Insuring commercial construction risks –what to be aware of

Construction projects involve numerous risks – more than a single entity, contractor or business can generally bear alone. The role of insurance is to transfer (and spread) the financing of insurable risks, enabling costly construction works to proceed with the confidence that these risks are identified and can be covered. 

Holding an insurance policy isn’t of itself optimal risk management, being secondary to contractual indemnities. Not all indemnities are insurable, so having a thorough understanding and seeking advice about your risks and insurance you take out is critical.

“Insurance won’t cover your business for failing to meet the terms of a contractual agreement,” warns Gallagher Head of Construction – Australia and Asia, Roger Irvine. “The perception that ’insurance covers liability under indemnity’ is a misconceived view.” 
 

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Key exposures that insurers will and won’t cover

What construction and construction contract insurance may cover can include

• unforeseen fortuitous events
• protection of assets
• protection of people
• damage to third parties
• legislative requirements
• financial risk transfer
• some contractual requirements.

There  are sound reasons why construction insurance won’t cover particular conditions, such as

• if construction providers fail to complete the contracted works or fulfil the requirements through inadequate performance or poor quality work. Insurers expect engineers and contractors to perform to the standard of service required in these jobs
• certain exposures may not be covered by the terms of a policy. Remember to always check the applicable exclusions and conditions
• subcontractors are responsible for work they perform and any defective work related to subcontractor services is generally not part of the main construction contractor insurances. In principle, insurance policies are designed to cover only the business specified.  As a general rule, other parties must maintain their own insurance policies
• check that your sub-contractors are properly insured. A third party’s claims under your insurance will affect your loss history and future premiums and/or coverage.

Not all policies are the same and insurers’ approaches to different types of risks – and their attitudes to premium pricing ‒ also varies.
 

What’s driving construction insurance premium costs up?

Some construction business owners have been concerned about the effect of non-conforming cladding and building defects on premium pricing. These impacts on the insurance market should be considered in balance with other influences, such as the current insurance market cycle which is subject to higher premium pricing across insurance covers, Irvine says.

Recent and more frequent natural disaster claims both in Australia and overseas, coupled with lower investment returns for insurers, have resulted in insurers seeking to recoup losses and adopting caution in accepting risks. 

“For businesses buying insurance this means that premiums will likely continue to increase and certain risks, such as construction professional indemnity, will be more difficult to cover.”

This general trend is being driven by a number of construction-specific factors including substantial growth in contract works claims in the last 5 years, including 

• civil engineering – flood/rain damage to earthworks
• renewable projects – technology issues due to wind, solar and waste to energy pushing boundaries
• building projects – water damage due to defective work or accidental damage.

Gallagher’s construction expert Irvine  says there is no direct connection between construction premium prices and building defects or non-conforming cladding, except in the case of professional indemnity.
 

Cost and availability of construction professional indemnity insurance

Irvine says the professional indemnity market has suffered considerably but that the Lacrosse fire and Opal Tower defects are minor issues in the overall picture. “The bigger issues for insurers have been the impacts of infrastructure projects, the cladding crisis and the Design and Building Practitioners Act 2019.”

Changes to the Design and Building Practitioners Act 2019 introduced provisions for retrospective duty of care to apply for 10 years after building completion,  and expanded duty of care to include public interest. This additional retrospective liability may affect the availability of insurance capacity, going forward.
 

Why construction  project principals need to be aware of contractors’ balance sheets

From a contractor’s perspective professional indemnity cover provides essential balance sheet protection because when claims occur they tend to be substantial.

For project principals professional indemnity insurance provides protection for their contractors’ balance sheets.

The principal should understand 2 key things in regard to their contractors’ insurance.

1. They need to be aware of the sum of contractor’s professional indemnity cover as surety if a problem does occur. 
2. The size of the contractor’s balance sheet should be reflected proportionately in the amount of professional indemnity cover a principal needs to compensate for any shortfall.
    

How to approach minimising gaps in cladding or defect risk insurance

There are various ways cladding exclusions are applied to construction insurances, but contract works and public and products liability policies should not have any cladding exclusions imposed. 

For professional indemnity policies, a key tip is to look for references to non-compliant cladding in the exclusions. The exclusion should be limited to non-compliant cladding only and shouldn’t apply to all cladding, but many insurers have written a broader exclusion into their wording. Also check that cladding replacement projects aren’t excluded, and look at the terms around sign-off by an engineer. 

There is good cover available from the insurance market for go-forward cladding exposures, but be prepared to pay higher premiums and to present a positive case for your business by:-

• providing a detailed underwriting submission to positively differentiate your company or your project from others out there. Underwriters price unknowns negatively
• sharing outputs from your risk workshop, if applicable
• presenting detailed risk information and history in an effective and persuasive way. 
   

Benefit from broker expertise and support from construction insurance specialists

It’s recommended that all construction business owners review their current insurance cover, taking into consideration their professional indemnity cover, with the help of an industry specialist broker who can help you ensure you have the right protections for your situation. Gallagher has many construction clients, from major works to smaller projects, and construction insurance specialists to advise on key covers tailored to each construction business and project.