Protecting your contractors
- Protecting construction contractor clients may require a skein of insurance plans.
- Construction sites are vulnerable to disaster, theft, vandalism, being over-budget and late to completion.
- Because accidents and injuries are common to construction sites, workers’ compensation insurance is critical.
Developing an insurance plan for a construction contractor client can be complicated. There are just so many risks, so many unknowns: You must consider the likelihood of workplace incidents such as employee injuries, theft and damage caused by natural disasters, none of which anyone can reliably predict.
Furthermore, clients will need different insurance coverage depending on how they source or ship materials. If you’re working with an independent contractor who’s starting a small business, that’s a different kettle of fish altogether.
Let’s go over some basics, some deal breakers, some exceptions and some items for further consideration.
Builder’s risk insurance
Every construction contractor client will want to invest in builder’s risk insurance, also known as course of construction insurance. This type of insurance plan covers damage to construction sites caused by natural disasters, extreme weather and fire, as well as theft and vandalism, all of which are major contributors to loss and waste.
Theft and vandalism
Per statista.com, there were 11,504 reported construction site burglaries in 2021. That may not seem like much in the grand scheme of things: According to the Associated General Contractors of America website, there are, as of the first quarter of 2023, 919,000 construction sites in the U.S. But what’s being stolen, primarily, are multi-thousand-dollar machines. So the cost of theft adds up quickly.
In an interview with International Construction, Ryan Shepherd, director general and general manager, crime analytics and supply chain solutions at Verisk—which runs the National Equipment Register (NER)—reported that machinery theft costs companies half a billion dollars—and that 80% of such thefts occur on construction sites.
The five pieces of machinery most frequently stolen are all common on construction sites:
- Skid steer loaders
- Backhoe loaders
- Mini excavators
Lumber, power tools and other implements and materials are at risk for theft as well. Copper—especially copper wire—is so prone to theft that the FBI has long since issued an official warning about it.
Disasters, extreme weather and fire
According to the National Fire Protection Association (NFPA), between 2016 and 2020 construction site fires averaged 4,300 a year, causing (on average) five civilian deaths, 62 civilian injuries, and $376 million in property damage.
The Insurance Information Institute found that there were, in 2022, a total of 119 natural catastrophes—defined as a natural event causing at least $25 million in insured property loss; ten deaths; injury to 50 people; 2,000 destruction claims.
And it isn’t just outright damage costing clients money. Per an article for Construction Executive, weather-related delays cost the construction industry $4 billion annually.
Changing climatic conditions and supply chain challenges make equipment transport riskier. Inland marine contractors’ equipment insurance covers equipment transported via, or warehoused on, land. Marine insurance covers products transported over water.
Workers’ compensation insurance
Sometimes it’s effective to state the obvious, and that may be the case here: Construction sites are dangerous. Repetition is sometimes called for, too. So: Construction sites are dangerous.
Very dangerous: According to the Bureau of Labor Statistics, there were 5,190 fatal work injuries in on construction sites in 2021, up 8 percent from the previous year. Yet there were 2.6 million injury/illness cases in 2021—down 1.8 percent from the year prior. That may indeed be because safety measures roundly improved; it may also be the case that contractors declined to report certain incidents. The data is ambiguous.
Either way, construction is hardly a low-risk profession in terms of personal injury—or death: The Occupational Safety and Health Administration (OSHA) puts particular stress on what it calls the Focus Four (also known as Fatal Four), the four leading causes of construction site deaths. These are:
- Caught-in or -between machinery
- Struck-by (machinery, materials, etc.)
Bearing the potential for bodily injury (and worse) in mind, you’ll absolutely need workers’ compensation insurance. Every state—except for Texas—requires private contractors to purchase workers’ comp insurance. There are four states that require contractors to purchase state-funded work comp insurance. These so-called “monopolistic states” are:
- North Dakota
Exactly how much workers compensation insurance contractors need, and how much it will cost them, depends on several factors. Just to begin with, the Perlo Construction blog enumerates these construction site safety measures, which redound upon insurance prices:
- Experience Modification Rate (EMR), often called “ex-mods,” which has to do with the claims contractors’ insurers have previously paid out.
- Days Away, Restricted, or Transferred (DART) refers to the number of recorded injuries incurred on-site that were serious enough to cause employees to take days away from work.
- Total Recordable Incident Rate (TRIR) is a measure that will likely be higher than the DART rate as it measures all incidents, even those that don’t result in significant injury, per OSHA guidelines.
Other things to discuss with clients
As an insurance provider you will, of course, focus primarily on what you can do for contractor clients coverage-wise.
But there are other risk management factors worth discussing. These can affect insurance rates, amounts and types of coverage available, and so on.
Supply chain issues
COVID-19 caused, and called attention to, massive supply chain disruptions. Recovery is ongoing; in some cases, momentum is tenuous.
Bear in mind that material scarcity is generally a logistical, rather than an existential, issue. That is, it isn’t necessarily the case that desired materials don’t exist; the issue is that they’re bottlenecked somewhere in the supply chain.
The result of material scarcity—including that which results from supply chain inefficiencies—is an increase in the price of goods. The construction industry—relying as it does on finite resources such as lumber and steel—is particularly vulnerable to price fluctuation. While some products have rebounded from previous years’ serious supply chain bottlenecking, as of July 1st 2023, cement and stucco prices rose due to shortages.
The Bureau of Labor Statistics (BLS) projects a four percent growth in construction jobs between 2022 and 2032—an average amount. A stable amount. Or is it? The BLS also expects construction industry wages to remain stable. But amid inflation, stable wages are essentially falling wages.
What use, after all, are high-quality materials, delivered on time, if you don’t have the manpower to make use of them? Clients will have to reconsider on-the-ground wage standards. Unhelpfully, the BLS statistics simply don’t tell the whole story there.
Changing market trends
Rising interest rates, inflation, and, in some places, government caps on construction mean that demand for residential building isn’t as high as it could be. And commercial construction revenue continues to be squeezed by the remote- and hybrid-work revolution: According to the McKinsey Global Institute, this trend, if it continues apace, could result in an industry loss of $800 billion worldwide.
And what are the implications of artificial intelligence on the construction industry? As in other industries, A.I. may be beneficial in terms of project management, design, and performance optimization. Actual construction tasks may eventually be offloaded onto robots.
This could replace workers, which means, to take the sunniest possible view, less injury liability. On the other hand, it means the displacement of at least some portion of the nearly eight million construction sector workers, leading to widespread economic disenfranchisement. And the construction sector itself isn’t recession proof, robots or no robots.
You can’t read a client’s tea leaves. While they don’t exactly expect you to, they do rely on your knowledge of risks in their workplace and trust you to ensure they’re covered adequately. If you’re looking for a better workers’ compensation market, check ours out.
Agents, take a look at our Workers’ Compensation Program to add to your portfolio of insurance solutions.