The Expert Podcast

If you're a builder or contractor, it's not just your client that has to deal with supply chain issues and higher prices. Even though you may pass it along as a cost-plus or margin on your contract, you probably have higher costs as well, or will have very soon. This is a great article from the insurance industry, where we have some involvement. We own a commercial insurance agency, and construction projects are having issues with coverage. Supply chain challenges and inflationary pressures have left contractors and developers with soaring insurance costs amid a scramble to extend coverage for delayed projects.

Here's what happens: you start a development project and get a policy to cover that project—builders risk, general liability, E&O, or whatever it may be. These are based on the contract amount of that particular development. As the project proceeds, you may find that there are increased costs. There might be delays because you can’t get labor, permits may be taking longer, or materials may not be available. Now, your policy may have an expiration date, and the dollar amount may exceed the policy, making it no longer fit the footprint of the project. You’ll need to go back to your insurer, and you might think it’s just a small thing to get an endorsement or extension of cover. However, you may find that the insurance company behind it has other plans.

If you bought a policy a year ago and you’re now facing delays, you’ll have to extend that policy, which increases the cost. Some carriers are not willing to extend past a certain date or dollar amount, which can put you in a bind if you're in the middle of a project and your insurer won’t extend it. You may have to write a new policy with a different carrier, which means they'll re-rate and underwrite the entire policy. Don’t blame your insurance company—they have to get reinsurance from another carrier, and they’re facing difficulties acquiring that reinsurance. The reinsurance companies are aware of the issues in the marketplace too—they know about the supply chain, labor issues, and lumber price hikes. If the project goes beyond a certain date or dollar amount, it can trigger a re-rate for the entire project.

Typically, policies are underwritten for 12, 18, or 24 months, and if it goes beyond that, allocating more to that risk may put the policy in a different category, which could lead to higher costs. You might even be priced out of it. You may not be able to pass along the increased insurance costs to your customer, since your contract likely covers materials increases and delays but doesn’t include additional insurance costs. The worst-case scenario is not realizing this at all. If you don’t recognize that your policy has a limit and you go past the date specified for completion, you could be left uninsured without even knowing it.

We’ve had clients whose policies only insured up to a certain dollar amount—let's say a $2 million project. If the project now exceeds that amount due to increased materials costs or delays, it could become a $2.7 million project. Even if the client accepts those price increases and absorbs some of it internally, or if the client pays for some of it, you could be at risk. If your policy only covers $2 million and your project is now $2.7 million, you may find that you’re not covered for the extra $700,000. Worse, if it goes over that amount, it could trigger that the policy is no longer effective. This is because your representations on the dollar amount were lower than the actual cost, and insurance companies rate a project based on the total dollar amount. A $2.7 million project may go beyond the threshold where additional underwriting is required, and breaching that threshold could render your policy void.

Check with your carrier as you progress with your project. If you need an extension of time or a re-rating of your contract with your client, make sure you also go back to your insurer or broker to ensure no changes need to be made to your underlying policy. Additionally, if you're making changes to the project itself to reduce costs—such as switching from a steel beam to a timber beam—make sure your insurer covers that. If you originally had coverage for the steel beam, switching to timber might not be covered. Always check with your insurer anytime there’s a major change to your construction project to ensure you still have coverage for liability or damages down the road.

Oh yeah, one more thing—don’t forget about workman’s comp. Your work comp policy may have triggers that can be breached with more time, more complexity, or a higher contract price.