Insurance and bonding: More claims, challenges for construction insurance while surety market performs surprisingly well

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Matthew Civichino

Ontario Construction Report staff writer

After 18 months of COVID-19 pandemic stresses, how well are contractors managing with insurance and surety requirements and claims?

The answer, say industry representatives, is surprisingly good, considering the massive stresses and challenges that the pandemic has caused in the economy.

Indeed, insurance underwriting has become more complex and challenging and premiums are higher. But surety loss ratios are healthy and bonding has become easier and quicker to manage with the increasing adoption of E-bonds.

Still, contractors need to take their insurance and bonding obligations more seriously than ever before – and not simply regard these as last-minute “check the box” requirements.

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Matthew Civichino

“Quotation turn-around time is much longer,” says Matthew Civichino, vice-president, Contract Surety and Commercial Insurance, at Elm Insurance Brokers Inc. “For quotations, underwriters are asking for architectural drawings, cost breakdowns, environmental assessment reports and (evidence of) experience from the contractor on similar projects, showing a proven track records.”

These observations are backed up by Dan Boan, a partner and construction and infrastructure specialist at Borden Ladner Gervais LLP. Owners and contractors are increasingly exploring the possibility of insurance claims for issues they wouldn’t have considered before.

“Traditionally, when you get a fire on a project, everyone looks at the insurance because they know that it stands for, but we’re seeing a trend for parties looking towards the insurance package as an option for recovery when we didn’t necessarily see it before.”

One result: Increased claims and disputes/litigations relating to these new claims. Another change: “We’re seeing the insurance companies looking at their polices, premiums and everything, to try to figure it out. Are there additional exclusions? Should we be charging more premiums for these products? Should we be increasing the premiums for these products?”

Boan says these more challenging underwriting conditions mean that it is vital for contractors to communicate with their insurance specialists early in the planning stages – and they must be careful to read and review their contracts carefully, to avoid unexpected liability and insurance coverage gaps.

“My advice is to get a good broker, engage them early in the process, and actually review the requirements and the policies form the outset, so that you’re making your sure you are covering what you need to cover as part of the security package.”

As for 2021, the overall health of the industry has been spurred by massive government infrastructure spending. This has led to a much better than expected first half with impressive premium growth and loss ratios approaching pre-pandemic levels.

Steve Ness
Steve Ness

“Our numbers for the first six months of 2021 are, I think, just under 14 per cent better than they were for the same time in 2020, and six per cent better than they were even in 2019. So 2021 is shaping up to be a phenomenal year,” said Steve Ness, president of the Surety Association of Canada (SAC).

“When I talk to our people across the country, including Ontario, Quebec, everywhere, they’re saying: ‘Yeah, we’re going great guns and loss ratios are great. They’re back down to the pre-pandemic levels. I think at the end of the second quarter we were at a 24 per cent loss ratio.”

Ness says COVID-19 restrictions helped encourage the increasing adoption of E-bonds, a fully digital surety product (The final e-bond can have the look of a PDF but it much more than that, with additional security features.) Notably, E-bonds reduce the possibility of errors, as you cannot complete the process unless everything is correct, when sometimes mistakes can slip through on manual bonds.

The insurance and bonding representatives say the introduction of new Ontario Construction Act prompt payment and adjudication requirements, and mandatory bonding for most larger government projects, has been helpful in reducing stress but the impact hasn’t been overwhelming.

After all, public agencies and municipalities had required surety bonds on most projects before the new rules went into effect, said Boan. “The automatic release of holdback has changed the process  a little but there isn’t much difference at the end of the day.”

New CCDC standard contract forms have increased the insurance requirements from $5 million to $10 million, and the deductibles as well. As well contractors pollution liability has become a standard CCDC requirement, says Civichino.

He also said that insurers are taking water damage claims more seriously. “Insurers are wanting the client to have a leak detection system installed in order to minimize water losses. Higher deductibles and higher water damage deductibles are more commonplace.”

The conclusion: There’s no need to panic – surety will continue to be available and reasonably priced for qualified contractors. While insurance will cost more and underwriting will be more challenging, contractors can alleviate these concerns by consulting with their insurance specialists early in the project planning stages.

Civichino sums up the advice:

  • Deal with a knowledgeable, experienced construction broker who is also familiar with the industry and products;
  • Send all insurance requirements, including any supplementary conditions, to the broker for review and advice;
  • Send all insurance requirements with plenty of lead time so the broker can tailor the policy to comply with all requirements; and
  • Failing to comply with insurance contract requirements can lead to a breach of contract leading to an uninsured financial losses for the contractor.

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