The three-year-old hard construction market has boosted prices and trimmed coverage terms and limits. It also has turned what had been a fairly routine practice—obtaining extensions of policies to cover projects that drag out longer than anticipated—into a more complex negotiation.
John Roe, head of construction casualty insurance in North America for Berkshire Hathaway Specialty, said the issues involved can't be attributed to “any one event" but are the result of "10 years of pricing and claims going up.”
His comments were offered at the annual construction conference of the International Risk Management Institute, Nov. 9, in San Diego, where extensions were a subject of special interest. Risk managers from Bechtel National and McCarthy Holdings sat on a panel on the subject with Roe and a high-level brokerage executive and together they examined the matter from their differing perspectives.
Nobody in construction operations "likes spending millions of dollars more on premiums that hadn't been budgeted for."
Jaap Vrolijk, global business unit risk manager, Bechtel National Inc.
The unforeseen project completion delays have many causes: delays in permitting, owner change orders, scope creep or overall project complexity. The new difficulties arise from what insurers say are skyrocketing claims costs, higher premiums and the fact that several carriers have bowed out of certain coverage types for which they would have readily written policies five years ago.
Most sources of insurance coverage are willing to have a discussion around extensions of six to 12 months, the panelists agreed. The problems often crop up over the builders risk coverage, where insurers may seek bigger retentions cutting into the project's profit margins. Other times it is the competed operations coverage—for policies that have what insurers describe as longer tails beyond the actual time of construction—that cause the most problems.
Nobody in construction operations "likes spending millions of dollars more on premiums that hadn’t been budgeted for," said Jaap Vrolijk, global business unit risk manager for Bechtel National Inc.
Thomas Grandmaison, chief broking officer for AON Construction Services Group, said that in AON’s book of written policy coverage, about “90% of our portfolio need an extension of some sort” and “maybe 10% to 15% create the problems.”
The issues can come up when the needed extension is part of an insurance "tower," the layers of primary and excess coverage, that may need to be aligned and extended together. Whether insurers will deny coverage misalignments or conflicts isn't clear yet. "In court cases, this subject hasn’t been tested yet," said Jeremiah Welch, the session moderator and a partner in attorneys Saxe Doernberger & Vita.
Insured Until Statute of Repose
An important goal with some insurance coverage is to get the policy to extend out to the state's statute of repose, which frees a party from liability after a certain amount of time elapses. Most states, according to IRMI's website, have statutes specific to construction that prohibit claims for defects after a specified number of years.
Ted Wickenhauser, McCarthy Holdings' senior vice president of risk management, says a long-term relationship with an insurance carrier is important. He said his company is looking for insurers "who are in business, stayed in business and not been in and out," meaning, entering and existing various types of construction insurance markets.
As for the value of a long-term relationship, "I would say at end of the day, relationships do play in your favor more than not."
Construction companies in general have had to work harder on risk management and controlling insurance costs in recent years.
Because of the hard market, Vrolijk said, his colleagues in the legal department and construction operations have "learned more about the insurance market in that last year" and "that’s a good thing."