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Confusing array of insurance regulations tests construction sector's resilience


LAS VEGAS — Ongoing confusion about the reliability of risk transfer agreements and an unskilled and aging workforce are the major risks facing the construction sector, but cyber liability is gaining prominence.

Contractual risk transfer and additional insured agreements for subcontractors are a continuing risk management concern, experts said at the International Risk Management Institute Inc.'s Construction Risk Conference in Las Vegas this month.

General contractors rely heavily on agreements that transfer risks to their subcontractors, but these are “not foolproof,” said Michael Campo, senior vice president and team leader, construction and design group, Lockton Cos. L.L.C. in Kansas City, Missouri. The uncertainty arises from the more than 300 additional insured forms providing varying degrees of coverage to general contractors, he said.

“If there was a panacea solution out there, we would have found it by now because someone could make some money on it,” Mr. Campo said.

States are passing anti-indemnification and additional insured statutes and are likely to continue, adding to the confusion, experts said. An indemnity agreement promises to shelter the indemnified party against existing or future loss, damage or injury liability. In the construction context, that often means the entire risk of loss is transferred to the subcontractor. The contracts governing construction projects may even require subcontractors to purchase insurance naming owners and general contractors as an additional insured. But these clauses are viewed by some stakeholders as onerous, and states have moved to ban or significantly limit them, experts said.

“If that happens, you're going to have 450 (additional insured) forms,” said Douglas Cauti, senior vice president and chief underwriting officer, construction, national insurance, Liberty Mutual Insurance Co. in Boston. “I think it's going to be a while before we solve the whole (additional insured) issue just because of the changes that are out there, and the anti-indemnification increase in the states is going to have a big impact on that.”

Forty states prohibit broad (subcontractor at fault regardless of who is negligent) or intermediate (subcontractor is held wholly responsible though may only be partially at fault) indemnification, while 10 states ban certain parties from requiring additional insured coverage, according to a January report by Hartford, Wisconsin-based law firm Matthiesen, Wickert & Lehrer S.C.

Shifting to wrap-up coverage — commercial liability policies designed to protect the developer, general contractor and subcontractors for specific projects — could be an option, because they provide certainty of coverage for a prescribed period of time for the sponsors and do not rely on the subcontractor's insurance policy, Mr. Campo said.

The construction industry also lost much of its talented labor pool during the recession, and these workers have not returned, which is creating challenges as new construction starts in the United States increase post-recession and unskilled workers raise the possibility of more frequent injury.

“I would submit that it's not a risk — that it may actually meet the definition of a hazard,” Mr. Campo said.

Gary Kaplan, president-construction and managing director XL Catlin in Chicago, said it will be critical for the construction industry to take advantage of the expertise of its aging workforce, with some contractors taking older employees out of the field to teach younger employees, which has the added benefit of removing older employees from hazardous environments, he said.

Cyber risk is still developing for the construction industry, but contractors possess a significant amount of information that needs to be protected and should consider cyber coverage, experts said.

“Basically, the uptake was pretty low,” Mr. Kaplan said. “Now we're seeing there's not enough time for people on the cyber side to take in all the submissions. If you haven't worked with your broker yet to try to address the cyber issue, you need to get in line quickly because it's starting to really take off. We will eventually figure out what it should cost.”

The development of cyber risk is similar to the trajectory of employment practices liability, a product that had low uptake until claims began to emerge and people realized the extent of the exposure. It became “a part of everybody's standard program,” said IRMI President and CEO Jack Gibson.

“Nobody's infallible, particularly when you have the Russians and the Chinese and every crook around in those countries and outside of them trying to penetrate all our systems constantly,” he said.