Construction Liability
The Captive Opportunity
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Executive Summary Contents
Section One: America’s Construction Challenge
Section Two: Emerging Materials, New Perils
Section Three: The Captive Sweet Spot
The US construction liability market is diverging from broader general liability trends, with residential construction emerging as a particularly distressed market. While commercial property markets have started to stabilise after years of rate increases, liability exposures —particularly for condominiums, townhomes, and high-end residential developments — remain challenged by tightening capacity, rising excess rates, and increasingly selective underwriting.
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Captives.Insure is an independent and award-winning captive insurance MGA and consulting firm headquartered in Knoxville, Tennessee. As one of the only independent captive program managers in the world, Captives.Insure uses their delegated underwriting authority from AM Best rated carriers to our broker and captive management partners with turn-key captive program access, multi-class experience-rated underwriting, actuarial-driven risk structuring, and strategic advisory services. Free from carrier ownership and distribution affiliations, Captives.Insure’s open programs and global distribution network serves independent captive managers and sophisticated brokerage firms. The firm’s combination of proven education-first approach and proprietary underwriting platform enables high-performing mid-market businesses access to the same captive reinsurance structures and underwriting profit participation historically available only to Fortune 1000 companies. As one of the only independent firms combining delegated authority, in-house risk structuring, and integrated captive reinsurance operations under one roof, Captives.Insure eliminates the friction and fragmentation that define conventional captive program execution. For more information, visit www.captives.insure.
Construction defect litigation continues to escalate in both frequency and severity – which is particularly amplified in plaintiff-friendly jurisdictions – extended statutes of repose, and the growth of third-party litigation funding.
Multi-unit residential projects are also presenting aggregation risk, where a single defect can trigger multiple costly claims. At the same time, economic pressures including labor shortages, wage inflation, and a 40%+ rise in construction input costs since 2020, are creating quality control challenges that may not fully materialise in loss data for years to come.
Emerging construction materials, sustainability initiatives, and evolving building techniques are adding further underwriting uncertainty. In response, insurers are imposing higher retentions, narrowing coverage terms and conditions, requiring more project-specific underwriting, and, in certain states, declining to cover residential risks altogether.
As traditional market solutions become less viable, construction firms are reassessing how liability risk is financed. Captives are increasingly being evaluated as part of a broader risk and capital strategy. Beyond potential cost stabilisation, captives are also providing improved claims oversight, greater control over long-tail exposures, and access to reinsurance and structured capital solutions.
This evolving landscape is prompting a shift from a transactional insurance purchasing approach toward a more deliberate strategy of aligning capital with risk. For many construction firms operating in litigious or capacityconstrained markets, alternative risk financing is becoming an increasingly strategic consideration rather than a secondary option.
Specialist facility structures are also expanding access to captive solutions, with Captives.Insure developing a protected cell facility designed to bridge the gap between traditional group captives and standalone single parent captives. By combining delegated underwriting authority with centralized management and shared service providers, the structure lowers capital and administrative barriers while allowing each participant to retain its own risk independently.
America’s Construction Challenge
America’s construction liability insurance market is diverging from broader general liability trends, with residential construction exposures seeing heightened rate pressure, tightening capacity, and increasingly selective underwriting in the commercial market.
Construction general liability is facing structural challenges driven by litigation trends, economic pressures, and evolving construction practices. As a result, captive insurance is becoming an increasingly attractive risk management tool for construction firms navigating the volatile environment.
Historically, the property market has been of greater concern for the real estate sector, though with a softening commercial property market after years of rate increases, liability is becoming the more prescient issue. General liability rates for residential exposures range from flat to +10% across the United States with umbrella and excess liability up 5% - 15% due to nuclear verdicts and reinsurance constraints, according to a Risk Strategies report
Well-performing accounts in non-catastrophe jurisdictions with strong risk management are experiencing rate stabilisation (flat to +5%), while challenging exposures face capacity constraints and rate increases of +10% to +20%.
The $1.2tn Infrastructure Investment and Jobs Act (IIJA), passed in November 2021, initiated a surge in construction and modernisation projects across the US, creating significant
“The question carriers must answer is where the line is between how much they can charge and when pricing becomes so high that insureds decide to absorb the risk themselves and create self-insured solutions.”
John Kempton, FHS Risk
liability exposure for municipalities and contractors. The forsale residential market is more distressed than the rental market when it comes to obtaining construction liability insurance.
“If a 300-unit building is developed and operated as a multifamily rental property, construction defects are less of an issue because ownership of the property is retained,” says John Kempton, senior consultant at FHS Risk. “If it remains a rental property, property insurance is maintained, and any damages are covered by that insurance. But if that same 300-unit building is constructed as condos and sold at completion, every minor or major issue is likely to generate a third-party claim.”
