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Digital EditionBridge Collapses, Labor Shortages, and Rising Costs: The Insurance Battle Behind Public Projects
Insurers and brokers that have a vital social role in protecting public entity infrastructure projects are operating in an uncertain market that calls for careful underwriting.
“There are quite a few headwinds right now when it comes to getting infrastructure off the ground, and, obviously, to insure it properly,” said Marcus Henthorn, managing director at Gallagher. “I think one of the biggest is labor — there’s a chronic shortage of labor across the country.”
Construction labor shortages, along with inflation, supply chain issues and others are pushing up building costs and creating delays on some projects, sources point out.
“It makes it harder for our clients to understand the true exposure, when [a project] is going to finish and what it’s going to look like,” Henthorn said. “That concern translates into the underwriting community.”
Public entities can’t do without a willing and healthy insurance market if infrastructure projects are to be built. Without adequate property/casualty coverage and a surety bond market to guarantee project performance and payments, the risk to build would be too great, experts agree.
“Insurance is absolutely critical,” said Aldo Fucentese, chief underwriting officer for Liberty Mutual’s practice serving large contractors. “A lot of different lines come into play, and, if you don’t have surety capacity, you can’t even get started.”
Reduced Appetite After Tragedy
Finding coverage has gotten somewhat harder for contractors on large infrastructure projects. Some sources contend that the deadly collapse of the Francis Scott Key Bridge in Maryland last year has caused skittishness on the part of some underwriters, even though the disaster occurred when the span was struck by a ship. The span’s age and condition was not thought to be a direct factor in the accident.
Six workers died when the bridge fell into the Patapsco River after being hit by a Singapore-flagged container ship.
An insurer prominent in the infrastructure space took a big hit on the bridge collapse and has re-examined its appetite for such risks, said Darron Johnston, executive vice president at Amwins. Other insurers have taken similar steps. “Since that time, we have seen a reduction in capacity, an increase in price and amendments to certain terms and conditions” in the infrastructure market, he added.
Marcus Henthorn, managing director, Gallagher
Tamika Puckett, national public sector division leader at Willis Towers Watson, said the bridge collapse has insurers asking more questions to determine whether the risk that such an incident could be repeated has been properly managed.
Property insurers were on the hook for large losses in the disaster. WTW placed $350 million in property coverage with Chubb and the state of Maryland has estimated the cost to replace the bridge could reach as high as $1.9 billion.
Location, Location, Location
Because of the potential for catastrophic weather, geography as well as project type, has a lot to do with how underwriters view infrastructure construction, Henthorn said. Meanwhile, PFAS and other potential contaminates have made such projects as wastewater and storm-water systems difficult to insure.
“Some of the dams, bridges and tunnels are starting to be more scrutinized, with some special underwriting and more questions,” Henthorn said. “It’s more time consuming from a placement perspective, but it’s not that there isn’t adequate coverage in the marketplace.”
Puckett said brokers and insurers are concerned with large concentrations of infrastructure risks in major metropolitan areas that could be vulnerable to natural catastrophes — the impact of wind and flooding on the East Coast, for example, and the potential for fires and earthquakes in the west.
In cities where port authorities operate airports and transportation systems — and public works projects are seemingly ongoing — arranging coverage for such tightly packed infrastructure is a hunt for capacity, Puckett said.
“You only have so many carriers that are willing to insure large mega-projects,” she pointed out, and putting together sufficient limits can be difficult if several projects need limited insurance capacity.
Getting Adequate Coverage
As some insurers have pulled back, brokers have asked others to take larger shares of placements on infrastructure projects, according to Johnston. “Say they would generally take 10% to 20% of a quota-share arrangement before, we may be asking them now to take 20% to 30%. We’re asking for more capacity from more players,” which usually means increased coverage costs, he added.
Finding adequate liability coverage for infrastructure projects has been a particular problem, per Fucentese. “That has probably been the biggest pain in the market,” he said, as U.S. insurers shy from writing the coverage in a class of business known for attracting litigation that sometimes results in huge awards.
The cost of construction has risen dramatically in recent years; and with continued inflation, a tight labor market and uncertainty around tariffs imposed by the Trump administration, costs have become a big concern for public entities, according to Kevin McDowell, vice president at Arch Insurance.
“Fitting those needs into established budgets” can be difficult for public entities, McDowell said.
“And, in some cases, we’ve seen projects taken off the boards completely due, in part, because of spending freezes recently proposed by Washington … Market dynamics driving increases in costs of construction will be a challenge for public owners.”
Where Insureds Are Looking for Capacity
It’s not all doom and gloom, Johnston contended. Tough times in insurance markets tend to create opportunities for insurers that are willing to commit capacity, he said.
“Markets tend to step up. As the public entity sector is dealing with some of this heartburn right now, we’re all working to generate more capacity that can support this space … We’d love to have more competition to ultimately deliver a better product to the client.”
Fucentese said the excess and surplus lines market generally offers capacity for infrastructure risks when admitted insurers pull back. The coverage might not be as broad, and non-admitted insurers should be carefully evaluated, he noted.
“You have to be very careful about how the policy is built and what type of exclusions you have … Coverage might be cheaper, but it might not provide all the coverage you need.”
While the traditional market grapples with these challenges, insurers that offer surety bonds guaranteeing jobs are done according to specifications and everyone involved is paid are finding plenty of opportunities as infrastructure spending booms.
The rise of mega-projects — those in the multi-billion range — has spiked demand for surety bonds that are required for construction to go forward, sources confirmed. And those huge projects can require multiple surety underwriters.
“The jobs are getting much bigger,” said Niladri Sannigrahi, vice president of client services, surety distribution and partnership at Liberty Mutual. He explained multi-billion-dollar data centers, battery storage facilities and other massive construction projects are too large for a single surety provider. “No surety is going to take that risk alone, so we’ll have multiple sureties on there.”
Because surety bonds are written to protect against contractor default, the underwriting process begins with a deep dive into the contractor’s background and financials.
Kevin McDowell, vice president, Arch Insurance
“Once we have underwritten the account, then they bid the jobs and we look into the individual projects,” Sannigrahi explained.
There is plenty of capacity available in the surety market, which has been very profitable for nearly two decades, according to Stephen Ruschak, executive vice president at Arch Insurance. Since some very large defaults in the early 2000s, “there’s been a really good run of results,” he said.
That does not mean surety is a risk-free business. If bond issuers have to step in and complete a project because of a contractor default, they face the same cost escalation issues as traditional insurers on the risk, Ruschak said. “And that’s probably been the biggest driver of the severity of surety losses in the last couple of years,” he added. &
