While construction delays are common in most situations, COVID-19 is creating additional complications for building contractors.
More and more contractors are being forced to suspend operations when crew members are diagnosed with COVID-19. But when they do, they are discovering that their builder's risk coverage doesn't provide the number of extensions they may need to finish the job, according to the 2021 U.S. Property Market Outlook.
The builder's risk market is especially challenging for frame construction and historical renovation projects, and some insurers have been reluctant to insure properties being rebuilt after they were destroyed in last summer's riots, labeling cities where the civil unrest occurred as potential "hot spots," the report said.
"There are always delays, but the delays are longer because of COVID. Sometimes multiple extensions are required," said Chelsea Bergen, Area Assistant Vice President.
"We have a current project where if any of the workers on a site is diagnosed with COVID-19, the whole construction site is shut down for three days, no matter what," she said. "That's an unforeseen delay. Even when they ask for an extension, it's hard to know how long they will need it."
Because most admitted insurers are unwilling to provide more than one extension on each builder's risk contract, many of these buyers—even the "clean risks" that historically found coverage easily in the admitted market—are now looking to the E&S market for coverage, often for the first time.
As a result, E&S underwriters are being overwhelmed by the volume of builder's risk business pouring into the non-admitted market, according to Bergen.
"Everyone is inundated with submissions," she said. "Underwriters are doing triage to determine which risks they want to consider."
To ensure their clients are among those considered by E&S underwriters, retail brokers need to partner with a wholesaler that has longstanding relationships with non-admitted carriers, Bergen advised.
They also should prepare their clients for the premium they will have to pay in the E&S market, she warned.
"Maybe we have an agent who comes to us and says they've got a great insured without losses that is getting a 20% rate increase from their admitted carrier," Bergen described. "But that 20% increase is lower than what they'd pay an E&S carrier."
There are a limited number of carriers providing midterm builder's risk coverage, and most are "very, very expensive," she explained.
Bergen also recommends that brokers negotiate longer construction terms with carriers on their initial builder's risk policies, as long as COVID-19 is still a public health concern.
"It's better to overestimate than underestimate the construction time line and have a fixed cost than try to extend on the back end," she said.
Experience and relationships matter in today's market, maybe now more than ever.
Independent agents and brokers should choose a wholesale broker with a solid track record and longtime relationships with underwriters. Seasoned wholesale brokers who have experienced the market's historical ups and downs know how to negotiate and structure placements to make them more affordable.