Why the status quo can be dangerous in the construction insurance world

“We’ve always done it this way” are six dangerous words in the construction world, and equally dangerous for those trying to assess or procure adequate insurance for construction projects.

“Doing what we’ve always done rarely is OK when we’re facing change,” said Mike Hergott, senior vice president of construction and surety, Ontario region, with Gallagher. “It’s OK to do what we’ve always done if that means we have a really good process which assesses our current situation, the characteristics in front of us, and the process itself helps us make good decisions.”

Hergott will be speaking about construction insurance in Canada on Sept. 15 at 2 p.m. EST during the Gallagher Talks virtual conference.

Besides obvious scheduling delays or issues from COVID-19-related shutdowns, there are a variety of evolving issues in construction related to contract language, market capacity, risk exposure, labour pools, litigiousness and severity of claims, to name a few.

Procuring the right type of “project insurance” — think builder’s risk, wrap up and pollution coverage — for the job protects the policyholder from paying more unnecessarily or being left with gaps in coverage.

So how do you get the appropriate coverage? It goes back to putting the right process in place, Hergott said. That involves three different “buckets,” or considerations:

• Who is placing the coverage
• The coverage itself
• Third-party considerations

The first bucket looks at who is placing the coverage — is it the developer, the general contractor, a private real estate mogul, someone else? “What’s the differences here? Do we need to be thinking about different coverages because things are more litigious?” Hergott asked. “Do we have enough limits?”

For example, buildings are bigger, higher and denser now. “You can easily see 400-, 500-,600-unit condos,” Hergott said. “Think about what happens with a water damage claim on that.”

Another consideration is the design or latent aspect after the project is complete. “What we’re trying to get them doing is thinking about the process so they can become better buyers, whether that’s buying themselves as an owner-controlled entity or buying it through their contractor or someone else in the procurement chain.”

iStock.com/lijah-Lovkoff

Once the broker understands where their client is in the pyramid — the developer, contractor, ultimate asset owner or a combination thereof, for example — and their priorities on the project, they can use the process to understand whether they need tailored coverage or more of a cookie-cutter approach. A client with a building that’s completed in 12 months and sold will require a different approach than a real estate investment trust company that plans to not sell the building for 20 years. “You can’t address every one of those issues by putting it into an automated rating or benchmarking system,” Hergott said.

“[Construction] isn’t what it used to be 20 years ago or even 10 years ago,” he added. There used to be lots of domestic capacity, but now there are fewer insurance players in the game. “What is the approach for actually engaging the market once you’ve selected what you need and what your risk continuum looks like?” Hergott asked. “The marketplace is so much smaller. If I have a global insurer, they might have different appetites depending on the specific situation.”

The second bucket — the coverage that is actually purchased — needs to consider macro trends in the industry, shifts in contract risk and the complexity in how projects are being delivered. “From 10 years ago to today, we’re in a very different market,” Hergott said, pointing to capacity and coverage, and skilled trades staffing levels (the ability of people to do the work).

The final bucket relates to the entrepreneurial spirit of construction and development, and the various third parties involved, such as lenders or government grants and incentives, for example. “Really what I want to do is ensure we understand the ‘what and why’ behind third-party requirements that lenders may have,” Hergott said.

But sometimes minimum requirements from third parties use antiquated rules of thumb. “That’s not a slight to the lending review … they may not always have insight into how the wordings have shifted or how policy triggers may actually not perform the way they think they do.”

As an example, sometimes one party will get a cost-consultant report with hard and soft costs, and “it’s almost like we take that and literally transcribe it into what we should have on the policy without taking the time to understand that project,” Hergott said.

“Are any of those costs actually one-time development costs that would never be incurred again? Are there things that we really aren’t considering, but there’s going to be a tail that chases us after the project is done?”

With all the different parties involved, sometimes details can fall by the wayside “and it’s not until something goes wrong that the client ends up realizing,” Hergott said.

“Let’s not continue forward doing what we’ve always done because we know that’s a recipe for increased risk or issues coming out of the woodwork that we weren’t anticipating.”

Feature image via iStock.com/ranplett