The U.S. construction industry consists of more than 650,000 employers and more than 6 million employees—and it generates nearly $1 trillion worth of structures each year, according to the Associated General Contractors of America.

In recent years, the strength of the construction industry has held steady and healthy: ConstructConnect, a provider of construction information and technology solutions in North America, recently forecasted that total 2017 construction starts will mark a 7.9% year-over-year increase.

In both the residential and commercial space, “construction is still booming,” says Jeff Benson, vice president, builders risk at Victor O. Schinnerer & Company. And beyond just new construction projects, “there’s a lot of remodeling going on, too—in my experience, to have both of those sectors doing well at the same time is pretty impressive.”

“The underlying construction market really remains very strong,” agrees Joe Vierling, senior vice president, XL Catlin North American Construction Property. “We’ve seen a lot of submission activity here in the Northeast for residential, as well as high-rise buildings in New York with some very large deals going up. The oil and gas market also seems to be recovering, so we’re seeing more projects along that line. And we’ve seen some infrastructure—I would expect to see a little bit more of that as we enter into 2018.”

Such thriving industry translates to big opportunities for builders as they head into the New Year. Here’s what they should expect as the builders risk insurance market reacts.

Pricing Trends

Benson believes price increases for builders risk will be “catastrophe-driven” in 2018. “There’ve been lots of storms and brush fires happening, so that is likely to impact rates,” he says. “In the wood frame market especially, we’re seeing the rates tighten.”

“Two areas are experiencing price increases,” agrees Alexander McGinley, vice president, marine, XL Catlin. “Cat-prone areas, which isn’t just limited to builders risk—that’s the entire market. And frame construction, because there have been several high-profile frame losses recently.”

“Hurricanes have really impacted the U.S. and the Caribbean this year—the industry is looking at about $100 billion in estimated losses,” Vierling adds. “So reinsurance costs will go up, and we expect to see corresponding increases in any type of program that might have some wind or earthquake exposure.”

But increases aren’t likely to be drastic—most carriers that fielded a lot of cat claims in the latter part of 2017 had underwritten correctly and secured enough reinsurance to respond sustainably, Benson says. “I’ve been doing this my whole career, and builders risk doesn’t change dramatically—it doesn’t go up or down 40% year over year,” he explains. “Increases will be smaller and incremental.”

Still, it’s a competitive market, which means you need to be wary of carriers that haven’t necessarily proven their longevity or financial stability. “As we see more and more companies enter into this line of business, the agent really needs to look at the policy they’re selling,” Benson cautions. “The policies are very different. Look at the coverage form—it might be very hollow. That never matters until you have a claim.”

Words of Wisdom

In addition to making sure coverage forms are adequate, share these three pieces of advice with your builders risk clients to help them take advantage of the lucrative construction market in 2018:

1) Cover every corner of your project. How do you help your builders risk clients determine what to insure a project for? “I keep it very simple—at a minimum, you should insure your project for the labor, materials, overhead and profit,” Benson says. “It gets more complex as you’re building skyscrapers and bridges, but that’s the formula for the typical small general contractor.”

Often, insureds forget to include profit in their calculations. “A lot of times, you’re buying the builders risk to satisfy the lending institution, and the lending institution doesn’t care about your profit,” Benson explains. “They’re worried about getting their own interests covered. As the builder, you’re responsible for making sure your interest is properly insured.”

2) Secure a good contract. McGinley recommends owners, contractors and architects follow a comprehensive contract template from an organization like the American Institute of Architects. “Make sure it’s spelled out exactly what the limit of the project is, the payment terms of the project, who’s responsible for doing what, and the timetable,” he suggests.

Because builders risk clients are often in a rush to get jobs approved and begin construction, they may overlook some of those details—which could result in confusion regarding whether the contractor, owner or designer is responsible if something goes wrong.

“The devil is really in the details. A little effort can go a long way when it comes to resolution in the event of stolen property, a project catching on fire or some other loss,” McGinley says. “If it isn’t insured or if it isn’t quite clear, it can be devastating.”

3) It could happen to you. Imagine a crew is weeks away from completing construction on a new custom home. When they arrive onsite one morning, they discover two inches of sewer water throughout the house. The city’s water authority determines the cause of the damage was a discharge of water from a blocked sewer line.

In this real-life claim scenario from a Schinnerer insured, a water restoration company had to be hired to clean up the damage, which included saturation of the newly installed carpet and partial damage to the Italian terrazzo flooring. The crew had to replace that flooring, and the construction workers and subcontractors had to work overtime to finish the project by deadline.

The cost to replace all the damaged materials? $5,000. The overtime wages for the crew? $13,000. “If you sit down with a small builder and talk about the World Trade Center, that doesn’t mean much to them,” Benson points out. “But if you give them examples of claims that happen to small builders every day, that’s something that resonates.”

Jacquelyn Connelly is IA senior editor.