This article originally appeared in Risk Management’s August 2021 issue.
Most mid-size and large construction companies have excess or umbrella liability policies in place that allows them to survive a significant liability claim that exceeds the limits of primary coverage.
No one expects or wants to experience a catastrophic loss. However, it is crucial to have appropriate coverages in place in the event that such a loss arises. Umbrella and excess liability policies increase limits of insurance over primary general liability, auto liability and employers liability policies. Without umbrella and excess liability coverage, a construction company could face financial ruin from just one event.
Market Trends
The umbrella and excess liability insurance marketplace for the construction industry has been a challenging environment in recent years. The following trends are affecting the market in a negative manner:
- Reduction in capacity: Even accounts with no recent claims activity are seeing policy limits being cut. Pricing is continually increasing, and buyers are having to pay more for less. Terms and conditions are also restricted, making procuring appropriate coverages extremely difficult.
- Nuclear verdicts: Generally defined as verdicts and settlements of $10 million or more, nuclear verdicts are on the rise across all industries, including construction. Several societal trends, often referred to as “social inflation,” have created increasingly anti-corporate juries. Social inflation presents itself as the growing phenomenon of for-profit litigation funders, higher jury awards, more generous workers compensation claims, legislated compensation increases and new tort and negligence concepts.
- Third-party litigation financing: Litigation financing involving a third-party source funding a plaintiff’s court costs to receive a portion of jury awards is another trend connected to nuclear verdicts. When a plaintiff has a third party’s financial backing, they are much more likely to hold out during the litigation process, which generally means a higher verdict or settlement.
- Excess tower troubles: The casualty market for construction is having to involve a larger number of carriers to fill out excess towers. This drives the cost up while increasing the challenges of completing a tower with consistent terms and conditions.
Advice for Insureds
For companies in the construction industry, the specific type of work an insured performs will ultimately dictate the needed insurance limits. Josh Janes, regional vice president of construction at The Hartford, offered the following advice for those businesses:
Do not look at the size of the projects, but rather the risk associated from bodily injury actions and especially large loss of use or business income loss claims. Contractors also need to be careful about tying limits or get waivers of consequential damages.
Take a step back and view exposures with an open mind throughout the process of determining appropriate umbrella and excess liability coverage.
Consider auto liability as well. Many focus solely on project sizes they perform, but the auto liability and jurisdictions in which they work often drives auto umbrella claims higher than what we see for site accident or property damage claims.
Construction Liabilities and Losses
The largest losses, which could potentially put insureds out of business, typically arise from construction site bodily injury claims, construction property damage/delay/loss of use claims, and auto liability claims. Particular focus on adequate limits needs to be paid by self-performing subcontractors whose contract value may only be $10 million of a $200 million project, but that insureds liability directly or through additional insured and contractual indemnity to extend to the whole project.
Large subcontractors usually have larger, heavier auto fleets. General contractors tend to face more balance sheet liability claims via project claims related to incorrectly performed work and/or delay claims caused by property damage. The Hartford sees many of its clients remain disciplined on requiring waivers of consequential damages from owners, or limitations of liability for delay or loss of use via liquidated damages provisions or liability caps.
The Hartford’s Middle and Large Commercial Construction umbrella are all admitted policies with robust coverage over the primary and can include umbrella coverage over a self-insured retention. The Hartford’s construction umbrella policies typically do not have “deemer,” non-cumulation or telescoping clauses, so they are able to follow form.
Furthermore, The Hartford can provide primary and non-contributory coverage on a construction umbrella policy, which is primarily for upstream parties that qualify as additional insureds on the policy. The Hartford prides itself on being flexible about negotiating specific, or manuscript terms on our primary and umbrella construction policies to tailor the coverage with the broker and insured for their unique risks.
Whether you are an owner, general contractor or prime/trade subcontractor, the umbrella market will likely continue to be challenging next year, but the analysis of how to assess your company’s risk and the needed limits remains the same. We look forward to continuing to work with our policyholders and broker/agent partners to provide support guidance over the long term.
For more information, read about The Hartford’s insurance solutions for the construction industry.
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