CONSTRUCTING THE FUTURE

Construction’s continuously in the headlines, and brokers need to be in constant contact with clients in this ever-changing industry.

By MARTIN WANLESS

For the past few years, the demise of building companies has frequently made front-page headlines. The failures of Opal Tower at Sydney Olympic Park and Mascot Towers have been well documented, while in March, Porter Davis Homes Group and Lloyd Group both collapsed, causing yet another round of headlines.

The bigger names are just the tip of the proverbial iceberg, however, with data from ASIC showing that 1236 companies in the construction sector have gone into liquidation, receivership or administration in the 22-23 financial year to the end of March.

Supply chain difficulties, price increases and labour shortages have contributed to the construction industry’s troubles, and the impact for insurance is significantly more awareness around coverage and wordings.

“Builders going into administration has been around for decades, but the frequency of this has increased dramatically in the past two years,” says Steven Duong, National Construction Manager at ATC Insurance Solutions.

“This is not new to the construction insurance market, but the frequency of companies going into administration –particularly when it’s some of the larger, more reputable builders going into liquidation – does raise awareness within the wider industry.

“When we talk about awareness, it’s around policy coverage with insurer wordings and how they will respond. There is such an increased exposure to partially complete projects when the building contractor is unable to complete the work, so, insurers and brokers need to understand how the policy will respond, if at all, and communicate this accordingly.”

FIXED-PRICE CONTRACTS SPELL TROUBLE FOR CONSTRUCTION CLIENTS

One of the many challenges in the construction industry at present is, of course, the rising costs every construction company is encountering. With prices surging in response to increased demand, supply chains are under stress to deliver –which means difficulties getting materials in the first place, not to mention the increased price tag they arrive with.

While a fixed-price contract is completely understandable from the end customer’s perspective, the practice of issuing fixed-price contracts is one of the longer-term lessons that will have to be taken on board – and it’s one to watch out for when assessing clients’ exposures.

“Hopefully, we take on board the lessons learned from the circumstances of peers who have faltered,” says Glenn Ross, CEO and Founder of MECON Insurance. “Those who don’t could be the next to falter.”

“However, those who recognise the risks and dangers that contributed to the issues others encountered –such as fixed-price contract exposures, supply chain delays, and inflation and labour cost increases –and manage these risks and their clients’ expectations accordingly, will be stronger in the future.”

Potential Project Delays Need To Be Taken Into Consideration

Supply chain shortages and workforce difficulties can mean projects blow out time-wise, and that needs to be reflected in policy schedules.

Projects will also require extensions when a contractor becomes insolvent. Owners will need to source alternative contractors to complete the project, and that brings with it additional potential risk for brokers’ clients.

“Often these policy extensions are not automatic and will require negotiations with insurers, who will often use the opportunity to request significant additional premiums and reductions in policy terms,” says Alister Burley, National Construction Practice Leader at Aon.

“This is further complicated when the insurance is procured by the contractor that has gone insolvent, and project values will often increase substantially as the new contractor is engaged, requiring policy limits to be reviewed.”

Burley also says insurers are putting contractors’ financials under far greater scrutiny than ever before when assessing a risk – as well as a number of other factors.

“Insurers are now factoring in the solvency of contractors as an underwriting requirement and will request financial statements as part of the renewal process.

“The market cycle is currently in a technical underwriting phase with insurers requesting in-depth information in order to consider a risk. Exposure to weather and other CAT events, access to skilled workers and management to inflationary factors are all risk factors being considered by insurers.”

Lizzie Nelson, Director at Insurance Mentor, adds, “Site theft has become a prominent issue for various trades and principal builders. Insurers now require full details of the security that will be in place on-site. Increased security such as site cameras, additional fencing and security patrols to help deter thieves are of the utmost importance.”

And that comes in alongside a number of other challenges, continues Nelson.