This distinction has resulted in more aggressive underwriting scrutiny and pricing for for-sale residential construction. Condominiums and townhouses are particularly challenging with common exclusions or outright policy refusals, particularly in severe defect states. There has also been a surge in
500,000
workers labor shortage impacting construction timelines.
Source: 2025 Home Builders Institute
construction defect claims linked to high-end custom homes valued between $10m and $15m and this represents an emerging trend identified in multiple 2025 industry analyses.
Other severely distressed areas of the market include exterior insulation and finish system (EIFS) installation, foundation work, and high-volume tract development exceeding carrier-specific unit count thresholds. In response, insurers are increasingly requiring project-specific underwriting approaches, often involving extensive documentation, enhanced subcontractor qualification protocols, completion guarantees, and elevated self-insured retentions. These more stringent measures reflect insurers’ efforts to mitigate long-tail exposure in an environment where loss predictability has suffered.
Litigious environment
A key driver of the severity of construction defect losses is the legal environment in many states. A lack of meaningful tort reform has allowed claims and verdict sizes to escalate beyond traditional levels.
A single project defect can trigger simultaneous claims from dozens to hundreds of individual unit owners, creating aggregated loss potential that exceeds single-occurrence liability events. Long statutes of repose of between six-to-12 years, depending on jurisdiction, further extend exposure periods, while plaintiff-friendly legal standards, contribute to unpredictability and a prolonged claim development period.
“Individuals may be in a block of flats, become injured in the car park, or be a victim of a robbery. Even if they were only a guest, the claimant will often then sue the property owner or property manager, alleging that lighting was inadequate, security was ineffective, or similar failures occurred,” says Nate Reznicek, president at Captives.Insure.
With an estimated market size of approximately $30bn by 2028 according to a Swiss Re report, litigation funding introduces profit incentives to the claims process, encouraging higher claim values and more aggressive litigation. This dynamic has reinforced negative loss trends and contributed to insurers’ decisions to reduce capacity, increase retentions, and restrict coverage for residential construction risks.
“This is why 10–15%, and sometimes higher, rate increases are being seen on general liability for residential risks,” said Reznicek. “When compared with the broader GL market, which has largely remained flat, the disconnect is clear – and there are no real signs that this trend is slowing.”
Carriers are also reluctant to take claims to trial, and even in jurisdictions where there may be favorable legislation, carriers show a willingness to settle claims for what most would consider way over the odds.
Kempton highlights an example where the client owned a multifamily building in which a car became stuck in a pothole in
the parking lot. An employee of one of the retail tenants went out to help, slipped and injured her shoulder. “She acted on her own, yet the carrier settled the claim for one million dollars,” he said.
Kempton said that this behaviour by carriers reinforces the point that, in the long run, captives and other self-insurance solutions need to gain traction. “To a large degree, carriers benefit from higher premiums because if the target return is 20%, a higher premium produces a larger absolute return,” he said. “The question carriers must answer is where the line is between how much they can charge and when pricing becomes so high that insureds decide to absorb the risk themselves and create self-insured solutions.”
As the economic environment deteriorates, there is typically a corresponding increase in fraudulent activity within these lines of business, further exacerbating loss trends. The situation is exacerbated by a labor shortage of approximately 500,000 workers across the US that has created an estimated $10.8bn annual economic impact through extended construction timelines, substandard workmanship, and quality control failures, according to a 2025 Home Builders Institute report.
Wage inflation of 40-50% for small and medium builders, supply chain disruptions driving material costs up 41.6% since the pandemic, and housing affordability pressures have all contributed to elevated claim frequency and severity. During periods of high inflation, cost-driven decisions may compromise long-term building quality, potentially leading to defect claims years after project completion.
Insurers anticipate that a wave of claims linked to inflation-era construction practices may emerge in future loss data, even though it has not yet fully materialised.
“It would not be surprising if, during the high inflationary period of recent years, corners were cut on process controls and building material quality, including the use of unproven materials,” said John Philipchuck, founder and CEO at Propriety Insurance. “For example, a crumbling brick or stone facade – the result of a cost-efficient and unproven option – may reflect a unique period where inflation pressures drove decisions that compromised building quality. This dynamic could ultimately exacerbate future insurance claims, particularly when compared to inflation periods.”
“It would not be surprising if... corners were cut on process controls and building material quality, including the use of unproven materials.”
John Philipchuck, Propriety Insurance
Defect Claim impacts by State
Emerging Materials, New Perils
Residential construction is also being reshaped by sustainability practices and technological innovation, where insurers are uncertain about the long-tail and unknown exposures associated with these new risks. This in turn makes certain risks more difficult to price, which is driving up construction costs further, increasing insurance rates, and in some cases, resulting in commercial carriers excluding certain exposures altogether.
