Building insurance rates have trended upward as claims have increased, fueled by recent workforce upheaval, supply chain shortfalls and record inflation. According to the MarketScout Barometer, the construction industry experienced an average insurance increase of 6.2% in the second quarter.
Across all industry segments, property increased 8.3%, general liability increased 5.3%, auto increased 9% and inland marine increased 3.7%. Excess interest rate increases have been even higher.
What drives construction insurance prices up?
Inflation. Rising inflation and rising fuel and labor costs have resulted in high construction project-specific insurance prices, especially property (builder’s risk) and casualty coverage. With project-specific coverage dependent on a project’s estimated contract value (ECV), rates rise if ECVs exceed any initial insurance estimates provided by the insurer.
High material costs and problems with the supply chain. According to an April 2022 report from the National Association of Home Builders, pre-energy home construction materials are up 33% since the start of the pandemic, compared to 20.4% year over year. These include pricing for softwood lumber, gypsum products, ready-mixed concentrate and steel products. In addition, rising material costs are putting a huge strain on construction insurance rates.
A separate report by US Chamber of Commerce (Commercial Construction Index Q4 2021) saw an overwhelming number of contractors experience shortages of at least one material.
Labor shortage. Another reason for rising construction insurance prices is a labor shortage. According to a survey by the Associated General Contractors of America, 91% of construction companies have experienced problems with job site staffing. Staff instability can increase liability issues due to new and untrained staff, forcing insurance companies to raise premiums.
What changes are we seeing with construction insurance?
One way insurers are reacting to increased uncertainty is to tighten their termination clauses. Policies may have shorter periods (eg 30 or 60 days) for coverage in the event that no construction work occurs.
Another change to many policies is the addition of communicable disease clauses and covid-19 exclusions. These may exclude damage or loss caused by infectious diseases.
Finally, with rising costs, claims reach policy limits more quickly and in some cases co-insurance clauses are triggered. It is important to ensure that your projects are adequately insured.
To minimize the risk, building owners should pay attention to policy limits, construction timelines and contract wording.
How do I take control of rising building insurance prices?
There are many steps you can take to take control of your total cost of risk.
- Understand policy language. Work with your insurance advisor to see what protection clauses may apply to your organization. For example, cost escalation and inflation protection may be available on some policies.
- Monitor ECV. Keep your insurance broker updated on estimated contract values, especially with newly awarded contracts. They can help you update existing policies and policy limits.
- Strengthen security practices. With staffing challenges, safety is more important than ever. Review all your procedures, communicate and monitor compliance with security policies. Document your actions. This will help us present a good case to insurers.
- Work closely with your broker. If you’ve had a negative loss experience or if you anticipate any complications with your renewal, contact us early so we have plenty of time to shop the market and identify the best options for you.
Contact the team at BNC Insurance for guidance on how to protect your business against rising construction insurance costs.