- Captives.Insure creates facility that mirrors PCC structure
- Commercial insurers increasingly requiring project-specific underwriting approaches
- For-sale residential market more distressed than rental market
America’s construction liability insurance market is departing from broader general liability trends, with residential construction exposures seeing heightened rate pressure, tightening capacity, and increasingly selective underwriting.
In a new technical report, produced by Captive Intelligence in partnership with Captives.Insure, the challenges and captive opportunity facing the construction sector is explored in depth.
READ AND DOWNLOAD THE REPORT HERE
For many construction firms operating in litigious or capacity-constrained markets, alternative risk financing is becoming an increasingly strategic consideration rather than a secondary option, and captives are being evaluated as part of a broader risk and capital strategy.
Specialist facility structures are expanding access to captive solutions for companies in this space, with Captives.Insure developing a protected cell facility designed to bridge the gap between traditional group captives and standalone single parent captives.
By combining delegated underwriting authority with centralised management and shared service providers, the structure lowers capital and administrative barriers while allowing each participant to retain its own risk independently.
As traditional market solutions become less viable, construction firms are reassessing how liability risk is financed.
The $1.2tn Infrastructure Investment and Jobs Act (IIJA), passed in November 2021, initiated a surge in construction and modernisation projects across the US, creating significant liability exposure for municipalities and contractors.
The for-sale residential market is more distressed than the rental market when it comes to obtaining construction liability insurance.
“If a 300-unit building is developed and operated as a multifamily rental property, construction defects are less of an issue because ownership of the property is retained,” says John Kempton, senior consultant at FHS Risk.
“If it remains a rental property, property insurance is maintained, and any damages are covered by that insurance. But if that same 300-unit building is constructed as condos and sold at completion, every minor or major issue is likely to generate a third-party claim.”
This distinction has resulted in more aggressive underwriting scrutiny and pricing for for-sale residential construction.
Condominiums and townhouses are particularly challenging with common exclusions or outright policy refusals, particularly in severe defect states.
There has also been a surge in construction defect claims linked to high-end custom homes valued between $10m and $15m and this represents an emerging trend identified in multiple 2025 industry analyses.
With an estimated market size of approximately $30bn by 2028, according to a Swiss Re report, litigation funding introduces profit incentives to the claims process, encouraging higher claim values and more aggressive litigation.
This dynamic has reinforced negative loss trends and contributed to insurers’ decisions to reduce capacity, increase retentions, and restrict coverage for residential construction risks.
“This is why 10–15%, and sometimes higher, rate increases are being seen on general liability for residential risks,” said Reznicek.
“When compared with the broader GL market, which has largely remained flat, the disconnect is clear – and there are no real signs that this trend is slowing.”
Other distressed areas of the market include exterior insulation and finish system (EIFS) installation, foundation work, and high-volume tract development exceeding carrier-specific unit count thresholds.
In response, insurers are increasingly requiring project-specific underwriting approaches, often involving extensive documentation, enhanced subcontractor qualification protocols, completion guarantees, and elevated self-insured retentions.
These more stringent measures reflect insurers’ efforts to mitigate long-tail exposure in an environment where loss predictability has suffered.
Captive sweet spot
In such a capricious construction landscape captives can be utilised to provide greater control and allow for insureds to have greater skin in the game.
They can curry favour with commercial insurers in environments where availability and affordability are constrained, often leading to better pricing and greater access to the reinsurance market.
A captive solution can help companies in the sector take control of risk and better manage claims. Group captives are an increasingly common option for US liability risks, but their appetite for residential construction liability remains limited.
Without scale it is difficult for companies to create self-insurance programmes that insulate them from the commercial market unpredictability.
Even for those with the required size, making a captive work in this sector almost always requires an AM Best–rating or admitted or excess and surplus lines policies.
This requirement severely reduces the opportunity for captives to write the business directly, ensuring they rely on reinsurers and fronting carriers.
The viability of captive solutions in residential construction can be heavily influenced by the degree of control exercised over the construction process.
Issues can arise when subcontractors perform poorly and on-site management fails to catch problems as they occur – a risk generally not worth retaining.
“However, if the developer is vertically integrated with the general contractor, there may be greater confidence in quality control across buildings,” says John Philipchuck, founder and CEO at Propriety Insurance. “In that case, it may be the type of risk worth taking.”
For companies with strong subcontractors and diligent construction oversight, the resulting certainty in quality makes them a better candidate for a captive than companies with lighter oversight.
“Ultimately, the decision comes down to the strength of the construction management process and the willingness to invest in it to reduce claims,” Philipchuck says.
“Given the six- to-12-year exposure period under the statute of repose, the question becomes how much risk to take, and for how long. These issues must be evaluated before moving to a captive solution.”
The captive facility answer
Captive facilities sponsored by specialist firms could provide a more accessible and cheaper captive solution for many companies in the construction market looking to reduce premiums and circumvent capacity shortages.
Using delegated underwriting authority combined with the required underwriting expertise, Captives.Insure has created a facility that mirrors a captive protected cell structure, with the aim of reducing the administrative burden and operational costs associated with running a captive.
Each entity effectively has its own captive under the cell structure. Because Captives.Insure sponsors the facility, entities do not need to contribute significant capital, with the firm also managing collateral requirements.
The programme is also open to captive managers, where Captives.Insure underwrites the insured and then cedes the premium and risk to the third-party captive manager’s facility.
Joe McDonald, executive vice president & director of captive consulting at Captives.Insure, says the subtle difference in the company’s model is what allows it to position the offering between traditional group captives and pure, single parent captives.
In most cases, participants are effectively operating a wholly owned insurance subsidiary of a single parent – they retain their own risk.
“However, we have structured it so that an individual operating company can truly own their own risk, either within our turnkey facility or with their own captive manager, at group captive–level costs,” McDonald says.
Each participant effectively gets their own captive, which is then administered by the selected captive manager.
“Captive managers do not view us as competition – we are not taking brokerage commissions, and brokers have no objections,” says Nate Reznicek, president at president at Captives.Insure.
“This allows each entity to operate independently while still benefiting from the broader structures.”
Premium thresholds and other reduced costs are achievable because the facility is centrally managed, with shared service providers. This lowers the barrier to entry, similar to that of a group captive, while still allowing each participant to retain their own risk without sharing it with other companies.
“That combination represents the sweet spot of our approach,” Reznicek says. He believes the biggest factor that helps businesses become comfortable with these risks is staff experience and expertise.
“Delegated underwriting authority is not granted lightly – we have to demonstrate capability,” Reznicek says.
“The challenges that exist stem from a lack of understanding among all parties – broker, carriers, and captive owners – about the risk, how to price it appropriately, and how it fits within the value chain.
From our own experience, we have direct evidence of growing interest despite the challenges – not only from significant initial inquiries, but also from insureds binding transactions to formally assume risk in these deals.”
Captives.Insure believes the firm can deliver on more of these than most, but they still have to turn away a significant number because of market constraints. “In some cases, losses are too high, premiums are insufficient, or the insured simply cannot afford it,” Reznicek adds.
“Often, it is a matter of timing – the market is not yet ready to provide a solution, or the insured isn’t ready to accept the solution the market is willing to provide.”