The time is ripe for a new approach to insurance

11 March 2010

At present, many contractors purchase a standard package of insurance products, regardless of the type, size, location and duration of the project. Often there are overlaps and inefficiencies with this approach. As the construction industry begins to position itself for an economic upturn, it has become clear that conventional products are not meeting the needs of contractors and clients, and the insurance market needs to catch up. 

On any large project, contractors are likely to spend a significant amount on insurance. The cost to the main contractor of taking out a bond – which essentially protects the client from the contractor becoming insolvent – has risen in the past 12 months as bond providers take a more conservative approach to underwriting. When the main contractor then seeks to offset its own risks by demanding bonds from subcontractors, the costs usually flow back up the supply chain to the client, and can add as much as 1.5% to a total project cost.

But what if an insurer could write a single project-wide policy, which would indemnify the client for a sum sufficient to get the project back on track in the event of a contractor or subcontractor insolvency? It would be in line with today’s ethos of project partnering and would reduce administration and legal costs along the supply chain. If the worst did happen, the policy would pay out without arguments about accountability. The client is already paying for downstream cover, so in effect the only thing changing is the name on the policy.

For consultants such as architects, engineers and quantity surveyors, professional indemnity (PI) insurance – ususally taken out for 12 years (the period for which claims for latent defects can be made) – is another significant expense, which ultimately gets passed back to the client. But as developers demand greater protection, PI costs have increased, and have added a further 0.5-1% on average to total project costs.

Again, as the client ultimately absorbs the costs, it would also make sense to have a single project-wide PI policy to protect the client. A few such products are available, but they tend to be more restrictive than normal PI policies and none currently last for 12 years.

Tailored insurance packages could provide better cover, as well as save significant sums along the supply chain.  However, insurers are unlikely to introduce new products and insure different risks unless they are requested to do so. Currently there is competition and substantial capacity in the construction insurance market, so this would be an opportune time to broach new ideas with underwriters. With less business and fewer construction projects out there, many will be looking for and open to new sources of business.

Insurance brokers clearly have a pivotal role to play in taking the debate forward, but contractors and consultants too can exert pressure by making sure their broker is fully versed on the risks they face, and the insurance products that would better meet their needs.

Should insurers provide project-wide policies? Comment online.

David Hayhow is director of real estate and construction at Lockton International

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