Economic uncertainty remained the dominant concern for
the construction industry in the first half of 2013. Some
sectors showed signs of a sustainable recovery, with pent-up
demand overcoming uncertainty and attracting capital
to US projects. Shrinking public expenditures, however,
limited activity in other sectors.
The speed of recovery has varied by geography; in markets where profit margins
remained tight, competition for skilled labor increased
and created pricing pressures for construction firms. The
construction industry’s unemployment rate has steadily
declined in recent months, although it remains above the
national average for all industries.
The challenging business climate is driving many contractors to examine longstanding
relationships to ensure that value is delivered through expertise and strategic planning tied to
their financial plan. Many now look to these relationships for a “forward view” that will identify
opportunities to preserve capital and drive margin growth. The focus on data-driven, fact-based
decision making is likely to increase as the so-called “profitless recovery” moves into 2014.
Renewal rates continued to escalate in the
first half of 2013 for commercial general
liability (CGL) insurance for contractors.
Capacity remained strong; however,
insurers with contractor business were
affected by increases in claim settlement
amounts and frequency, rising health care
costs, natural disasters, and the aftermath
of years of significant insurance premium
The implementation of the new 2013
general liability forms from Insurance
Services Office, Inc. (ISO) along with
corresponding endorsements is an area of
caution. Underwriters that have adopted
the new forms have generally tried to
scale back coverage afforded to additional
insureds. Because the new endorsements
are not considered “equivalent” to previous
ISO additional insured forms, using these
forms may place contractors in breach of
contracts that have already been executed.
Many other traditionally available coverage grants are now being
negotiated case-by-case, often with associated premium charges.
Contractors seeking coverage grants must also be prepared to
provide a significantly greater amount of underwriting information
to obtain such grants. Read more about the new ISO forms in our recent white paper.
The workers’ compensation insurance market has been relatively
stable for high-quality risks. Several large insurers have reduced
their workers’ compensation capacity as they reevaluated their mix
of business. Pricing for workers’ compensation insurance escalated
in the first half of 2013, with guaranteed cost programs typically
increasing more than loss sensitive ones. Insureds with higher loss
frequency or severity were likely to experience significantly greater-than-
average increases in pricing.
Project-Specific General Liability
Pricing for project–specific general liability (GL) insurance increased
in most markets, although new market entrants and strong capacity
tempered widespread rate increases for preferred risks.
In New York, many owners and contractors purchase project-specific
GL in response to Labor Law 240/241 (known as the
“scaffold law”). In an effort to eliminate lawsuits between
subcontractors, excess and surplus lines (E&S) insurers include
cross-suit exclusions. In some cases, underwriters are agreeable
to amending these exclusions so that they do not apply to project
owners and/or general contractors.
Pricing for GL wraps is increasing in most markets. In New York,
where claims under the scaffold law average $1.5 million to $3
million, there are virtually no markets writing GL wraps. In New
Mexico and Texas, however, GL wraps are seen as a necessity —
statutes in these states restrict one party’s ability to indemnify
or provide additional insured status to cover the negligence of
Pricing for apartment and condominium projects has increased
significantly in the last year. Pricing for non-residential construction
is increasing as well, but to a lesser degree. Few insurers are willing
to write coverage for wood-frame condominiums. In addition,
coverage for “condo conversion” is becoming more difficult to place
and much more expensive, due to claims arising out of allegations
of defective construction.
We are seeing higher price increases for GL wrap excess than for
primary coverage. Some insurers have cut back on the amount of
limits that they will provide on GL wraps, particularly with regard to
The majority of insureds saw low single-digit rate increases in
the first half of 2013. Additional capacity entered the market for
contractor practice programs and controlled insurance programs.
Higher attachment points provide more certainty of projected
losses for certain segments of the industry, including street
and road contractors, contractors with large vehicle fleets, and
situations in which per-project general aggregates are needed. Lead
attachment points are still an issue for many underwriters.
Controlled Insurance Programs
The markets for two-line — liability and workers’ compensation
— owner-controlled insurance programs (OCIPs) and contractor
controlled insurance programs (CCIPs), also known as wrap-ups,
remain generally competitive. New York, for reasons described
above, is an exception.
Although pricing has increased this
year, the scale of increases typically depends on the type of
construction. Price increases appear most frequently in the lead
excess layers. Excess structures have been altered in some cases;
insurers often are promising $10 million leads instead of $25
million. Insurers new to this segment have stepped in, providing
alternatives to some markets that have grown more conservative
over the past two years with pricing, terms, and conditions. This
has kept project pricing from increasing to the same degree as
contractors practice programs.
