9/11 attacks hike insurance costs

BY WILLIAM ATKINSON SPECIAL TO CONTRACTOR IF YOU ARE having a difficult time getting property-and-casualty insurance coverage for projects and the availability of terrorism coverage seems to have dried up, youre not alone in these experiences. Virtually everyone is struggling. Seth Fink, CFO for the Mechanical Contractors Association of America, noted: Contractors are having a difficult time getting

BY WILLIAM ATKINSON

SPECIAL TO CONTRACTOR

IF YOU ARE having a difficult time getting property-and-casualty insurance coverage for projects and the availability of terrorism coverage seems to have dried up, you’re not alone in these experiences. Virtually everyone is struggling.

Seth Fink, CFO for the Mechanical Contractors Association of America, noted: “Contractors are having a difficult time getting the proper insurance. In some cases, insurance companies are cutting off smaller policyholders.”

While many point to 9/11 as the sole source of the problem, experts told CONTRACTOR that the property-and-casualty market was hardening prior to the terrorists’ attacks; many contractors already had experienced premium increases.

“We are within a three-year insurance contract, so have not had to shop for coverage recently,” said Fred Oyer, vice president of National Piping Systems in Schaumburg, Ill., and an MCAA member. “However, I am aware from talking with a lot of other contractors, especially those from the West Coast, that they are having critical difficulties buying general liability coverage and complete operations coverage. I have been hearing a lot of horror stories about renewal rates. Even last May, increases of 50% to 60% were common.”

Don Nelson, senior vice president for insurer AIG, said the market began to change in early 2001 due to three factors: excess losses in the insurance industry; “incredibly competitive rates at the time that were so low that most companies could not make money”; and the stock market slump, which reduced insurance company investment income.

“Even before 9/11, the insurance industry was under reserve, and there has also been a significant increase in the cost of claims,” added Kathy Woodliff, senior vice president and chief underwriting officer for construction for CNA Insurance. “In addition, there has been more demand for insurance and less capacity available from reinsurers.”

The Insurance Services Office reports that the property-and-casualty industry’s net income dropped 76% for the first six months of 2001 from the same period in 2000, leading to the insufficient capacity. Post-9/11 claims on property-and-casualty insurers and reinsurance companies could reach as high as $60 billion, the highest for any incident in history. (Hurricane Andrew, the largest prior single event insurance loss in U.S. history, was $16 billion.)

Insurance companies are passing along the price increases from their reinsurance companies. In fact, reinsurance may not even be available for some small or unstable insurance companies, possibly forcing them into bankruptcy. Even many of the strong insurance companies may not be able to negotiate next year’s policies with clients until they negotiate with their reinsurers. And when they do negotiate, clients can expect costs to rise 30% to 70%.

“Since 9/11, the market has contracted even more, and the reinsurance market, which provides support to insurance market, is also contracting,” Nelson said. “In sum, there is a shortage of capacity, and the capacity that does exist will cost more.

“Expect P-and-C rates to continue to increase for at least 18 months, possibly for three years.”

Terrorism coverage

Since 9/11, many major insurance and reinsurance firms have been refusing to provide coverage for future losses due to terrorism. In fact, many insurers have filed terrorism exclusions with the insurance departments in the states where they do business.

The National Association of Independent Insurers reports that at least 35 state insurance departments have issued statements agreeing to adopt exclusion language.

Even in states that have allowed this exclusion, however, insurance companies must still cover terrorism-related workers’ compensation claims, for which there are no exclusions.

“We will be attaching a terrorism exclusion to all our policies where it is approved by the state’s department of insurance,” CNA’s Woodliff said.

This lack of available coverage has caused many lenders to walk away from some large projects because of inadequate insurance coverage. GMAC Commercial Holding Corp., for example, will not do any significant construction loans without a terrorism policy that would cover the term of the loan, said David E. Creamer, chairman and CEO.

“This may be the most critical issue for a lot of contractors,” said Ronald Suarez, property unit manager for Risk Specialties of New York, a subsidiary of AIG. “Banks are becoming concerned about carriers excluding terrorism coverage in their construction contracts.”

Woodliff agreed that CNA is seeing bank loan availability drying up for contractors that don’t have terrorism insurance on certain jobs. So, while most financing today requires terrorism coverage on major projects, it is being excluded from most insurance contracts.

As a result, contractors will have to search for independent terrorism coverage, AIG’s Nelson said. Terrorism insurance, though expensive and somewhat limited, is more easily available than some might think, he added. Three companies today are providing independent terrorism coverage: AIG and Berkshire Hathaway in the United States and Lloyd’s in London.

“When we look at terrorism coverage, we look at the type of property and the location,” Nelson said. “If you’re talking about something in the Middle East, coverage will be very expensive. If you’re talking coverage for a project in Nebraska, though, it probably won’t be as much.”

AIG rates range from 2.5 cents to 25 cents per $100 of coverage. If a normal construction premium is $100, Nelson said, it probably would be $125 with terrorism coverage.

On Feb. 27, Alan Greenspan of the Federal Reserve Board and Richard Hillman of the General Accounting Office recommended that the federal government provide financial support to the insurance industry, so it can once again offer terrorism coverage. Their recommendation came on the heels of H.R. 3210, the “Terrorism Risk Protection Act,” which the House passed in November. However, the Senate has yet to act on it.

In the meantime, what should you do?

“The most prudent thing is to conduct a thorough investigation of all the insurance companies that work in your area,” MCAA’s Fink suggested. “There will be insurers who will provide coverage, but they may be difficult to find and, unfortunately, it is going to be very expensive.”

Suarez added: “Construction insurance has always been a specialty area, but during a soft market, almost anyone could broker it. Now, with the changing market and the critical need for specialists, insureds need to locate brokers who have qualified construction specialists on staff.”

Stephen Lamb, executive vice president of the Mechanical Contractors Association of Chicago, suggested another alternative. “I expect to see more companies moving toward self-insurance or make a push for creating some self-insurance pools,” he said.