On a yearly basis, construction input prices increased 1.3%, with non-residential prices up 0.7% - marking a 40.5% increase to overall construction input prices since February 2020, according to a report by the Associated Builders and Contractors (ABC).
The increased use of mass timber, engineered wood products, façade systems, advanced heating, ventilation, and air conditioning (HVAC) designs, and integrated smart home technologies, are all increasing caution among commercial carriers. While these materials offer performance advantages and reduced carbon footprint, limited long-term performance data in residential applications creates underwriting uncertainty.
When preferred materials are unavailable or cost-prohibitive due to supply chain constraints, contractors may substitute alternative products that have different performance characteristics, installation requirements, or compatibility with other building systems. If substitutions are made without proper engineering review or when installers lack experience with the substitute product, defects can result.
Ways to use different types of measuring and technology during the construction process, such as taking pictures and making sure things are done correctly in order to reduce claims. “There are ways to go about this, so we do not have these problems,
but that involves spending more money and probably using nicer materials, etc,” one broker, who asked not to be named, said. “But everybody wants to make a bigger profit.”
Location, location, location
There are certain states where construction defect claims are more frequent and more severe, largely driven by differences in legal frameworks and liability standards. While construction defect litigation is a national issue, its impact is most pronounced in high-cost states and jurisdictions with plaintifffriendly legal environments.
Hawaii stands out as being one of the most challenging locations for residential construction insurance appetite, with capacity experiencing a severe capacity crunch. Despite having a regulatory framework designed to facilitate repairs before litigation, attorneys frequently circumvent these requirements by arguing provisions apply only to individual claims and do not preclude mass litigation.
Around 27% of all residential units built in Hawaii from 20132023 have been involved in construction defect litigation, which is up from 16% in the prior decade, according to a report from the Home Builders Institute. In two of the last 15 years (including 2011), units encumbered by construction defect litigation exceeded total units built that year.
“In Colorado.... It’s when you get sued, not if you get sued.” Broker
type of claim then comes back against the liability insurance. As a result, in certain states there is inherent risk during the development phase itself, and then, depending on the state, there can also be significant exposure to construction defect claims.”
40.5%
increases in construction input prices since February 2020.
Source: Associated Builders and Contractors (ABC)
“In certain states there is inherent risk during the development phase itself... There can also be significant exposure to construction defect claims.”
John Kempton, FHS Risk.
Florida’s residential market, particularly for coastal and multifamily developments, has also contracted due to a combination of soil conditions, construction defect litigation, and elevated premises liability activity.
Some of the more experienced companies are simply refusing to build in the most litigious states. One broker believes that in Colorado, for example, “It’s when you get sued, not if you get sued”.
“Every one of these developers in town gets sued for some kind of construction defect issue, and they have for the last 20 years,” he said. “There’s a whole group of attorneys here locally who basically prey on those groups when they build these kinds of projects.”
Colorado, despite enacting House Bill 1279 in 2017, requiring homeowners’ associations to obtain unit owner approval before filing construction defect lawsuits, continues to see significant claim activity. New York presents a distinct risk profile due to labor laws that impose strict liability on property owners for certain worker injuries, effectively shifting losses from workers’ compensation into general liability programs.
“There have been claims where a worker carrying cement across a construction site spilled it on his chest, developed a rash, and sued the owner for $100,000,” Kempton said. “That
The trend appears national in scope but is most acute in high-cost markets and states with favourable plaintiff legal environments. Recent statutory reforms have introduced defined risk mitigation requirements for property managers, with the aim of limiting liability exposure for compliant entities. In Florida, for example, to combat these claims regulators have introduced statutory reforms that provide property managers with a defined set of risk-mitigation requirements.
“If a property manager complies with these six or seven prescribed measures, the state now recognises that they have likely met their duty of care with respect to tenant safety and property conditions,” says Joe McDonald, executive vice president & director of captive consulting at Captives.Insure.
As a result, liability may be limited through caps on damages, shortened statutes of limitation, or other procedural protections. “These reforms are intended to rebalance the claims environment between business owners and theirclaim filers,” McDonald adds.
“These reforms are intended to rebalance the claims environment between business owners and claim filers.”
Joe McDonald, Captives.Insure.
The Captive Sweet Spot
In such a capricious construction landscape captives can be utilised to provide greater control and allow for insureds to have greater skin in the game. They can curry favour with commercial insurers in environments where availability and affordability are constrained, often leading to better pricing and greater access to the reinsurance market.
A captive solution can help companies in the sector take control of risk and better manage claims. Group captives are an increasingly common option for US liability risks, but their appetite for residential construction liability remains limited.
Unlike group captives designed for workers’ compensation or professional liability, where members share relatively similar exposures, residential contractors vary dramatically across multiple dimensions making this model more challenging for construction liability. Reinsurers and fronting carriers scrutinise residential group captive programs intensely and frequently decline to provide capacity or price at levels that negate any economic advantage.
