Cracks in the Cover - Construction Insurance Insights

We need to be considerate of that, you know, catastrophic loss that could potentially happen. With modular construction, it's not just about a single site risk exposure. It's about a continuous chain of risks beginning at the manufacturer and ending at the completion of the installation at the sites. Hello everyone, welcome to the Q2 edition of our Construction Insurance Power Panel as we welcome back those ever-reliable experts, Colin White, Senior Client Advocate Construction at Willis and Chris McLean, National Leader Construction and Infrastructure at Aon. So, Gents, as we approach the 2026 cat loss season and with rebuild capacity potentially straining across Canada, how are you adjusting limits, deductibles, project timelines to reflect those constrained post-loss resources and surge pricing? Chris, let's get your thoughts. Well, it's a great question, Paul. So, we haven't had, you know, we haven't really had cat losses yet, but I think we anticipate that there probably will be some coming. It's important to note that reinsurance renewals, you know, are sort of coming up pretty soon and the reinsurers are all anticipating at the moment a fairly soft renewal. So, you know, that certainly means that we're not expecting any real changes to the market as far as it continue to be soft or suddenly hardening up. But if there is, you know, significant catastrophic events, you know, that will change. And to your question, you know, what do we need to do to ensure that we're kind of protecting ourselves against that? I think just really having an engaging client discussion and ensuring that we're being realistic about all the different exposures, the things that can happen. You know, I'm more concerned today about the different things like, you know, the cost of fuel and the knock-on effect that's having on commodities and labour and frankly access to labour. You're hearing stories about, you know, workers not being able to stay in country. So, that's having an effect. And then just thinking in terms of, you know, what your project means to other projects. So, if you're building a massive data centre, you're probably going to be taking up a lot of the mechanical and electrical capacity that's out there. So, you know, what if you're building other projects, what does that mean for those other projects? Or if you're an owner who's building a library at a university, what does that mean if you have a data centre that's nearby? So, all these things need to be considered. But certainly, there is in the back of our minds, we need to be considerate of that, you know, catastrophic loss that could potentially happen. That's something that's, you know, we'd be silly not to think is on the horizon at some point. It sounds like a fairly strategic approach is needed. Colin, do you have any strategies that you look at ahead of a cat season? Absolutely. And as Chris mentioned, those early conversations with clients and the stakeholders is key, particularly when it comes to establishing the appropriate policy limits for a builder's risk policy to not only contemplate the immediate project budget, but those potential cost escalations post loss that can be driven up by, you know, for surge pricing and constrained resources. So, part of that exercise and strategy we look at with our clients is, you know, do those values that have been declared contemplate contingencies. Sometimes there might be, you know, tendencies for project owners to try to remove contingencies from their project budget and, you know, therefore do not form part of the project limit. Our thoughts and our recommendations to our clients is that contingency should actually be included in the project budget and form part of the project limit as it creates a budget or a buffer, should I say, to account for any post loss cost escalations. In addition to working through the project budget and establishing the limit, we also work with our insurance carriers to negotiate enhancements in the policies, such as escalation clauses, which add additional, you know, costs or, you know, buffers in the event of project escalation, rebuild costs occur post loss. Let's move on a little bit and talk about the federal and provincial governments looking to accelerate their infrastructure spending across 2026. There's a big push, of course, at the moment. So, Colin, how are you managing aggregate exposure and capacity deployments across what is multiple large projects right now? Yeah, we're fortunate there is still ample construction capacity in the marketplace. So, as projects get bigger and we're seeing more frequent mega projects, there is a great appetite and capacity to account for that. But at the same time, it's still very important for us as brokers and insurance partners and our clients to, you know, manage the limits and deployment of capacity for projects. So, a big part of that is really working with our owners, our clients, to understand how projects are being executed and the values. So, for example, is a project going to be phased? And for each phase, what is the buildup of values? So, what that allows us to do is ensure that the limit structure is adequate, that insurers are not buying too, clients are not buying too much limit, but the limit they are purchasing, you know, does provide them with the necessary protection for how their project is being completed and executed. Yeah. And Chris, just give me your insights here. I mean, how do things sit? Because it's, of course, such a soft market right now. Yeah, no, and again, great, great perspective from Colin. I think we, you know, we probably have 20 plus insurers in Canada who are able to put up, you know, meaningful builder's risk capacity for projects. So, the market is soft to Colin's point. I think there's a couple of things that we're doing and I think, you know, others are doing as well is really, you know, building a fit for purpose program for certain things. So, whether it's data centers or infrastructure projects, I think there's an opportunity to ensure, you know, with the