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Managing construction site violence and terrorism risks

By Wendy Peters | May 5, 2022

In this article, we set out the principal terrorism and political violence risks affecting the construction industry and outline the tools available to contractors to manage these exposures.
Credit, Political Risk and Terrorism
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Introduction

The capricious nature of violent events means that terrorism, civil unrest and acts perpetrated by so-called ‘active assailants’ are sadly never far from the headlines. The catastrophic physical, emotional and financial consequences of these crises cannot be understated, and with a rise in domestic extremism alongside traditional global terrorist networks, a fragmented set of bad actors create an increasingly volatile risk environment.

Far from being simply a concern that construction projects will be the target of a direct attack, certain factors inherent to the sector create unique vulnerabilities that contractors must confront if they are to protect their property and personnel, remain resilient in the face of delicate supply chains and fulfill ever-expanding duties of care.

In this article, we will set out the principal terrorism and political violence risks affecting the construction industry and outline the tools available to contractors to manage these exposures.

Violence on the worksite

Construction projects are particularly vulnerable to the consequences of acts of terrorism and political violence owing to three principal factors:

  1. 01

    Construction as a target industry

    Major construction sites are often powerful – even iconic – symbols of a nation’s growth and resilience. Accordingly, attacks on them can evoke strong emotions, which from the perspective of a terrorist, makes them an ideal target. Equally, protestors can exploit the high-profile nature of marquee projects to shine a spotlight on their platform. Often this may involve holding contractors’ timely project completion hostage to their demands by impairing safe access to facilities.

  2. 02

    Open access nature of work sites

    The layout of construction sites is sadly both appealing to those looking to gain unauthorized access, and conducive to mass-casualty events. Multiple access points, with a regular movement of workers, vehicles, staff and suppliers pose a significant security challenge and concentrates a large number of people in relatively close quarters. This vulnerability is amplified when contractors operate sites across the globe, within risk environments that have varying standards with respect to site access, hiring practices and the rule of law.

    Sadly, the construction industry has not escaped the kinds of tragedies that have brought the phrase ‘active shooter’ into our vernacular. A high-stress environment, frequent turnover of personnel, often informal human resources (HR) protocols and access to dangerous objects combine to create a heightened level of risk of workplace violence – a trend which lingering COVID-19 restrictions have only served to perpetuate. In recent years, contractors have suffered several incidents of fatal shootings at work sites, involving current and past employees.

  3. 03

    Delicate dependencies

    Finally, the construction industry increasingly operates on a just-in-time basis, and disruptions to any point of the supply chain due to violence, threats thereof or broader political conflicts, can wreak havoc on the financial stability of projects, their sponsors and contractors. Tightly interconnected workstreams relying on regular shipments creates an enormous exposure to trade disruption risk, with delays in shipment stalling progress, threatening contracts and pushing completion dates back.

Confronting emerging perils

In the context of this complex risk environment, those responsible for risk management within the construction industry face an enormous challenge. Which threats should be prioritized? What is the magnitude of probably and/or potential loss? How can these risks be transferred? One helpful approach is to consider losses across a spectrum ranging from direct assaults on physical assets, to indirect (but no less catastrophic) impacts on a balance sheet. In the context of terrorism, political violence and crisis management, Figure 1 sets out some of the principal threats to contractors, and the risk transfer options available.

Graphic showing the spectrum of potential losses to contractors due to terrorism and insurance coverages.
Figure 1: Principal threats and available risk transfer options

Finding new opportunities to manage violent risks

The specter of terrorism has long loomed large for any organization, and the attacks of 9/11 locked in terrorism coverage as a mainstay in any risk management program.

Most construction firms in the U.S. are faced with two main choices when it comes to purchasing terrorism insurance. They can either buy coverage ‘embedded’ within their Builders Risk policies (often referred to as TRIA coverage, given that it protects against those acts described within the Terrorism Risk Insurance Act), or they can go to the specialty terrorism marketplace to buy ‘standalone’ coverage. Historically, the embedded option has been more cost effective when compared to standalone policies, owing in part to the significant differences in coverage scope offered under each.

However, with the cost of embedded coverage being tightly related to the price of the overall policy within which it sits, (between 1%-10% of the package premium, generally), the price of this option has risen dramatically when compared with the relative stability that has characterized the standalone market.

