covid-19's impact goes beyond insurance

Construction Update: covid-19's impact goes beyond insurance

By: ian ackerman

COVID-19 has changed not only the world, but also how businesses operate. The construction industry has not been immune to these changes and the new challenges that they present.

Insurance Market Update

Property and Builder’s Risk: Overall costs accelerated faster than anticipated in Q1 2020.

Workers Compensation: Pricing remains competitive but is increasing for the first time in years.

Casualty: Continued negative impact by mega verdicts.

Management Liability and Cyber: Public company D&O is the most distressed line of coverage in the marketplace.

Surety: Increased underwriting scrutiny of working capital and financial solvency.

Hard Market: The hard market still exists in pockets. Captive Wire explains that “the COVID-19 pandemic will hit commercial insurers hard, and most may only return to technical profitability in the second half of 2021, assuming normal levels of catastrophe losses, according to Fitch Ratings.” 1

With a drop in investment returns due to COVID, unknown financial exposure to COVID-related claims, and the potential for reduced exposures due to declining sales and payroll figures, we anticipate seeing even more discipline from underwriters. 2019 saw some of the most aggressive rate increases in decades.

Umbrella and excess insurance were particularly challenged heading into 2020, and we anticipate that trend to continue. Carriers have increased pressure on attachment points, increased rates, and have been unwilling to offer the same limits as in the recent past. This sentiment is true for loss-challenged and best-in-class accounts. Workers’ compensation costs generally remained stable or saw a reduction in rate, often increasing in premium based on growing payrolls. Expect continued underwriting scrutiny on height exposure and a reinvigorated focus on PPE and safety plans. Some states such as New Jersey and Pennsylvania have created new rating classification codes related to COVID-19 for workers who are either not working but being paid or have transitioned to modified job duties outside of their previous classification rating codes. General liability rates largely remained stable with modest single-digit rates increases for accounts with favorable loss history while also often increasing in premium based on increased sales or payroll. Construction defect claims will continue to be a focus. Work in New York continues to be a challenge with limited players willing to take on the risk. Appetite for specialty work such as street and road, rigging and crane, excavation, and demolition remains limited to select markets.

Surety Market Update

Surety concentration on working capital and the financial solvency of contractors will only increase moving forward in 2020. Expect increased scrutiny of these areas with an eye specifically on contractors with balance sheets heavily skewed towards government, hospitality, retail, and other industries that may be disproportionately affected by COVID. The surety market has been a bit soft, and underwriting has been relatively lax; plan to see a much more disciplined approach to future underwriting. Surety underwriters will expect business owners to articulate a forward-thinking approach with business continuity and disaster response plans, 3-year plans with milestones, and updated monthly cash flow projections.

COVID-19 Related Insurance Claim Concerns

We anticipate claims and litigation regarding COVID-19 to continue for years into the future. Many different lines of insurance of insurance can and will see claims activity and legal challenges to insurance contracts. High impact areas that Gallagher has identified include but are not limited to workers’ compensation, general liability, directors and officers, management liability, property, business interruption, travel accident, and pollution. Multiple states have enacted executive orders, proposed legislation, or enacted legislation specific to regulating property and casualty insurance carriers’ responses to COVID. Business interruption and workers’ compensation lines of insurance have been under state, federal, and public scrutiny. The situation is very much still developing. Some states such as New Jersey and Pennsylvania have created mandates through state workers’ compensation bureaus to remove COVID-19-related claims from experience modification rating (EMR) factors. With workforces moving from traditional job site or office models to a more distributed remote work environment, cyber exposure has increased with bad actors using ransomware, phishing schemes, and social engineering attacks with much greater frequency. Some outlets have reported

over a 100% increase in ransomware activity.

Contractual Obligations and Liability

Contractors need to review and understand their existing contracts specifically looking for clauses that could provide financial relief, additional time to meet contractual obligations or other helpful remedies. Understanding contractual obligations, providing adequate notice of potential delays, maintaining detailed CPM schedules, and managing jobsite risk are all integral to protecting a business’s financial interests. All future contracts must be scrutinized with the potential for future pandemics in mind. The industry has already reported instances of new and unfavorable contractual terms related to COVID-19.

Managing Cash Flow and Protecting the Balance Sheet

Some contract provisions such as those frequently found in AIA contracts may allow a contractor to require an owner to substantiate that they can pay, even after a job has commenced. Use these provisions to your advantage. Prepare for labor rate increases, especially considering the already limited supply of skilled work, and potential increases in material costs along with delays in receiving materials from factories or supply chains that have been challenged or taken completely offline.

Matt Dawes

Account Executive – Construction Practice Phone: 908-938-0152 Email: matthew_dawes@ajg.com

Ian Ackerman

Insurance Broker & Consultant -- Construction Practice Phone: 973-536-2895 Email: ian_ackerman@ajg.com

Jim Gilmore

NJ North Construction Practice Leader Phone: 201-213-0713 Email: Jim_Gilmore@ajg.com

1 “Commercial Market Hardens but Pandemic To Delay Insurer Profitability.” Captive Wire, 14 May 2020, www.captive.com/ news/2020/05/14/commercial-market-hardens-pandemic-to-delay-insurer-profitability.