The construction insurance sector is facing many risks. These risks come from economic pressures, climate events, and changing laws. Various factors have impacted key coverage lines in different ways. These include General Liability (GL), Professional Liability (PL), and Builder’s Risk.
Insurers have raised rates, though some stability is starting to show. They have also tightened underwriting terms and increased retentions. These changes are in response to higher loss costs from inflation, more lawsuits, and severe weather events.
Trends and Challenges in Construction Insurance
New companies are entering the market. There is also a lot of capacity in some areas, like builder’s risk. This is increasing competition and helping to keep prices from rising too much for well-managed risks. Here, we explain recent trends and challenges.
Economic and Labor Headwinds
High inflation in materials and labor has driven up project costs and claim payouts, pressuring premiums. Coupled with rising interest rates dampening new construction starts, contractors face higher insurance costs even as work volume slows. A persistent skilled labor shortage adds safety risks, requiring stricter risk controls on sites.
Climate and Catastrophe Impact
Frequent severe weather disasters are straining property insurers. The U.S. saw an average of only 3 major disaster events per year in the 1980s, versus 18 per year recently.
In 2023, there were 28 events that each caused over a billion dollars in damage. These events included not just hurricanes, but also hail, wildfires, and floods across the country. Insurers have responded by limiting coverage and capacity for projects in high-risk zones (e.g. coastal wind, wildfire) and demanding robust mitigation measures.
Litigation and Underwriting Shifts
Social inflation – the rise in lawsuit frequency and “nuclear” jury awards – has increased liability claim costs. To protect profits, carriers are raising rates, increasing deductibles, and adding new exclusions. These exclusions include PFAS chemicals and cyber risks in general liability and umbrella policies. Underwriters are more cautious, scrutinizing risk details and requiring early engagement to secure adequate capacity, especially in litigious venues.
Understanding Coverage Limitations Across Key Construction Insurance Policies
General Liability
The general liability policy covers losses from third parties. This includes bodily injury and property damage from events at a job site.
This policy does not cover mistakes made on a project. It also does not cover property damage to a contractor's work while it is being done. Additionally, it does not cover damage to the finished work or any related losses.
Numerous general liability policies for contractors specifically exclude losses due to poorly executed work. The market for general liability has provided limited protection for faulty workmanship, but this coverage has been inconsistent and frequently includes low coverage limits.
Professional Liability
Professional liability policies crafted by insurance firms are intended to cover negligence in delivering professional services, whereas actual construction tasks are not considered professional services. Therefore, the policy does not cover negligence in these activities. Professional liability policies do not serve as warranty or guarantee policies, and they usually exclude warranties and guarantees. Additionally, contractor professional policies often feature a faulty workmanship exclusion, which explicitly omits 'the cost to repair or replace defective workmanship.'
Builders Risk
Builder’s risk policies are a kind of property insurance. They safeguard structures during construction or renovation.
These insurance policies are designed to cover materials and equipment from direct physical loss or damage. Most builder’s risk policies do not cover faulty design, materials, or workmanship. They will not pay for the cost to fix or replace the flawed work. Some policies, if made correctly, could cover damages to other property caused by the faulty work.
How Insurance Strengthens Risk Management in Construction
Insurance is very important for construction firms. It helps reduce risk by shifting the financial burden of unexpected events to another party.
Whether it’s general liability, professional liability, or builder’s risk coverage, each policy is designed to address specific exposures that could otherwise result in significant financial losses. For example, general liability insurance protects against claims from others for bodily injury or property damage. Builder’s risk policies cover physical damage to a project while it is being built.
Contractors and project owners can protect their operations, assets, and finances. They can do this by finding the right mix of coverage. This helps them guard against many possible disruptions.
Beyond financial protection, insurance also encourages proactive risk management practices. Insurers often provide access to risk engineering services, safety training, and loss control resources that help firms identify vulnerabilities and implement preventive measures. This partnership lowers the chances of claims. It can also result in better underwriting outcomes, like lower premiums or wider coverage terms.
Insurance is more than just a tool. It is a strategic asset. It helps with resilience, compliance, and long-term project success.
NFP Construction Insurance Market Expertise
NFP construction experts are here to help you build. We capitalize on our exceptional and longstanding insurance company relationships to our clients’ benefit, especially as the market continues to evolve.
Look forward to more from NFP on the changing insurance market for construction. We will focus on developments and challenges in the rapidly changing insurance market, and their impacts to the construction industry, including contractors, suppliers, and owners/developers.
