Addressing insurers’ concerns over wood-frame construction

Building with wood offers a range of advantages, from environmental benefits to efficiency gains. However, insurers have become increasingly aware of, and concerned about, the additional risks presented by wood-frame buildings that need to be addressed.

Wood-frame or timber construction is arguably the most widespread method for building domestic structures in North America and parts of Europe. It is lightweight, allows quick and relatively inexpensive construction, and only requires a limited range of heavy tools or equipment. Every component can be easily sourced, mobilised and installed.

Wood-frame buildings can adapt themselves to almost any geometric shape and be clad with a wide variety of materials. There are a huge array of products and systems now available, all of which have been specifically tailored to this type of construction.

The disadvantages

As you would expect of anything made of wood, timber buildings are not particularly fireproof. The organic compounds that make up a piece of timber consist primarily of carbon and hydrogen. All that’s missing for these to burn is a spark and some oxygen. For this reason, wood is classified as a combustible material.

Another drawback to wood-frame buildings is that they lack the strength to withstand major wind events like tornadoes and hurricanes. It is for this reason, timber construction is fortunately not commonly used in locations exposed to high winds.

The insurers’ perspective

The timber construction insurance sector has become more challenging in recent years and achieving equitable solutions for all parties is not always easy. Placing these risks is by no means straightforward. Even specialist insurers, will often decline outright or offer limited capacity. Having said that, during Q4 2021 and early 2022, we have been seeing nominal capacity increases from select wood-frame markets, likely attracted by higher rates. We are hopeful this trend will continue, and we expect wood-frame rates and selective underwriting will remain fluid throughout 2022.

Making your risk more attractive

The provision of sound, detailed underwriting information remains a key requirement when approaching underwriters. Specifics around site security can differentiate your project from others in the same sector and details of the previous loss history of the main general contractor carrying out the works can also help.

Site security is an important aspect of any construction project, but particularly so with wood-frame structures, given the combustible materials involved in their construction. Following a number of serious fire losses in recent years, stricter site security measures have been implemented. Against this backdrop, insurers are more insistent than ever about verifying that appropriate security measures are in place before committing capacity.

Standard requirements include the site being enclosed by a fence at least 6ft high, locked, and lit out of hours to mitigate the risk of break-in or intrusion. The installation of adequate camera surveillance systems is also a requirement, along with third-party monitoring outside working hours to ensure that emergency services will be notified promptly. Another approach is to employ watchmen or guards to patrol the site regularly.

A project’s location can also have a bearing on whether additional security will be required. For instance, if the project is in an area notorious for having a high crime rate, this can affect the capacity and terms insurers will offer.

Proactively arranging site surveys on wood-frame projects can go a long way towards supporting project information and avoiding potential breaches of any warranties in place.
Site surveys give underwriters an opportunity to see a site first-hand. For clients, they offer a valuable third-party opinion on any risks already evident – and any others likely to arise. As a building nears its practical completion date, site surveys can also help by facilitating a seamless transfer of risk intelligence and understanding from the construction-phase insurer to the operational property insurance underwriter. This can be particularly helpful on projects involving more challenging construction materials like timber.

Negotiating policy extensions

Many wood-frame projects encounter supply-chain issues during the construction phase, leading to significant delays. This in turn will require negotiating an extension to the construction insurance policy.

The appetite of insurers and reinsurers alike has reduced significantly over the past couple of years. More and more carriers now require larger additional premiums and apply restricted terms for policy extensions. As most construction projects experience delays, extension provisions should be negotiated prior to binding the policy. But such advanced negotiations with markets are currently proving more challenging.

Requests for extensions are being met with uplifted additional premiums, increased deductibles, or even the need to find a new carrier. It is not unknown for incumbent insurers to decline a request to extend – even if a project has run clean of losses. The many variables that could affect an extension request may not be known until the need for one arises.

Advanced strategy is key, and, as always, accurate and thorough policy drafting can help overcome these challenges.

