As the federal construction stimulus gets going, buyers willrely on their insurance pros to write policies that cover new andemerging risks. In some cases, these insurance buyers may not yetfully understand the new risks they face.

To meet these challenges, agents and brokers must get up tospeed on the types of projects being funded and their roles inhelping clients manage risk. They will need to be broadlyknowledgeable about multiple industry entities, includingcontractors, construction companies, design/engineering firms,project owners, developers and residential builders.

While many of their clients' needs will fall into traditionalareas of property, builders' risk and equipment coverage, somestimulus projects will require more complex covers. Agents andbrokers also will need to be aware of relevant industry trends.They also should become familiar with the construction work that islikely to be taking place in their states and regions. Five mainthings provide clients with the most appropriate coverage andcement roles as trusted advisors: The need for speed; meeting biddeadlines Limits still subject to cost-cutting pressures Greenconstruction Often and early: The expanding role of risk managementThe growth of public-private partnerships States and municipalitiesare eager to access the stimulus funds as quickly as possiblethrough “shovel-ready” projects. Many of these involve maintenanceand repair rather than new initiatives. Construction companies andcontractors are first in line to receive work. Developers,engineers, designers and others are expected to follow.

Three areas of focus are expected to have the greatest impact onthe construction industry: infrastructure, energy and healthcare.By varying estimates, these account for 13 to 27 percent of thetotal stimulus spending.

Infrastructure work involves upgrading and restoring bridges,roadways, airports, wastewater treatment plants and other publicuse facilities. Healthcare spending likely focuses on expandingexisting hospitals and healthcare facilities. This segment had beengrowing prior to the economic downturn and is expected to increasesubstantially with the stimulus.

The drive for sustainable energy sources is expected to fuel thegrowth of wind farms, solar technology, geothermal andwaste-to-energy plants and other alternative energy sources. Unlikesome of the infrastructure repair and maintenance projects, thisarea will generate new initiatives.

In terms of the overall insurance market, buyers will look tospread their risks among a number of carriers to avoid a majorimpact on long-term liabilities and defaults that would have amaterial effect on risk transfer and claims-paying ability.

Beyond the general parameters, agents and brokers should beknowledgeable about and prepare for these specific areas related tothe stimulus plan: The need for speed
Withthe initial emphasis on shovel-ready projects, agents and brokersmay face significant time constraints in writing policies as theirclients race to submit bids. Their workloads may increase anddeadlines will tighten. They may not have all of the information attheir fingertips, or they may have a lot of information to analyzein a short amount of time. At the same time, producers will need tobe particularly vigilant that contractors, in their rush to securework, pay attention to sound risk management practices, safety andquality, among other considerations. Finally, with pressure onstates and municipalities to quickly use the funds, there is thepotential for them to forego or abbreviate the traditional biddingprocess. This could lead to a rise in claims from contractors whobelieve the bidding process was unfair. Limits stillsubject to cost-cutting pressures
As the size andnumber of projects decreased over the past few years, manyconstruction firms, contractors, engineering firms and otherslowered their limits. In some cases, they didn't need the higherlimits for the smaller projects that replaced large jobs. Many alsowere focused on cutting costs and were more concerned aboutcovering ongoing business needs rather than worrying about whatmight happen in the future, when they might not even be inbusiness.This cost-cutting pressure exerts a strong influence asthe economy continues to struggle. Agents and brokers will seeongoing efforts to scale back, including higher deductibles andless catastrophe coverage, as well as establishing more realisticlimits. From the carrier point of view, however, this drive toreduce expenses could be challenging. Catastrophe protection ratesand premiums have increased dramatically during the last 5 years.All carriers are adhering more strictly to catastrophe modeling asa major part of the pricing basis and accumulation control toensure claims-paying ability and solvency and to meet rating agencyrequirements. Rates in the property construction segment areincreasing with the major toll on:

o Catastrophe-driven business

o Difficult classes of construction such as tunneling,underground works, transmission lines and wet marine works

o High-valued projects on the order of $1 billion and requiringworld market capacity

o Clients with adverse loss experience

o Bankrupt clients

o Locations in major metropolitan areas that are highly exposedto terrorism and similar risks.