insurance, you know, best interests in mind, really ensuring that the terms and conditions are really strong. You know, Colin mentioned it on a previous answer, just future-proofing and ensuring that you're kind of guarding against downside risk. Like, this is the time to do that, especially on those large projects. But I think then when you move over to other just very large projects, not maybe the mega projects, it's an opportunity really to have a panel approach with insurers and really be fair and really, you know, manage their expectations. But, you know, also ensure that everyone's getting a good opportunity and good look because, you know, you want to ensure that we're partnering appropriately with, you know, clients, with insurance partners so that when things do turn, you know, we've been very kind of fair in thinking in terms of partnership. I think that's really critical. You know, you don't want to preclude certain markets and then need them down the road and not have that relationship. So, those are all things that we're kind of thinking of, but today is really soft and perhaps it'll change. So, we're just really trying to be mindful of that. Well, of course, we might be seeing accelerated infrastructure spending, but there is still plenty of contractor financial stress at the moment and that's seeping into surety concerns as well, Chris. So, how are you coordinating construction insurance placements with bonding requirements and credit risk visibility? I think it's really important to sort of uncouple what's happening in the surety marketplace versus what's happening in the insurance marketplace. I wouldn't suggest that the surety marketplace is hard, but I would say that it is a little more constrained and constrained because of, you know, very good reasons. As you mentioned, trade contractors are maybe a little more stressed. Certainly, we have seen some losses, not very many, but there have been some losses and, you know, the sureties aren't all, you know, running, you know, 100% no claim ratios or anything like that. So, there is a little bit of more rigor that's being kind of deployed with the underwriting and I think it goes to then the general contractors needing to really think about, do I have adequate capacity in my surety facility to bid these projects? Have I considered trade contractors and their capacity? Do I have, if I have a subcontractor default insurance program, you know, am I pre-qualifying the trade contractors that I need to in such a way that allows me to have flexibility so that I'm not having too much aggregation with certain trades and then potentially having, you know, downstream performance issues. So, I think those are all considerations, but also general contractors need to think about the counterparty risk of owners. Is the owner able to pay for the project? You know, especially if we're encountering, you know, these very, very large data center projects, you know, is there sufficient funding for those projects? That's something the general contractor really needs to ensure they understand that. And then I think consultants are often so overlooked in that counterparty risk perspective. And certainly, you know, owners are, you know, have traditionally carried that risk, but in design build scenarios, you have general contractors partnering and contracting with consultants. I think they need to be aware of, you know, their ability to perform as well. And so, these are all, you know, factors that need to be considered, but ultimately then become part of the consideration around the risk transfer of insurance program. Yeah. And Colin, working with stakeholders is really important here, isn't it? Absolutely. You know, completion risk, there's a lot of factors that build into that completion risk profile, but contractor, subcontractor, financial health, as well as the owner's financial wherewithal and balance sheet, as Chris touched on, all come into play. And it's not only a concern from a surety perspective, but also from a property casualty standpoint. So, working with the owners to understand the surety requirements that are being implemented for the project and understanding that betting process can be key and can be beneficial as part of our conversations on placing property and casualty project-specific coverages for a project. Insurers are worried that with the size of these projects and the resources being required and the size of the subcontractor packages, that there might not, that the trades might not be able to successfully execute or there might not be the resources to successfully execute. So, part of our process is with, you know, partnership with the contractor and the owners is to also use the surety and the process that's used to vet those contractors and those trades as a tool and as a strategy to provide certainty and comfort to our property markets that there are really strong partners and contractors that have been engaged for this, for a project. And because of that, they will have the financial ability and the resources to successfully execute a project. So, it's really working and leveraging the surety process in tandem with our marketing efforts on the property casualty to achieve successful insurance results for the clients. I want to go back to something we touched on at the top, if I may. Of course, we spoke about how the cat season perhaps this year is still to come, but there has been, of course, a lot of wildfire activity in recent years and modelling updates alongside that. So, Colin, how are insurers refining their appetite, their pricing, risk engineering requirements now for projects that perhaps were in previously low-risk regions? Yeah, the increase in wildfire risk has just really motivated insurers to continue to invest and develop out their modelling capabilities when it comes to wildfire. We've seen significant insurance events related to fires in Jasper, Fort McMurray and Interior BC over recent years. So, those models have become a very important underwriting tool for insurance carriers. And with that modelling process, it's really allowed underwriters to