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Building Business

BFL Canada's John Donovan shows that success in construction insurance hinges on the broker's ability to balance a number of competing interests.

Do you remember the photo, “Lunch atop a skyscraper 1932”? It’s the famous black and white picture of workers sitting on a steel beam suspended hundreds of feet in the air, casually using it as a lunch bench, taken by Charles Ebbets during construction of the RCA building in New York. Keep that image in mind; it’s a fitting illustration of construction insurance, the way John Donovan talks about the sector.

As vice-president and national practice leader for construction with BFL Canada, Donovan describes the industry as a series of balancing acts. On one side, success requires chutzpah and entrepreneurship. But on the other hand, teamwork plays a part. In addition to being a “people person,” technical know-how is more important than ever. Clients always come first, but carriers shouldn’t get the short end of the stick. Innovation is the way for construction companies to succeed, yet “innovation” spells “risk” for insurers.

Just as the workers in that old photo seem relaxed as they sit conversing and eating, Donovan and his construction-team colleagues at BFL across Canada seem comfortable maneuvering between these juxtapositions. But that doesn’t mean it’s always smooth. Inasmuch as the construction industry rewards a certain kind of broker—one who is at ease with contradiction—it also presents numerous challenges.

Capacity Crunch

One challenge has to do with capacity—or the inevitable lack thereof. Donovan predicts a capacity pullback that could impact large construction projects. Rating models are at historical lows, and they’re bound to go up.

“We’re seeing rates on certain project types at half of what they were two to three years ago on the same kind of project,” he says. “Something’s going to give eventually.”

It won’t affect everyone: for a $50 million office building in Vancouver, there may be five to 10 markets that would be happy to participate. But for a $1 billion mine expansion or a major energy risk, “you’re talking certain markets capping out,” he says.

Higher prices will result. “I suspect it will be a sharp turn,” Donovan says. “Clients won’t like it. Brokers won’t like it.”

He isn’t sure when the uptick will happen, but his team at BFL figures it’s late already. “We thought this was coming two years ago, but it didn’t.” They’re seeing pullbacks on large projects now, but he isn’t confidently suggesting that 2012 will be the year of reckoning.

Another issue before the construction sector: complex air parcels. Air parcels describe parts of a building owned by different legal entities. Floors one to three might belong to a business that rents office space to tenants. Floors four to 10 could be condos.

With the increase in mixed-use property developments, buildings often have a number of stakeholders. “We’re seeing projects with seven to nine different air parcel entities,” Donovan says.

But this presents challenges. For one thing, air parcel owners might not always see eye to eye on how the insurers divide the premium on property and liability insurance.

“It’s common for a commercial building parcel to believe that there’s more risk from the residential side and vice versa,” Donovan says. “So when it comes to the cost allocation for the premiums for liability or property, we have to ensure that we’re explaining that we’re treating individual risk and that we’re addressing their individual contribution to the risk so they’re not carrying a higher cost for the premium such that it benefits the other party.”

“Our construction and real estate divisions are very well versed on the structure of air parcel agreement and the [British Columbia] Strata Property Act,” he says, explaining that being so well informed enables BFL to navigate situations that can arise with air parcels. “It’s one of the pillars of our organization.”

Capacity can be a challenge for air-parcel projects. “Certain insurers are not fans of air parcel buildings,” Donovan says. “It can limit the available capacity.”

Still, “as cities become proponents of higher densities in downtown cores, it’s a natural progression that we’re going to see this. Insurers that want to gain market share are going to have to find a way to understand it and make sure it meets their risk appetites.”

It’s an example of the contradictions BFL faces: here customers employ an innovative approach to rising land costs, but carriers haven’t completely embraced the concept—yet.

So how do Donovan and the BFL construction crew deal with these incongruous trends? He says the solution is also steeped in contradictions: entrepreneurship plus teamwork, client relations equal to technical know-how, and risk taking with risk aversion.

Employee-Owned

Twenty-five years old as of December 2011, BFL Canada is the largest employee-owned and operated commercial insurance brokerage and consulting services firm in the country. It has nine offices across the country and 350 employees.

One of the company’s defining factors is its flat management structure, wherein everyone is expected to perform and help others. “It can’t be an individual-accomplishment environment,” says Donovan, an equity owner in BFL nationally.

For instance, when a Montreal customer needed insurance for a major and complicated  project in Calgary a few weeks ago, BFL’s construction teams in Montreal and Vancouver worked together to complete the placement. “If we had too much of a focus on regional reward systems, that teamwork would fall down,” Donovan says.

