The construction industry is one segment of the economy that could emerge from the pandemic stronger. That's good news for construction insurance experts. But moving forward comes with a few challenges as contractors adjust to jobsites in a COVID-19 world.
Danette Beck, national construction practice leader at Valhalla, N.Y.-based USI Insurance Services, says her construction clients are tackling these adjustments head on, but the new safety protocols add cost and new exposures.
"No one had a plan for this," she said, adding that some construction projects had 24 hours to get everyone off a construction project site. "How do you close the project down safely? How do assess employees? The call to action was pretty immediate."
Contractors with project sites in multiple states faced various compliance rules at the same time, she said. Contractors are resilient and always have been, Beck noted. They staggered workforces. They took temperatures on sites. They shut down projects and created plans to get back up and running when possible.
And insurance professionals like Beck stood by to advise where needed especially when project delays meant securing insurance coverage extensions.
Alan Ferguson, president of US Assure, a program administrator specializing in builder's risk coverages, told agents to get out and talk to their contractor clients sooner rather than later.
"They are experiencing delays, and as these moratoriums are lifted, agents should be getting out to the job site quickly to see if there has been any trespassing and vandalism and report those claims timely," he said. But they should also talk to contractors about any delays in project completion, he advised.
"Look at the policy period for which they've been insured and determine if you need to extend those policies," Ferguson said, explaining that could be a big exposure. "From a risk selection and pricing standpoint, delays do have impacts in certain parts of the country."
For example, projects that may have only been exposed to one wind season for hurricanes could now be exposed to two wind seasons. "So that exposure will have an impact on renewal pricing going forward," he said.
Overall, the construction industry will fare better than harder hit industries like hospitality, entertainment and restaurants, Beck predicted.
"At least in construction, it was just a different kind of perspective because we were still working," she said. "Were states shut down? Yes, but they were shut down for 30 or 45 days, not months and months." Contractors will forage ahead with some changes, she says.
Much of the slowdown happened in states that deemed the construction sector as nonessential. "Certainly, that impacted the industry by shutting down those jobs and not allowing new jobs to start," Ferguson said.
In other parts of the country where construction kept building, there were hurdles around social distancing guidelines on job sites.
"A lot of jurisdictions are only allowing one trade contractor on a job site per day," Ferguson said. "For example, if the heating and air conditioning contractor is there doing a rough-in for the ductwork, the plumbers can't be downstairs doing the rough-in for the plumbing. They have to wait until the HVAC guys are done to come on the job."
That is leading to delays in project completion. Pre-COVID, a typical job site could have six to eight trade contractors per day, Ferguson said. "So now you're extending that work time, which adds to length of completion time and that adds exposure for the contractor," he said.
Todd Germano, managing director of Optio Insurance Services North America, the group company that includes Cove Programs, Ascent and Bay Risk, said most contractors are expecting significant changes in terms of their delivery times. "So, the scheduling is what you're going to see changing the most," he said.
What concerns him is not project delays, but projects being shut down entirely.
"That's something that we're watching carefully to understand what people are abandoning versus what people are delaying," he said.
"If you look across the various sectors, you're seeing some of the larger commercial stuff, some office buildings, being indefinitely delayed."
There have also been delay issues in securing permits. "There's been delays for architect and engineering plans for new buildings because of alternating schedules of who's in the office to use heavy digital CAD programs. It's slowing down the engineering work that has to be done to pull building permits," Ferguson said.
Hospitals and medical facilities are seeing construction projects suspended as well, according to Brian Permenter, an area vice president for Risk Placement Services, who added that potential bright spots are in residential and infrastructure. For other construction projects, Ferguson said stay-at-home orders led to acceleration in project completion, rather than delays, such as street and road projects.
"Maybe the Department of Transportation normally allowed workers to be active on a job site for 10 hours a day, but since everybody was forced to stay at home and there's no traffic, those contractors were now allowed to be on the job 20 hours a day," he said. "That side of builder's risk actually saw a little bit of an increase."
Making a Comeback
Construction is already seeing improvement. May saw the largest monthly increase in construction jobs since the government began tracking employment in 1939, a drastic improvement from April, which recorded the industry's largest drop in construction jobs. The construction industry added 464,000 net new jobs in May, according to according the Associated Builders and Contractors analysis of data from the U.S. Bureau of Labor Statistics (BLS). "For contractors, this is purely good news," said ABC's Chief Economist Anirban Basu. "With the economy beginning its recovery sooner and more dramatically than anticipated, fewer projects are likely to be postponed or canceled."
That said, Basu added that state and local government finances remain in tough shape, with many local government workers losing jobs in May. "Make no mistake -- these remain treacherous times," said Basu. "Though economic recovery may have begun, there is still the possibility of a resurgence in infections as stores, restaurants and other businesses reopen."
He added that while unemployment dipped to 13.3% in May, it remains elevated overall. "Labor force participation has been rocked in recent months, and it may be the case that many dislocated workers, including construction workers, will remain out of the labor force for an indefinite period."
The construction unemployment rate fell to 12.7% in May, up 9.5 percentage points from the same time last year, but down 3.9 percentage points from April 2020. Unemployment across all industries fell to 13.3% in May, down from 14.7% in April.
Unlike the Great Recession in 2008, today's economic downturn is expected to take a different path for the construction industry.
