Nearly every industry in the U.S. underwent massive changes over the past few years as the pandemic, supply chain disruptions, and inflation impacted all corners the economy. In construction, those larger issues manifested in addition to industry-specific challenges, such as the ongoing skilled labor shortage.
To be sure, the news has not been all negative for construction. There are favorable trends in risk management; new construction techniques, methods, and technology; and insurance solutions that address complex construction claims. When you put it all together, what does it mean for the overall claims and litigation environment? Is it trending better or worse in 2022? What are the biggest factors driving claims and lawsuits today?
These are the questions we asked our community of CLM professionals who deal with construction claims and litigation day-in and day-out. The variety of answers we received shows that even broad and seemingly simple questions about the industry are more complicated once you drill down into the specifics of different regions and types of construction.
For example, of the 30 responses to the question of whether the construction claims and litigation environment is better or worse in 2022, 18 indicated the environment is trending worse, 11 said it is trending better, and one respondent pointed to reasons why it is more of a mixed bag depending on the type of construction.
For those who said the construction claims and litigation environment is trending worse, some focused regionally. Morris Ricketts, litigation specialist, Encova Insurance, speaking to the experience of southern states, says, “Weather-pattern changes have resulted in more water intrusion issues, for which homeowners seek to pass on to others.”
Jane Lulli, vice president, claims, Frank H. Furman Insurance, says, “Since the collapse of [Champlain Towers South] in Surfside, Florida, construction-defect claims have increased in frequency [in the state].”
Stephen Henning, founding partner, Wood Smith Henning & Berman, also took a regional approach to the question: “Several jurisdictions come immediately to mind where the trend line is cause for concern. There is the adage that everything is bigger in Texas, and that seems true with construction-defect claims. Florida is another state that reminds me of issues that California saw decades ago in terms of frequency and evolving case law. For Florida, high-rise product and homeowner association-driven cases make this a challenging climate. On the other side of the nation, Hawaii is on the radar for the plaintiffs’ bar, fueled by big settlements and emerging issues like hurricane straps.”
Other respondents observed broader challenges seen across the nation. Bill Pollock, partner, Ragsdale Liggett PLLC, says the environment is trending worse “as claims are increasing and becoming more difficult to resolve.” As Patricia Ostrowski, principal, EPIC, puts it, “The value and verdicts are insanely high.”
Brenda Radmacher partner, Akerman LLP, expanded on the reasons for the worsening environment across the U.S., stating, “Construction firms, as well as owners, are facing ever-increasing challenges—from inflation, to material and labor shortages, to price escalation and fluctuation—which results in more uncertainty and inability to adequately keep projects moving forward on time and on budget.”
Some professionals noted societal changes in attitudes that are negatively affecting the claims and litigation environment. Peter Russell, senior claims specialist, construction and environmental claims, CapSpecialty, says, “It just seems that there are more people who are less concerned with the facts of a case than in the past. A party’s scope of work and whether there is any property damage is not really discussed or relevant; its more about whether there is insurance, and how much insurance.”
Michael Rodriguez, casualty claims specialist, Tokio Marine HCC, adds, “Particularly regarding mediations, parties fail to prepare ahead of time, and they use the process to collect information instead of investigating beforehand and appearing at mediation ready to engage in substantive settlement discussions.”
Jay Anthony, vice president-claims, west region, BITCO Insurance Companies, describes an environment where all sides appear to be simply digging in: “Plaintiffs continue to cast a broad net on even the most cosmetic issues, with earlier litigation on these matters and ever-increasing theories of improper work. Contractors, both general and subs, are increasingly taking hardline positions to defend their reputations and ability to gain new work while considering the ever-increasing cost to procure insurance protections. And carriers appear to be taking harder positions on risk share and coverage to attempt to control cost. The results appear to be increasing cross claims, third-party actions and/or coverage actions, delays in getting to a resolution point, and increased claim-resolution costs across the board.”
On the Other Hand
Plenty of professionals, though, see an improved claims and litigation environment in 2022. For some, the reason is simply due to lagging construction activity. As Timothy B. Spille, attorney, Reminger Co., notes, “The economy has slowed development and construction a bit. This is impacting the volume of claims.”
William D. Morrow, senior partner, Morrow & White, says construction-defect claims have declined significantly “probably as a result of COVID-19 and plaintiffs’ counsel’s inability to meet with new clients.”
Several respondents pointed to efficiencies in new construction methods and resolution strategies as reasons for the improving environment. John Toohey, partner, Bremer Whyte Brown & O’Meara, says, “As an example, we are really seeing the fruits of the pre-litigation statutes and OCIP trends. They are paying off in the southwest and are both operating as intended—streamlining litigation and saving on indemnity and costs.”
Maren Mooney, account executive, Construction Risk Partners, notes, “I think the construction claims and litigation environment is trending better when it comes to finding efficiencies in the dispute resolution process. Whether it’s conducting virtual proceedings, using new technologies for document sharing, discovery, or fraud detection, there are many tools available that contribute to a leaner approach.”
Lauren Griffith, team leader, architects and engineers professional liability, The Hartford, says labor shortages and supply chain issues are keeping activity steady from 2021. “But I think we are seeing a trend in the right direction—companies are understanding the bottlenecks better and are trying to address them,” she adds.
