Builders’ Risk Marketplace: Wood Construction

Builders’ Risk Marketplace: Wood Construction
Justin Lehtonen

Vice President

July 17, 2017

By nearly every measurement, wood is a great construction material. It’s a renewable
resource abundantly available in America, it’s easy to cut and fit, it’s cheap (on average 15% or
more savings compared with steel or concrete construction). Wood is considered a sustainable
and green building material because it has a more favorable impact on the planet’s carbon cycle
compared with other materials and requires less energy to produce. With good forestry
management, wood can be regrown indefinitely. Wood construction also tends to perform better
during earthquakes because wood is lightweight, ductile, and it can bend and absorb seismic
energy. Where concrete structures crumble and steel twists and collapses under its weight,
wood-frame buildings regularly withstand major earthquakes around the world.

It’s no wonder then that the construction industry keeps pushing the limits with wood –
taller, larger, closer to adjacent structures and improvements. But there is one flaw inherent in
wood construction (in some cases quite literally a fatal flaw): wood burns hot! Wood materials
can reach a temperature of 1,400 degrees Fahrenheit less than 4 minutes after ignition –
temperatures which lead to flashover, rapidly engulfing the entire building in flames. In new
multi-family construction, a sprinkler system greatly reduces the fire risk. But the international
building code is designed around health and safety for a completed, occupied structure. The
code is not written for fire safety during the course of construction. And the sprinkler system,
while incredibly effective at saving lives and reducing property damage once it is activated, is
not installed until all the framing is complete (and in many cases is not activated until much
later). When plans call for a building to be sprinklered, the code allows the building to have less
than half the number of firewalls a non-sprinklered building would require per square foot. So
you’re left with a giant wood box (perhaps we should just call it a bonfire) with no fire protection
sitting on top of a 1 or 2 story cement podium. Low formaldehyde emission adhesives used in
plywood and other composites and high winds blowing through the upper stories when windows
have not been installed yet can further accelerate the spread of fire. Let’s just say, there is a
point during construction when these structures are uniquely vulnerable.

Insurers are increasingly aware of this. Before 2011, wood frame rates were in the teens
for quite a while with insurers offering up large net and treaty capacity, even taking major lines
with no reinsurance backing. Protective safeguards were never required or even requested. A
one-page application was enough to quote and bind builders risk coverage on a large frame
project. Beginning in March 2011 with the major fires in San Francisco CA, then Carson CA, and
other cities with rapid succession, suddenly the party was over. Insurers began to realize the
serious risk that insuring these giant piles of unprotected wood presents as one residential
frame construction fire after another lit the evening news. But the overcapitalization of the US
property insurance marketplace (both from a lack of natural disasters in the US and from
alternative sources of capital entering the market) created a dilemma: How do you raise rates in
this type of environment without losing market share? It seemed at the time that while a few
insurers tried to push for higher rates, most looked to underwriting for a solution.

Underwriters are great people with a wealth of experience and knowledge. But more
detailed underwriting did not result in fewer losses in this case. In fact, it may have had the
opposite effect. If an insurer who would previously quote from a 1-page questionnaire filled out
in pencil is now requiring soils reports, a Gantt chart, site plan, the construction budget, profiles
of key subcontractors, and extensive safeguards like 24-hour watchmen, camera and heat
monitoring systems for any project they are going to cover, along with frequent inspections, that
insurer is only going to write large projects for major developers, many of which will be in highly
populated urban areas. And none of these safeguards make the building inherently less
vulnerable. In fact the larger the project, the more workers are traversing the construction site,
and the more attention the project attracts in its community. The potential for both negligence
and malevolence is increased with higher traffic and greater visibility. Additional protective
safeguard requirements imposed by underwriters were costly to builders: if the safeguard
requirement was merely a subjectivity, the cost of compliance can be very high, as much as 6
figures for elaborate monitored cameras and guard service. If the requirement was a warranty it
could be even more costly, not just in the cost of compliance but in the serious risk of a
suspension of coverage in the event of non-compliance with a technicality.

Enforcement of OSHA compliance (such as the requirement for a hot work permitting
system) is valuable in that it can reduce the risk that a building will be ignited by sparks from a
welding or roofing torch, or by other construction work underway, but it will not automatically
extinguish the fire. And therein lies the real problem: you have buildings that were designed to
have an automatic extinguishing system based on their configuration and the placement of
firewalls, but there is no such system present until the end of the project. That project sits
exposed overnight and on weekends, and any fire that arises will consume the building very

As brokers, we constantly seek to differentiate the specific project we are looking at
from the broader pool of construction projects in a particular class. The building configuration
and spread of risk is a big part of that. So is the experience of the GC and Subs. We work with
insurers to advocate for the best combination of terms and pricing for the client, and to make
sure there are no hidden coverage restrictions that could leave the client uninsured or
underinsured after a loss. We push down pricing, and we bring all the capacity the industry has
to offer to the table as there are still a ton of players in the space. Ultimately we seek to ensure
the end result of our efforts is competitive and will stand up to the scrutiny of any 3rd parties
who review it during the course of the project.

2017, like 2011 (and 2013, 2014, and 2015) has been a challenging year for inland
marine insurers as the big fires keep coming. Insurers are on edge and are reacting to each
major loss in real-time, tightening rates and introducing new underwriting requirements. In the
midst of the market turmoil, we are the steady hand.

To learn more about the Builders’ Risk Marketplace, please contact Justin Lehtonen at (213) 236-4536 or

Looking for a specific solution?