NFP's Pellen: Stockpiling, re-examination of escalation clauses amid new tariffs is complicating construction risk

By Isha Marathe

July 9 - (The Insurer) - Property owners and contractors are stockpiling heavy equipment and materials like copper, complicating risk in the construction market as U.S. President Donald Trump announced a new round of tariffs this week, said Adrian Pellen, co-leader of NFP's construction group.

Trump on Tuesday said he will impose a 50% tariff on imported copper and introduce levies on semiconductors and pharmaceuticals. The trade decision would bring U.S. duties on the metal in line with those announced on steel and aluminum in January.

This new round of tariffs will likely go into effect on August 1, just as the pause on reciprocal tariffs of early 2025 is set to lift, with a potential for exemptions to imports from major trading partners such as Chile and Canada.

Some large construction projects have stalled or been broken down into phases in response to the tariff back-and-forth, and policyholders are carefully going through their escalation clauses as market volatility ripples through North American supply chains, Pellen told The Insurer.

STOCKPILING

Although the 50% levy on imported copper was announced this week, contractors and builders have been discussing the possibility since February, when analysts predicted a 25% rate on the metal.

As a result, the trend in copper and metal stockpiling had already been underway, Pellen said.

Analysts at Macquarie estimated that copper imports totalled 881,000 tons in the first half of 2025, compared to an underlying requirement of roughly 441,000 tons, creating a significant domestic surplus to dip into, Reuters reported.

"For a long time, I think we have experienced a 'procure as you go' type of model... Where you try to organize and order and procure the equipment for a very specific period of time, and then schedule other materials or equipment to be delivered after the initial (project) is done," he said.

But now, due to tariff-induced supply chain concerns, some property owners and contractors are ordering materials like levied metals, including copper wiring and piping, heavy machinery and tunnel boring machines to store them off-site regardless of immediate need.

"From an insurance perspective, (they) have to insure these (stockpiled) materials," he said.

"So are we actively talking to owners and contractors about the materials they're storing for their project pipeline? Are we buying adequate insurance in the event (of a natural disaster)?... These are some of the considerations that we have to be much more proactive about both during the annual renewal cycle and for projects on an ongoing basis."

Additionally, Pellen has noticed a pickup in modular construction, an off-site building method where sections of a building are fabricated in a factory setting and then transported to a construction site for final assembly.

Combined with stockpiling, the trend of pre-fabrication puts the onus on insurers and brokers to be much more thorough about coverage in P&C events, he said.

ESCALATION CLAUSES

On the property side, policyholders are accustomed to builders' risk policies offering coverage on a full replacement cost basis, subject to cat perils.

Insurance policies, on the other hand, may have escalation clauses, or provisions that allow for adjustments to the coverage or premium based on factors like inflation. With the tariffs in the mix, contractors have been increasing contingency.

"We're allocating contingency at roughly 8%, (but) some of these tariffs are significantly larger... We're really seeing a bit of an examination on the insurance side, 'Is the escalation clause sufficient?'" Pellen said.

As of right now, most escalation clauses that Pellen has consulted on have been enough, but that could soon change as new tariffs go into place.

"For folks looking for higher escalation clause limits, it is possible. It's just subject to negotiation and market availability," he said.

The current uncertainty especially complicates matters because construction projects are not insured on an annual basis, but for the term of construction, which is often multiyear, Pellen said.

"We have to try to look ahead in a crystal ball and figure out where things could head, given the extreme volatility in the economic climate," Pellen said.

"If input prices increase 50%, is that enough coverage to have for those types of scenarios?"

WHO IS MOST AFFECTED?

Commercial and residential construction are likely to be more affected by tariffs, with projects potentially being delayed or split into parts.

"Where I've seen more of acute impact is in markets where the bankability of projects is a bit in question," he said.

For instance, Canadian projects are likely more susceptible to trade uncertainty because they already have regulatory structures that disincentivize foreign investment around new construction, putting into question the profitability of projects.

In the U.S., cities where the population is sparse or declining are likely to see projects getting mothballed, creating more of a clog or wait-and-see approach to the impact of new levies.

On the other hand, high migration to booming metropolitan areas like Nashville, Charlotte and South Florida means that while "they don't like tariffs," the projects are very much still bankable, so construction is moving full steam ahead, Pellen said.

Public infrastructure projects are likely the most resistant to levies for now, with builders still enjoying the COVID-era stimulus benefits, and the U.S. economy remaining strong despite market volatility, Pellen said.

"Overall, labor has gone up, materials have gone up, so maybe the stimulus dollars aren't going as far as they used to, but a lot of these projects are still moving ahead in spite of that," he said.