The COVID-19 crisis has revealed a significant insurance protection gap in the construction industry (and others): communicable disease. Many contractors found that their business interruption insurance and other policies didn’t cover pandemic-related project shutdowns because of either exclusionary language or the need for physical damage or a physical trigger element, such as flooding.
One type of policy that has been gaining traction in light of the gaps left by traditional plans — including pandemic-related coverage — is parametric insurance. Construction companies can buy one of these policies to protect their balance sheets, rather than property, when projects are exposed to qualifying events that cause unexpected delays or expenses.
The basics
While traditional insurance pays claims for loss of or damage to physical assets, parametric insurance payouts are triggered by an event, such as bad weather. It provides a solution for companies requiring immediate financial relief when an adverse event delays or otherwise negatively impacts a project but doesn’t necessarily cause physical damage.
The concept is relatively simple. The insured and insurer agree on predetermined, measurable parameters as well as the sum to be paid when those parameters are triggered. Once the parameter thresholds have been met, and measured by a neutral third party, the payout is disbursed to the policyholder.
For instance, if high winds temporarily stop a project, and the wind speed reaches a predetermined level that’s confirmed by a nearby weather station, the policy is triggered and the predefined sum is automatically paid. There are no deductibles and no need for adjustments, negotiations or settlements. Another example is when the ambient air temperature drops below a predetermined level and interrupts the concrete mixing and curing process.
Larger strategy
Parametric products can be part of a larger strategy to protect cash reserves, lines of credit and surety capacity on projects.
In the past, construction companies have used parametric coverage to minimize the gray areas presented by traditionally underinsured risks, such as project disruptions caused by extreme temperatures and catastrophic events such as wildfires, earthquakes and flooding. Now, some are considering parametric contracts that protect against risks related to viral outbreaks, public health crises and government-mandated shutdowns.
Supplemental plan
Parametric coverage isn’t a one-size-fits-all solution to insurance needs, and it’s not intended to replace traditional plans. Rather, its purpose is to supplement other policies by providing an additional layer of protection in the face of specific adverse events. To determine whether parametric insurance might be right for your construction company, contact a qualified insurance rep and consult your CPA on the cost impact.
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