The construction industry may emerge from the pandemic strong or relatively unscathed compared to other segments of the economy. But it also faces its share of challenges in managing exposures, delays, added costs and shutdowns in this COVID-19 world.

Construction clients have been making adjustments, but the new safety protocols have added cost and new exposures, according to Danette Beck, national construction practice leader at Valhalla, N.Y.-based USI Insurance Services.

“No one had a plan for this,” she said, adding that some construction projects had 24 hours to get everyone off a construction project site. “How do you close the project down safely? How do you assess employees? The call to action was pretty immediate.”

Contractors with project sites in multiple states faced various compliance rules at the same time, she said. Contractors are resilient and always have been, Beck noted. They staggered workforces. They took temperatures on sites. They shut down projects and created plans to get back up and running when possible.

Insurance professionals like Beck stood by to advise where needed, especially when project delays meant securing insurance coverage extensions.

Alan Ferguson, president of US Assure, a program administrator specializing in builders risk coverages, believes agents should get out and talk to their contractor clients sooner rather than later. Agents should talk to contractors about any delays in project completion, he advised.

“Look at the policy period for which they’ve been insured and determine if you need to extend those policies,” Ferguson said, explaining that could be a big exposure. “From a risk selection and pricing standpoint, delays do have impacts in certain parts of the country.”

For example, projects that may have only been exposed to one wind season for hurricanes could now be exposed to two wind seasons. “So, that exposure will have an impact on renewal pricing going forward,” he said.

Overall, the construction industry will fare better than harder-hit industries like hospitality, entertainment and restaurants, Beck predicted.

“At least in construction, it was just a different kind of perspective because we were still working,” she said. “Were states shut down? Yes, but they were shut down for 30 or 45 days, not months and months.” Contractors will forge ahead with some changes, she said.

Slowdowns mostly happened in states that deemed the construction sector as nonessential. “Certainly, that impacted the industry by shutting down those jobs and not allowing new jobs to start,” Ferguson said.

In other parts of the country where builders kept building, there have been hurdles around social distancing guidelines on job sites.

“A lot of jurisdictions are only allowing one trade contractor on a job site per day,” Ferguson said. “For example, if the heating and air conditioning contractor is there doing a rough-in for the ductwork, the plumbers can’t be downstairs doing the rough-in for the plumbing. They have to wait until the HVAC guys are done to come on the job.”

That is leading to delays in project completion. Pre-COVID, a typical job site could have six to eight trade contractors per day, Ferguson said. “So, now you’re extending that work time, which adds to length of completion time and that adds exposure for the contractor,” he said.

Todd Germano, managing director of Optio Insurance Services North America, the group company that includes Cove Programs, Ascent and Bay Risk, said most contractors are expecting significant changes in terms of their delivery times. “So, the scheduling is what you’re going to see changing the most,” he said.

What concerns him is not project delays but projects being shut down entirely.

“That’s something that we’re watching carefully to understand what people are abandoning versus what people are delaying,” he said.

“If you look across the various sectors, you’re seeing some of the larger commercial stuff, some office buildings, being indefinitely delayed.”

There have also been delay issues in securing permits. “There’s been delays for architect and engineering plans for new buildings because of alternating schedules of who’s in the office to use heavy digital CAD programs. It’s slowing down the engineering work that has to be done to pull building permits,” Ferguson said.

Hospitals and medical facilities are seeing construction projects suspended as well, according to Brian Permenter, an area vice president for Risk Placement Services, who added that potential bright spots are in residential and infrastructure. For other construction projects, such as streets and roads, Ferguson said stay-at-home orders led to acceleration in project completion rather than delays.

“Maybe the Department of Transportation normally allowed workers to be active on a job site for 10 hours a day, but since everybody was forced to stay at home and there’s no traffic, those contractors were now allowed to be on the job 20 hours a day,” he said. “That side of builders risk actually saw a little bit of an increase.”

Making a Comeback?

Construction is seeing improvement, but the sector still lags behind where it stood in early 2020.

While May saw the largest monthly increase in construction jobs since the government began tracking employment in 1939—a drastic improvement from April, which recorded the industry’s largest drop in construction jobs—overall, the sector has recovered only 59 percent of the jobs lost since the start of the pandemic-induced recession, according to an Associated Builders and Contractors analysis of data from the U.S. Bureau of Labor Statistics.

Nonresidential construction employment was down by 4,000 jobs on net in July compared to June. The bulk of job loss emerged from the nonresidential building subsector, which experienced a decrease of 9,300 jobs. Nonresidential specialty trade contractors added 3,500 jobs, while the heavy and civil engineering segment added 1,800 jobs.

The construction unemployment rate was 8.9 percent in July, up 5.1 percentage points from the same time last year, while unemployment across all industries declined from 11.1 percent in June to 10.2 percent in July.

“For several weeks, contractors have noted an increase in project postponements and cancellations due to coronavirus impacts,” said ABC Chief Economist Anirban Basu. “July data reflect this reality, as many of the postponed or cancelled projects are in categories such as office, lodging and retail. Correspondingly, employment in the nonresidential building segments declined by more than 9,000 positions in July.”

Basu noted that there appears to be a growing amount of work modifying existing structures. “That helps explain the 3,500 jobs created within the nonresidential specialty trade segment, which, among other things, encompasses workers who handle air handling systems.”

