The construction industry faces growing complexities, such as escalating costs, evolving climate risks, and regulatory changes, that demand sophisticated approaches to risk management.

Exploring a quota share is a great way to ensure your client’s projects remain protected and profitable despite challenges. A quota share is an insurance arrangement in which multiple insurers collaborate to cover a single project, dividing the premiums collected and the losses incurred according to agreed-upon percentages. This strategy allows insurers to manage large exposures effectively by spreading risk, enhancing capacity to insure complex, high-value construction projects.

Ongoing Builders Risk Challenges

Rising Costs and Project Complexity

Construction costs have surged significantly due to persistent supply chain disruptions and labor shortages. The imposition of tariffs suggests those costs will rise further, significantly inflating overall project costs. For instance, a construction project that cost around $100 million five years ago could easily exceed $120 million today.

These escalating costs have significantly increased the scale and complexity of construction projects, raising the financial stakes and potential risks associated with insuring them. As projects grow larger and more expensive, it becomes increasingly challenging for a single insurer to carry the entire financial exposure.

Misconceptions about Insurance Capacity

A common perception exists that insurance capacity for Builders Risk projects is limited, which creates uncertainty. However, capacity constraints are often misunderstood. In reality, ample capacity typically exists for standard commercial construction projects.

Certain project types and locations inherently carry more significant risks, leading some insurers to reduce available coverage or avoid them altogether. High-risk niches, such as wood-frame construction, rehabilitation, or renovation projects, and those located in catastrophe-prone regions, frequently experience significant claims or catastrophic losses. Exercising caution when committing substantial coverage in these areas can contribute to the perception of limited overall capacity.

Climate Uncertainty

Climate change is reshaping the risk profile of construction projects, increasing the unpredictability and severity of weather-related incidents. Historically, reliable risk models used by insurers to predict potential losses from events like floods, hurricanes, and wildfires have become less accurate. Previously safe regions are experiencing unexpected losses as severe weather events become more widespread.

This increased climate volatility has significant consequences for builders, brokers, and insurers. Projects located in traditionally non-catastrophic areas may suddenly face substantial losses, leading to unexpectedly high claims and financial strain. As traditional predictive models become less reliable, insurers are adapting to increased uncertainty in risk assessments, which may lead to more measured underwriting decisions, adjusted premiums, or changes in coverage availability.

Increasing Claims

Builders Risk claims frequently involve costly events such as water damage from burst pipes, fire incidents, and theft. Water damage, particularly from plumbing failures, has emerged as the most common and expensive issue, disrupting construction timelines and inflating project costs. For example, a recent claim involving nearly $8 million in water damage resulted from a burst pipe on a major urban project, illustrating the severe financial consequences associated with common risk scenarios.

Such frequent and high-cost claims impact project budgets and drive stricter underwriting practices, increased deductibles, and more rigorous risk management requirements. As these claims become more prevalent, advanced risk management tools such as environmental sensors, water detection systems, and regular site inspections are required to secure coverage. These proactive measures help identify potential hazards early, mitigate damage quickly, and reduce overall loss potential, ultimately stabilizing insurance costs and coverage availability.

Regulatory Impacts

Regulatory developments significantly impact the construction sector, with both positive and negative consequences on both sides. The proposed tariffs will increase construction material costs, raise overall project expenses, and complicate budgeting and planning processes for contractors. This escalation in material costs can delay projects, reduce profit margins, and amplify financial risks.

Conversely, recent infrastructure funding programs represent positive regulatory shifts, creating substantial new opportunities in the construction market. Federally funded infrastructure projects, such as large-scale road and bridge improvements, are attractive to contractors because of their size and scope. However, these projects often come with complex risks and inflated construction limits, further intensifying the need for comprehensive, flexible, and substantial insurance coverage solutions.

Faulty Work Coverage

Faulty workmanship or contractor errors represent a significant emerging risk within the construction industry. Historically, these types of losses were explicitly excluded from Builders Risk policies because insurance was primarily intended to cover external events such as fires or weather-related damage. However, changing market dynamics have prompted project owners and general contractors to demand coverage for faulty work as part of contractual requirements.

The shift toward covering faulty work stems from the growing complexity of modern construction projects and rising expectations for contractor accountability. Consequently, there is pressure to incorporate this coverage into Builders Risk offerings. Including faulty work coverage in policies significantly expands risk exposure, requiring careful underwriting, risk assessment, and management strategies.

The Strategic Importance of Quota Share

Quota share arrangements are critically important across the Builders Risk insurance landscape, offering a comprehensive solution to your clients' challenges. To effectively address the critical issues currently impacting the construction insurance market, quota share:

• Enables collaboration on large-scale, expensive projects, spreading the financial risk and ensuring adequate capacity.
• Provides stable coverage options even in niche, high-risk scenarios.
• Distributes the risks associated with unpredictable climate-related incidents, reducing individual insurers' vulnerability and promoting collective risk mitigation strategies.
• Allows insurers to be better equipped to handle costly and frequent claims without significant financial strain on a single entity.
• Secures tailored insurance coverage to accommodate the complexity and scale of large infrastructure projects.
• Provides comprehensive faulty work protection, ensuring contractors are financially protected against risks arising from workmanship errors.

In today's complex construction environment, quota share arrangements are essential for effectively managing risk. By distributing financial exposure, enhancing risk mitigation, and capitalizing on specialized insurance expertise, quota share solutions enable your clients to undertake ambitious and complex projects confidently.

Have questions about how quota share could benefit builders risk? Our inland marine experts are here to help.

Reach out to us at intactinlandmarine@intactinsurance.com or visit www.intactspecialty.com/inland-marinepage to learn more.

This article is provided for general informational purposes only and does not constitute and is not intended to take the place of legal or risk management advice. Readers should consult their own counsel or other representatives for any such advice. Intact hereby disclaims any and all liability arising out of the information contained herein.

This material is intended as a general description of certain types of insurance coverages and services. Coverages and availability vary by state; exclusions and deductibles may apply. Please refer to your insurance policy or consult with your independent insurance advisor for information about coverages, terms and conditions.