"From our perspective, we have definitely seen a slowdown," US Assure's Ferguson said. "But what's interesting is that when you compare what we're going through now, compared to the Great Recession where construction and housing in particular drove the economy down, in today's world, we really believe that construction is going to lead us all out," Ferguson said.
Construction economists seem to agree. While the long-term impact of COVID-19 on construction is difficult to predict, the decline in construction activity might be short-lived.
Markets are already showing resiliency, and data for housing are good, said the National Association of Home Builders' Chief Economist Robert Dietz, in a recent statement. The construction industry's recovery is not expected to be quick, but the May jobs report provides evidence of an economy on the rebound, he added.
Like Ferguson, Dietz believes that housing and construction will lead the way. Dietz said home builders and remodelers in particular posted 226,000 jobs in May. "Clearly, hiring has restarted, and construction activity conditions improve," he said.
So far, the pandemic has not made a significant impact on the insurance market for contractors, a market the experts say was already experiencing a hardening rate environment.
According to a recent report by Willis Towers Watson, titled "Insurance Marketplace Realities 2020 Spring update - Construction" insurance rates were accelerating prior to pandemic and not because of the pandemic, but that doesn't mean the insurance rate environment won't have further deterioration post-COVID.
"The spread of COVID-19 is expected to exacerbate the hardening market for construction, as significant declines in available labor typically give rise to increased losses in workers' compensation and general liability," the report said. "Carriers are bracing for a flood of inquiries about coverage interpretation, while insurance buyers can expect delays in project placements."
One area where insurance prices have skyrocketed in recent years has been liability lines, most notably in the umbrella market, USI's Beck said. "Social inflation, nuclear judgments and third-party litigation financing, coupled with the situation that surrounds distracted driving in auto for everyone is making the umbrella market more difficult," she said. Now the sector's seeing larger judgments on the casualty side, too, she added. "There's no longer a direct correlation between umbrella pricing based on the underlying exposure." It's severity driven, she said.
The WTW report said contractors are experiencing significant rate increases and restrictions in coverages for the umbrella and excess liability lines. Rates have increased 25% to 50% for umbrella (lead) and 50% to 100% on excess liability, the report stated. WTW expects these conditions to continue throughout 2020 and perhaps even deteriorate further due to the pandemic.
RPS's Permenter said the umbrella and excess liability market is tightening more every other week. Underwriters are scrutinizing account information and asking for more details. "So right now, what we try to do is to prepare our retailers to say, even if it's a renewal, we need all the best information available. Especially now, you have to make sure that you keep yours at the top of the list," Permenter said. "Exposures change and carriers now may have different requirements for different states. Some states are now becoming 'construction defect' states. These are states that you didn't think [in the past] would have a construction defective timeframe in; now that's come into fruition."
Most other lines of coverage for contractors continue to harden, but at a more manageable pace, USI's Beck said. "The builder's risk market is still viable, and there's still a lot of markets out there," Beck stated.
The WTW report reveals project specific builder's risk has increased from 5% to 15% while master builder's risk/contractors block programs has increased from 5% to 20% on average.
"The builders risk market, while generally competitive with abundant U.S. capacity, has shown signs of hardening in 2020 after many years of soft conditions," the report stated. One exception is wood frame construction. "Wood frame continues to be an extremely difficult class of business," the report added.
Beck agreed frame construction is a tougher class of business, and it's getting more difficult due to several large losses in late 2019 and early 2020. Ferguson said the frame market has steadily hardened over the past 30 to 36 months. "Not only from a pricing standpoint, but from a capacity standpoint," he said. "You're seeing a lot of markets that will want to participate on a quota share basis, but not necessarily want to take the whole risk once a project gets over a certain limit."
He said there are limits as low as $10 million for frame construction, which is unusual. Recent fires in California and high catastrophes nationwide are driving that trend.
Going forward, Germano says larger home builder clients have said that despite the upheavals of 2020, their annual projections are not likely to be affected. Smaller home builders might be a different story.
"In the aggregate, the single-family home construction is down about 15%. So if the bigger clients are saying they're not seeing a change, that feels like there's a disparity between the bigger professional builders and the smaller builders.
It's sort of an indicator that perhaps the larger, more professional home builders are better able to maintain their activity level, and that means it's got to be shrinking faster somewhere else, which would indicate it was the smaller builders," Germano said.
In his view, there will be some winners and losers in construction, but overall, the market will recover. "If you're overly exposed as a construction business to entertainment, building stadiums, concert halls, entertainment venues, that's not going to be great for a while," he said. "But if you're more on the industrial side or the infrastructure side, I would expect you will see a quicker recovery and less of an impact."
There are still many unknowns about where building will be in the future. "It's hard to tell, but the prediction is that people are going to leave urban areas for suburban areas," Germano said.
Ferguson sees that happening. "I do think there'll be a quest for space and people will want to spread out after this, understandably," he said. "As we transition more and more to work-from-home, companies servicing customers in offices will change their workspaces significantly as well."
That could mean shifting back to more square footage per person, higher cubicle walls, offices with doors, and fewer open and collaborative spaces. "Or those spaces that are open will be forced to be larger because of the social distancing," he said.
Despite the economic slowdown from the COVID-19 pandemic, there is still steady competition for preferred construction risks, Ferguson said. But it is more selective.