But the outlook for nonresidential construction spending is “not especially favorable for the next year,” he cautioned. “The pandemic remains stubbornly in place, and while today’s jobs numbers indicate ongoing economic recovery, the pace of recovery has softened in conjunction with viral resurgence.”

Today’s economic downturn is different for the construction industry than the Great Recession in 2008.

“From our perspective, we have definitely seen a slowdown,” US Assure’s Ferguson said. “But what’s interesting is that when you compare what we’re going through now to the Great Recession, where construction and housing in particular drove the economy down, in today’s world, we really believe that construction is going to lead us all out,” he said.

Construction economists seem to agree. While the long-term impact of COVID-19 on construction is difficult to predict, the decline in construction activity might be short-lived.

Markets are already showing resiliency, and data for housing are good, the National Association of Home Builders’ Chief Economist Robert Dietz said in May.

Over the first six months of 2020—and after the onset of the impact of the coronavirus—total single-family permits issued year-to-date nationwide reached 433,484, according to NAHB data. On a year-over-year basis, this is a 3.8 percent increase over the June 2019 level of 417,453.

However, Dietz noted in an August update that “the V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April,” he said. “Such cost increases could dampen momentum in the housing market this fall, despite historically low interest rates.”

Insurance Market

So far, the pandemic has not had a significant impact on the insurance market for contractors, a market the experts say was already experiencing a hardening rate environment.

According to a recent report by Willis Towers Watson, titled “Insurance Marketplace Realities 2020 Spring update—Construction” insurance rates were accelerating prior to the pandemic and not because of the pandemic, but that doesn’t mean the insurance rate environment won’t have further deterioration post-COVID.

“The spread of COVID-19 is expected to exacerbate the hardening market for construction, as significant declines in available labor typically give rise to increased losses in workers compensation and general liability,” the report said. “Carriers are bracing for a flood of inquiries about coverage interpretation, while insurance buyers can expect delays in project placements.”

Liability Rates

One area where insurance prices have skyrocketed in recent years has been liability lines, most notably in the umbrella market, USI’s Beck said. “Social inflation, nuclear judgments and third-party litigation financing, coupled with the situation that surrounds distracted driving in auto for everyone, is making the umbrella market more difficult,” she said. Now the sector’s seeing larger judgments on the casualty side, too, she added. “There’s no longer a direct correlation between umbrella pricing based on the underlying exposure.” It’s severity driven, she said.

The WTW report said contractors are experiencing significant rate increases and restrictions in coverages for the umbrella and excess liability lines. Rates have increased 25-50 percent for umbrella (lead) and 50-100 percent on excess liability, the report stated. WTW expects these conditions to continue throughout 2020 and perhaps even deteriorate further due to the pandemic.

Permenter said the umbrella and excess liability market is tightening more every other week. Underwriters are scrutinizing account information and asking for more details.

“So, right now, what we try to do is to prepare our retailers to say, even if it’s a renewal, we need all the best information available. Especially now, you have to make sure that you keep yours at the top of the list,” Permenter said. “Exposures change and carriers now may have different requirements for different states. Some states are now becoming ‘construction defect’ states. These are states that you didn’t think [in the past] would have a construction defective timeframe in; now that’s come into fruition.”

Most other lines of coverage for contractors continue to harden, but at a more manageable pace, USI’s Beck said. “The builders risk market is still viable, and there’s still a lot of markets out there,” she stated.

The WTW report reveals project-specific builders risk has increased from 5 percent to 15 percent while master builders risk/contractors block programs has increased from 5 percent to 20 percent on average.

“The builders risk market, while generally competitive with abundant U.S. capacity, has shown signs of hardening in 2020 after many years of soft conditions,” the report stated. One exception is wood frame construction. “Wood frame continues to be an extremely difficult class of business,” the report added.

Beck agreed frame construction is a tougher class of business, and it’s getting more difficult due to several large losses in late 2019 and early 2020. Ferguson said the frame market has steadily hardened over the past 30-36 months. “Not only from a pricing standpoint but from a capacity standpoint,” he said. “You’re seeing a lot of markets that will want to participate on a quota share basis but not necessarily want to take the whole risk once a project gets over a certain limit.”

He said there are limits as low as $10 million for frame construction, which is unusual. Recent fires in California and high catastrophes nationwide are driving that trend.


Going forward, Germano noted that larger home builder clients have said that despite the upheavals of 2020, their annual projections are not likely to be affected. Smaller home builders might be a different story.

In his view, there will be some winners and losers in construction, but overall, the market will recover.

“If you’re overly exposed as a construction business to entertainment, building stadiums, concert halls, entertainment venues, that’s not going to be great for a while,” he said. “But if you’re more on the industrial side or the infrastructure side, I would expect you will see a quicker recovery and less of an impact.”

There are still many unknowns about where building will be in the future. “It’s hard to tell, but the prediction is that people are going to leave urban areas for suburban areas,” Germano said.

Ferguson sees that happening. “I do think there’ll be a quest for space and people will want to spread out after this, understandably,” he said. “As we transition more and more to work-from-home, companies servicing customers in offices will change their workspaces significantly as well.”

That could mean shifting back to more square footage per person, higher cubicle walls, offices with doors, and fewer open and collaborative spaces. “Or those spaces that are open will be forced to be larger because of the social distancing,” he said.

Despite the economic slowdown from the COVID-19 pandemic, there is still steady competition for preferred construction risks, Ferguson said. But it is more selective.

Topics USA Excess Surplus Contractors Construction COVID-19 Willis Towers Watson