Construction insurance market growing ‘increasingly distressed’

A leading insurance advisory firm has warned that the construction insurance market is growing ‘increasingly distressed’ with a ‘considerable erosion’ to be expected in the quality and extent of coverage bought.

MacTavish, a risk analysis, insurance reliability and claims resolution firm, said these problems are affecting other sectors too, but there are two factors which make them particularly challenging for construction companies.

Liam Donnelly, analyst at the firm, explained, “The first is the difficulties posed to the sector by the end of lockdown and return to work, which are far from straightforward on active construction sites. The second is the way in which commercial contracts create a complex web of liabilities and obligations across contractors, sub-contractors and other elements of the supply chain.”

He continued by telling of how businesses’ operational changes in response to Covid-19 have altered their risk profiles. In some cases, he said, the changes are so significant that current policies may fail to respond in full in the event of a claim.

Mr Donnelly added, “This problem is intensified for those construction projects in which various contractors and subcontractors, each with their own unique risk exposures, have sourced coverage independently – subject to separate terms and obligations. Even when wrap-up policies are employed, such as an OCIP or a CCIP (in which the project sponsor or lead contractor sources the coverage for all participants) these arrangements require all parties to comply with specified operational conditions to ensure certainty of coverage. Managing this mosaic of policies at a time of rapid and ongoing change represents a particular problem for construction companies of all types.”

Another challenge – and one in which he said is ‘almost unique’ to construction – is that new coverage restrictions can ‘suddenly’ place firms in breach of commercial contracts that form the basis of existing projects.

He explained, “This can expose multiple parties. First, the contractor must ensure the appropriate cover is in place to comply with the insurance requirements contained within the commercial contract, which can be thrown by sudden reductions in limits or removal of cover for specific types of work. In addition, contractors might then expect to subrogate to subcontractors many of the losses incurred following a claim.

“However, to do so it is crucial that the subcontractor’s coverage also complies with master policy requirements. This is becoming more of a challenge under current market conditions, where substantial restrictions in cover are commonplace and policies become increasingly unreliable. As a result, contractors might find themselves unable to exercise their subrogation rights, leaving them ultimately liable for the loss.”

As a result of this, Mr Donnelly said that construction firms should look to develop a robust understanding of the key scenarios in which they want to be covered and the releavnt structures of projects and parties involved.

He continued, “All stakeholders must understand what coverage is contractually required for a project, and there should be a means through which they can communicate and collaborate on coverage developments and concerns; this is crucial where coverage changes might place a firm in breach of contract, or where additional disclosure obligations under the policy are likely to be required to maintain cover. Where there are rights of subrogation, firms should designate responsibility for overseeing the validity of the underlying policies that are placed.

“Secondly, the other crucial area of focus in a hard market – of the type not seen for at least 15 years – is how to market your risk effectively. This involves improving insurers’ understanding of your exposures and differentiating it from those of your peers. Developing a bespoke risk prospectus is an effective way of ensuring that insurers will not view your risk as a commodity nor sell you a standard commoditised policy, and puts you in the best position to achieve improved, reliable coverage at a more competitive rate.”