As the construction industry sees premiums soar significantly since lockdown, Mactavish emphasises the importance for construction firms to review their insurance programmes as renewals approach 

The construction industry is growing “increasingly distressed” that insurance premiums are even higher since lockdown.

This was the warning from compliance firm Mactavish - it highlighted that premiums that were already high prior to the Covid-19 pandemic have now been “turbo charged” as a result of the ongoing crisis.

Mactavish is urging firms to review their insurance programmes in order to develop a deeper understanding of their risks and what it is they need to be covered for; all stakeholders must understand what coverage is contractually required for projects.

The firm also touched on the hard market and the importance of how to market risks effectively. This involves improving insurers’ understanding of construction firms’ exposures.

It suggested developing a bespoke risk prospectus.

Mactavish also warned construction firms to expect “considerable erosion” in the quality and extent of insurance cover, but it further recommended that companies remain extremely vigilant as renewal dates edge nearer.

Bruce Hepburn, chief executive at Mactavish, said: “Some of these problems are also affecting other sectors, but there are two factors that make them particularly challenging for construction companies.

“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.”

Breach of contract

The construction industry has also seen the introduction of new coverage restrictions, which can put firms in breach of commercial contracts for their existing projects.

Due to the Covid-19 pandemic, there has been some changes for construction firms with regards to altering risk profiles.

This means that firms may not be covered and, therefore, would not receive a payout if a claim were filed.

Although the problems surrounding the professional indemnity market have been widely reported, other lines have also fallen victim to the “unforgiving macroeconomic conditions”.

Construction All Risks (CAR) insurance witnessed increasing restrictions in cover and premium rates have doubled over the past 24 months.

Insurers’ severe economic losses following the Covid-19 pandemic have been estimated to top $200bn, which Mactavish warned will only lead to further coverage erosion with new exclusions, higher deductibles, lower limits and more disputed claims.

Two challenges

Mactavish highlighted two challenges for the construction sector.

Firstly, businesses’ operational changes in response to Covid-19 have altered risk profiles. In some cases, these changes are so significant that current policies may fail to respond in full in the event of a claim. This problem is intensified for those construction projects where various contractors and sub-contractors, each with their own unique risk exposures, have sourced coverage independently – subject to separate terms and obligations.

Mactavish pointed out that even when wrap-up policies are employed, such as an OCIP or a CCIP (which the project sponsor or lead contractor sources for all participants) these arrangements require all parties to comply with specified operational conditions to ensure certainty of coverage. 

The second challenge – and one which is almost unique to the construction sector – is that new coverage restrictions can suddenly place firms in breach of commercial contracts, which form the basis of existing projects.

Mactavish warned that this can expose multiple parties. First, the contractor must ensure appropriate cover is in place to comply with insurance requirements 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 sub-contractor’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.