While claim frequency has remained relatively stable across the construction sector, claim costs continue to rise.
Several factors are contributing to larger losses, including higher replacement costs, increasingly complex project delivery models and the continued impact of social inflation within the legal system, driven in part by third-party litigation funding.
Water loss remains the primary driver in construction claims, says Gallagher Senior Construction Claim Advocate Eric Michna, who refers to such claims as a "severity multiplier". Defects in pool installations, cistern impacts and rain filtration systems cascade into multi-party liability and builder's risk disputes, leading to lengthy remediation times and delayed claims.
Michna also sees fewer claims that were once straightforward: "Every meaningful claim has two to three competing theories of loss and coverage," he says, leading to higher subrogation and more complexity as each claim is assessed.
Claims and litigation funding from private equity have exacerbated social inflation because law firms no longer need to provide upfront funding, says Brian Cooper, Gallagher's Senior Managing Director for U.S. Construction. He adds that commercial auto is one line heavily impacted by "nuclear verdicts" plaguing insurers, creating substantial pressure on liability insurance programs and increasing overall project risk.
"Since some claims can take several years to resolve, these firms don't have to front the costs to receive large payouts at the end," he notes.
Insurance carriers, aware of this pattern, often hesitate to litigate. "Instead, they tend to pay large sums to settle claims quickly," Cooper explains. "We've seen situations in which the primary auto liability carrier fears that if they don't settle, the claim might move into excess liability layers covered by other carriers, potentially making them responsible for those coverages."
"Losses in which markets engage coverage counsel has increased exponentially, which has led to a longer claims process and the unwillingness of adjusters to find a solution to even the most logical issues," says Gallagher Property Claims Advocacy Manager Jack Nelson.
The timeline for engineers to provide reports on the losses they are regularly engaged with exceeded six weeks, longer than the three to four weeks expected in years past. While a few weeks may not seem like a lot, he adds, "the cascading impact that it has on timelines for the general contractor or subs and scheduling can cause this delay to multiply quickly."
Water intrusion remains one of the most common drivers of significant builder's risk and general liability claims, particularly on multifamily and hospitality projects. Fire losses also continue to increase, including incidents involving lithium-ion batteries used in tools, equipment and temporary power applications.
The rise of design/build contracts has introduced gray areas regarding whether professional liability or general liability coverage responds in the event of a claim, says Cooper. As a result, "those claims are very complicated; they're usually large, and they take time to settle. The question becomes, what caused the event: design or consulting services, or the actual construction?"
Environmental changes and natural hazards are increasingly being recognized as significant risks in the construction sector, drawing more attention than in previous years.
"Weather patterns greatly influence the risk of wildfires, tornadoes, storms and convective events, all of which substantially impact insurance capacity and costs in affected areas," says Cooper. Fortunately, new predictive tools help to assess natural catastrophe risks more accurately, but weather exposures continue to heavily influence property and builder's risk coverages.
"The timing and duration of projects matter," he adds. "A construction project that begins in June in a hurricane-prone area must account for multiple hurricane seasons. The length of coverage and timing directly affect insurance capacity and rates."
These trends underscore the importance of documentation, quality assurance procedures, contractual risk transfer and proactive claims management.
Learn more about how construction firms can more effectively manage their exposures in Gallagher's new U.S. Construction Market Mid-Year Report.