Recently, a major fire raced through the AvalonBay at Edgewater apartment community in New Jersey, destroying several hundred units and displacing the residents of the luxury development in the middle of winter.
As dramatic as this enormous fire was, it was by no means a singular event. In fact, even as you read this article, firefighters somewhere may be responding to yet another huge apartment blaze. The reason: The proliferation of wood-framed construction in mid-rise buildings.
One need only look at the record. In the first few months of 2014, for example, fire disasters fueled by wood framing destroyed a four-story apartment community under construction in Salt Lake City; the five-story, 396-unit Axis Apartments building in Houston; and the 300-unit Gables Upper Rock apartment community under construction in Rockville, Md. Similar events occurred throughout the year, culminating in December with one of the most spectacular mid-rise blazes of 2014 when the five-story, 526-unit DaVinci Apartment Complex under construction in Los Angeles burned to the ground.
Insurers have long been wise to these risks. “Wood” construction has a greater likelihood to burn or be damaged by fire and will be a total loss versus a partial one. Loss history for wood construction has been poor, and carriers are very restrictive of the amount of risk they will take. This drives up the cost to the builder, and actually weakens the pro-wood argument that it is less expensive than other materials. The recent major wood frame fires calls for a need to look at cost savings and particularly insurance more closely.
But insurance is more than a line item, and can seem to have as many variables as a project itself. That’s because a single commercial building project requires a range of insurance products, including property insurance, workers compensation, course-of-construction liability insurance and builders risk insurance. Complicating matters further, the cost of each of these types of insurance depends on factors unique to each individual project.
Because insurance is necessary, even if a builder shops for insurance with close attention to cost, the prevailing attitude may be to “bite the bullet” and accept insurance expenses as the “cost of doing business.”
But for a range of low- and mid-rise construction projects, there are a few options. Builders may be missing a major opportunity to trim their insurance costs where they might least expect it—through the use of cold-formed steel framing.
The simple reason is that cold-formed steel is non-combustible: It simply does not burn or contribute to the spread or intensity of a fire.
One insurer, the US Assure Builders Risk Plan insured by Zurich American Insurance Co., for example, offers a builders risk insurance plan specifically designed for steel-framed projects. The firm says the plan is the first offering explicitly based on the non-combustibility of steel versus wood.
According to the company, the plan establishes builders risk insurance rates for cold-formed steel framing in commercial and multifamily construction projects that are significantly lower than the premiums available for wood-framed projects. Of course, all this is subject to underwriting.
For insurance purposes, a noncombustible designation for a commercial project depends largely on the classification of the load-bearing material used to support walls, floors and roofs. This is key, because insurers look at the individual parts of the project, which for underwriting purposes may be classified under one of five other designations—frame, joisted masonry, masonry non-combustible, modified fire resistive and fire resistive.
This is an important consideration for builders, because although a project may contain a majority of noncombustible components—like walls and floors—if the roof trusses are made from wood, the entire project cannot be classified as noncombustible. Each component matters in an insurer’s eyes.
Once a project is properly qualified as noncombustible by an underwriter, it may also qualify for discounts on other kinds of insurance, such as property insurance.
Of course, while the potential for savings by using cold-formed steel framing is there, other factors also affect the cost of builders risk insurance, including geographic location, catastrophic surcharges, deductibles, the contractor’s history of loss, and so forth. The same holds true for the cost of property insurance, which may be affected by intended building use, fire protections, adjacent risks, geographic location and other factors.
But cold-formed steel offers more than an insurance advantage. It has the highest strength-to-weight ratio of any construction material. And it enjoys definite advantages over wood in terms of durability, moisture- and mold-resistance and recyclability.
Most builders who have followed the recent trend toward using wood in nonresidential construction often use “cost” as their motivation. That is certainly understandable in today’s tough economic and competitive construction market. However, there can be substantial savings associated with noncombustible materials, and they could be selling themselves short if they’re not exploring the impact of lower insurance costs. As the market adjusts to the upswing in major claims from the recent fires, this could be even more important in the future.
Charles Specht is an independent insurance consultant at Constructive Risk, specializing in construction insurance in the cold-formed steel market. He was previously an area vice president at one of the world’s leading insurance brokerage firms in California.