apply another level of scrutiny to the risk and understand it and ask more pointed and detailed questions when it comes to understanding that exposure. So, we're seeing insurers now, after they've modelled it, ask questions about how is the site being cleared of vegetation, of trees? Are there fire breaks? What type of other fire protection measures are being implemented to protect against the risk of wildfire? And there's also additional assessment of the ingress and egress to project sites, which can be affected by wildfires. So, we're seeing throughout the underwriting process that there is heightened scrutiny and questions being asked about this exposure. But fortunately, due to the current mark conditions, is that once clients are able to successfully answer those questions, that there is ample capacity and appetite from insurers to write projects, regardless of project type and regardless of wildfire exposures, that with successful risk management implemented to address these exposures, there is a lot of capacity available to underwrite these projects. And that's a great point, isn't it, Chris? There has been something of a double whammy, if you want, because we've seen these increased wildfires, but as Colin says, it's also been a soft market as well. Right. And I mean, great perspective from Colin. I think that certainly all of that activity over the past 10, 15 years has really led to just raising the underwriting bar. So, the underwriting bar, it's been increased. They're asking more questions. They want to understand all the things that Colin mentioned around ingress, egress, how are you managing health and safety on site, fire suppression, is there access to water, is the site being cleared? I think health and safety is probably where the biggest opportunity to focus on is because of the market being so soft. And that's probably where I think most general contractors, to be honest, are really focused at the moment. There's so much that goes into it. So, whether it's supply chain, depending on where the project is, there's still a significant amount of work that happens in the far north or in some of the very remote regions where, whether it's wildfire you're concerned about, or maybe you're worried about just an early spring season that then washes out your winter road. These are all things that need to be considered. So, while there is certainly enough capacity in most cases for most projects, there are other considerations that I think people are beginning to focus on more, or at least we're becoming a little more in tune to. But nonetheless, I think insurers are awake to the fact that, yes, there are concerns and they need to understand the risks, but their projects are being insured. It's not a challenge. It's not an issue. Let's, for a final question, if we can just steer in a little bit of a different direction, talk about modular construction. So, as that gains traction to address labour shortages, how are you adapting coverage around transit assembly risk and defect exposures, particularly in builders' risk placements? Chris, any thoughts on this? Yeah. So, it's really exciting. I mean, if you've ever visited a large hospital project, you've certainly seen the modular construction happening and you've seen things like entire bathrooms being constructed and put into buildings like Lego blocks. So, it's very timely. It's very efficient, but there are risks. So, I think the biggest change is that there needs to be more engagement with all stakeholders, with the general contractor, with trades to really understand who's doing what, how it's happening, what's the chain of custody for different things, who's holding design risk. Establishing all that will then allow the broker to provide some timely advice around professional liability insurance, whether or not you need a certain level of defects coverage under the builder's risk. And then, as you mentioned, transit's a factor or offsite storage, where is this fabrication happening? All that needs to be kind of thought about. But it certainly is. I mean, it's pretty inspiring seeing these projects get built that way, but it does require a little more thought around whether it's risk transfer or just how things are getting done and who's responsible. This is now a really integrated chain, isn't it, Colin? Absolutely. As modular construction continues to become a main way and manner to execute larger projects, and we're not just seeing it in hospitals or social housing, but in a lot of other project occupancies, these risks need to be reviewed in their entirety. So, with modular construction, it's not just about a single site risk exposure. It's about a continuous chain of risks beginning at the manufacturer and ending at the completion of the installation at the site. So, as Chris had already mentioned, it's about reviewing how those risks are being dealt with between stakeholders, and that's part of reviewing the contracts to understand who's at risk of loss, who's responsible to assume those risks and ensure those risks. So, as part of structuring insurance solutions for modular construction projects, a lot of early engagement with the owners and the contractors is key to really understand how those risks need to be insured and transferred to the insurance market. And when it comes to some of the specific risks that insurers are asking for, it's really about the defects, because with modular construction, it's just not about how the project is constructed and sold at site. It's about how it's manufactured at the initial facility. So, we're seeing a lot more questions and review of not just how are these modules being put together, but how are they being manufactured and inspected before they even leave the facility to be transported to the site. So, it's a lot more wholesome conversations about the risk and a lot more conversations about the various risk elements of the entire risk chain associated with modular construction. Insights and indeed another fantastic panel with this pair. Remember, they will be back in Q3. Until then, keep it right here on Insurance Business TV.