In Their Own Words,
A conversation with EM’s leaders

As a Senior Executive General Adjuster with Engle Martin’s Specialty Loss Group (SLG), David Alvarez has his eyes on Construction Property trends. In a recent conversation, David discussed key areas of Engle Martin’s practice that helps insureds get back to business after a construction event and clients sort through the issues in these complex claims.

Q: What’s top of mind for insurance companies today when it comes to Construction losses?

A: I am located in South Florida and handle commercial property claims all over the nation and occasional losses in the Caribbean. In my experience, I have seen that some of the biggest concerns that our clients have today are related to being able to accurately reserve the potential exposure of a loss in terms of hard cost and the soft cost. Hard costs consist of the actual “sticks and bricks” repair costs associated with the damaged property. Soft costs involve the additional extra-contractual costs incurred because of physical damage to covered property that results in deviation of the schedule of construction, resulting in a delay (of construction) that affects a project’s completion.

Q: There are many moving parts in a construction claim as you pointed out. It sounds like delays are of particular interest to both the insurance companies and the insureds. True?

A: True. A Delay in Start-up or DSU can be one of the most interesting facets of a construction claim, often viewed as the projects business interruption loss. The DSU endorsement provides coverage for defined soft costs the insured incurs because of a delay in construction. The endorsement sometimes offers coverage for (lost) rental income/ business interruption.

As an example, if you’re building a condominium building with a scheduled completion date of December 1st, but a loss to the project results in a necessary revision of the scheduled completion date to February 1st, a two-month delay might have to be considered. There is a component of rental income that that could have been generated had the loss not occurred. Usually, the developer/owners advertising and marketing teams are obtaining applications for rent, doing background checks, signing leases, and moving forward to actually renting these units once a TCO or substantial completion date is obtained. A loss can halt that, resulting in the turnover of the project to stop.

Q: With this this level of complexity, how does Engle Martin approach these cases?

A: The DSU is a moving target for a lot of reasons. Most construction schedules have some sort of delay. It’s our job to understand when a project delay occurred, compartmentalize that delay, and determine what part of the delay is caused by a loss. It takes a tremendous amount of analysis of the construction schedule and communication with the insured, the contractors, and subcontractors to understand what part of that delay was caused by the loss.

Q: We know that inflation is having a significant impact on costs. How is that impacting construction claims?

A: Despite the inflationary charges and labor shortages we have seen in 2022, there is still a lot of construction projects happening. Our clients understand that we are going to see inflationary charges, labor shortage charges, increased labor premiums charges that may need to be included in the loss measure.

One new issue that has recently arisen from is the general contractors request to pay subcontractors their current (withheld) retainage before sub-contractor’s work is 100% complete. Specifically, both general and sub-contractors are looking for goodwill payments of withheld retainage in order to return to the project once the construction project triggers them to return to facilitate repairs to the project. Subcontractors have their choice of projects they want to work on and what kind of pricing they can get for it. If we can go ahead and retain good subcontractors, that’s advantageous to the project in lieu of going back out to the market to find specialized contractors to complete the job.

Q: In this environment, what is it that Engle Martin brings to the table for the client?

A: Engle Martin understands the market, the complexities, and the challenges that exist to bring resolution to both property and liability construction claims. We understand what the real world of construction looks like so we can provide the right information to clients. There’s a reason why some numbers might appear inflated; inflation, labor and material shortages, etc. In addition, Engle Martin understands the reasons why construction schedules become delayed. These projects are impacted by the current state of the market, and we know how to communicate that to insureds and clients.