The construction industry has seen many changes in the past few years. Significant growth in commercial and residential construction projects was met head on by COVID-19 constraints. The next few years are likely to see a new set of challenges as COVID-19 issues subside, labor shortages persist, inflation reignites and interest rates increase. The trend toward work-from-home, brought upon the world by necessity, will also be tested and could have a significant impact on the demand for commercial real estate.

COVID-19 insurance claims were filed by many policyholders and were challenged by all insurers. In some cases, claims are not being paid even though coverage is clear; some policyholders have strong wording for coverage for losses due to “infectious disease” or losses due to a “declared public health emergency” or similar wording. But, two years after the start of COVID-19, many of these claims have unfortunately not been paid by insurers. Conversely, some policies contain unambiguous exclusions for infectious disease, but losses are still being pursued by overzealous policyholders. Other policies contain more ambiguous wording; many are “all-risk” policies that don’t include clear exclusions. The courts will continue to decide their resolution.

Construction claims too often result in disputes between insurers and policyholders. These include disputes over the wording and intent of policy terms, disputes concerning the length of the delay to the project and disputes concerning the quantum of the loss. These disputes can be costly, increase the angst of policyholders and, ultimately, result in higher premiums.

Supply chain issues continue to impact the construction industry. FM Global, in its 2021 FM Global Resilience Index, identified six main supply chain concerns1:

1. COVID-19
2. Cyber Risk
3. Port Backlogs
4. Truck Driver Shortage
5. Floods
6. Chip Shortage

It seems that COVID-19 issues are greatly improving. Cyber risks may have worsened. Most cyberattacks originate in Russia where Vladimir Putin increasingly shows perverse intent.2 Port backlogs seem to be improving.3 Truck driver shortages will likely continue for some time.4 The unprecedented flooding in Europe, attributable to low-pressure system “Bernd,” caused significant damage to the manufacturing industry in Germany, Austria, Italy, the Netherlands, Switzerland and the United Kingdom. The chip shortage is expected to abate as semiconductors added capacity.5

The impact of inflation will have a big impact on insurance premiums for the construction industry. Higher costs will be factored into higher estimates for repair costs. Ongoing labor shortages may even impact the assessment of the time to complete repairs, should a significant loss occur. Higher interest rates will help the insurers’ business model; the premiums that they receive can reap a higher return on their investments. The impact of an insurer’s equity investments may hurt this equation as the high returns of prior years is hardly being met in 2022.

Insurance premiums were up before the onset of COVID-19 as high construction activity put a strain on capacity. Any decline in commercial and residential construction may be offset by an increase in civil construction of roads and bridges as a result of the recently passed Infrastructure Investment and Jobs Act. Increasing loss history from wildfires, hurricanes, flooding, tornadoes and power outages, will impact pricing in 2022. The costs of insurance disputes will make its way to higher premiums.

The assessment of a maximum probable loss (MPL) for property damage repairs is up as contractors face rising prices and labor and supply shortages. However, any expected decline in profitability should reduce the MPL as the potential business interruption impact would be lower for builder’s risk insurance claims. Building owners and developers should consider a more detailed assessment of their own MPL, which could be reviewed with underwriters and potentially reduce premiums.