As illustrated in Figure 2, TRIA premiums embedded within Builders Risk policies have risen by a compounded rate of over 40% in the last five years, when standalone rates have dropped by 15%. Furthermore, the broader Property and Casualty markets have engaged in a tightening of conditions within package policies; withdrawing fire-following coverage for terrorism; shifting toward excluding or restricting coverage for strikes, riots and civil commotion (particularly following the protests in the summer of 2020 and the storming of the U.S. Capitol), for instance. Not only are contractors seeking specific and comprehensive coverage turning to the specialty political violence market, but they are increasingly finding significant savings when doing so.

Line graph showing increase in TRIA premiums embedded in builders risks policies in the last 5 years.
Figure 2: Increase in TRIA premiums embedded in builders risk policies

 

Exploring the captive advantage

For large contractors operating in the U.S., obtaining direct access to the Terrorism Risk Insurance Program (TRIP) by establishing a captive insurance vehicle can bring broad benefits with little up-front cost. Relative to coverage available in the private markets, captives can deliver higher limits (up to $100 billion), low retentions, and bespoke coverage with respect to many perils excluded by insurers.

Given the cost structure of TRIP, up to 80% of this coverage is backed by a Federal Guarantee (as shown in Figure 3), with specialty reinsurance coverage available for those organizations seeking to eradicate any residual risk.

Graphic showing an example captive structure
Figure 3: Example captive structure

Active assailants and the risk of workplace violence

The rise in ‘lone-wolf’ attacks in recent decades has posed a distinct challenge to risk managers who have traditionally relied on property and casualty coverages for protection. Where bad actors may have once seen major property damage as their prime modus operandi, individuals (either belonging to terrorist organizations, or simply acting on their own grievances) with ready access to hand-held weapons now frequently launch improvised attacks targeting human life rather than physical assets.

A key innovation in the insurance market in recent years has been the blending of traditional indemnities with round the clock access to retained specialist consultancies, to assist policyholders in preparing for, and navigating through the complex aftermath of a violent crisis. Coverage scope can be designed to operate from a liability/personal accident perspective, from a loss of earnings/ physical damage exposure concern, or a combination of both.

Supply chain risks

As construction supply chains become more streamlined, emphasizing minimum stockpiling and just-in- time delivery, the links become more fragile. If a key source of supply goes down, there can be serious ripple effects throughout the entire chain. We have seen the dramatic escalation of these issues most recently with failures in the supply chain causing delays in project completion, loss of customers, reputational damage, reduced share price and higher cost of capital. Disruption can be caused by myriad events (apart from pandemic) including weather delays and other natural perils, cyberattacks, restrictive governmental actions, and acts of politically motivated violence.

What if there is no direct physical loss to materials being shipped, but the company is unable to source or deliver them to customers on a timely basis?  Property and Marine Cargo insurance responds only to direct physical loss or damage to goods in transit. Business interruption (BI) coverage is triggered when the physical loss occurs to insured property. Contingent BI provides coverage against loss of net earnings due to direct physical loss or damage to suppliers.

Supply chain policies can address the risks presented by suppliers across the globe for a suite of perils, including terrorism and political risks. These stand-alone policies address potential reductions in supply, which lead to construction delays, and reduction in business and extra expenses of the insured. Policies can be constructed to address:

  • Additional Costs and Expenses – Incurred to overcome disruptions.
  • Contractual Penalties – Incurred if the terms of a contract are not fully met.
  • Value of Loss or Damaged Assets – Including cargo, inventory, stock, building and machinery
  • Loss of Profits – Suffered due to the disruption.

As global trade and supply chains hinge on various political and economic movements across the world, building supply chain resilience is key to any successful business continuity plan. Through innovative analytics and risk evaluation and monitoring, financial risk transfer options like trade disruption insurance can assure that business processes continue as usual even when major crisis risks emerge.

Analytics and security-oriented design

Focused risk assessments, insightful analytics and continual monitoring of both the operational environment and broader risk are the central pillars of a robust risk management platform.

Pre-Construction Design Assessments, Proximity to Target Analysis, Blast Zone Modeling and Site Surveys all can help lead to more informed decisions. Additionally, a broader look into the potential impact of various security measures can provide more accurate cost/benefit analyses to help determine which might be needed on a jobsite.

The continued rise in unrest on the global stage has, unfortunately, only increased the likelihood of terrorism, political violence and ‘active assailant’ events. For contractors, establishing a risk management strategy that adequately addresses the realities of today’s environment can remove a layer of uncertainty and build resiliency in the face of shocks. Those in the construction industry can find innovative, affordable coverage within the terrorism and political violence insurance marketplace to achieve both of these goals.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.

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Terrorism and Political Violence

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