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Construction companies are stepping up risk management efforts and making greater use of technology in response to a growing number of fire and water damage claims during construction projects, according to industry sources.
At sites where buildings are under construction, catastrophic fires in major metropolitan areas and water damage claims have led to adverse loss experience and are “a key issue” affecting the market, rating agency A.M. Best Co. Inc. said in a report on May 21.
The impact has been felt acutely by insurers writing builder’s risk exposures and by construction underwriters in general, Best said.
Over the last 24 months, the construction property business has taken some big losses, said Gary Kaplan, Chicago-based president of North America construction for Axa XL, a division of Axa SA.
“There have been a couple of losses of over $1 billion … that have caught the attention of the entire world marketplace. A lot of insurers have exited the business,” he said.
After years of soft market conditions, the construction property market is starting to tighten, with increases in rates and deductibles, he said.
“Double-digit rate increases are the minimum and deductibles are getting bigger,” he said.
Water damage is one of the most frequent claims affecting the construction industry, experts say.
“We are seeing an uptick in frequency because the soft market has required low deductibles in a competitive market,” said Jason Behrer, New York-based vice president and North America underwriting manager of construction property at Starr Specialty Lines Insurance Agency LLC.
“Historically water damage deductibles haven’t been increasing with the price of materials. We’re starting to see the market hardening now,” he said.
“About one-third of our losses come from water damage (other than flooding), but fire continues to be the highest severity. It’s almost three times the average size claim from fire than from water, and fire losses are around one-twelfth of the number of claims so they’re a lot less frequent but more severe when they do occur,” Mr. Kaplan said.
Fire is one of the biggest risks facing the wood frame construction industry, said Michael Feigin, Arlington, Virginia-based executive vice president and chief construction officer for AvalonBay Communities Inc.
“So far this year there were 11 total loss fires in large wood frame construction projects in the U.S.,” he said.
An estimated 30% of construction site fires are started by third parties, either intentionally or unintentionally, for example “when someone breaks into a job site and starts a fire … either to make a statement … or just to stay warm,” Mr. Feigin said.
“The problem with a job site is if it’s not properly maintained there are a lot of materials other than wood that can start burning, like construction debris,” he said.
AvalonBay has an “extreme housekeeping” plan to limit flammable debris at its project sites, and it has also banned the use of open flame heaters, he said.
Most water damage claims arise from faulty workmanship, said Sedat Kunt, New York-based national construction property leader within Marsh LLC’s U.S. property practice.
“It’s primarily incomplete or improper pipe connections or equipment installations…A lot of losses are due to plumbing issues or where a sprinkler contractor charges the systems without proper testing, flooding projects,” Mr. Kunt said.
Contractors work hard to get the structure or envelope of the buildings in place so “they’re safe from weather water like rain or hail or wind-driven rain,” said Mr. Kaplan. It’s when they start working on the interior of the building “putting up walls, drywall and fixtures, that the claims get bigger,” he said.
Planning and having the proper procedures in place are key to preventing water damage claims, experts say.
Once the interior work begins, shut down inspections and “wet work” permits are among the steps that can help prevent water damage during construction projects, according to Mr. Kaplan.
“The answer is to do almost the same work that you do to prevent fire,” he said. Like a “hot work” permit system that outlines a procedure to be followed every time work is done that might create sparks, a “wet work” permit system makes project teams aware when people are working with water in the building, he said.
“You need to know where the shutoff valves are, you need to think about where the water will go when it gets loose…If you follow procedures consistently you won’t get those claims,” Mr. Kaplan said.
Construction companies increasingly are making use of new technologies and tools at project sites to help mitigate losses, experts say.
Following several large fires at its sites, including a February 2017 fire at an apartment complex under construction in Maplewood, New Jersey, AvalonBay Communities deployed a new plan to fireproof the wood on all its wood frame projects across the U.S., said Mr. Feigin.
The sprayed or dipped application limits the ability of the wood to ignite and prevents fire from advancing, he said. “We’ve got about 3.5 million square feet of wood treated currently on all of our projects,” he said.
The company has also partnered with New York-based technology firm Pillar Technologies Inc. to deploy sensors at its sites that sense heat, humidity and airborne particulates. “If there’s a flood on the job site it’ll sense a spike in the humidity levels, so you know right away that there’s extreme water on the job site,” he said.
While technology can help mitigate the loss, it’s doesn’t prevent the loss from occurring, said Mr. Kunt.
“Where we need to really focus is to prevent water damage losses, to aspire not to have a water damage claim,” he said.
“There is a lot that needs to be done in the industry to get to a certain level where everybody is on the same page,” he said.
“There has to be a cohesive approach in the industry where all parties, the developer, the general contractor, the sub-contractors, the insurance companies sit together and agree on certain procedures,” Mr. Kunt said.
Increases in construction spending and the transport of goods have led to a near doubling of inland marine insurance premiums in the last decade, with direct premiums written totaling $24.5 billion in 2018, up from $13.3 billion in 2009, rating agency A.M. Best Inc. said in a report Tuesday.