In a Rising Tide of Construction Risk, Captives May Be the Risk Transfer Solution the Sector Needs

A CorVel claims executive points to the allure that captives might hold for those that seek to manage a rising tide of construction liability risks.
By: | January 12, 2022

Very few industry sectors seem to be immune to labor shortages, materials pricing hikes and a litigation environment that can spur big losses and erode profit margins.

Construction, always a complex risk to underwrite, has these issues and more as so many have pointed out recently. 

Now and going forward, owners and contractors on construction projects are going to need expert claims handling, acute underwriting, and creative approaches to risk transfer if they hope to not only stay in business, but thrive in a very competitive field. 

As liability carriers retrench, pulling back capacity and raising premium rates in the face of frightening jury verdicts, the use of captives to manage construction liability risk is an option that is gaining favor. 

Ed Burtnette, a San Diego-based national vice president of liability services with CorVel Corp., recently spoke to Risk & Insurance® about the factors that are adding so much pressure to the construction liability equation, and the appeal of captives as a risk transfer solution that may be sorely needed. 

Liability Multipliers 

To begin with, Burtnette pointed out the many ways that labor shortages are leading to increased construction liability.

He said published reports indicate 81% of construction firms are struggling to find and retain talent. 

Ed Burtnette, vice president of liability services, CorVel Corp.

On the job site, a dearth of experienced subcontractors has resulted in an increase in construction defects and construction related injuries, Burtnette said. 

“With the compromised available work force, there’s not enough guidance for them in the risk areas. This leads to higher exposure cases.  With respect to construction defects, we see incompatible materials used throughout the building, we see defective materials used throughout a given project, and we see subcontractors inability to identify the issues.  With respect to safety injuries from a fall from heights, breaking through building roofs, or objects collapsing are a regular occurrence,” Burtnette said. 

“Injuries arising out of improper use of equipment, forklift accidents, ambulatory losses, things of that nature are on the rise.  The inexperience of workers is creating some real liability exposure going forward,” he said. 

Burtnette reported that according to data he is seeing, in just one area of reporting, fatalities at construction sites are up more than 5% over 2020.  

A less obvious place where a lacking or inexperienced workforce is leading to greater liability is in the area of manufactured products that are used in construction; things such as circular saws, drywall, piping, earth-moving equipment and demolition tools.  

Manufacturers struggling to find skilled workers are experiencing a lack of quality control, Burtnette said. 

The result is that defective products are making their way into the construction supply chain. Think of  flawed  pipe or wiring, installed throughout a project, creating  issues that might not come to light until after building is completed and occupied.    

“Once the material gets put into a building, then water intrusion and property damage happens. So we’re seeing more of that now,” Burtnette said. 

Burtnette began his career in insurance claims decades ago, and remembers a previous cycle of construction defect claims. 

“In the late ’80s, early ’90s, with condominiums being put together so quickly, people weren’t water testing, and conducting other types of quality testing that they should have. So that’s what’s coming up again, more defective materials are winding up in the market,” Burtnette said. 

Malfunctioning tools due to manufacturing defects are combining with a lack of labor experience to jack up injury rates. 

“That’s opening up some doors for some injury claims as a result of the manufacturing defect in the equipment,” Burtnette said. 

The supply chain is another area that is creating exposures for construction companies. 

“There’s a heavy reliance on the global supply chain,” Burtnette said. 

“Ongoing supply chain disruptions are causing increased costs and delays in completion,” Burtnette said.  

“That’s impacting the lenders which are advancing credit on these projects,” he said. 

More delays can translate to legal action, thus yet more liability loss exposure. 

The TPA’s Role in Alternate Risk Transfer 

An increase in liability claims is one area where contractors increasingly need assistance from third party administrators. Gaps and exclusions in construction coverage is yet another. 

Pollution exclusions and gaps in fire coverage are two of the most painful gaps for contractors when they are overlooked, Burtnette said.  

As with claims handling, contractors could choose to review coverage gaps themselves, but many of them rely on their brokers and third party administrators to handle those areas of the risk transfer equation. 

Burtnette said a TPA with expertise in multiple lines of business can be a very useful partner for a construction company or a group of contractors that is investigating creating a captive or a risk retention group.  

TPAs can also serve a crucial function in making sure a general contractor is a named insured on the insurance policies held by subcontractors. Holding a certificate is one thing. Making sure the GC is a named insured on that particular project is another. 

“ We educate our clients to make sure they go beyond  requesting a certificate of insurance. Our clients are encouraged to get an endorsement to the policy naming them as an additional insured for that specific construction project,” he said. 

Burtnette’s decades of experience have educated him on the wide range of skills and knowledge a risk transfer and claims handling partner needs to bring to bear in this area. 

“You have to have construction defect experience. You have to have products experience. You have to understand the concepts of risk transfer,” Burtnette said. 

It’s not just CorVel that is picking up on how captives and astute claims management partners are increasingly in demand in the construction sector. He said many of CorVel’s competitors are seeing the same thing. 

“What we’ve been seeing is that there’s a drastic and sharp rise in the need for captives in the market,” Burtnette said. 

According to information provided by the Vermont Department of Banking, Insurance, Securities and Health Care Administration, construction and manufacturing topped of the list with the most new captive formations in that domicile with seven apiece in 2020. 

Burtnette sees CorVel’s already established experience and expertise coming into play here.  

“We have the knowledge,” he said. 

“We’ll put the appropriate staff together. We can dedicate teams to construction defects, record reviews, etc.,” he said. 

When damages do come in, and inevitably, attorneys get involved, CorVel’s claims management experts monitor the entire legal process, providing technical support until the case is resolved. 

Construction-related businesses (A group of drywall manufacturers is one example that Burtnette pointed to) that seek to build group captives, or risk retention groups are going to need help with the monitoring of self-insured retentions, the aforementioned due diligence to make sure sub-contractors carry the right coverage, reviewing defense and indemnity obligations and making sure a notice of loss is quickly and clearly communicated to all stakeholders, and a host of other services. 

Burtnette said he doesn’t expect the factors  leading to increased liability exposures in construction to wane anytime soon. The ongoing trend  using captives to manage risk is the future. 

“I can’t get anybody to say this is something that they see turning around in a year or two years, three years. Until the supply chain and the talent issues are resolved, this could go on for a while,” Burtnette said. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected].

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