Masonry Magazine April 1987 Page. 35
THE CONSTRUCTION INSURANCE MARKET IN 1987
Will the market improve this year, and will pricing stabilize or continue to escalate? Here are some incisive forecasts by the author
by Harry F. Brooks, CPCU, CLU
Assistant Dean, Miami University
Oxford, Ohio
Some observers of the construction insurance market believe it will improve in 1987, citing the possibility that it finally has stabilized with a return, or at least an imminent return, of competition among insurers. This observer would give only a very qualified approval to that consensus. There may be some coverages and limits which are easier to obtain than previously, but these are not the mainstream insurance lines. Pricing is still on the upswing and will continue to escalate through most 1987 renewals. Underwriting will continue to be tortuous and penetrating as insurers carefully attempt to assess construction activities in order to pick only the better risks.
With respect to a return to insurer competitiveness, this may be based more on wishful thinking than on solid evidence. It is true that some insurers are indicating an interest in broader participation in the construction insurance market but, to date, actions do not support their announced intentions. More predictions later.
General Liability
The new CGL (Commercial General Liability) policy, on a claims-made basis, will begin to have considerable influence on the market in 1987. The claims-made feature provides that a contractor's current liability contract applies to claims made or reported during its policy period, as opposed to the application of the occurrence form in effect when the loss occurred. The claims-made form was thought to be the saving grace for liability insurers battered by "deep pocket," long-tail losses. There has been less than overwhelming enthusiasm for the claims-made form and more than moderate resistance to it, especially by risk managers.
As a result, some insurers have pursued the claims-made form less avidly than others. Occurrence forms are still being sought and are available for better risks. It is still an open proposition as to whether the claims-made form will sweep the market in the near future. Certainly, it will not happen in 1987. Should insurer results improve, with prospects of continued improvement, it is even less likely it will happen.
Obviously, certain risks have characteristics that make the occurrence form far more desirable. Unfortunately, some of these characteristics also bring about the dreaded "tail" losses which were instrumental in producing the claims-made form. However, risk managers have not necessarily embraced claims-made on the basis that it is inevitable. It seems as if risk managers, insurance buyers and others, have quite rightly assessed the new CGL on a claims-made basis as a complex document requiring more sophisticated analysis and use in particular exposure situations than the older CGL (Comprehensive General Liability) policy.
For smaller construction firms with less sophisticated risk management advice available to them, the new CGL's retroactive date, laser beam endorsement, and "tail" coverages are somewhat inhibiting. For any size construction organization, the use of the new CGL should be undertaken carefully. It can be troublesome.
As indicated above, difficult construction risks will continue to be hard to place in the liability insurance market. Contractors using toxic materials, having possible pollution exposures, engaged in design and build construction or construction management and similar risks will not find much joy in the 1987 construction insurance market. Availability of adequate limits for many contractors during 1987 and probably 1988 will continue to be restricted.
The most impacted area seems to be the middle layers of the basic or excess liability coverage limits, causing them to be the most difficult to fill. Liability self-retentions or large deductibles for the larger construction risks make for interesting discussions with underwriters, but they are not without their problems. Certain risks, usually the smaller to medium-sized construction firm, will not obtain lower and lower premiums as the firm's self-retention or deductible increases.
In some cases, underwriters have a predetermined amount of premium income they believe is desirable for the risk to develop and they will not venture below this figure, regardless of the contractor's willingness to retain more of the risk.
Moreover, as the contractor's retention increases, certain conditions may be imposed with respect to the retention. The insurer may want to participate in the conduct or direction of any defense of a lawsuit, even though it appears as if the lawsuit is easily one whose verdict will not exceed the retention. Presumably, the insurer fears that it just might penetrate into the coverage provided by the insurer. In some professional liability coverages, the insurer may require that when a lawsuit occurs which appears likely to exhaust the retention, the amount of the retention must be deposited immediately with the insurer for its use in mounting a defense against the lawsuit. Some of these provisions often can be softened by negotiation.
The umbrella market for contractors and for almost all insureds is restricted. Umbrella insurers have increased rates on what was previously grossly underpriced excess coverage. Limits are shadows of what previously was available and at costs which, in most cases, are prohibitive