Industry Market Trends

Escalating Insurance Costs Keep Builders and Designers on Edge

Mar 25, 2002

Faced with the toughest insurance market since 1985, builders and designers are strategizing for what lies ahead. Industry insiders also lend their advice.

Even before September 11th, the accelerating occurrence and harshness of insurance claims, lessening investment incomes and a series of natural catastrophes had both building contractors and design firms feeling as if they were on unstable ground. The last serious turn in the market was in 1985. Illustrating the chaos that currently reigns in the insurance market, Paul Becker, executive vice president and manager of Willis Construction in Nashville, TN, describes premium increases for building firms as "wildly all over the board," depending on the firm's size, loss history, type of work and location. The way Becker sees it, umbrella coverage is the major culprit. For example, a California building firm that boasts a flawless claims record says that its contractor general liability policy has been bumped up by one-third in the past three years and said that umbrella coverage "had the most significant delta." Between the third quarter of 2001 and the start of 2002, building firms at the low end had premium increases of between 20% and 25%. Builders at the high end had increases of between 200% and 500% for the same period.

On the bright side, Troy Wagener, senior vice president of broker Stewart-Sneed-Hewes/BancorpSouth in Biloxi, MS, says that an average increase of 25% is good for smaller building firms purchasing workers' compensation, general liability and auto insurance. He adds, however, that larger firms are in a better position to cope with the hardening insurance market because they can afford to assume more risk and higher deductibles.

Commenting on turbulence in the builder's insurance market, Jackie Sirany, vice president and director of risk management for M.A. Mortenson Co., Minneapolis, MN, says that builder's risk insurance, which covers projects as they are underway, "is where we are seeing the most dramatic effects of the change in the market." Before the September attacks, coverage for terrorist acts was conceived as part of the all-risk rate. Now, Sirany points out, "terrorism exclusions are blanket." Becker predicts that nervous lenders will make builder's risk insurance skyrocket from 20% to 100%.

Design firms face similar, though somewhat less severe, troubles. In a recent survey of professional liability carriers by the American Institute of Architects (AIA), the American Council of Engineering Companies (ACEC) and the National Society of Professional Engineers (NSPE), it was revealed that insurers are preparing to boost rates from 10% to 15%, perhaps even higher. In AIA's opinion, to anticipate insurance dilemmas, design firms should review their records to differentiate between low-risk and high-risk services. As examples, AIA defines master planning and feasibility studies as low-risk. Preparation of construction documents and construction administration, are defined as high-risk services. Keeping these services separated can help the design firm's broker better understand the business and in turn negotiate favorable deals with underwriters. Design firms can also hold premiums at a manageable level by instituting loss control. Others keep premiums at a minimum by working hard to untangle disputes before they mushroom into full-blown claims.

In the aftershock of the terrorist attack last Fall, the House of Representatives approved a bill allowing insurers to apportion the costs of terrorism-related claims that come to less than $1 billion. Claims that are between $1 billion and $20 billion would be paid for initially by the Treasury Department, which would then be reimbursed through assessments on property-casualty firms. Costs upward of $20 billion would have 90% paid by the Treasury. However, the bill got waylaid before the Senate and Congress, just back in session, has yet to approach the issue.

Of course, this bill wouldn't even be discussed were it not for the destruction of the World Trade Center. The WTC has become a symbol for the paranoia that has gripped the insurance industry. Its cleanup project, which has been tallied at between $750 million and $1 billion, had a wrap-up insurance policy worth an estimated $50 and $75 million granted to Boston-based Liberty Mutual Group who won a competitive bid. The policy covers general liability, workers' compensation and errors and omissions claims. What it doesn't cover is the possibility of lawsuits that the cleanup firms may face in years to come.

Until some legislation is ratified giving insurers a backstop for terrorism-related disaster claims, builders and designers can expect to wait on pins and needles. Their hope is that Congress will pass a bill extending the same indemnification that has been given to the state, the Port Authority of New York and other sites impacted by the September attack. Until that happens, and the insurance market relaxes a bit, the construction industry would do well to follow its insurance strategies and deal with the escalating rates as best they can.

Source: Insurance Rates on a Wild Ride
William G. Krizan, Tom Ichiowski, Debra K. Rubin, Gary Tulacz & Joann Gonchar
Engineering News-Record, Feb. 4, 2002