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Covid-19 ‘turbocharges’ construction insurance premiums

6 August 2020 | By Neil Gerrard

The covid-19 pandemic has “turbocharged” the cost of construction insurance premiums and the market is showing signs of “distress”.

That’s according to specialist outsourced insurance buyer and claims resolution expert Mactavish, which has warned construction companies to expect “considerable erosion” in the quality and extent of the insurance cover they buy.

Mactavish urged firms to remain vigilant through upcoming insurance renewals, warning that some who have made dramatic changes to their operations in response to covid-19, altering their risk profiles in the process, could see their current insurance policies fail to pay out in the event of a claim.

Another risk that the construction sector faces is that new insurance coverage restrictions can suddenly place firms in breach of commercial contracts that form the basis of existing projects, it warned.

While the professional indemnity (PI) insurance market had already been facing problems prior to covid-19, Mactavish said that other lines have also fallen prey to unforgiving economic conditions in recent times.

Construction All Risks (CAR) insurance, for example, has witnessed increasing restrictions in cover and a doubling of premium rates over the past 24 months. Meanwhile, insurers’ severe economic losses following the covid-19 pandemic, estimated to top $200bn (£152bn), will lead to further coverage erosion in the guise of new exclusions, higher deductibles, lower limits and more disputed claims, it warned.

What should insurance buyers do?

Mactavish advised construction firms to reflect on their insurance programmes and develop a robust understanding of the key scenarios they want to be covered and the relevant structures of project and parties involved. It stressed the need for all stakeholders to understand what coverage is contractually required for a project, and recommended that there be a means through which they can communicate and collaborate on coverage developments and concerns.

The company added that this was particularly important 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, Mactavish advised.

And Mactavish urged construction firms to consider how to market their risk effectively by improving insurers’ understanding of their exposures and differentiating it from those of their peers.

Bruce Hepburn, CEO, 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.”