The impact of water damage

Water damage on construction sites rarely makes front-page news or leads to the most severe of losses. The issue here is frequency. A project could be affected multiple times. The quantum for each event may be relatively low. But, add them all up, and the total loss over the project lifetime could be comparable to a single catastrophic event.

Water damage can arise in many ways. Outside the category of natural catastrophes, however, the two most common causes are burst or damaged internal pipes and heavy rainfall.

Insurers are focusing strongly on water damage now and on how much effort developers and contractors are putting into mitigating this exposure. On both temporary and permanent water systems, there are often requirements for active flow monitoring systems to be installed, as well as automatic shut-off devices on some projects, ahead of specific milestones or activity on the project site.

In today’s increasingly unstable climate, buildings and infrastructure are being designed to withstand the worst that nature can throw at them. During the construction phase, however, these assets can be vulnerable to a range of natural perils, including significant rainfall events.

The resulting damage can be extensive - particularly in terms of mould and fungus. Construction insurance policies typically provide cover for mould and fungus in the form of an extension of cover. In recent months, the market has seen reductions in the limits available for this type of coverage. As wood is very good at absorbing water, timber-frame buildings are particularly prone to mould. Combine moisture, warm temperatures and the mould spores that are always present in the air around us, and you have the perfect recipe for a mould infestation.

Insurance markets have been increasing deductibles for water damage, particularly over a three-year period (when they were often included as any other perils deductible of USD 25,000). We are currently seeing a rising trend of up to between USD 150,000 and more than USD 250,000, depending on a project’s size and scope.

Why we are likely to see more timber buildings in future

Wood-frame construction is likely to remain a hugely popular construction method, despite its challenges. The environmental, social, and governance (ESG) criteria required of new builds will only reinforce this trend.

Another major appeal of wood-frame buildings is that they can potentially be much greener than other building types. The construction of a wood-frame house will typically result in far lower CO2 emissions than a traditional brick build. If the wood is ethically sourced, with all the trees used during its construction replanted, the environmental credentials look even more impressive.

Developers and investors are eager to integrate wood because it is a renewable resource that’s environmentally friendlier than either concrete or steel, whose production and off-gassing leave enormous carbon footprints on the built environment.

In the current economic climate, investors are demanding higher standards from the companies they invest in and the funds they hold. There is a growing concern to see ESG principles applied. The construction industry has a tremendous opportunity to make a meaningful and significant contribution to the delivery of the counter climate change agenda.
Many countries have set ambitious targets for achieving net zero carbon over the next 20-30 years. Wood is the primary building material that will help meet ESG targets, as it is sustainable, replenishable, and can be positively recycled at the end of its use.

Insurers are increasingly looking to partner only with organisations that have best-in-class ESG scores. This thinking is driven predominantly by shareholder expectations and the increasing obligations on insurers to be good corporate citizens in the eyes of the public.

The advent of ‘mass timber’

The continued popularity of wood as a construction material has seen the product evolve in recent times into what is classed as ‘mass timber’. There is a growing enthusiasm for building taller with sustainable materials, and recent updates to international building codes allow the construction of mass timber buildings with greater areas and heights than previously permitted for wood-frame buildings.

The product has become more robust with the aim of alleviating some of the perceived risks timber brings to a construction project. During fires, exposed mass timber chars on the outside, forming an insulating layer that protects the interior wood from damage. Where the code requires it to be protected with gypsum wallboard, mass timber can achieve close to damage-free performance during a contents-fire burnout event.

Recently completed mass timber buildings weigh approximately 80% less than comparable concrete buildings. This, in turn, reduces their foundation size, inertial seismic forces, and embodied energy. High strength-to-weight ratios enable mass timber to perform well during seismic activity.

Mass timber buildings are approximately 25% faster to construct than concrete buildings and require 90% less construction traffic. Mass timber panels are prefabricated then assembled on site, resulting in shorter project timelines and safer construction sites.

While constructing with wood is nothing new, mass timber is now pushing previous boundaries in terms of building scope and height. This will be a construction type to watch as the sector and materials evolve over time. We will be monitoring the insurance implications of mass timber with interest.

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