The Changing Dynamics of Construction Insurance
Tariffs and inflation have long posed challenges for the construction sector, but their influence on builder’s risk insurance has become increasingly significant. As material costs fluctuate and supply chain disruptions persist, both contractors and insurers are re-evaluating their strategies for risk mitigation, pricing, and project planning. The unpredictability surrounding tariffs complicates contractors’ ability to forecast expenses with certainty, a situation exacerbated by inflation that elevates costs for materials, labor, and logistics.
Anticipating Changes: A Crucial Skill
Brian Cooper, the US national construction practice leader at Gallagher, highlights the importance of anticipating changes for successful project execution. He explained to Insurance Business that negotiating price escalation clauses has become standard. These clauses adjust payments if material costs rise due to tariffs, inflation, or supply chain issues, thereby preventing contractors from bearing the full financial risk.
“Owners, who will benefit from the facility for decades, now share more of that risk, rather than placing it entirely on contractors. This practice is becoming more common in contract negotiations, ensuring that cost fluctuations driven by tariffs or other factors don’t solely burden builders,” Cooper noted.
Impacts on Insurers and Policy Adjustments
The financial strain of escalating costs doesn’t just affect contractors; it also impacts insurers who must decide how to underwrite policies in a volatile market. Builder’s risk insurance, covering structures under construction, must now account for the reality that replacement costs are dynamic. Simultaneously, construction projects are becoming larger, more complex, and longer in duration, reflecting a broader shift in the industry.
Years ago, a major construction project might have been covered by one or two insurers. However, today, a quota-share approach spreads risk across multiple insurers, increasing negotiation complexity and the potential for coverage gaps if policies aren’t carefully coordinated. This fragmentation necessitates securing favorable terms upfront to avoid scrambling to adjust coverage when costs escalate.
Valuation and Financial Uncertainty
Another concern is the valuation of builder’s risk policies. Inflation and tariffs can significantly affect the cost of completing a project, so insurers want to ensure that the valuation accurately reflects real-world replacement costs. The unpredictability of construction projects means that insurance carriers are scrutinizing projects more closely before providing coverage.
“There’s much more upfront negotiation and planning now,” Cooper remarked. “Project owners, developers, and insurers are considering environmental risks—such as windstorms, wildfires, and flooding—at the earliest stages. How can those risks be minimized? Should we build here at all? These discussions are happening earlier than ever before.”
For instance, many projects now include remote sensor-activated sprinkler systems designed to engage automatically in the event of fire or smoke. Incorporating these features during the design and planning phases significantly impacts budgeting but also enhances safety and insurability.
The Critical Role of Timing
Timing is another critical factor. Projects that once concluded in 24 months may now require an additional six months or more due to rising costs and unpredictable delays. The pandemic underscored this reality, and despite improvements in supply chain issues, some materials still have lead times longer than most project managers are comfortable with.
Contractors have adapted by securing materials earlier than before. “The standard procedure now is for contractors to negotiate with clients for immediate payment on materials with long lead times, so they aren’t at the mercy of suppliers,” Cooper explained. This strategy allows builders to maintain control over timelines and costs, albeit requiring a greater financial commitment at the project’s outset.
Besides early purchasing, supply bonds have emerged as a tool to manage risk in a volatile pricing environment. By securing a bonded obligation from suppliers, builders ensure materials arrive on schedule and at agreed-upon costs. Cooper observed this approach gaining traction as contractors seek ways to shield themselves from global supply chain volatility. “These bonds ensure that suppliers deliver materials on time and to spec, giving contractors more leverage if issues arise,” he said. “Suppliers tend to prioritize bonded obligations over unbonded ones, keeping projects on track.”
A Strategic Approach to Insurance
As financial pressures on construction mount, securing builder’s risk insurance is not just about obtaining coverage but obtaining the right coverage with suitable terms. Contractors and project owners must prepare for detailed discussions on mitigating rising costs, contingency plans, and whether their valuation estimates accurately reflect market conditions.
Cooper stressed that the era of treating builder’s risk insurance as a last-minute consideration is over. “The biggest trend is the increasing use of risk mitigation measures and early planning,” he stated. “Insurers want to see risk management strategies incorporated from the start rather than waiting until a project is fully designed before seeking insurance.”
The ripple effects of tariffs and inflation have reshaped the approach to insuring construction projects, necessitating a proactive, strategic approach to coverage. Insurers demand greater transparency, and contractors are responding by embedding risk mitigation strategies into initial planning phases. “Early discussions with insurers, site visits, and demonstrating how risks are being managed are key,” Cooper concluded. “This proactive approach is essential for all aspects of construction risk management, particularly for builder’s risk insurance.”
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