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Whether building a single home, a 100-home subdivision, or a 250-unit garden style apartment complex, getting the right insurance coverage for your residential construction project is an absolute necessity. Changes in the market can make this challenging, however. Here are five construction insurance trends that you should know.
Trend Number One: Stricter Underwriting and Higher Rates
Willis Towers Watson’s Insurance Marketplace Realities 2020 warned of a tightening marketplace and rising rates in construction. In general liability lines, for example, underwriting has been becoming more rigorous, while excess liability has been particularly challenged.
Insurance Business reports that the construction insurance market has continued to harden, a trend that has also been seen in the broader property and casualty market. Significant rate increases have occurred in primary, excess and specialty lines, and market capacity has been reduced.
As a result of these conditions, finding the best insurance coverage options for your project may take a little more time and effort than usual.
Trend Number Two: Rising Building Costs
Lumber costs have skyrocketed. According to the National Association of Home Builders, lumber prices reached a record high of approximately $950 per thousand board feet in September. After that, prices gradually decreased, but they’ve been rising again. In early December, it was reported that prices had increased nearly 20% in four weeks.
Constructive Dive says that 71% of contractors have faced a material shortage. Although lumber is the most common issue, other supplies are also seeing problems with shortages and price increases, and the shortages are expected to persist into 2021.
In the meantime, the increased costs are having a big impact on building values. When determining your coverage needs, make sure you factor this increased cost into your calculations.
Trend Number Three: Increasing Appeal of Wrap-Up Policies
Traditional annual practice insurance policies are intended to provide coverage only for your work, while wrap-up policies are designed to cover your work and the work of your subcontractors on a specified project, ensuring specified coverages exist through the statute of repose within the state the project occurred in. When properly designed, a wrap-up policy can provide huge risk management advantages. Historically, wrap-up policies have been cost prohibitive, but now they are making more sense than ever before on smaller-sized projects.
Now, more cost-effective wrap-up options have emerged, making this a more viable solution. When considering the costs of a wrap-up policy, it’s also important to remember that subcontractors do not report the work done under a wrap to their insurance carrier. Therefore, they should provide a credit for insurance costs within their bid. The cumulation of bid credits from all subs enrolled within the wrap can offset a good portion of the cost of the wrap and excess policies purchased for the project. According to expert commentary published in IRMI, the subcontractor’s insurance costs can be anywhere from 2% to 8% of their estimated contract value, and cost savings can be one critical benefit to using a wrap-up policy. Traditionally, wrap administrators estimate bid credits to fall within .4% and .6% of the total project cost.
At the same time, wrap-up policies are increasingly attractive due to other trends in the marketplace. With policies changing from year to year, it is hard to guarantee your subs will continue to have adequate coverage for the work they’ve performed on future policies that may need to respond to a claim. New policy exclusions and forms come out every year, further complicating this issue.
Another relevant trend involves multi-year or “continuous or progressive” claims. Consider a water leak that started in 2012 but wasn’t discovered until 2016. The resulting claims can impact multiple policy years. As a result, you and your subcontractors may have exposure under multiple policies. Exposures like this are much easier to insure against on a wrap-up policy.
Trend Number Four: COVID Complications
Safety has always been an issue in construction, but the coronavirus pandemic has created new hazards.
The CDC has issued guidelines for construction workers regarding COVID-19. Among other precautions, the guidelines encourage workers to clean and disinfect shared equipment and other frequently touched surfaces, and to limit tool sharing when possible.
OSHA has also provided guidance for the construction industry, along with guidance and reporting requirements for employers in all industries. Noncompliance with the requirements could result in significant fines. As of November 5, 2020, OSHA has proposed penalties of $2,856,533 for coronavirus violations.
Trend Number Five: Cyber Risks
Cyber risks aren’t just a problem for big businesses. According to Small Business Trends, 43% of cyber attacks target small businesses. Construction Dive warns that many construction companies are unprepared for a cyberattack, and hackers have been targeting them as a result.
In addition to data breaches, ransomware and other types of malware, construction companies should also be on guard against business email compromise and phishing schemes. Fraudulent emails, including fake draw requests and fake invoices from subcontractors, have become common. Train your team to be alert for scams. In addition to using strong cyber security practices, have policies and procedures in place to verify requests.
During a hardening market, it’s more important than ever to start preparing for your renewal early and to work with an agent with construction industry expertise and access to many markets. If you have any questions, the team at Propel is here to help!