Emerging Liabilities in the Construction Industry

October 1, 2024

It’s well known that any construction project – residential or commercial – comes with risks. Although the construction industry has come to terms with building, employment, and economic risks, emerging risk profiles threaten to upend the sector, potentially leading to expensive litigation, financial damage, and reputational harm.

It is critical to understand both the expected risks and emerging liabilities. Let’s explore three of the most crucial risks facing construction businesses in 2024.

To learn more about insurance solutions for the construction industry, visit our construction insurance page.

Risks on the Horizon

The construction industry in the United States is facing a rapidly evolving landscape of emerging liabilities that demand greater attention from contractors, developers, and insurers alike. As projects grow more complex and economic conditions fluctuate, three key areas of concern have come to the forefront.

1. Insurance Purchase Limits Required by Contract

Construction contracts often specify minimum insurance purchase limits, but emerging trends show a shift in these requirements. As projects become larger or more complex, contractors may face:

• Increased Liability Exposure: Contracts now often demand higher limits, particularly for general liability and professional liability insurance. Failure to secure sufficient coverage can lead to significant out-of-pocket expenses if a claim arises.
• Potential Gaps in Coverage: Contractors may inadvertently assume higher risks without fully understanding the extent of coverage required. Inadequate policy limits can expose them to financial instability in the event of litigation or large claims.
• Impact on Small and Mid-sized Contractors: Higher insurance requirements can be a barrier to entry, limiting opportunities for smaller firms and potentially driving up construction costs.

2. Conversion/Building Repurposing Projects

With the growing trend of converting commercial spaces into residential units or repurposing industrial buildings, new liabilities have emerged:

• Zoning and Code Compliance: Converting buildings often requires significant changes to meet local zoning laws and building codes, increasing the likelihood of legal issues if requirements are not strictly followed.
• Structural Liability: Existing structures may not be suitable for their new purpose without extensive renovations, leading to structural risks that could result in costly repairs or even collapse.
• Environmental Concerns: Older buildings, especially industrial ones, may harbor hazardous materials like asbestos or lead, triggering environmental liability risks that were not a concern during construction.

3. Rising Costs Due to Inflation

Inflation has significantly increased the costs of materials, labor, and insurance premiums, contributing to a volatile landscape:

• Budget Overruns and Legal Disputes: Rising costs often lead to budget overruns, which can result in disputes between contractors, developers, and clients over who bears the responsibility for the additional expenses.
• Underinsurance Risks: As construction costs soar, projects might end up being underinsured if the initial policy limits do not account for inflation, leaving contractors exposed to financial shortfalls in case of claims.
• Workforce Shortages and Liability: The cost of labor has increased alongside inflation, leading to workforce shortages. Inexperienced or overworked crews can heighten the risk of construction defects or workplace accidents, exposing firms to liability claims.

By addressing these emerging liabilities, contractors can better navigate the evolving construction landscape and protect their businesses from unforeseen risks.

Finding Solutions to Protect Against Construction Risks

Most construction companies have some form of commercial liability insurance to protect against the financial and reputational threats inherent in building projects. In many areas, construction insurance is required before contracts are signed.

Unfortunately, existing policies may not have kept pace with the changing risk landscape.

Working with an experienced, specialized insurance team is crucial for navigating the complexities of construction liability insurance. A qualified team understands the unique risks associated with construction projects, from contract requirements to site-specific hazards, and can tailor coverage to meet the specific needs of each contractor or developer.

Experienced agents also help identify potential coverage gaps, ensuring that policy limits are sufficient to protect against claims related to accidents, defects, or delays. Additionally, they stay informed about evolving regulations and emerging risks, such as those related to building conversions or rising inflation costs, helping clients adjust their coverage as needed. As a risk management tool, this type of constant evaluation and adjustment can help identify weaknesses in current policies and allows business owners to adjust their coverages to meet changing needs.

By partnering with an expert insurance agency, construction firms can safeguard their financial stability, reduce exposure to costly legal disputes, and ensure compliance with contractual obligations. This professional guidance is vital in securing comprehensive protection, allowing businesses to focus on project completion without being blindsided by unforeseen liabilities. ◼