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Hard market complicates construction coverage extensions

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construction

SAN DIEGO – Construction project delays are increasing, and the hard market is complicating the process of securing coverage extensions for the risks.

Insurers are raising prices, adding conditions, crimping capacity or withdrawing from the builders risk and contractors general liability market, making it more difficult for contractors to lengthen the terms of their insurance coverage, a panel of experts said Tuesday.

Buyers with strong relationships with insurers are better placed to solve problems surrounding project extensions, but other tools and resources are also available, they said.

Causes of project delays vary, said Jaap Vrolijk, risk manager at Reston, Virginia-based contractor Bechtel National Inc. Delays in owners obtaining permits can delay projects for years, and catastrophe losses can also lead to long delays, he said during a session of the IRMI Construction Risk Conference in San Diego.

In addition, construction projects are becoming more complex, which makes them more prone to delays, said Thomas Grandmaison, Boston-based chief broking officer, construction, at Aon PLC.

Insurance problems have been exacerbated by an increase in the number of insurers pulling back or exiting the market, particularly builders risk insurers in London, he said.

And insurers that remain in the market often look to increase prices for coverage extensions, increase retentions or insert conditions that weren’t included in the original coverage, panel members said.

With social inflation – the term used to describe increases in court awards and settlements – insurers want to raise coverage costs for an extension to reflect higher losses, said John Roe, New York-based head of casualty construction, North America, for Berkshire Hathaway Specialty Insurance Co.

“An extension gives us the possibility to potentially redress that loss trend,” he said.

Insurers are usually willing to work with policyholders, Mr. Grandmaison said.

“When there’s a problem that won’t go away any time soon, generally there’s a way to find a solution,” he said.

Policyholders that have good relationships with insurers are usually best placed to complete coverage extensions, Mr. Grandmaison said.

But there are limits on how much buyers can rely on relationships with insurers, Mr. Vrolijk said.

“The relationship doesn’t help at all when a carrier doesn’t do that line of business anymore,” he said. “Even if you have relationships with a carrier on other lines of business, it really doesn’t seem to matter.”

To reduce the risk of having an insurer on a program that pulls out of the market before a project is completed, buyers should work with insurers that have an uninterrupted history of writing construction business, said Ted Wickenhauser, senior vice president of risk management at St. Louis-based contractor McCarthy Holdings Inc.

“We are looking for those who are in the business, have stayed in the business and not been in and out, and have a consistent appetite for the construction industry,” he said.

Where insurers refuse to grant an extension, buyers can return to insurers that offered more capacity than was used under the original policy and see whether they are willing to still provide some of the extra capacity, Mr. Vrolijk said. “You can say, ‘You promised us $20 million, we only used $10 million, can you at least give us $5 more,’” he said.

In other cases, contractors can use their captive to cover uninsured risks, but project owners rarely pay that increase in costs for contractors, he said.

Buyers can also negotiate an extension provision in the original insurance contract when it is bound, said Mr. Roe of Berkshire Hathaway.