Overall, client rates and deductibles–”skin in the game”–will beincreasing, but the buyers are likely to buy less insurancecapacity and look to more sophisticated alternatives from theiragents and brokers. Rates generally will increase as a result of amore conservative approach to transferring risk and the economy'scontinuing impact.

Green construction
A portion of thestimulus money is designed to increase energy conservation throughgreen retrofitting as well as encouraging the use of greenmaterials and green construction methods. This raises a number ofissues. Specifically, many of the materials and techniques arerelatively new and untested over time. Contractors may have limitedexperience working with and installing these materials. Theirefficacy may be untested and unproven. Defects and productliability issues may emerge over time.

These factors must be considered, along with traditionalconstruction liabilities and risks. From the builders' riskperspective, apparent exposures include: increased costs inreplacement parts, particularly modular components; client attemptsto include defects under the premise of resulting damage fromfaults in material, workmanship and design; and lead time inreplacement of components affecting time element coverage.

Also, some insurance carriers have extended property andbuilders risk product covers to provide coverage in the event of aninsured loss to the property to upgrade the structure to meet LEED(Leadership in Energy and Environmental Design) certification,generally at an additional premium. With the economic recoverytaking off slowly, it is not likely clients will pay more for thiscoverage. However, those clients that have or are building to LEEDstandards would expect to be reimbursed on a similar basis withoutthe endorsement coverage. Overall, it is important to note thatproject owners, developers and builders will be taking a hard lookat the return on green building. Expected recovery time will be akey consideration. Right now, they may decide it's prudent toforego adding the additional expense of green materials.Often and early: The expanding role of riskmanagement
To be most effective, agents and brokersmust be part of their clients' risk management teams. In thisclimate and with some of the new risks and exposures, agents andbrokers must be involved from the very beginning, including earlyon in the bidding process. If not, they may be unable to placecovers effectively or adequately assess risk. This is particularlytrue in this highly competitive environment, where the winning bidmay be separated from the second-place bid by just a fraction of apercent. In general, agents and brokers also will have to take amuch broader role in evaluating exposures to company assets,particularly in the area of financial risk, whether it is insurancecompany capitalization or customer financial condition.

Finally, there is no substitute for actually visiting a site.Agents and brokers who have not been out to their clients' projectsor facilities should consider visiting.

Public-private partnerships
Anotherimportant trend is the increase in public-private partnerships–acontractual agreement between a public agency (federal, state orlocal) and a private-sector entity. Through these agreements,sometimes referred to as PPP or P3 , the skills, capabilities andassets of both the public and private sector are combined todeliver a service or facility for the use of the general public.Among the reasons for the increase is that states simply do nothave enough money to take on critical projects, including largeprojects that may be funded in part by the stimulus. On the privateside, the expectation is that the surety market will harden andbonding capacity will begin to shrink. Finally, U.S. companies arelikely to engage with more foreign partners. From an insurancestandpoint, P3s require in-depth and comprehensive analysis of eachentity and its specific requirements and coverage. For example,most requirements for builders risk coverage will likely requirethat the completed operating risk be incorporated in the coveragefor continuity and to avoid coverage and claims gaps. Likewise,separation of the insured entities will need to be addressed tobetter understand what risks will be assumed, such as increasedexposure to design risks that might have been the responsibility ofa separate contract.

Looking forward
As the hard-hitconstruction industry looks to the stimulus to jumpstart andsustain its recovery, agents and brokers will play a critical role.By understanding the new risks and situations posed by some of thebill's provisions, agents and brokers can help their clients andthemselves take full advantage of the new opportunities.