With fewer insurers operating in this sector, alongside the impact of COVID-19 , has resulted in premium rates continuing to rise in conjunction with material increases in the levels of self-insured excesses being demanded by insurers, making it a challenging environment for construction professionals.
1. Continued selective underwriting
Underwriters continue to be cautious and selective when underwriting construction risks and the provision of high-quality risk information is paramount to being able to secure terms. The underwriting process is now taking much longer with increased internal referrals, ever more detailed information being required on some risks, which has often led to delays in the provision of terms. This can be very frustrating for clients and has been compounded by remote working, with brokers no longer physically able to meet with the underwriters.
In light of the global pandemic, PI insurers are requiring additional supporting information as part of their response to the issues facing the construction industry. Gallagher has produced questionnaires to help our clients meet these requirements and which include:
- Details on a company’s financial viability including liquidity and managing debt obligation, particularly surrounding the impact of COVID-19 on their current and predicted revenue streams.
- Details surrounding a company’s business continuity plans as part of the risk management process.
- Information on contractual protections in place for COVID-19 related project delays. For example, this could be force majeure clauses in contracts and how these are being managed and recorded – as well as monitoring of delays within the supply chain and the availability of materials.
3. Capacity reduction
Insurers are continuing to reduce the line sizes they deploy on each risk, meaning more insurers are needed to complete programmes, which in turn drives up pricing.
4. Rate increases
The range of rate increases is circa +15% to up to 100% is dependent on a number of factors including risk profile, claims performance and if significant new capacity is required to complete programme. Furthermore we are seeing insurers impose higher levels of self-insured excesses even on largely claims free risks, particularly if these have not been adjusted after many years of soft market conditions during which time the firm’s turnover has increased significantly, whilst premiums and excesses have remained flat or have decreased.
5. Coverage restrictions
Combustible cladding and fire safety related coverage limitations have been applicable on all construction related PI risks for some time. These limit cover to a negligence trigger, single aggregate limit, exclude consequential losses and often stipulate higher each claim excesses applicable to each and every site and sometimes to each and every building.
An increasing number of insurers will not consider risks without a full cladding and fire safety exclusion. An increasing number of insurers will not consider new risks without a full cladding and fire safety exclusion as they do not want to pick up any further exposures in this area along with concerns that any future changes in the Regulations could result in even more notifications. It is therefore very important for all construction professionals to continue to undertake qualitative past project reviews and to have notified their insurers of projects that have utilised (non-compliant) combustible materials in external wall systems.
More recently insurers are seeking to impose project delay coverage restrictions. An example of this is manufacturing and transit exclusion which excludes claims arising from the manufacturing and delivery of products where such is undertaken by a third party. Insurers are clearly concerned about that employers may bring claims against the contractor due to such delays.
6. Limits of indemnity
Historically, the manner in which PI programmes have operated have differed between design and build contractors and construction consultants. Contractors PI policies were typically on an Aggregate Limit basis with (unlimited) round the clock Reinstatement(s), whereas the consultants were largely able to obtain cover on any one claim (AOC) basis.
However AOC cover is now much less available for many consultants, and they in turn have had to accept Aggregated limits and /or with reinstatements. For those parties who are required to maintain multiple or unlimited reinstatements, insurers are frequently dictating minimum total limit of indemnity that must be purchased or they will not provide reinstatements of the limit and furthermore the cost of these reinstatements has increased significantly.
As we move in to 2021, we expect insurers to remain very cautious with many having no capacity available for new business for remainder of the year due to GWP income caps. With no signs of new capacity entering the market in 2021 and with insurers focussed on maintaining their underwriting discipline, all construction professionals will continue to face premium increases in the near future.
Whilst early engagement in the renewal process has long been advocated by brokers, it is increasingly important for the broker to fully understand their clients business and help them with the information gathering process so that the risk can be presented effectively to the market. The quality of underwriting information and evidencing of supply chain risk management processes being in place, is one of the key factors in being able to achieve best terms at renewal particularly for clients operating in higher risk project areas or where the claims history is challenging.
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 01.12.2020, but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher.