The COVID-19 pandemic continues to present significant challenges for the construction industry including rate changes, capacity and coverage issues, and financial exposures. While largely geographically driven, certain construction sectors deemed nonessential continue to be on hold 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. In addition, the recent impact of Hurricane Laura and the California wildfires will likely serve to provide further momentum to already hardening market conditions.
Construction workers are continuing to experience:
- Project delays, suspensions and terminations
- Operational disruptions
- Supply chain disruptions
- Extended time frames due to labor shortages/lower productivity
- Price escalation for labor and materials
- Increased modular adoption
Insurance Market Update
In 2019, we saw some of the most aggressive insurance rate increases in decades, as insurers previously accustomed to subsidizing their books of business through strong property insurance performance and high investment portfolio returns were forced to reexamine them. The following insurance coverage lines have experienced the largest increases.
- Excess liability: Average increased 25%–100%, and capacity provided by carriers decreased significantly.
- Commercial auto: Experienced 15%–25% average annual increase for the past two years.
- Property/builders risk: Wood frame in particular has been a very challenging area with major decreases in capacity and significant rate increases.
Insurance 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 personal protective equipment (PPE) and safety plans.
In response to COVID-19, the National Council on Compensation Insurance (NCCI) released a circular announcing the creation of the new workers’ compensation class code 0012 for paid furloughed employees. It is up to each jurisdiction to approve the use of this code or provide other instruction for the carriers to use. As of May 12, 2020, all NCCI states have adopted this class code, with the exception of Alaska, Hawaii, Oregon and Texas.
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. Appetite for specialty work such as roofing, rigging and crane, demolition, and solar remains limited to select markets.
In May, Lloyd’s of London estimated the global underwriting losses for 2020 resulting from COVID-19 at approximately $107 billion. Although the financial impact of COVID-19 on the industry will not be fully understood for some time, it is expected that estimates of the direct cost to P&C insurers will show considerable variation. Another market concern is the expected liability fallout that may result from current events causing an increase of class actions.
Companies that came out ahead after the financial crisis of 2008 typically moved fast and hard on productivity and cost reduction, rapidly reallocated resources, and made bold moves to prepare for the future. Leaders in this area also invested heavily in digital technologies. A fast return to business-as-usual seems unlikely for the industry, so leaders must first define and then prepare for what the construction industry will look like after the crisis. Making investments in the culture and skills needed to operate will help navigate the next normal. It is also more important than ever to stay close to current and future customers.
Surety Market Update
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, so plan to see a much more disciplined approach to future underwriting. In the current COVID-19 environment, cash is king in the surety world, and there is nothing more important. Expect sureties to be focused on the cash flow and cash position of their clients.
Disclaimer
The information contained herein is offered as insurance Industry guidance and provided as an overview of current market risks and available coverages and is intended for discussion purposes only. This publication is not intended to offer legal advice or client-specific risk management advice. Any description of insurance coverages is not meant to interpret specific coverages that your company may already have in place or that may be generally available. General insurance descriptions contained herein do not include complete Insurance policy definitions, terms, and/or conditions, and should not be relied on for coverage interpretation. Actual insurance policies must always be consulted for full coverage details and analysis. Gallagher publications may contain links to non-Gallagher websites that are created and controlled by other organizations. We claim no responsibility for the content of any linked website, or any link contained therein. The inclusion of any link does not imply endorsement by Gallagher, as we have no responsibility for information referenced in material owned and controlled by other parties. Gallagher strongly encourages you to review any separate terms of use and privacy policies governing use of these third party websites and resources. Insurance brokerage and related services to be provided by Arthur J. Gallagher Risk Management Services, Inc. (License No. 0D69293) and/or its affiliate Arthur J. Gallagher & Co. Insurance Brokers of California, Inc. (License No. 0726293)..