50 predictions: Construction & Engineering

Published 11 septiembre 2018

How will Brexit affect construction insurance?

The spectre of Brexit has already affected the construction industry. It presently struggles with a downturn in investment, currency fluctuation, skills shortages, issues with staff immigration status and the increased costs of imported materials. Changes to supply chains and the eventual rules on movement of goods will also affect project tendering and management.

Contingency planning and review must also include insurance. Where multi-national projects or international insurance programmes exist, subscriber passporting and access to the EU area must be re-considered. Policy definitions and territorial limits for the cover may be affected. Traditional wordings for many construction risks will require review. There will be an increase in the construction industry’s need for risk advice throughout the Brexit transition and the insurance market will play a key role in this.

Construction insolvency – the cost to insurers

UK construction companies in financial distress have doubled in the past 18 months. Construction insolvencies increased by 73% in the first quarter of 2018. The Carillion collapse is the most conspicuous but it is just the tip of the iceberg.

The risk for the insurance market is multi-faceted. Performance bond insurers will see an increased call and project Construction All Risk and Delay in Start-Up insurers may face increasing challenges to disentangle ‘damage’ and delay from endemic insolvency. As design and build contractors stagger on or fail, an increase in claims will arise against them or construction professionals for failure to warn, supervise or intervene. Directors’ & Officers’ notifications will increase. The legacy will be an increasing number of completed but defective buildings. Latent defects insurers should increase the vigour of their pre-inception surveys.

The future is the present for smart construction insurance

Smart construction and the use of technology are widespread. In 2016, Building Information Modelling (BIM2) became mandatory in all public projects placing them entirely in the cyber 3D realm. The march will continue to BIM3, the ultimate in multiple build participation and perhaps too smart construction contracts. But is the industry ready for an all-encompassing common data environment, where incorruptible information is essential? The proliferation of blockchain database technology is thought by some to be an answer to information security creating an absolute audit trail of every construction participant’s contribution.

All classes of construction insurance will be affected by these present and horizon changes. Insurers should work with industry players both to devise relevant products and manage future risk.

Modernise or die – the expansion of off-site construction

Eighteen months on from the 2016 Government- commissioned Farmer Review, which warned the construction industry to “modernise or die” and embrace new building techniques, off-site or modular construction is indeed growing in popularity as quality, time and labour concerns eclipse more traditional construction methods.

However, insurers will have concerns about how straightforward it is to repair defects/damage and the expense of doing so, and whether errors in design and/or workmanship are replicated across significant numbers of modules. This may lead to issues with notification and aggregation. The interplay between professional indemnity, public liability and product liability insurances is important: a composite policy from one insurer may avoid potential gaps in cover but equally prevent subrogated recoveries.