Heidi Carslaw, managing director, Mactavish, explores how companies can minimize risk, understand their cover and navigate their construction business insurance policies
While the construction industry is acutely aware of the compounding impact of Brexit, COVID-19, rapidly rising inflation, and the conflict in Ukraine on their business operations with the rise in costs for labour and materials evident, a common blind spot is the impact these crises continue to have on the efficacy of insurance policies.
In instances where inflationary pressures can’t be passed on to consumers via price increases, construction companies will likely find themselves dependent on the reliability of their insurance policies to recover from their losses in the event of a claim. Failing to account for the impact of recent crises and their consequent price increases means that, those companies are at risk of possessing insufficient insurance coverage. In effect, paying for an insurance policy which declares values based on XXX value vs inflated value, and consequently too low, resulting in an inability to financially compensate out of pocket expenses is not something that the construction industry can afford to ignore. The cost of a misstep in securing appropriate coverage, therefore, can be drastic for businesses already stretched by hard economic conditions, increased operating costs, and loss of profitability.
While it is easy to think of insurance as just another drastically increased cost, the reality is far more complex than that, with insufficient insurance policies being the difference between successful protection or a barrier to business continuation. As such, construction companies must fully consider the impact of the cost increases of wider, global events to address potential shortcomings in their insurance policies and to better limit the risk of major insurance claims being denied or disputed.
Impact of inflation and rising costs on construction business insurance
One of the first steps in securing an appropriate level of coverage is to provide an accurate valuation of your business assets, without which, all claims’ payouts are at risk. As a result of inflation and rising costs, however, assets which may have been accurately valued when a policy was first taken out may now be significantly under-declared. For instance, if a commercial building’s insurance policy devised in 2019 included a limit covering rebuild costs of up to £750,000 or within a stipulated indemnity period, the policy may now fail to consider that, as a result of global supply chain disruption, rapidly rising inflation and widespread material and labour shortages, the policyholder faces a far more prolonged and costly rebuild process.
On the other hand, the value of a policyholder’s insured asset itself may have risen as a consequence of inflation, meaning current coverage limits may in fact, no longer suffice. An added layer of increasingly common practice which many policyholders do not always realise, is something called “average”. Where the sum insured at the time of the loss is inadequate, and “average” is applicable to the policy, then this clause will allow to insurers adjust the claim downwards in proportion to the degree of underinsurance. Therefore, if the declared value is £1,000,000 but it should have been £1,500,000 and the loss is £500,000, the sum insured is 50% underinsured and the claim will be reduced by the same proportion.
Keeping up with rapidly changing risk profiles for your construction business insurance policy
In addition to the rapid rise of costs in the industry, construction firms have all been subject to new exclusions resulting in additional consequences for policyholders. June marked the five-year anniversary of the tragic Grenfell Tower fire which prompted many bold pledges to improve the safety standards of the UK’s existing building stock. This has led to rapid change in the construction industry, which has been adapting to ensure compliance with new safety regulatory measures. Similar to material shortages and delays, this development has resulted in a significant operational change that has altered the risk profile of those in the industry; failing to disclose such changes or insurance policies that have not kept pace or have been subject to the introduction of inappropriate new exclusions, may cause insurance to fail to respond in the event of a claim.
Many insurers, cautious of this new risk that policyholders fall short in meeting new fire safety and regulatory standards, have adopted new exclusions into policies that many firms may be unaware of. For instance, 60% of firms have some restriction on PI cover relating to cladding or fire safety. Unfair policy obligations and exclusions brought about by a rapidly changing risk profile must be identified through careful review of existing policy exclusions to ensure areas of risk exposure that firms expect to be insured for, are covered.
The Building Standards Act 2022 represent a similarly significant shake-up for the industry. For instance, the legislation’s extension of the liability period to 30 years is expected to lead to an increase in the volume of highly complex claims. Construction firms now also find themselves responsible for ensuring there is an ‘accountable person’ for buildings over 7 stories who has the duty to register the building prior to occupation, apply for the Building Assessment Certificate, and produce regular Safety Case reports to the government’s Building Safety Regulator – else their insurance policy will not cover them.
The compounding impact of disruptive global events has created a highly distressed and hardened UK insurance market, wherein policyholders across all industries should expect – in addition to continued increased premiums – considerable erosion in the quality and extent of the coverage they buy, along with an increased likelihood of their claims being disputed. The construction industry has been hit harder than most by insurance market conditions. It has also been subject to major operational changes in a relatively short period of time; from Brexit to Grenfell, to COVID-19 and now the Ukraine-Russia war.
With such a transition in exposure, companies must ensure that their changed risks are disclosed as well as their values accurately reflect the costs of today’s landscape. Policies must reflect these changes, or they will likely find themselves vulnerable to underinsurance and the potentially financially crippling consequences of a denied policy. Given the current instabilities, Mactavish advises businesses to review their valuations, policy sub limits and conditions and consider extending their indemnity periods for business interruption coverage to secure a full recovery.
With the risk profile of many construction firms evolving day by day, these firms must now proactively look to ensure their changed reality is borne out in the extent, form, and nature of their insurance coverage