Success comes to those who can communicate with customers while grasping technical insurance issues, he says. In construction, where contract language is an increasingly important peg in the risk-management architecture, it isn’t enough for a broker to talk the talk.

“Being a real ‘people person’ is one thing. But these days if you’re going to be successful you have to back those traits up with highly technical capabilities,” Donovan says.

He exemplifies this. He began his career as a teenager just out of high school, starting in the mail room of Parsons Brown & Company Ltd. in 1987. He worked his way up into positions with more responsibility, joining the auto plan group and then focusing on marketing, where he learned the ins and outs of contract language and endorsements. After a couple of years, he went to work for Willis, which was opening a new Vancouver office. This is where he started to zero in on the construction industry (Vancouver was in the midst of a building and property-value boom that wouldn’t let up until 2007). All the while he succeeded by pairing an interest in what’s needed to complete placements and what’s needed to attract customers.

“I morphed into account production and account marketing,” Donovan says. “It wasn’t a conscious change. It’s just that one day I realized I was attracting clients as well as marketing projects for other account executives.”

Donovan left Willis to join Jardine Insurance Brokers Ltd. (now Jardine Lloyd Thompson Canada Inc.). He was there for more than 10 years, where he attained the level of head of western construction. In 2004 he joined BFL as the head of the national construction practice.

Keys to Success

Ask Donovan why he thinks he has succeeded, and he’ll point to a few things: strong mentorship (back at Parsons Brown he would be invited to listen in on the executives’ business discussions—“I was just a sponge”); integrity (one of his mentors, Bill Davis, pointed out that no one can take away your integrity, but you can give it away); and focusing on the customer. “The client always gets the edge,” he says, not the carrier and not the broker.

But that doesn’t mean the carrier should suffer. “It’s a fine line. We have other business that we have to place with them.”

Case in point: a client needed insurance for the construction of a $1.6 billion mine project. Specifically, the customer needed to cover a significant delay in start-up (DSU) risk, and it had to protect a part of the grinding equipment that is integral to the mine’s operation. It had to be shipped into the country. If it was damaged en route or while being tested for production during ramp up, it would take three years to replace.

BFL had to call on international capacity to complete the placement. The brokerage demonstrated to the market that the client’s procedures shouldered some of the catastrophic risk. BFL also pointed out that the engineering, procurement and construction (EPC) contractors were globally recognized in the sector.

“I believe that gave the underwriters some confidence,” Donovan says, adding that the client is now covered for DSU, and covered for the bottleneck items in transit and in construction.

Brokers also need to know when to push the envelope—and that means understanding new construction concepts. One example is taller wood-frame buildings. Since 2009, BC property developers have been allowed to construct wood-frame buildings as high as six storeys, up from four stories under earlier regulations. But the new wood-frame rules drew the wrong kind of attention when one of the first six-storey buildings in Richmond was destroyed by fire.

Donovan says BFL recently met with members of the Canadian Wood Council to discuss insurance challenges for a 10-storey wood-laminate building planned for construction. BFL told the council that yes, the Richmond fire caused concern among insurers. A number of the markets that participated in that project had to file reports to heads of underwriting and syndicate leaders explaining how their underwriting criteria were met. (Donovan notes that all reports satisfied the parties, and indicated that no company had taken an excessive risk in underwriting the destroyed six-storey structure.) But BFL itself was involved in placing insurance for a six-storey wood building, and the brokerage made it happen without the client having to pay a fortune. “The rating models were very aggressive,” Donovan recalls.

Issues such as the Richmond building fire and civil unrest about oil-industry pipelines expected to be built in Canada make life more challenging for brokers serving the construction sector, he says. “Anytime you have controversy surrounding anything, insurance actuaries tend to get a little nervous.”

Nonetheless, controversy is bound to follow disruptive business practices. And in an industry like construction, where innovation is the key to success, brokers have to bridge carriers’ endemic risk aversion and the client’s risk-taking. That’s the balancing act Donovan and BFL face. But judging from his tone during the interview, he doesn’t seem to mind, especially since he thrives in BFL’s flat management structure, where managers are expected to take part in developing new business.

“I really enjoy what I do. If they ever try to take me out of dealing with clients in the trenches with the team it’s going to be tooth and nail,” Donovan says, adding that it’s unlikely he’d be asked to work any other way.

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Advice for young brokers

Find a mentor or two – people you admire for their accomplishments. Focus on the traits that resonate with you. “Don’t copy them. Take only certain things from them and then create your own personality.”

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Copyright 2012 Rogers Publishing Ltd. This article first appeared in the April 2012 edition of Canadian Insurance Top Broker magazine.

Transcontinental Media G.P.