Group captives can also result in adverse risk selection as those contractors with the worst exposures have the greatest economic incentive to join a group captive. Single parent captive formations typically require a minimum annual premium of approximately $1.5m, with start-up and operating costs of $80,000-$120,000 plus substantial initial capital – thresholds that exclude most mid-market contractors.
Without scale it is difficult for companies to create selfinsurance programs that insulate them from the commercial market unpredictability. Even for those with the required size, making a captive work in this sector almost always requires an AM Best–rating or admitted or excess and surplus lines policies. This requirement severely reduces the opportunity for captives to write the business directly, ensuring they rely on reinsurers and fronting carriers.
The viability of captive solutions in residential construction can be heavily influenced by the degree of control exercised over the construction process. Issues can arise when subcontractors perform poorly and on-site management fails to catch problems as they occur – a risk generally not worth retaining.
“However, if the developer is vertically integrated with the general contractor, there may be greater confidence in quality control across buildings,” Philipchuck said. “In that case, it may be the type of risk worth taking.”
For companies with strong subcontractors and diligent construction oversight, the resulting certainty in quality makes them a better candidate for a captive than companies with lighter oversight.
“Ultimately, the decision comes down to the strength of the construction management process and the willingness to invest in it to reduce claims.”
John Philipchuck, Propriety Insurance
“Ultimately, the decision comes down to the strength of the construction management process and the willingness to invest in it to reduce claims,” Philipchuck said. “Given the six- to-12year exposure period under the statute of repose, the question becomes how much risk to take, and for how long. These issues must be evaluated before moving to a captive solution.”
Facility Solution
Captive facilities sponsored by specialist firms could provide a more accessible and cheaper captive solution for many companies in the construction market looking to reduce premiums and circumvent capacity shortages.
Using delegated underwriting authority combined with the required underwriting expertise, Captives.Insure has created a facility that mirrors a captive protected cell structure, with the aim of reducing the administrative burden and operational costs associated with running a captive. Each entity effectively has its own captive under the cell structure. Because Captives. Insure sponsors the facility, entities do not need to contribute significant capital, with the firm also managing collateral requirements.
This program is also open to captive managers, where Captives. Insure underwrites the insured and then cedes the premium and risk to the third-party captive manager’s facility. McDonald says the subtle difference in the company’s model is what allows it to position the offering between traditional group captives and pure, single parent captives. In most cases, participants are effectively operating a wholly owned insurance subsidiary of a single parent – they retain their own risk.
“However, we have structured it so that an individual operating company can truly own their own risk, either within our turnkey facility or with their own captive manager, at group captive–level costs,” McDonald said. Each participant effectively gets their own captive, which is then administered by the selected captive manager.“Captive managers do not view us as competition –we are not taking brokerage commissions, and brokers have no objections,” Reznicek said. “This allows each entity to operate independently while still benefiting from the broader structures.”
Premium thresholds and other reduced costs are achievable because the facility is centrally managed, with shared service providers. This lowers the barrier to entry, similar to that of a group captive, while still allowing each participant to retain their own risk without sharing it with other companies.
“That combination represents the sweet spot of our approach,” Reznicek said. He believes the biggest factor that helps businesses become comfortable with these risks is staff experience and expertise.
“Delegated underwriting authority is not granted lightly – we have to demonstrate capability,” Reznicek said. “The challenges that exist stem from a lack of understanding among all parties – broker, carriers, and captive owners – about the risk, how to price it appropriately, and how it fits within the value chain. From our own experience, we have direct evidence of growing interest despite the challenges – not only from significant initial inquiries, but also from insureds binding transactions to formally assume risk in these deals.”
Captives.Insure believes the firm can deliver on more of these than most, but they still have to turn away a significant number because of market constraints. “In some cases, losses are too high, premiums are insufficient, or the insured simply cannot afford it,” Reznicek added. “Often, it is a matter of timing – the market is not yet ready to provide a solution, or the insured isn’t ready to accept the solution the market is willing to provide.”
Conclusion
The US construction liability market is becoming more volatile, more litigious, and more difficult to insure through the traditional. As capacity tightens and pricing continues to rise—particularly in residential construction—firms are increasingly being forced to reconsider how they finance and manage their risk.
In this environment, captives are emerging as strategic tools to provide greater control over claims, help stabilise price increases, and create access to broader sources of capital beyond the commercial market.
Captives and facility solutions are becoming increasingly relevant for firms seeking long-term stability and greater control in an increasingly uncertain liability landscape. As market pressures continue, the use of captives is likely to continue expanding across the construction market.
“Delegated underwriting authority is not granted lightly—we have to demonstrate capability,” Nate Reznicek, Captives.Insure.
Construction Liability
The Captive Opportunity