Insurance underwriters, property managers, and government officials must face the reality that insurance coverage for the construction of mass timber buildings is much higher than for most other building types.
The insurance industry generally does accept mass timber as a separate building product from wood frame construction. Fire or water damage risks remain the key determining factors when pricing insurance coverage for mass timber and wood frame construction.
Consequently, the search for ways to lower these costs is a matter of great concern to property developers and building contractors.
Types of Coverage
The primary insurance coverage relevant to this analysis is contractors’ insurance, which provides indemnification against building damage while under construction. Contractors generally are required to carry the following types of insurance during building construction or renovations:
- · Commercial General Liability / Wrap-Up Liability
- · Course of Construction / Builders Risk
- · Contractor Supplied Equipment
- · Equipment Breakdown Insurance / Boiler & Machinery Insurance
Liability insurance (a Commercial General Liability Policy) covers all contractor operations, including third-party property and bodily injury. While only compensatory damages are covered, liability insurance includes liability from past work. Premiums are generally based on the company’s annual revenues, and different rates are applied to different types of work, even if by the same contractor.
Wrap-up liability is project-specific general liability coverage, where all contractors, subcontractors, and consultants are insured under one policy. For projects worth over $1 million, Wrap Up Liability insurance is standard, with premiums based on total contract values of $1.00 to $1.75 per thousand of construction cost per year. Rates can vary with the scope of the work required.
Many factors are taken into consideration when pricing wrap-up insurance coverage. However, the rate-setting for wrap-up coverage for wood-frame structures could range upwards to ten times the per every $100 value per month compared to equivalent noncombustible construction projects.
Construction or Builders’ Risk Insurance typically includes the project owner, the general contractor, and all subcontractors with an insurable interest in the project from when it begins until the structures are completed. Damage caused by natural events (such as lightning) is covered, as is damage from a covered peril (such as a fire).
Damage caused by the negligence of the owner or a contractor is also covered. Perils not explicitly identified are excluded. Flood, earthquake, and equipment breakdown coverage can be purchased as an add-on to the Builders Risk policies.
A builder’s risk policy covers property damage to the building during its construction, damage from natural events (such as lightning), and damage caused by a covered peril (such as a fire) caused by the negligence of the owner or a contractor.
Here are two building projects cited by insurance experts to demonstrate the pricing differential and the reasoning governing rate setting.
Example One
A recent 4-storey $16 million mass timber building to be constructed over 18 months. Coverage was priced as a wood frame project. The rate was 5.5 cents per $100 value per month ($8,800 per month x 18 months), resulting in a total premium of $158,400 for the Course of Construction insurance. By comparison, coverage for that same project, if built out with concrete, would be at an estimated rate of 1 cent per $100 value per month ($1,600 per month x 18 months), totalling $28,800.
Example Two
This case involved a $120 million concrete building project, which was insured at 1.1 cents/per $100 value/ month for 18 months for a total premium of $237,600. A comparable mass timber building insured at 5 cents /$100/month for 18 months would cost over $1,080,000. For the mass timber comparison, however, it is unlikely that a 5-cent rate would apply for such a large project, especially since it would need several insurance companies to cover the total $120 million project cost.
Insurance companies have varying comfort levels with their rating structures and deductibles. Typical pricing for wood frame construction is 5 to 6 cents per $100 value per month. Securing total coverage for a $120 million mass timber project would require the participation of several insurance companies. Of those, few would agree to a 5-cent rate. Most would demand six or even 6 ½ cents rates to participate. There could be some latitude if advanced fire protection measures are in place, but the differential will remain significant. Minor adjustments in rate-setting may apply based on local conditions and project-specific details.
These examples demonstrate that insurance pricing for mass timber construction projects is rooted in concerns by underwriters about their degree of exposure to risks that could lead to expensive claims for repair, remediation, or replacement in the event of a calamity. This represents a ‘zero-sum’ paradigm about the risks that guide insurance underwriting.
The key risk factors for tall mass timber structures are similar to those for mid-rise buildings or single-family homes: resistance to fire or water damage, resiliency to extreme weather or other climate-related hazards, and design features to ensure safety.
Proponents of mass timber construction know the need to better prepare project developers, architects, and designers on how best to approach insurance underwriters when negotiating coverage for projects in design or underway.
Managing Insurable Risks
Many mechanisms help to reduce the costs of insurance in the construction and operation of buildings. These include owner-controlled insurance (OCI) programs, governmental regulations to reduce insurance rates, and liability management measures.
Certain classes of buildings, such as those that are government-owned or part of an academic precinct, may also be insulated to some extent from higher commercial insurance prices by being part of larger self-insurance or liability protection programs.
In complex buildings, such as wood high-rise buildings, applicants tend to meet early in the design process with the city to identify specific areas of concern. Independent third-party analysis of the proposed design is part of the alternative solutions process, generally including engineers’ analysis with expertise in fire and life safety systems.
Some economies can be achieved by including all subcontractors and trade insurance requirements under one policy, lowering rates that would apply to small contractors and suppliers.
Summing Up
Insurance coverage for all wood buildings will be more costly than comparable structures built with masonry, concrete, or other fireproof materials. The insurance pricing differentials for wood buildings will range from five to ten times the rates for comparable concrete or non-wood structures.
Many risk factors are considered when pricing insurance coverage for all buildings. During construction, these factors include fire prevention measures, building envelope breaches (usually from water), materials quality, contractors’ experience and skill levels or sub-contractors, and site security practices.
Other climate-related risk factors considered include location relative to flood plains, resistance to extreme weather events, such as windstorms or forest fires, and the ability to withstand earthquakes.
The fact that wood building projects are more vulnerable to all these risks has prompted some insurance companies to vacate or to severely limit their involvement in the wood frame or mass timber markets. This is why most wood construction projects require multiple insurers, each limiting their risk exposure.
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Read Part One of this series on Insurance pricing – INSURING MASS TIMBER BUILDINGS.
You can read more about insuring buildings on the Pacific Northwest Building Resilience Coalition website.
