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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 1, 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

High Net Worth

Your High Net Worth Client Wants to Live in the Danger Zone? Here’s What Your Resiliency Plan Should Look Like.

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]