Insurance Mic

Construction Insurance Rates Continue to Increase First Quarter 2013

With January 1^st re-insurance treaties negotiated and in place, and the losses from super storm Sandy still being tallied it comes as no surprise that rates for construction liability, construction umbrella, and construction workers compensation are seeing 30 to 40% increases in their insurance cost structures. 

According to an article in Property Casualty 360, 56% of insurance buyers saw substantial increases in their umbrella insurance rates, with increases in both workers compensation and general liability lines of insurance not far behind. 

Construction companies and projects in NYC saw by far the largest increases due to a confluence of events.

• From 2005 until 2011 carriers were bludgeoning each other with pricing wars which in the end leaves them with a construction risk portfolio that generates far more in losses than the premium they take in. This is called an adverse combined loss ratio. The combined loss ratio for the industry was 108.2 % country wide according to ISO (Insurance Service Office). For NYC construction that number can be as high as 140 contingent on what carrier you speak with. That means for every $1 in premium received for a NYC construction risk the carriers on average paid in excess of $1.40 in claims and related expenses. 
• The excess carriers (Insurance companies that provide umbrella and excess liability) have seen huge losses in the this line of insurance when they attach over the first $1 million in coverage in the last several years. “They have been so underpriced for years in this market that most of the carriers left the space convinced they can’t make money” revealed Rina Visconti from CRC Insurance Services out of Jericho NY. Thus the few carriers that remain are pricing the next layer of excess over the $1 mill per occurrence $2 mill aggregate at 100% of the cost of the first layer from your base general liability carrier; sometimes more. 
• Workers Compensation continues to be another line of insurance that continues to be challenged. Although Gov Cuomo has some interesting new initiatives as it relates to the NY Workers Compensation system, the reality is the cost benefits if any won’t be realized for several years. 
• Construction companies that have significant exposure to NY Labor Law/Scaffold Law AND construction companies with adverse loss histories are getting punished severely with higher insurance cost in this market.

Some Quick Takeaways:

• Order your loss runs 6 to 7 months before your insurance renews to get a handle on if your account is profitable to the insurance market place or not. Have you broker run a loss pic. Anything over 50% is unprofitable to the insurance marketplace thus expect a substantial rate increase.
• Try and get some indications early on to avoid signing contracts with a cost basis that does not reflect your true insurance costs. Many times we see construction companies take on work, and their insurance cost structure changes leaving the job unprofitable. We suggest contract language that will adjust your project costs consistent with the changes in your insurance cost structure. Contact a Risk Advisor for that language. 
• The liability carrier that provides the first million should be in a position to provide a 2^nd million of coverage more cost efficiently than the excess market place. 
• Make sure you have a strong risk transfer mechanism in place; not just a strong sub contract. It’s absolutely critical that your construction firm retain the services of a vendor qualification analyst like the RISK ROCKET to confirm your sub contractors are carrying good insurance. This ensures coverage is triggered and paid for by the sub’s carrier not yours. If your sub’s policy has exclusions kicking the claim back to you your cost will be very steep upon renewal. 

While these insurance increases are challenging, past hard market cycles have shown that usually the result is less competition for the better construction firms. The ones with poor claims history become uninsurable or their cost structures become so high they can’t compete with best practice firms. Small solace I am sure, however I have seen this repeat itself twice in my 24 year career.

NY Construction Umbrella Liability Market Going From Hard To Distressed

If you’re an Umbrella Insurance Carrier how many accounts do you have to write to pay a $20 million dollar claim? The answer is not enough, which is why the pricing on NY Construction Umbrella Insurance policies have doubled since the January 1^st . The biggest drivers are the reinsurance treaties that have been renewed at much higher insurance rates.

 

The problem stems not just from the two high profile crane accidents that occurred in Manhattan back in 2009, but from the NY States Labor Laws 240 & 241 , also known as the Scaffold law. In most other states large claims that would pierce the underlying general liability insurance policy would be a rare event. “ In NY  the Labor Law  claims start at $ 1 million and usually settle for between $ 2 & $ 3million almost routinely , imposing absolute liability on Building Owners, General Contractors, and Developers” stated Howard Klar, general partner of Gallo, Vitucci, and Klar.

 

Adding to this troublesome dynamic is the fact that base general liability costs for construction firms are up a minimum of 25% to 100% contingent on scope of work and geographic work location. This too effects the cost of umbrella insurance as the premium is usually priced as a % of general liability costs. Further the NYC Department of Buildings new liability insurance mandate that stipulates certain projects must maintain a higher  project specific liability limit ; ranging from $5 million up to $80 million of additional liability insurance limit.

 

Prior to January 1^st the industry would see $10 million of additional umbrella liability insurance priced typically at approximately 40% of the price of the construction general liability insurance premium. Post January 1^st clients that used to seek a $10 million limit are now seeking $15 million thanks to the new NYC DOB ruling. The cost is  75% to 100% of the now higher general liability insurance premium, contingent on scope of work, and project location. Additionally it typically would take 2 to 3 days to underwrite , quote , and bind. Now it's upwards of 5 to 10 business days contingent on size and complexity of the project.

 

What’s the answer? The macros are the macros, that said focus on the cost of your primary construction general liability insurance. The cost of your umbrella liability insurance or excess liability insurance is predicated off your primary construction general liability policy. For tips on managing your insurance costs read our previous article 7 Tips To Position Your Business During a Hard Insurance Market.Need further clarification call a Risk Advisor to help manage your cost, get quotes  and boost your profit margin.