Risk insurance that covers construction damages is up 30%, and the rising cost of all types of needed insurance is causing some builders to reconsider new projects.
MIAMI – Building developers require risk insurance that covers damage to buildings under construction, and some have seen rates increase by 30% over the last two years. Developers also need liability insurance, which has increased fourfold over the same period for condominiums.
Although housing demand remains robust, costs for labor and materials, and hikes in inflation and interest rates are squeezing developers’ finances and limiting their ability to make a profit.
For some high-rise projects in South Florida, developers say insurance costs can exceed 8% of the project’s total cost; three years ago, insurance averaged around 2% of project costs.
As costs continue to rise, many developers are postponing or canceling projects. Fred Zutel, an insurance broker at Lockton specializing in the Florida market, said that some developers are relying on old insurance rates from two or three years ago when calculating their budgets only to later find out that things have changed.
Insurance experts say the hike in rates is tied to an increasing number of natural disaster claims from more frequent and severe natural disasters. Additionally, Florida has had a building boom, and if the same insurer provides coverage to multiple projects within a small area, it increases the riskiness of their portfolios.
Insurers and developers are seeing a rise in construction-defect litigation in Florida that has also increased costs, plus the costs primary insurers pay for reinsurance – essentially insurance for insurers – has gone up following losses after disasters.
“When you add all these factors together, it creates the single-most difficult environment to procure insurance in the country,” says Zutel.
Source: Wall Street Journal (11/29/22) Acosta, Deborah
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