General contractors that are able to manage and assume the
risk of loss arising out of subcontractor claims are increasingly
implementing CCIPs to gain competitive advantages, earn
returns on their investment in risk management efforts, and
provide a single insurer for GL claims in jurisdictions that limit
indemnification and additional insured protection. In light of the
increasing need for GL coverage and decreasing financial benefits
of providing workers’ compensation in a wrap-up, owners and
contractors are trending toward purchasing GL wraps.
The evolution of the market for construction insurance, including
careful underwriting and the prevalence of loss sensitive programs, has resulted in greater emphasis on
cooperation and collaboration between owners and
general contractors for project-specific insurance
placements. This sometimes occurs in the form of a
so called “Co-CIP” or programs that run premiums
through an existing CCIP structure with collaboration
on enhanced terms and conditions and shared risk
and reward between owner and contractor. Health
care and educational institutions with recurring capital
expenditures are more frequently exploring forms of
integrated project delivery (IPD), which demands a
coordinated approach to project insurance.
Although fewer markets have capacity and appetite to
insure the construction, operations, and maintenance
risks on projects, leading insurers are gaining comfort
and continue to favor:
- Infrastructure projects, which are often funded
with private capital in a public private partnership
(P3) whose concessionaires (the private partners)
implement CIPs to lower cost.
- Contractors and sophisticated owners that employ
extensive loss control measures and represent a
source of recurring revenues.
- Well-managed rolling programs, which typically
receive coverage for five years of construction
operations, plus an extension for completed
operations claims of up to 10 years. Coverage for
warranty repair work conducted after substantial
completion is also available.
Demand for builders risk insurance has grown in 2013
as more projects began in the first half of the year.
Premium rates for builders risk insurance generally
remained flat. At the same time, overall rates for
catastrophe-exposed property risks increased an
average of 5% compared with 2012. An anticipated
increase in rates in the Northeast following Superstorm
Sandy was not seen.
Although the market remains generally soft, there
are no new insurers adding capacity to the so-called
contingency markets (liquidated damages and force
majeure). Only a few insurers are capable of and
interested in writing such coverages.
The marketplace for professional liability insurance
for contractors and architects and engineers has been
slowly hardening. Most insurers continued to seek rate
increases on renewing business, but at a decelerated
rate compared with the increases that marked most of
2012. The first half of 2013 remained generally stable;
rate increases of 5% on average are likely into 2014
for profitable firms, though insureds with significant
losses are likely to continue to see higher rate increases.
In addition, insurers in larger markets have become
less willing to provide outside-the-box coverages and
continue to be less amenable to requested coverage
changes and modifications.
Capacity for contractors and architects and engineers
professional liability practice insurance remained
plentiful, with newer insurers in the market continuing
to aggressively seek business, especially among small
and midsize firms. Capacity is also abundant for owners
protective coverage and contractors professional
liability project coverages, though the number of
available markets is more limited.
Capacity for project insurance for architects and
engineers professional liability remained limited and
more costly than other standard coverages. However,
the owner’s protective and contractor’s protective
indemnification forms of coverage continued to offer a
cost-effective alternative, with more insurers willing to
offer the coverage, at least on an excess basis. There is
also a continuing trend toward more layering of limits
on project-specific coverages.
The market for contractors pollution liability (CPL) remained
competitive in the first half of 2013. Although insurers looked
for rate increases on certain renewals, competition helped to
keep overall rates generally stable, typically -5% to flat. The
use of CPL coverage increased as more owners required the
coverage for varying types/sizes of projects and contracts
(for example, energy, infrastructure, P3, and brownfield
redevelopment). Although capacity has increased over the
past several years, individual carrier limits have actually
decreased, resulting in the need to structure layered programs,
especially for larger, more complex projects.
Insurers continue to offer CPL coverage on occurrence and
claims made forms as practice policies, project polices,
controlled programs on behalf of both project owners and
contractors, and owners/contractor’s protective policies. Key
coverages regularly provided include transportation, waste
disposal, and emergency response costs. Project terms vary
by carrier; however, the maximum term offered including
completed operations is 17 years.
CPL is also offered on combined forms with professional
liability as well as GL for certain classes of business/exposures.
Rates remain generally competitive (ranging generally
between -5% to +20%), but are subject to greater fluctuation
due to the GL/PL components.
Coverage for cleanup cost cap remains restricted; however,
there are now two insurers willing to entertain this coverage
for certain types/sizes of projects. Limits up to $10 million
are available and are offered for projects with approved
Site specific pollution liability coverage is often used by project
owners to protect against the discovery of unknown pollution
conditions or against regulatory “re-openers” during a project
and post-construction. PLL is also being required of contractors
in certain P3 contracts to cover this risk during construction
and development, as well as for long-term operations and
maintenance (O&M) obligations. Rates for this coverage
remained competitive, with multiyear policy terms available.