Construction Risk Management
Can a New Construction Insurance Policy Cut Delay and Estimating Risk?
A smoothly running construction project in Northern, N.J. in summer, 2020. Photo: Richard Korman for ENR
Delays, estimating errors and unforeseen field conditions always have the potential to blast big holes in a contractor's balance sheet. The Travelers Cos. recently introduced what it calls project loss insurance specifically to cover risk of financial losses from those problems.
The new insurance also is designed to cover risk of losses from subcontractor failure and default—a type of insurance that already exists—as well as price escalations and supplier failure.
One broker's innovation chief described the new policies as a welcome expansion. "Some insurers have decided to work with the construction sector to design products that not only provide more coverage for the risks faced by the industry," but also offer "access to improved risk controls" required by the policies, wrote David Bowcott, global director concerned with innovation in Aon's construction and infrastructure group.
“Project loss insurance can be seen as insurance for a contractor's balance sheet.”
– Gregg Lyon, strategy chief, Travelers construction surety unit
Bowcott, whose article appeared in a recent issue of On-Site, the Canadian construction industry news website, stated that the policies are intended to cover losses not already insured, "so care needs to be taken to identify the cause of loss when making claims."
There are significant deductibles and co-insurance, too, so the policies are "for catastrophic project losses," Bowcott wrote. The deductibles and co-insurance assures that the contractor has “skin in the game,” he wrote, and sticks to risk controls to avoid losses.
The Travelers policies add another interesting dimension to the insurance and surety marketplace, including the tangled issues related to the cost of delays.
For generations, the effort to limit the risks and costs of construction delays and unforeseen field conditions has rested on contract language, prior state and federal court decisions and public works contracting rules. Arbitration and alternative dispute resolution methods have helped somewhat.
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So have improved contract terms. For example, ConsensuDocs' Owner/Constructor Agreement, which includes details on how to calculate the cost of the work when making equitable adjustments, as they are called, has a long section on the subject of delay costs. That contract language was added 10 years ago to prevent conflicts about how to calculate the costs, especially on lump-sum contracts.
Travelers' project loss insurance is meant to help mitigate the losses that could force a middle-size contractor to close or file for bankruptcy protection and can be seen as "insurance for a contractor's balance sheet," says Gregg Lyon, chief strategy officer for Travelers' construction surety business. The payouts for claims are based on actual or liquidated delay damages, he says, and would be made periodically for anticipated covered project loss during the project's life.
"That's so cash can get in a contractor's hands while the project" goes on, says Lyon.
Offered as a standalone policy, the benefit triggers are based on accounting losses on the company's work in progress schedule, he says. Each accounting loss must be driven by a covered cause of the loss.
The insuring agreement includes coverage for mistakes within the contractor's control, such as overestimating productivity in the field, problems caused by a third party such as a vendor or owner, and problems such as unforeseen field conditions or bad weather.
Virus and microorganism-related causes are excluded, as are government actions. Travelers would retain the right to seek compensation for payouts from a third party. But the policyholder does not indemnify Travelers as it would under a surety agreement.
