in less than 10 years, Hohlbein says. But it’s also helping its retail agents and the end customer — the contractor — with ease of doing business in today’s fast-paced construction market.

New technology is streamlining the insurance buying process for micro-contractors and agents that use BTIS, he says.

“We’re trying to make it easy for them to purchase insurance product and give them options, so they choose and custom tailor what they need,” he said. Hohlbein’s goal is to give contractors a different way to buy coverage that helps his firm and his agency partners as well. “BTIS has been busy building technology to put on agents’ websites, that will allow the contractor to get a price and actually submit and bind the piece of business online through the agent website.” The API-based technology aims to cut quoting and binding times from five minutes to 60 seconds, the announcement said.

Hohlbein said the firm is currently working with a group of beta agents to test the technology and it will soon be made available to all the retail agents that do business with BTIS.

Coverage Trends

The construction insurance market is no different than the overall property/casualty market, according to Kaplan.

“Everything is soft to stable,” he said. “There isn’t really a hard market for any line of coverage except commercial auto,” he said.

Beck agrees commercial auto is a challenging market for construction but added that catastrophe exposed regions such as California might be experiencing some pain as well. With last year’s wildfire activity in California “we’re seeing some carriers struggle with writing coverage for wildfire risk,” especially with infrastructure-related construction. “That’s just because California got hit really hard.”

One coverage area that is trending in importance during today’s construction building uptick is delay in start-up coverage, according to Tim Kania, Aspen Insurance Global Head of Energy & Construction and U.S. Property.

While delay in start-up coverage has been around for a long time, it’s still probably one of the most complicated and potentially misunderstood coverages in construction insurance, he says. There remains some uncertainty around what the coverage covers from multiple players in the construction transaction from lenders to brokers, and even insurers, according to Kania.

“If you have various people in a room, there might be a slight misconception as to how the cover responds and what should be reported as value. That obviously can lead to misalignment or misunderstanding whenever events happen,” Kania said.

With the uptick in construction activity, this coverage is becoming more prevalent and it is important that the entire industry from lenders to brokers to insureds understand the coverage, he said.

Kania describes the coverage, simply, as time element coverage related to construction projects. Delay in start-up coverage is provided to insure against potential loss of earnings, debt service obligations, fixed costs and/or other soft costs following a delay beyond the anticipated date of a building’s completion resulting from a covered property damage loss under the property construction policy.

Kania says the coverage can be purchased as an option by the principal/owner of the project. Coverage might also be mandated as a condition of applicable financial lending covenants.

It’s important for projects of all sizes. “Delay in start-up coverage as well as the coverage components can be sought on a wide array of projects with varying project size and complexity and is not limited to mega projects or to a minimum sized project,” he said.

It has similarities to business interruption coverage but is unique for construction. “It is triggered only after the project goes beyond an anticipated date of completion,” Kania said. “In other words, the project has to go beyond the original estimated date that the project would be completed.”

If coverage is triggered, claims are paid based on indemnities from losses that were covered under the property damage section of the policy, he said.

Kania advises construction brokers to have a good understanding of the following:

  1. The principals in the scope of the coverage provided. “That can be complicated because it can be tailored for a particular project and the needs of that project, and projects vary from project-to-project. Even though it’s two building projects, those building projects may vary in how they want to protect loss of earnings,” he said.
  2. The insurance parameters need to be understood clearly. “That’s who is insured, what is the sum that’s insured, and how long is the period of indemnity,” he said. “Look at potential loss scenarios in the indemnification examples to make sure that you get the principals in scope of cover correct and the insurance parameters correct.”
  3. Translate potential revenue loss into covered delay in start-up. “So, it’s not a loss of revenue cover; it’s a loss of earnings cover. It really looks at net profit and fixed costs as the indemnification and doesn’t look at lost revenue,” he said.

Kania says there can be some misconceptions regardless of size of project when it comes to delay in start-up coverage. “But when it’s communicated clearly and concisely, and people understand what they’re trying to protect against, then it’s very good.”

For the Love of Construction

Construction has been the perfect niche for Michael Ehrenfeld’s Kaplan. “There’s a lot to know in this industry, but there’s a lot to know with anything,” he said.

Kaplan says he has met “some of the best people” through specializing in construction. “Contractors are sometimes stereotyped as flaky and I don’t get that,” he said. That stereotype is just wrong, he said. “My clients are not flaky; they’re responsible. They want to do the right job. It’s important that they have a good reputation,” Kaplan said.

USI’s Danette Beck couldn’t agree more.

“People ask me all the time, ‘Why did you get into construction?’ And I say, ‘I think it’s the best industry,'” she said. By insuring the construction industry, Beck plays a small role in how she impacts the communities in which she lives. “The skylines, the cities, the infrastructure that connects people. What other industry says they can do that?” But it is an industry that requires a specialist to be thoughtful and knowledgeable when it comes to insuring risk, not unlike any other industry.

Construction firms, like many U.S. business, are family-owned companies, second generation, third generation, or fourth generation companies and their personal brand, their thumbprint in the community is at stake, she said.

“When something goes wrong, it’s very personal,” she said. “This is a family name that’s going on the face of this building, this road, this bridge, this wastewater treatment plant, this nuclear power plant,” she said. “I look at all my clients and prospective clients as family. It’s really important that you not only protect their balance sheet, but also their reputation.”