While attitude shifts in the eyes of some professionals are leading to situations in which all sides dig in and plaintiffs cast as wide a net as possible, other professionals have seen more positive changes in behavior. Stuart C. Poage, mediator/arbitrator, Pennington P.A., for example, notes, “The cases I am seeing are more narrowly focused as to the issues and the parties involved. Plaintiffs seem more willing to resolve cases early and avoid the costs of litigation, while defense entities seem to be more afraid of juries (at least in Florida), and are willing to pay a little more to resolve a case than push it closer to the courthouse steps.”
Whether the environment is improving or worsening may depend on location and the line of coverage involved. Bill Nebeker, founding member, Koeller Nebeker Carlson Haluck, makes the point that the question should be looked at from both the residential and commercial perspectives. “My firm is seeing fewer meritless claims on the residential side,” he says. “I see this as a good sign because the advent of claims that have substance leads to early and effective resolution.
“On the commercial side, with the increased construction activity demand, the shortage of labor and materials has led to an uptick in claims due to delays and corner-cutting in the building process. This may be trending better for attorneys, experts, and litigation support vendors, but I do not see it as a positive for the construction industry as a whole.”
What Is Driving
Claims and Litigation?
CLM professionals also discussed what they see as the most significant factor driving construction claims and litigation today, for better or worse. The economy and rising costs featured prominently in responses, as did longstanding challenges to the construction industry, such as the skilled labor shortage.
Derrick Mullen, vice president, Seneca Insurance Company, was perhaps most succinct when summing up why the environment is trending worse: “Economy, economy, economy.”
Some point out that the cost to defend claims is becoming prohibitive. Ashley Brown, partner, Ward, Hocker & Thornton, says, “Litigators and claims professionals know that cost of defense will always be a huge factor in construction claims and litigation. This can make defending a highly defensible claim financially untenable. It is up to litigators and claims professionals to collaborate in choosing the right cases for investing in defense.”
Tim Repass, partner, Wood Smith Henning & Berman, says, “The cost of construction is having a negative impact on claims.” And Lori-Ann Russo-Green, complex claims manager, Gramercy Risk Management, points to the cost of labor, the lack of experience, and the lack of oversight.
Mark Wright, owner and principal, Claims Done Wright, builds on Russo-Green’s point about the lack of experience, stating, “Technology in materials and application is outpacing the labor force. We do not have the expertise in the workforce to render the proper details on projects. This is especially true in small to mid-sized general contractor/builders and subcontractors.”
Regarding the lack of oversight Russo-Green mentioned, John Bergquist, attorney, Parsons, Lee & Juliano, says the most significant factor driving claims and litigation is lack of supervision by the homebuilder in residential construction.
Greg Perruzzi, senior vice president-construction vertical leader, Gallagher Bassett, places the labor shortage issue in the context of growing demand for large projects. “A factor we are seeing negatively impact construction claims and litigation trends is the convergence of growing large-scale construction projects with the macro market challenge of labor shortage—specifically experienced labor—which can hinder businesses from delivering projects on time and within budget. For this reason, it is imperative for construction businesses to prioritize safety training and education of the labor force through continued investment in loss prevention and loss control services to mitigate potential exposure.”
Lee Wright, casualty claim director, Tokio Marine, says, “I think the economy is driving a lot of what we’re seeing. Money is tight for everyone and repair costs are going up faster than repair estimates can be written. This all creates uncertainty for litigants and makes resolution of matters more difficult.”
Interestingly, Wright continues, “Additionally, I believe that doing most of our communication digitally for almost two years has eroded the level of professionalism and collegiality that previously existed.”
This observation builds on some of the behavioral shifts mentioned earlier, and others make similar observations. Griffith notes, “I think the isolation of the pandemic has resulted in a number of issues that are affecting the construction industry. Parties seem less collaborative and more self-interested, [and] plaintiffs seem more unreasonable….”
Thomas Rosenberg, partner, Roetzel & Andress, mentions another pandemic side effect: “The court system is unable to handle the cases at all due to the COVID-19 backlog and the length of the cases.”
Of course, weather also continues to be a driving force for claims activity. But Gary Strong, partner, Gfeller Laurie, says some are using weather damage to pursue other types of claims. “The radical weather is causing unheard-of damage to new and old buildings.” He adds, “However, because developers or individuals suffer damage, they will go back to the contractor or design professional and state that the standard of care was not met and that is why the building is damaged. There can very well be no causal connection between the work and the damage, but parties then need to spend time and money defending the case for what can amount to years when the actual work or design services was not defective.”
The news was not all negative. Some respondents pointed to positive factors impacting claims and litigation. Cynthia McGraw, senior claims adjuster, Davies Claims Solutions, mentions “the ability to bring in knowledgeable experts and create a village of experts to clarify liability.”
And Jody Smith, president, JAS Risk Advisors, says, “Carriers I deal with have, so far, honored their obligations to provide coverage to their insureds.”
Angela Clemente, assistant vice president, corporate claims, UFG Insurance, looks at how all the major trends are converging to paint perhaps a murky picture of the future of construction claims. “According to the National Association of Home Builders, because of rising interest rates, they are anticipating that new construction will slow down. If the new construction market begins to slow down, we should expect to see a reduction in construction claims overall at some time in the next few years.” She adds, “However, this does not negate the fact that current construction claims litigation continues to be impacted by the supply chain issues and labor shortages due to the lingering impacts of COVID-19 restrictions, which will now only be exacerbated by inflationary price increases and demand continuing to outpace supply of goods in general, including building materials.”
CLM’s construction professionals certainly tackled the question of whether the construction claims and litigation environment is trending better or worse in 2022 from many different angles. With no consensus, but many keen insights, the ultimate answer may well be, “It’s complicated.”