By Stephanie Cliff

It’s hard for large frame builders to be unhappy with the growing economy that pushed unemployment down, wage growth up and private residential construction spending up by 9.5% during 2018.

But that demand and business growth are being offset by other pressures: Catastrophic fires along with water damage during an era of epic flooding are hammering construction with big insurance claims. Over the last 24 months they’ve steadily mounted, with losses in some instances surpassing $1 billion and many insurers leaving the market as a result.

It’s put large frame builders on the spot. “Large frame,” refers to the mainly wood structures that are typical of many multi-unit apartment developments that are underway. The complexes can be valued at up to $70 million or more. Wood structures, even if the materials are fire-treated, are still wood, and susceptible, whether because they are in wildfires’ paths, accidentally set ablaze by an errant welder’s torch spark or an easy target for arson.

It’s taking creativity and solid relationships to get the builder’s risk policies written with somewhat competitive terms. Very few standard insurers will consider large frame builder’s risk at all, and even the wholesale markets are being cautious. Since few of even those carriers will cover the full policy limit, the best strategy is to “layer” percentages of the limit among two or three carriers.

Builders will see the full effect of all this with their premiums. To protect themselves and keep the increases manageable, here are two important considerations that can help:

• Ensure project security. You will get the best rates on your insurance based on the level of security applied to your project. A construction security fence is standard, and you want to supplement it with cameras that are preferably monitored – not time lapse. A security guard on premises during the off-hours is also smart. With real-time monitoring, if a heat spot or a blaze or intruder is spotted, the security guard or someone in authority can be promptly notified. If your development catches fire at 2 a.m. and controls are not in place, your claim could be flat-out declined and/or a higher premium charged in the future.
• Don’t count on your general contractor’s builder’s risk quote. The contractor’s interests don’t always align with those of the owners and/or investors, so any insurance quote the contractor brings should be reviewed by a professional insurance broker. Concerns for owners are typically loss of income and other soft cost issues. If the project burns to the ground, you’re out a year of income with no tenants to collect from. That’s not the contractor’s concern, so it’s not something necessarily reflected in his quote.

Wood remains an economical material for large-scale complexes, which is a counter to the risk of fire and water damage in periods of high demand. Putting smart practices in place on safety and security (and having the right risk team, too) will help.

HUB International’s consultants are available to work with you on trends and developments that may impact your risk posture today and in the future.