Report Examines Potential Risks for General Contractors

A new report from an insurer with a high concentration of general contractors in its commercial lines business recognizes the high-risk nature of the construction industry and offers insights that contractors and their risk advisors can use to help mitigate risk and limit financial loss.

The 2023 Selective Insurance General Construction Risk Report outlines the changing construction risk landscape — from natural catastrophes to labor shortages to supply chain issues and technological advancements — and provides recommendations to aid general contractors in minimizing those risks.

Contractors represent almost half of Selective’s 2022 commercial lines customers, and the report compiles information from internal claims and underwriting, plus external data and input from Selective’s regional staff and independent agency partners. Areas of focus in the report include the rising cost of labor and materials, worker safety, building industry trends, technology impacts, and more.

Rising Costs

Inflation reached a record high of 9.1% in June 2022, and price increases for certain commodities soared into double and even triple digits. The producer price index of net inputs to construction industries rose to a yearly high in May 2022, according to the report.

Inflation decreased in the year’s second half, dropping to 6.5% by December. Consequently, lumber, steel and aluminum all saw price decreases from the year’s highs. Industry economists expect construction material prices to stabilize as 2023 progresses, the report says, although the cost of some construction staples, like cement products and diesel fuel, may be volatile. Overall, price growth for building materials slowed by 60% over the year, according to the National Association of Home Builders.

Selective notes that residential construction continues to grow in every region across the country. The South leads home starts by a wide margin, accounting for 52% of new housing construction. The West follows with 21%, the Northeast accounts for 15%, and the Midwest 12%.

Material Impacts

Higher material prices contributed to coverage limit growth in Selective’s builders risk policies, which protect against damage or loss to buildings during construction or renovation, the company says. The number of builders risk policies Selective issued with coverage limits of $2.5 million and over jumped 23% in 2022. Selective’s data also shows a notable uptick in jobsite incidents tied to fires from hot work, such as welding and brazing, and spontaneous combustion of oily rags and sawdust after disposal in plastic bags or trash cans.

General contractors also face property loss risks from natural catastrophes, theft, explosions, and building system failures in foundations, scaffolding and fencing. Unstable supply chains led many contractors to stockpile materials when they became available, leaving them vulnerable to material losses from theft, fire or flood, according to Selective’s report.

Worker Safety

The labor crunch has led to more inexperienced workers on job sites and higher workers’ compensation claim frequency rates. Workers under age 34 account for a larger share of claims than any other age group, according to Selective’s 2022 data. The report recommends emphasizing training and safety procedures for new and less experienced workers.

About one in seven workers’ comp claims Selective received over the last three years were for injuries related to ladder safety and injuries from falling objects. Safety management training with those risk factors in mind is recommended.

Injuries roughly track the seasonality of housing starts, according to the report. So, general contractors may have opportunities “to offer safety training to employees during slow months, which typically vary by region,” the report states.

Building Trends

The evolution of building materials means there will be a new roster of regulations and rules to protect workers and property, according to the Selective report. It will fall to the general contractors to train employees and provide property safety protection.

When using new building techniques, such as 3D printing or solar roof tiles, contractors “should work with fire code enforcement officials and fire protection engineers to use the Alternative Materials & Methods provision in many building codes,” the report notes.

Solar installation is a growing area of risk. Solar tiles installation takes longer than traditional roofing, so workers spend more time at heights. To mitigate the increased risk of falls, Selective recommends that contractors train employees, maintain responsible and conscientious job sites, and monitor the use of fall protection equipment.

The increasing prevalence of multi-family construction, such as condominiums, apartments and townhouses, could lead to more construction defect claims from larger projects, according to the report. From 2020 to 2022, Selective saw three times more completed operations claims from residential general contractors than non-residential general contractors. Inexperienced project managers and subcontractors, supply chain issues and labor shortages can all contribute to construction defect risks. And, in larger projects, defects may be repeated over multiple units. General contractors can face these claims long after project completion as the defects are discovered and reported.

Wood-framed condominiums and apartments are tied to higher fire risk, according to Selective, which notes that general contractors can mitigate risks by working with fire departments to preplan for the site, turning on hydrants, timing the activation of sprinkler systems, managing hot work and controlling project housekeeping.

Safety on the Road

General contractor commercial automobile claims exceed general liability claims by three to five times, with the most severe claims related to job site travel, especially in heavy-duty vehicles, and improper vehicle use, according to the report. General contractors are frequently found liable in business automobile accident-related tort claims. Along with driver training and vehicle maintenance, the report suggests general contractors can mitigate accidents and exposure with in-vehicle technologies like telematics, dashcams and driver-assist features.

Impacts of Technology

Technology plays an important role in driving construction industry safety. Technologies such as wearables, robots, remote monitoring of job sites for fire and flood dangers, and virtual training are helping to keep workers safe and job sites protected, the report says.

Forecasts predict that as the industry continues to boom and evolve, risks will grow in frequency and scope. General contractors must look at every facet of a project to ensure they have the right coverage for workers, materials structures and vehicles, Selective advises.

Download the 2023 Selective Insurance General Construction Risk Report.