Ongoing Product and Labor Shortages Affect Construction Insurance Policies

Untrained workers or lower-quality materials may impact construction businesses’ insurance policies.
By John Lack
September 20, 2022

With labor shortages and limited availability of construction materials due to ongoing supply chain disruptions, construction businesses are facing unexpected consequences from these ongoing challenges—one being the potential for increased insurance policy costs.

Hiring untrained workers or using lower-quality materials due to product shortages may lead to unintended risks that can impact construction businesses’ insurance policies far into the future. Here are how these two challenges can potentially impact commercial insurance premiums, and the steps companies can take to ensure their business is protected.

An ongoing shortage of skilled construction labor

The scarcity of skilled labor in the industry has forced construction businesses to rely on low-skilled laborers, who often lack the specialized training and experience to meet job demands. This hiring of low-skilled labor can have the unintended consequence of poor workmanship and lead to an increased likelihood of construction defects, which can impact construction business insurance premiums.

In some cases, construction businesses may be on the hook for damages arising from a construction defect under their commercial general liability insurance. Having an increased number of construction defect claims can lead to increased premiums and result in unexpected costs that could impact a construction business’s bottom line.

Training is a critical part of reducing the risk for these types of claims by ensuring low-skilled workers can use provided equipment safely and effectively. It also helps build a quality-focused culture, where all workers understand company leaders support their ability to complete jobs accurately and without defect. Pairing new employees to work alongside seasoned skilled workers can help demonstrate proper safety and hands-on skills.

Limited construction materials inventories and uncertain prices

Adding another layer of complexity to the industry is the limited availability and fluctuating cost of construction materials. These challenges have made it increasingly difficult for companies to value tools and materials accurately to identify replacement costs should a business or jobsite be impacted by an unforeseen accident or disaster.

The consequences of getting materials and structure valuations wrong can be severe. If the construction business’ replacement cost policy limit is less than the actual value of the materials or tools lost, the business would be responsible for the difference and could face increased premium costs when renewing the policy due to the unexpected increase in value of tools and materials.

Working with an independent insurance agent to regularly review policies and building or materials valuations can help construction businesses ensure they have the correct coverage amounts and enough capital set aside to cover any potential losses.

Beyond replacement costs for construction materials, with limited supplies, construction businesses may be forced to use lesser-quality materials, which, like using low-skilled labor, could result in an increase in construction defect claims and lead to higher policy costs in the future. One way to help mitigate this risk is by conducting routine on-site quality control inspections with necessary teams to catch misapplications and mistakes in the field before they become a more significant issue.

As supply and labor challenges continue to persist longer than expected and create an additional layer of complexity that extends beyond the jobsite, construction businesses can proactively take steps to protect their companies. Ensuring appropriate insurance coverages are in place, along with practices like proper employee training, can help mitigate potential risks and ensure construction businesses are able to run smoothly and effectively despite ongoing industry challenges.

Working with a trusted insurance partner with contractor-specific experience can help give construction businesses peace of mind that they have the proper coverage.

by John Lack
John Lack brings over 35 years of experience in the construction industry in both field and office positions to Acuity Insurance including carpentry, welding, project management, contract negotiation, and much more. His main focus at Acuity is to help his customers better understand insurance and offer products and services that meet their unique needs.

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