The Expert Podcast

So in case there's not already a number of reasons why construction and development cost will continue to go up, here's another one: it has to do with insurance. In the past, we've talked about building supplies and supply chain issues, lumber prices, and even labor prices, which are continuing to rise. In addition to all that, one of the major expenses for a general contractor or builder is insurance. There are various types of insurance — you have your general liability insurance, your E&O insurance, and most states require bonding for a general contractor.

But in addition to that, there's also builders risk insurance, which means while you're building a property or building a structure, you have insurance that covers your risk of that structure being damaged during the construction period and also covers the materials that are on site. Because the material costs are increasing and because there's inflation on these costs, insurance companies are starting to increase their premiums for all of these types of coverages. This is because your E&O insurance and your liability insurance would cover reconstruction of a property that was manufactured or constructed improperly in the past.

Even if it only cost you, let's say, your job cost was $180,000 three years ago, you might actually have to rebuild it for $300,000 today. The insurance companies know this, so they're baking this into their premiums. So, when you do your renewal of your builder’s policy, your bond for your general contractor license, your GL policy, or even things like workers' compensation, you're going to find that all your premiums will be increased. This is going to go into your fixed expenses, which you now have to distribute over your future jobs.

More importantly, when you have a specific policy on a certain job, such as a builder’s risk policy or materials policy — sometimes this will be under inland marine coverage — you will find that those premiums will be much, much higher as well. The reason why is because the replacement cost for losses is much higher due to labor, materials, and other expenses. In addition, they’re finding that liability expenses are also higher. If somebody gets hurt, if there’s some type of damage or litigation, all those costs are higher.

In some cases, we’re seeing builder clients being non-renewed — their existing carrier is no longer providing the kind of coverage that was carried by that builder in the past. One other area of coverage that some builders are looking to add is cyber liability insurance. You’re not really a tech company, but there are things about your company that are technology related. You have your building plans, your emails — all online. If a hacker gets in and locks down your system, you might have to pause your job for two to three weeks until it gets back up and running.

So be aware that you might want to start getting quotes on your different coverages for your construction company a little bit earlier than normal because you might want to shop around to maybe find some lower premiums. Also, be aware that one way to try to cut premiums is to maybe go to a higher deductible and maybe even add an umbrella policy.

Check with your agents and your broker to find out what would be the best coverage for you. But if you’re a builder, you’re going to find there are a lot of new challenging factors in your insurance markets that will either restrict coverage, have higher costs, or maybe even more exclusions and exceptions to your current policy. Let us know what you think in the comments.