May 1, 2023 Wood Frame Construction: Insurance Considerations

This issue will tackle 4 key aspects of the wood frame market, considering wood frame insurance remains very topical.

Introduction

Wood Frame insurance remains a hot topic as this method of construction has become a popular choice for many contractors, driven by the relatively lower cost of supplies when compared to non-combustible construction methods. Unfortunately, what many construction stakeholders fail to realize at onset, is the higher risk wood frame construction presents to the insurance markets, and, in turn, the substantial impact on project insurance costs. As always, it is important for contractors to engage with insurance advisors early in the project life cycle to fully understand and account for the ever-changing wood frame insurance market. In this issue, we will tackle 4 key aspects of the Wood Frame market:

1. Market Capacity
2. Underwriting Assessment Factors
3. Impact of Inflation
4. Mass Timber

Market Capacity

Wood Frame capacity was an issue long before the insurance market hardened in late 2019 which only drove a tighter and more restrictive market – especially on a first party builders’ risk basis. In subsequent years, markets have re- aligned their books and we have seen an increase in the availability of market capacity – with several key markets returning to the wood frame space in both London and North America. Furthermore, there are also new entrants seeking to underwrite wood frame business, which has created a competitive yet cautious underwriting environment.

As this form of construction gains popularity, a growing number of specialized wholesalers and MGAs have entered the market in order to fill demand. What this has created is a sophisticated insurance market for wood frame projects, with abundant technical expertise. In this environment, it has become increasingly important to partner with the right MGA or wholesaler, depending on a given project’s specific characteristics. An insurance advisor who has a deep understanding of the entire landscape of the market can be very beneficial to clients as market dynamics can shift fast.

Underwriting Assessment Factors

A key development in the wood frame insurance market has been deeper focus on technical underwriting. Underwriters are specifically concerned about risk mitigation measures to avoid Water Damage, Theft, and early detection of Fires. The level of mitigation will drive the broadness of coverage, level of deductible and credit to rates. Key carriers are even requiring specific AI-based security tools be utilized, along with an increased focus on what water mitigation efforts contractors are implementing. These systems are costly and require budget consideration as depending on the location of the project it is possible that coverage cannot be secured without these systems. These range from understanding the human element of potential water damage losses, or the installation of Internet of Things (IoT) devices that monitor fire, water and other environmental metrics – in addition these devices can control water flow with IoT triggered automatic shut-off valves (for instance, after the fire is extinguished).Through these measures we can see relaxed pricing, flexible coverage terms and lower deductibles aligned with proper risk mitigation.

Impact of Inflation

Inflation continues to wreak havoc for contractors and insurers, as rapidly rising labor and material costs can leave Insureds well short of being made whole in a loss scenario. Most policies contain Escalation clauses which have historically addressed the issues related to inflation. That said, most Escalation Clauses on Builders’ Risk policies are capped at 110% of the original value of a project, and price inflation is now often exceeding that threshold throughout the duration of a project– there is a growing concern related to insurance in these inflationary times. This issue also arises when projects are delayed, and policies require extensions. Often, insurers have maxed out their capacity at the end of a project lifecycle and are unwilling to provide an extension which incorporates the increase in values (sometimes as high as 20% from original value) through the duration of the project. It has become increasingly important for insurance advisors to be kept up to date by project teams with regards to changes in values, to stay nimble in their extension approach as a project approaches the initial completion date.

Mass Timber

An exciting development, from both a sustainability and quality perspective, is the recent shift towards utilizing mass timber for construction. Using timber is regarded as the most effective way of accelerating decarbonization. The carbon footprint of timber is much lower when compared to more traditional materials such as concrete and steel. Furthermore, timber stores carbon – making it a no brainer for an industry that is attempting to accelerate its transition towards more sustainable practices.

From an insurance perspective, there is a level of apprehensiveness to gain an understanding on what to expect from this modern method of construction. On one hand, in theory, timber will burn slower in a fire loss scenario and allow for a fire to be contained to specific sections should it occur. On the other hand, insurers are quick to point to the lack of loss data as to replacement of a burnt timber section of a building, and whether those costs would negate the benefits of containing a potential fire. For an industry that relies on past loss data to predict future claim payments, insurers are keen to closely monitor mass timber developments to create deeper expertise around how to rate the risk appropriately.

Conclusion

With growing demand wood frame and mass timber construction is not going away and is driving a need to realign and update risk strategies specific to these construction materials. Construction stakeholders must improve their upfront approach to the insurance market as it is important to have a deep understanding of risk controls and loss data related to these construction materials and, perhaps most importantly, a strong advisor that has intimate knowledge of not only the risk controls that mitigate fire and water risks, but also where the best underwriting capacity resides. There must be a clear story as to why the project has low risk of claims, and it must be conveyed to the appropriate risk finance capacity that understand the wood frame/mass timber sectors and the best ways to mitigate risks. This go-to-market strategy will ensure the ability to obtain best market terms and the most comprehensive coverage for the built asset.

About the Authors:
Brendan Sullivan is SVP, Construction and Infrastructure Group, NFP.
Hamza Jamal is VP, Construction and Infrastructure Group, NFP.

www.nfp.com

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