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While nearly every industry sector in the U.S. has suffered, the current economic crisis has been especially tough for the construction industry, slowing projects and cancelling others.

As a result, project owners, general contractors and subcontractors--and the brokers, agents and insurers who serve them--have faced unprecedented challenges. With no foreseeable change over the next 12 months--even with federal stimulus and highway spending--the industry must continue to deal with a host of critical issues, including a handful related to managing risk.

COMPETITION DRIVES CHANGE, ADDS EXPOSURE

One of those issues, increased competition, has led to new alliances and joint ventures among contractors. That's not a problem on its own, Conroy says, but joint ventures can add exposures and other coverage-related issues for each partner.

"Contractors have always been a competitive breed," Conroy says. "But courtesy of the state of the economy, in the last couple of years, it's made the competition more acute for the work that is available."

With increased competition comes increased business pressures, adds Tim Kania, senior vice president, Liberty International Underwriters, Liberty Mutual's global specialty insurer.

"Joint ventures have been one response to that pressure," notes Kania. "They can be especially helpful as contractors move outside their usual areas of expertise or specialty. But while they may provide a leg up in competing for limited jobs, they can raise a host of new exposures and risk issues."

Conroy says joint ventures can be tricky to insure, and contractors who have not done a lot of joint ventures need to understand the best practices for addressing the risk issues specific to these partnerships.

"This is where agents and brokers can make a real difference by providing expertise," Conroy says. "There will not be a one-size-fits-all solution because it all depends on the project and the risk appetite of the partners involved."

Beyond joint ventures, there has been an uptick in M&A activity as the economy has slowed. The construction industry is not immune to the unexpected turmoil acquisitions or mergers can cause.

"Competition-fueled changes underscore the value agents and brokers can bring to the client," Kania says. "They need to understand the situation and craft insurance solutions to address those unknown risk challenges."

MORE GOVERNMENT OPPORTUNITY

While the economy has buffeted the construction business, stimulus dollars have led to public entities being one of the few owners who still have money to spend. That's the good news. The bad news is contractors looking to make inroads and increase business in the public sector face a much more complex bidding process, and requirements and rules not encountered in the private sector.

The result, says Conroy, is a "contractor learning curve" when competing for government work, representing another area where brokers and agents can add value for their clients.

TIGHT CREDIT MARKETS

Naturally, as the economy slid, credit markets tightened. And with the emerging recession, banks stopped lending. They have not loosened up much since, Conroy notes.

"Contractors generally need bank lifelines in the way of credit facilities," he says. "But bank underwriting is tougher, and credit lines have tightened."

Conroy explains that tighter credit means contractors will experience pressure on their credit lines, used to secure everything from steel to insurance.

Once again, this is an opportunity for brokers to provide guidance to clients, this time in finding the best ways to use their finite and expensive credit for insurance coverage. In fact, he says, large national brokers have set up specialized units to dig through the credit complexities for clients.

"Agents and brokers can help clients create a detailed risk plan identifying exposures and risk mitigation tools to help their clients succeed within tight credit scenarios."

INCREASED CLAIMS ACROSS THE BOARD

Another direct, potentially damaging impact of poor economic conditions--on a more micro level--is the trend toward more workers compensation and general liability claims. Conroy says it's more important than ever that contractors and risk managers focus on workplace safety and claims/medical management in workers compensation cases.

"Particularly in workers compensation you can have the classic echo effect," he says. "If there isn't a lot of work to go back to when a project is completed, workers compensation fraud can be a tempting option for income continuity."

And, with legitimate claims, contractors need to work with agents, brokers and carriers to put a strong return-to-work program in place.

Of course, it's a major challenge; a classic "push-pull situation" says Conroy.

"There may not be a lot of money to pay for a well-designed and enforced safety program, but when one is not in place, you have to deal with potentially greater losses," he says.

Kania adds that from a property perspective, there also can be additional unexpected repairs, sometimes of suspicious origin that ultimately jeopardize a project's schedule but extend the work hours.

"These types of unexpected situations mean the job ultimately costs more," he says. "Unfavorable property loss results often go hand-in-hand with an increase in workers compensation claims."

NEW CONSTRUCTION METHODS

Emerging construction methods, especially the latest trend towards more LEED-certified and "green" projects, may have an impact on claims.

"Government funding and public sentiment has fueled the green and renewable energy project segments," notes Kania.

Risk management strategies must be able to identify the exposures associated with new construction methods and determine the best ways to mitigate loss and manage these new risks.

Even with these concerns and challenges, Conroy says it's not all doom and gloom for the construction industry and the agents, brokers and carriers who serve it.

"It's going to be a long road back, and construction will likely not see a return to the glory days of a few years ago," he says. "But there is reason to be optimistic. Construction will always play a large, vital role in the overall U.S. economy."

Of course, construction has undergone cycles before, maybe not this severe, but seeing the industry first-hand as he does at Liberty Mutual, Conroy knows contractors are a resourceful group.

"The good ones will learn from mistakes, receive good advice from their agents, brokers and carriers, and come out on the other side as vital businesses," he says.

For more information or to meet with representatives from Liberty Mutual, please contact Jim Conroy (jim.conroy@libertymutual.com) or Tim Kania (timothy.kania@libertyiu.com).

(The above piece is part of our continuing Insights series designed to highlight key products and services to our readers. This paid-for Insights was written and edited by Risk & Insurance® on behalf of our marketing partner. Additional Insights can be found on our Web site at www.riskandinsurance.com/.)

December 15, 2010

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