“We see construction clients facing a myriad of challenges currently, including but not limited to increases in worker-toworker claims, not only in frequency but claim settlement costs, increases in worker-to-worker deductibles, and the requirements of builders to hold professional indemnity insurance,

MOULD EXCLUSION –MORE THAN MEETS THE EYE?

Most, if not all, insurance companies have a mould exclusion in their policies passed to them via treaties.

Following the recent La Niña catastrophe events in New South Wales, MECON Insurance saw an upsurge in claims where erected building timbers had been physically damaged, triggering cover.

“In some of these circumstances, and where the builders were prevented from attending sites due to floods and road closures, the dampness present caused mould to grow on relatively undamaged timber, thereby rendering it unusable,” says MECON’s Glenn Ross.

“We have taken the view that, in these circumstances, despite our policy exclusion for mould –and even when our Contractors Pollution Cover (including mould cover) had not been taken – we would indemnify these claims for our clients.” regardless of whether advice related services are 100 per cent subcontracted. There are also requirements on various construction clients for their subcontractors to at least hold their own sickness and accident policy if they do not have income protection.

“Clients must ensure they are carrying out appropriate due diligence along with their broker to ensure a comprehensive approach to risk management.”

Working With Construction Clients

For brokers, working with construction clients presents many challenges, and Ross says they can be managed with regular communication.

“One thing that brokers must do with the dynamic risk that is construction, which doesn’t exist the same in static property risk insurance, is touch base with their builder clients regularly to see what is changing with regard to values, duration and

Cost Increases Present Risk In Plant And Machinery

Trent Rogash, National Plant and Machinery Manager at ATC Insurance Solutions, on the challenges in plant and machinery.

“The increasing value of machinery and cost of repairs are current key risk factors – we encourage our clients to review their sums insured at every renewal or whenever they know there has been a change in the market. This is very important as being underinsured come claim time can not only mean a lower settlement offer or contribution towards repairs by the client, but can also cause relationship damage between the client, broker, and insurer.

“I believe this will continue to remain an issue for the foreseeable future. On top of the increased cost of repairs, the wait time on some machinery and parts is still significant, which can have a financial impact on the client while waiting for their machine to be repaired.

“Have your clients review their sums insured on a regular basis and make sure you have some financial protection cover in place. The correct sum insured will ensure the machine is covered correctly, and the financial protection cover will lessen the impact of these wait times.”

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“Things might have changed –particularly in light of the current developments – and you need to ensure covers are still adequate and valid.”

Duong agrees that close relationships between brokers and construction clients are essential.

“Brokers need to work very closely with their clients to ensure their insurance program reflects the adequate levels of cover given the current economic conditions,” he says.

“Maximum contract values in policies need to be closely looked at to ensure the limit is correct – this would also include policy sub-limits and ensuring the limits are sufficient or if additional sub-limits need to be included. For example, transit limit, removal of debris, professional fees and claims preparation costs.

“Given the delays in the completion of projects, the period of insurance (maximum contract periods in policies) needs to be factored in when setting the maximum duration, and make sure policy clauses relating to client insolvency, liquidation and bankruptcy are carefully reviewed.”

Nelson says, “Disruption in the wider construction market requires a comprehensive approach to sourcing new policies for clients as well as renewal terms from both holding and alternate insurers. Insurers are clearly uneasy across a wide range of construction occupations at present and have increased their requirements of insureds in terms of understanding and mitigating risks, particularly for certain projects and site locations.

“Brokers need to be sitting with their clients, fully understanding their position and risk profile and then covering the market in a progressive manner to ensure they are securing the best cover available. There has never been a more important time than right now to be in the broader market, talking to insurers and opening up those communication channels nice and early.”

The construction industry certainly has challenges at present. However, from an insurance perspective, as long as building continues, those challenges will remain –and one contractor going out of business means opportunities for others.

However, as Duong warns, it’s vitally important clients only take on business they can fulfil.

“There will be opportunities to take over projects where builders have gone into liquidation, but it is essential that clients ensure they operate within their means, particularly regarding supply chain issues.”

Because if they don’t, they could be making the next round of headlines.

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