Parametric insurance may suit some construction companies
August 30, 2024
Construction businesses are rightly advised to consider a wide array of insurance policies to guard against the financial perils of an industry fraught with risk. Perhaps your company has invested in coverage such as general liability, builder’s risk, workers’ compensation and professional liability.
Assuming you’ve got your primary bases covered, it’s a good idea to keep an eye out for additional policies that could fortify your existing protection. One type of coverage that’s gotten a bit more attention in recent years — particularly since the pandemic — is parametric insurance. It works a little differently than other policy types but can prove helpful under the right circumstances.
Measurable parameters
While traditional insurance generally pays out claims for loss of or damage to physical assets, parametric policy payouts are triggered by specified, measurable occurrences such as:
• High wind speed,
• Excessive rainfall and/or snowfall,
• Temperature extremes,
• Earthquake magnitude, and
• Declared public health events, such as disease outbreaks, epidemics and pandemics.
It provides a solution for construction 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, as measured by a neutral third party, the payout is disbursed to the policyholder.
For instance, if high winds temporarily stop a job, 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.
Broader risk management
Parametric products can be part of a broader risk-management strategy to protect cash reserves, lines of credit and surety capacity. 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.
The pandemic, however, inspired many construction businesses to consider parametric insurance for protection against risks related to viral outbreaks, public health crises and government-mandated shutdowns. Insurers can even design a policy with triggering events related to civil unrest and terrorism, if those are concerns where a job is located.
Not a replacement
Given its relatively hassle-free claims process and fast payouts, parametric insurance may seem too good to be true. But it typically can’t be used to replace traditional forms of coverage, largely because triggering events are so specific. Parametric policies may, however, serve as strong supplemental safeguards against known risks. Our firm can help you identify the costs and tax impact of this type of insurance or any other.
© 2024
