Here’s How to Avoid Losses in a $10 Trillion Construction Industry

By: Rick Falcinelli | February 14, 2019

Rick Falcinelli is Vice President of Global Marine Risk Engineering at Aspen, where he provides risk engineering and loss prevention services to internal and external Inland and Ocean Marine clients globally. Rick also conducts risk assessments, technical reviews, site visits and surveys, and makes recommendations to improve our clients’ safety performance and profitability. Prior to Aspen, Rick was VP & Senior Manager, Marine Risk Engineering, with Liberty International Underwriters and EVP at K-Sea Transportation Partners L.P. Rick holds a Masters degree in International Transportation Management from SUNY Maritime College and is a NAMS Certified Marine Surveyor.

According to the McKinsey Global Institute, the construction industry is one of the largest sectors in the world economy, with approximately $10 trillion spent on construction-related goods and services every year, representing 13 percent of the world’s GDP[1]. Off-Highway Research recently reported that global construction equipment sales are expected to increase by 12 percent in 2018, translating to nearly one million units in total sales and almost $99 billion in total retail value of sales.

Industry experts attribute this growth in worldwide construction-related goods and services to such factors as an expanding population coupled with the global rise of aging infrastructures and rapid urbanization.

While this bodes well in terms of healthy sales for the segment, construction companies and contractors of all sizes need to recognize that with additional business volume comes increased risk of accidents and equipment damage. This article focuses on three major categories of equipment damage, addresses their risk factors and suggests controls to mitigate exposures.

Fighting Fire With…

Fire is a major cause of loss throughout the contractor equipment segment. Fires may occur at job sites and staging areas, damaging or destroying the equipment that is located there, or a fire could ignite on the equipment itself from a variety of sources.

Some of the more common hazards include: operating equipment around dry brush, trash or other flammable materials; storing equipment in buildings constructed of combustible materials and lacking fire protection; improper storage of flammable materials; careless smoking; and hot work. Equipment-related fires can result from electrical shorts, fuel or hydraulic leaks, overheating and unprotected exhaust systems.

There are several commonsense ways to lower the risk of fire loss to your equipment.

The most important of these is frequent and thorough inspections of job sites, facilities and equipment, followed closely by an effective, preventive maintenance (PM) program. Properly conducted inspections identify the hazards noted above and provide a system for documenting and tracking corrective actions.

And, PM programs help maintain equipment reliability and safety by providing fleet and equipment managers with a means for scheduling and tracking maintenance and repairs according to service hours, miles or other conditions established by the manufacturer.

One of the most basic but frequently overlooked preventive measures is to outfit all vehicles and heavy equipment with portable dry-chemical fire extinguishers and to train employees in their use.

Extinguishers should be included on inspection checklists to ensure they are ready for use and have not been damaged or accidentally discharged. This simple practice alone can make the difference between a relatively minor incident and a major loss.

The project manager or site supervisor has overall responsibility for the condition of the site and equipment and for ensuring that employees comply with key safety policies. This individual must also make certain an emergency response plan is in place, including after-hours notification procedures and contact information for security personnel. The plan should be re-evaluated periodically throughout the duration of the project as risk factors may change.

Water, Water Everywhere

Project sites with contractor equipment may be exposed to heavy damage from named windstorms and accompanying storm surge, and a detailed hurricane plan should be in place for areas prone to tropical storm activity.

When a hurricane is approaching, early efforts should be made to move as much equipment as possible to a safe location out of the storm’s path, although this is not always possible. Equipment remaining on site must be moved to higher ground and well-secured, including lowering or dismantling booms and other appendages. Smaller equipment, tools and materials should be tied down or stored in trailers to prevent them from being turned into projectiles in high winds.

One of the most basic but frequently overlooked preventive measures is to outfit all vehicles and heavy equipment with portable dry-chemical fire extinguishers and to train employees in their use. Extinguishers should be included on inspection checklists to ensure that they are ready for use and have not been damaged or accidentally discharged. This simple practice alone can make the difference between a relatively minor incident and a major loss.

Changing weather patterns and dense development have created vulnerability to flooding in areas that have never experienced such events previously. Heavy rains can quickly overcome storm water drainage systems, causing widespread flash flooding and extensive damage. While it is not always possible to anticipate these events, experienced contractors should be mindful of low-lying storage locations and monitor weather alerts to take appropriate action.

Identifying the geographic risks and creating an emergency plan should be a construction company’s first line of defense in mitigating site and equipment damage. Additionally, employees working at the site should be trained on where and how to store equipment so they know which steps to take to help reduce the impending threat.

Overturning the Odds to Your Favor

While in operation, contractor equipment can sustain damage in a variety of ways: Colliding with other equipment or structures on the site; being struck by falling trees or debris; exceeding rated operating capacities; becoming mired in marshy areas; or coming in contact with buried utilities or overhead transmission lines.

Many large losses are caused by upset or overturn of equipment. These cases result most commonly from machines working on inclines, where they either slide into other objects or roll over. Prevention of overturn incidents rests entirely with the operator, their assessment of the situation and knowledge of the machine’s limitations.

Newer operators who can operate safely on flat terrain may quickly get into trouble working on a slope without proper training and oversight. Upset/overturn cases may also occur when a machine loses its footing due to a trench collapsing. Again, operator training and experience combined with safe work practices can help prevent these types of incidents from occurring.

The occurrence rate for contact damage is typically higher for equipment used in demolition and land clearing operations than for construction and excavation. There also may be a higher contact damage claim rate with rental equipment providers, particularly for what operators may perceive as “minor” cosmetic damage (dents and scratches). Rental companies conduct stringent off-hire inspections and will claim for any and all damage found.

The Bottom Line

Worldwide sales of construction-related goods and services will continue to rise as more projects get underway.

That said, brokers and carriers have a golden opportunity to bring intrinsic value to the planning table and drive optimal results for clients through collaboration, risk engineering, education and creative solutions. Helping clients understand the causes of equipment damage and its loss patterns will lead to control strategies, many of which are low cost and can be implemented quickly and easily.

And, providing this type of guidance in a growing sector will lead to improved risk selection and renewal strategies, as well as improved policy terms and conditions. &

[1] McKinsey Global Institute, Reinventing Construction: A Route to Higher Productivity (McKinsey & Company, February 2017)

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.