Operational Changes due to COVID-19
COVID-19 has changed the world and how we conduct business. The construction industry has not been immune to these changes and the new challenges that they present. While largely geographically driven, certain construction sectors deemed “nonessential” have been shut down while other sectors have been allowed to continue to operate as “essential” — commonly those relating to healthcare, transportation, utility, affordable housing, or projects otherwise linked to supporting law enforcement and first responders.
Changes contractors are experiencing on their projects:
- Project delays, suspensions and terminations
- Supply chain disruptions
- Extended time frames due to labor shortages/lower productivity
- Price escalation for labor and materials
- Increased modular adoption
Check list of items that need should be considered during this time
- Communication is absolutely key! Be sure you are communicating with all stakeholders: employees, clients, subs, banker/financial advisors, attorneys, and insurance and surety brokers.
- Document everything.
- Document current conditions; photos and videos should be taken on a daily basis.
- Consistently update your schedules and monitor job progress.
- Mitigate any damages to whatever extent you are able.
- Understand force majeure.
- Understand your contracts as they relate to excusable delay, time extensions, changes, suspended work, stop-work orders, termination, identification, etc.
- Be flexible and prepared to negotiate with stakeholders on each project. Be prepared that every outcome will be different.
- Know that every owner is different, and discuss potential impacts with owners in advance.
- Adhere to contract dispute resolution provisions.
- Be aware of any outgoing reporting.
- Understand that the failure to follow contract terms could result in a waiver of force majeure remedies/delay damages/liquidated damages.
- Institute security procedures and requirements.
- Protect staff — be sure to have an updated safety plan to reduce exposure (this should be reviewed weekly at a minimum).
- What should be done with job site technology and remote work?
- Be prepared for growing union influence.
Managing Construction Crew Risks
Minimizing the size of work crews using segmented teams that allow for more optimal contact tracing in the instance of a confirmed infection; instituting social distancing measures; requiring face masks, gloves and daily temperature checks before entering job sites; self-reporting and self-quarantining symptomatic employees; and installing or increasing the number of sanitization stations are common risk management tools that industry leaders have implemented to reduce exposure. Technologically forward contractors are implementing wearable technology or phone applications with built-in GPS information to track workforces in efforts to manage social distance and trace employee contact. Personal protective equipment (PPE) is in very short supply, and managing PPE inventory will certainly be a focus moving forward. The Occupational Safety and Health Administration (OSHA) has released updated recommendations but have otherwise provided little direction to business owners. Return-to-work strategies are still in their infancy but have become a part of the broader national conversation in the federal legislature. There has also been conjecture about a potential COVID-19-related liability shield for businesses, but no formal solutions have been proposed or implemented at this time.
Contractual Obligations and Liability
Contractors should review and understand their existing contracts and specifically look for clauses that may provide financial relief, additional time to meet contractual obligations or other helpful remedies. Understanding contractual obligations, providing adequate notice of potential delays, maintaining detailed CPM schedules and managing job site risk are all integral to protecting a business’s financial interests.
All new contracts and engagements should be scrutinized with the potential for reoccurrence of COVID-19 and future pandemics in mind. As early as March 2020, the industry already began reporting instances of new and unfavorable contractual terms related to COVID-19. There are several clauses likely to contain relevant provisions, including the following:
- Force majeure and delay clauses
- Schedule requirements
- Notice provisions
- Escalation clauses
- Change-in-law clauses
- Termination and suspension provisions
- No-damages-for-delay clauses
- Mutual waiver of consequential damages and liquidated
- Owner’s duty to provide adequate assurances of financing
- Payment for stored materials
- Emergency and safety clauses
- Managing cash flow and protecting the balance sheet
Insurance Market Update
As insurers previously accustomed to subsidizing their books of business through strong property insurance performance and high investment portfolio returns have been forced to re-examine their books of business, 2019 saw some of the most aggressive rate increases in decades. Commercial auto and property, including builders risk and umbrella/excess insurance, were particularly challenged heading into 2020, and we anticipate that trend will continue. Carriers have increased pressure on attachment points and have been unwilling to offer the same limits as in the recent past. This is true for loss-challenged accounts and even best-in-class performing accounts. Workers’ compensation costs generally remained stable or saw a reduction in rate, but often increased in premium based on increasing annual payrolls. Expect continued underwriting scrutiny on height exposure and a reinvigorated focus on PPE and safety plans. Some states like New Jersey and Pennsylvania have created new rating classification codes related to COVID-19 for workers that are either not working but being paid or have transitioned to modified job duties outside of their previous classification rating codes. General liability rates largely remained stable, with modest single-digit rate increases for accounts with preferable loss history while also often increasing in premium based on increased sales and/or payroll. Construction defect claims will continue to be a focus.
Work in New York continues to be a challenge with limited players willing to take on the risk. States like Florida, South Carolina, Louisiana, Texas, California, Colorado and Oregon face challenges with residential work and construction defect claims. Appetite for specialty work such as roofing, rigging and crane, demolition, and solar remains limited to select markets.
With a drop in investment returns due to COVID-19, unknown financial exposure to COVID-19-related claims, and the potential for reduced exposures due to declining sales and payroll figures, you can anticipate seeing even more discipline from underwriters.
|What are the average rate increases?|
|GL||Flat to 10%|
|Property Including Builders Risk||20%-40%|
Surety Market Update for 2020*
Surety has always concentrated on working capital and the financial solvency of contractors. This concentration will only intensify in 2020. Expect increased scrutiny of these areas, with an eye specifically on contractors with balance sheets heavily skewed toward government, hospitality, retail and other industries that may be disproportionately affected by the slowdown due to COVID-19. The surety market has been a bit soft, and underwriting has been relatively lax; plan to see a much more disciplined approach to future underwriting. Since surety is a guarantee to perform or to pay, expect to see facilities choose to err on the side of caution and take a wait and see type approach except for best-in-class risks. Surety underwriters will expect business owners to be able to show forward-thinking business planning approaches like business continuity and disaster response plans, three-year plans with milestones, and updated monthly cash flow projections.
COVID-19-Related Insurance Coverage Claim Concerns
We anticipate claims and litigation related to COVID-19 to continue for years into the future. Many different lines of insurance will likely see claims activity and legal challenges to insurance contracts. Potential high-impact areas include but are not limited to workers’ compensation, general liability, Directors & Officers, management liability, property, business interruption and travel accident. Multiple states have enacted executive orders, and/or proposed specific to property and casualty insurance carriers’ responses to COVID-19. Business interruption and workers’ compensation lines of insurance have been under particular state, federal, and public scrutiny. The situation is very fluid. Some states, like New Jersey and Pennsylvania, have created mandates through state workers’ compensation bureaus to remove COVID-19-related claims from experience modification rating (EMR) factors.
With workforces moving from traditional job sites or office models to a more distributed remote work environment, cyber exposure has increased, with bad actors using ransomware, phishing schemes and social engineering attacks with much greater frequency. Some outlets have reported over a 100% increase in ransomware activity.
Additionally, we are now seeing new endorsements from carriers adding mandatory communicable disease exclusion on both new policies and extensions. This is even affecting projects that are almost complete.
For more information on any of these subjects, feel free to reach out to your Gallagher representative.