As American professional baseball Hall of Famer Yogi Berra once observed, "It's tough to make predictions, especially about the future." Berra may have been right, but he also didn't have the data, insights and 90-plus years of industry experience that is now used to analyze risk trends and help you prepare for 2021.
That being said, we do not guarantee that our predictions for 2021 will come true, but we do believe that using predictions based on data analysis to plan for the future will help your business, no matter how the future actually turns out. With that in mind, we have identified the top five risks the construction industry needs to be aware of, and actionable ways you can help mitigate those risks.
1. U.S. presidential transition
As with any transfer of power, great change is expected as U.S. President Joe Biden steps into office. On day one of his administration, President Biden signed executive orders intended to halt major projects that included major oil pipelines and the border wall. His proposed stimulus plan calls for a $15 minimum wage, and there will be renewed emphasis on environmental and other reviews on future projects. These key shifts will mean every member of the construction industry will need to adjust their operations.
Owners and developers will need to consider how these changes may affect both planned and current projects. Construction executives will need to consider how these changes will affect their markets and evaluate the impact of such changes when deciding whether to pursue specific projects. During the pursuit, estimators will need to consider the cost impact of these changes. Personnel negotiating contracts will need to address these risks when negotiating contracts.
2. Continued COVID-19 and vaccine challenges
When the first vaccines were approved, we began to see the light at the end of the COVID-19 tunnel, but that still looks to be a long tunnel. Some experts say that we need 80% of the country vaccinated to reach herd immunity while surveys show that less than 50% of the country is willing to take the vaccine when it becomes widely available, according to The Associated Press-NORC Center for Public Affairs Research. In the meantime, more than half a million Americans have died of the disease, lockdowns persist in various parts of the country, and new variants continue to emerge globally.
After almost a year of wearing masks and social distancing, human nature is sure to lead to inconsistent compliance with COVID-19 safety protocols. This will be especially difficult among crews that have already been infected or who have been vaccinated. Accordingly, we anticipate a rise in workers' compensation claims from those getting sick on the job against prime contractors for failing to consistently enforce safety protocols and against owners under various scenarios. COVID-19 impacts will continue to be felt in many markets where developers are reluctant to invest. Many projects have already been postponed due to COVID-19 restrictions, and these postponements are turning into cancellations in some cases.
COVID-19 is also accelerating demographic shifts. For example, while New Yorkers have been moving to Florida for years to take advantage of warmer temperatures and lower taxes, many more are now relocating due to the spread of COVID-19, and major organizations are starting to set up offices in Florida as well. While the Orlando area has been impacted with the closure of its recreational theme parks, construction markets in other parts of Florida are trying to keep up with the influx of new residents. Additionally, local news outlets in California cite COVID-19 and the rise in housing costs as the reasons for a record exodus of residents from the Golden State. In light of such developments, contractors should consider opening offices where the work is moving.
3. Supply chain disruptions and inflation
No one could have foreseen the impact of COVID-19 on supply chains for the construction industry, with price spikes for both basic materials, like boards and PVC pipe, and more complex items, like machinery. While prices may eventually return to normal, that is unlikely to occur in the first half of 2021. All contractors and suppliers should adjust their contracts and management practices to address those disruptions and price hikes. If they cannot get price protection in their contracts, materials will need to be purchased further in advance to lock in pricing.
Materials will also need to be ordered for delivery sooner than needed to avoid disruptions. This will have major effects on planning and require additional attention to contract payment terms. Updating schedules to track impacts will become more important than ever. Proper planning will also require contractors to accelerate the submittal and ordering process to avoid delays from late deliveries. The need to order materials earlier will also make payment terms for stored materials more important than ever.
4. Increased cyberthreats
With many managers working remotely and increasingly relying on technology, contractors are more at risk for cyber attacks. Increased cybersecurity threats followed the sudden shift, as many workers operated in potentially risky ecosystems via personal devices, public Wi-Fi, web conferencing platforms and remote desktops that may not have been secure. Imagine a ransomware attack where all your data is frozen for several days. While some fieldwork may continue, none of the back-office work relating to submittals, changes or requests for information could take place.
We anticipate remote work will continue well into 2021, so these risks need to be addressed through appropriate insurance policies and risk mitigation. Please consult your broker to discuss available coverages.
5. Insurance market challenges
Finally, there are changes to the insurance market that must be addressed. COVID-19-related workers' compensation claims will likely impact rates, but are yet to be fully realized. And the financial impacts of COVID-19 are causing sureties to be much more restrictive when issuing bonds.
What could be the most significant and long-lasting impact on the market, however, is the emergence of exclusions for communicable diseases in commercial general liability (CGL) policies. If a subcontractor employee gets sick, the subcontractor may be protected by workers' compensation insurance. If that employee, however, sues the prime contractor—alleging, for example, that the prime contractor's negligence in not enforcing COVID-19 precautions caused the employee to get sick—the prime contractor will generally make a demand for indemnity against the subcontractor.
Under traditional CGL policies, the subcontractor's liability carrier would defend the action and pay any judgment against the prime contractor. With an exclusion for communicable diseases, however, the subcontractor's general liability insurance carrier may not owe any duties of defense or indemnity. This means that the subcontractor would become liable both to defend its prime contractor and to pay any judgment against the prime contractor—even though the subcontractor would be immune from suit under the workers' compensation structure. This represents a huge risk if the subcontractor having to pay the costs of defending the prime contractor also pays any judgment. Carriers are inserting the exclusion for communicable diseases into policies because they do not know how to evaluate that risk at this time for underwriting purposes, and it is impossible for anyone to know the full extent of the risk until we have some idea how juries and judges will treat such suits.
Once these exclusions become part of policies, they tend to persist. Accordingly, you must have your broker review future policies for these exclusions and get endorsements to add back coverage for communicable diseases. As carriers may not have significant experience with COVID-19 claims at this time, pricing for such endorsements could be very expensive.
In addition to reviewing future policies, it is possible to require employees to get vaccinated when vaccines become available. It's advised that you review guidelines provided by the following organizations for guidance on employee vaccine policies.
- The Centers for Disease Control (CDC)
- Occupational Safety and Health Administration (OSHA)
- Equal Employment Opportunity Commission (EEOC)
Because of the highly nuanced nature of this market, it is imperative that you are working with an insurance broker who specializes in your particular industry or line of coverage. Due to the variability that we're seeing in this market and specific account characteristics, your individual situation may vary from others. Gallagher has a vast network of construction specialists who understand your industry and business, along with the best solutions in the marketplace for your specific challenges.
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.