Construction Market Hammered By Rising Fire, Water Damage Claims

Construction companies are stepping up risk management efforts and making greater use of technology in response to a growing number of fire and water damage claims during construction projects, according to industry sources.

At sites where buildings are under construction, catastrophic fires in major metropolitan areas and water damage claims have led to adverse loss experience and are “a key issue” affecting the market, rating agency A.M. Best Co. Inc. said in a report on May 21.

The impact has been felt acutely by insurers writing builder’s risk exposures and by construction underwriters in general, Best said.

Over the last 24 months, the construction property business has taken some big losses, said Gary Kaplan, Chicago-based president of North America construction for Axa XL, a division of Axa SA.

“There have been a couple of losses of over $1 billion … that have caught the attention of the entire world marketplace. A lot of insurers have exited the business,” he said.

After years of soft market conditions, the construction property market is starting to tighten, with increases in rates and deductibles, he said.

“Double-digit rate increases are the minimum and deductibles are getting bigger,” he said.

Water damage is one of the most frequent claims affecting the construction industry, experts say.

“We are seeing an uptick in frequency because the soft market has required low deductibles in a competitive market,” said Jason Behrer, New York-based vice president and North America underwriting manager of construction property at Starr Specialty Lines Insurance Agency LLC.

“Historically water damage deductibles haven’t been increasing with the price of materials. We’re starting to see the market hardening now,” he said.

“About one-third of our losses come from water damage (other than flooding), but fire continues to be the highest severity. It’s almost three times the average size claim from fire than from water, and fire losses are around one-twelfth of the number of claims so they’re a lot less frequent but more severe when they do occur,” Mr. Kaplan said.

Fire is one of the biggest risks facing the wood frame construction industry, said Michael Feigin, Arlington, Virginia-based executive vice president and chief construction officer for AvalonBay Communities Inc.

“So far this year there were 11 total loss fires in large wood frame construction projects in the U.S.,” he said.

An estimated 30% of construction site fires are started by third parties, either intentionally or unintentionally, for example “when someone breaks into a job site and starts a fire … either to make a statement … or just to stay warm,” Mr. Feigin said.

“The problem with a job site is if it’s not properly maintained there are a lot of materials other than wood that can start burning, like construction debris,” he said.

AvalonBay has an “extreme housekeeping” plan to limit flammable debris at its project sites, and it has also banned the use of open flame heaters, he said.

Most water damage claims arise from faulty workmanship, said Sedat Kunt, New York-based national construction property leader within Marsh LLC’s U.S. property practice.