- Chicago, IL
The builder's risk market continues to experience some of the same challenges it has over the last couple of years, along with emerging trends that are also impacting the space.
"Large, frame construction remains a difficult risk, with carriers exiting the market or reducing capacity — although we are seeing some stabilization," says Chelsea Bergen, area assistant vice president for Risk Placement Services (RPS)."Another tough area involves insuring structural renovations on existing buildings, particularly for projects that exceed $10 million."
Structural Renovations: Builder's Risk and Property Insurance
Bergen explains that it's tough to find a market to insure an existing building along with the portion undergoing structural renovations. Some buildings have landmark status while are simply old, so it becomes important to understand how the proposed renovations will impact the existing structure.
"If the values on the property favor the existing portion of the building over the renovations, most builder's risk carriers will insure the renovations and ask that the property market continue to cover the existing building, which is simple enough to do with properties in a real estate portfolio already listed and insured," Bergen notes.
"But if renovations exceed the value of an existing building, the builder's risk carrier may be more willing to write the existing property as the values are skewed toward the renovation portion of the building.
"However, the underwriting process is more involved, as it's critical to determine whether the renovations are simply cosmetic or structural. Structural renovations could potentially compromise the integrity of the building," she says. "Depending on the extent of the renovations and the type of renovations, the E&S [Excess & Surplus] market may need to cover the existing property until the renovations are completed."
Supply Chain Delays and Shortages Prompt Contractors to Plan Ahead
Contractors continue to request builder's risk policy period extensions due to supply chain delays and material shortages. However, many large contractors are increasingly ordering more materials well in advance of a project to mitigate potential delays.
"This trend means that more materials and supplies with higher values are being stored offsite for a longer period of time," Bergen says. While builder's risk extensions cover materials and supplies at a temporary off-site storage facility and for transit to and from the storage facility to the on-site property, a standard extension is not enough to insure higher values.
"On a $10 million builder's risk project, for example, you may have $500,000 of coverage for materials/supplies stored offsite," says Bergen. "With contractors increasing their orders to accommodate delays, you now have $2 million to $3 million worth of materials in storage that require coverage. This increase comes with additional underwriting scrutiny regarding location, COPE [Construction Occupancy Protection Exposure] and the maximum value of materials and supplies stored at a given time."
Trending: Modular Frame Construction
The construction industry is seeing increased popularity for modular frame construction — in which components of a structure are produced at an off-site factory and then assembled onsite as either a small single-story unit or stacked together to construct a large building.
The timeframe to construct modular frame buildings is much shorter, even for very large projects, resulting in labor efficiency and cost savings. In addition, projects that typically take 18 months to two years to build using standard construction methods take less than one year with modular construction, reducing the timeframe required for builder's risk insurance.
There are issues, however, with modular frame construction, including water damage losses. Water damage is, in fact, among the top causes of losses for all builder's risk projects. It accounts for about 30% of claims, with losses occurring from permanent or temporary pipes throughout the project.
Losses, however, are greatest during the final phase of the project, when water systems are turned on and tested. The extent of losses at this final stage will depend on the cost and type of finishing materials susceptible to water damage, such as carpeting, painted surfaces and wood.
"With modular construction, everything is outfitted at the factory and delivered to the site," explains Bergen. "Once the building is created, the mechanical, electrical and plumbing systems are hooked up and tested. There can be problems with improper pipefitting, flashing and other issues. At this point, you are in the final phase of the project and have significant property value at the site, so water damage losses can be sizeable, which we are now seeing."
The builder's risk insurance market for modular construction is still in its infancy, due to the relative newness of this building method. Currently, capacity is less and pricing is more expensive than with standard construction. Those in the market taking on the risk, Bergen says, will continue to evaluate data — including the frequency and severity of claims — as it becomes available.