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Construction Risk

11 Critical Risks Facing the Construction Industry

Workers and employers in the construction industry continue to face numerous emerging risks and challenges.
By: | May 8, 2018 • 6 min read

From slips and falls and weather-related business interruption to fires and stolen equipment, construction sites will face innumerable risks every day. As a complex sector for insurance professionals to insure, the industry will need to prepare for these growing and emerging risks.

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Added to that, construction is booming in the U.S., leaving it vulnerable to even more dangers.

Builder’s risk insurance is designed to protect the structure or building, employees on site and the raw materials being used. But builder’s risk doesn’t cover for faulty workmanship or poor materials. Exclusive remedy in workers’ compensation is being challenged daily, as well, and is a pain point for contractors across the country and particularly in New York, where the Scaffold Law has opened the door to hundreds of thousands spent on litigation. On top of that, increased frequency and severity of natural disasters has delayed sites from completing projects on time, hurting productivity and increasing the need for business interruption coverage.

Construction risk managers and contractors need to be on the top of their game. Know the risks involved; learn how to prevent them from happening. Whether its residential or commercial, a project needs a keen eye from start to finish.

1) Shifting Workforce

The skilled labor shortage, an aging workforce and an influx of inexperienced workers is driving up costly accidents and injuries on construction sites.

The Associated General Contractors of America (AGC) wanted to put a number to the talent gap, conducting a survey that questioned contractors about their current workforce. AGC found that 78 percent of firms are having trouble finding qualified workers.

Labor-shortage pain hit home when long-term workers were laid off during the U.S.’s economic downturn a few years back. More than two million jobs were lost. Add to that an aging population — baby boomers are continuing to retire at rapid pace — and few millennials entering into this manual labor career.

It’s a recipe for disaster.

Around 21 percent of construction industry employees are age 55 and older, while just 9 percent are 24 or younger. This leads to a heightened risk of injury or illness due to less experience in the field and few mentors to help the younger generation learn best practices. Construction holds the lead in all industries with the total number of worker deaths each year.

Not to mention, as more women enter into construction, the industry has yet to embrace safe equipment for them.

2) Construction Defect

With a less-experienced workforce, long-tail construction defect claims are on the rise.

Construction defects refer specifically to any defect in the design, workmanship or in the materials used on a project. (Think of the Leaning Tower of Pisa, sinking into the earth because its builders didn’t check the surrounding soil conditions.)

Construction defect claims arise from mishaps of all sizes and types of projects. The payout can be steep if a court rules in favor of the plaintiff.

These defects are resulting in failures to buildings or structures and leading to property damage and human injury. Construction defect claims arise from mishaps of all sizes and types of projects. And while commercial general liability (CGL) insurance is designed to protect construction companies from such claims, the payout can be steep if a court rules in favor of the plaintiff.

There are also exclusions to CGL that will leave a construction firm vulnerable if a construction defect claim arises. These exclusions include pollution, electronic data and war, to name a few.

3) Contractual Risk

Owners continue to shift more liability to contractors via contract language. This is especially tricky when it comes to workers injured on a construction site.

Contracts are used to bend the exclusive remedy provision of the Workers’ Compensation Act. This provision provides workers with compensation in the event of injury or illness while protecting employers from being sued for liability by workers injured on the job. Workers’ compensation acts as the sole remedy to address workplace injury.

Mark A. Lies, labor attorney, Seyfarth Shaw LLP

Sometimes the wording in a contract drawn up between a subcontractor and a general contractor may state that the subcontractor waives its right to the exclusive remedy protections of the Workers’ Compensation Act. This could then expose the subcontractor to a personal injury claim by its own employee, explained Mark A. Lies, labor attorney, Seyfarth Shaw LLP.

In many of these cases, the subcontractor does not realize they waived their exclusive remedy protection until an employee injury occurs. When this happens, the third party is protected by workers’ compensation if a worker is injured, but the contractor is left vulnerable to personal injury liability suits.

“We see potential waivers all the time,” added Lies.

4) Overextension

Increasing demand may drive general contractors and subcontractors to take on larger or more projects than they have the capacity to handle. This not only acts as a huge safety risk, but overextension can also exacerbate defects and site accidents.

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Building is booming in the U.S.; billion-dollar projects are no longer “abnormal” in construction anymore. And with contractors working to keep their firm ahead of the competition, it’s no wonder they’re taking on too big of projects with little bandwidth or resources to complete all of them. In fact, many overextend and take on projects outside their scope of practice.

When looking at the top five reasons why contractors fail, unrealistic growth — which includes overextension and taking on too much work — ranked as number one with 37 percent.

When looking at the top five reasons why contractors fail, unrealistic growth — which includes overextension and taking on too much work — ranked as number one with 37 percent, according to Surety Information Online. Performance issues, which includes inexperience with new scopes or types of work, came in at a close second with 36 percent.

Beyond construction, underwriters for the construction industry are feeling the pinch as more construction sites aim to take on bigger and broader jobs. The sheer volume of the work is a concern for underwriters, particularly projects costing billions of dollars.

5) Fire

Poorly managed hot work activities or shortfalls in site security, especially in wood-framed construction, can result in costly losses.

A construction site fire isn’t that uncommon. A single spark from a sander, welder, a cigarette, electrical wire, temporary lighting and the like will easily set wood, solvents, packaging or gasoline — all found on construction sites — up in flames.

Fire risk in renovation construction is especially high, because older homes and buildings contain studs that start in the basement and run up to the top of the house. If a fire were to start, the very core holding the building up could send a flame throughout the entire structure.

Munich Re released a fire loss prevention guide specifically for construction sites. It noted fire needs three things to become self-sustaining: heat, combustible material and oxygen.

Construction sites will have all three at any given moment throughout the building process because of the very nature of its work. Ensure the heat, material and oxygen are not combined in an uncontrolled manner. Training is key.

6) Site Protection

Unattended jobsites can result in unknown damage from leaking or frozen pipes, smoldering hot work, and theft/vandalism of equipment and materials.

A well-lit, fenced in construction site is less likely to be vandalized than one with nothing guarding it. Unfortunately, not all sites will have extensive security during its off hours, and unattended projects are vulnerable to damage and vandalism.

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One pipe with a small crack can leak more than 250 gallons of water per day, destroying walls, floors and tools if they are in the line of fire. Draining the pipes or keeping a site warm are two methods to protect pipes from leaking, freezing or bursting and save thousands on replacement and repair.

In addition, the price of stolen materials can add up. Losses in construction theft estimate $1 billion annually. A construction site will face the indirect costs of increased insurance premiums, rental costs to replace stolen equipment and machinery, and lost productivity while waiting to replace inventory.

There are some ways to protect against unwanted vandals, which can prevent loss on construction sites. Contractors should keep detailed records of all materials, secure equipment in safe places when not in use and register the construction site’s heavy equipment with their insurer.

Additional Risks

7) Natural Disasters

8) Financing Big Projects

9) Regulatory Change

10) New Technologies

11) Missed Deadlines

For your own chance to rank the top growing risks in construction, visit Risk & Insurance®’s Construction Risk List, where you can decide which risks are most pressing. You can then submit your answers and see what other risk professionals had to say about the top construction risks. &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

The Profession

Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]