As the construction industry continues to experience significant shortages, delays and rising costs of materials, some firms may unknowingly be impacting their insurance cover as they stockpile to help them fulfil future contracts.

Author: David Martin


Housebuilders in the UK have identified widespread material shortages as one of the biggest challenges they are currently facing, with 90% of the members of the Federation of Master Builders experiencing this issue.1 The material shortage has been further exacerbated, with the cost of building materials now being at a 40-year high. Between the first and third quarters of 2021, the price of timber increased by 78.9%, and steel by 77.4%.2

Recovery leading to material stockpiling

Despite the challenges faced by construction firms, the industry rebounded in 2021, with a 15% growth on 2020 and a further 5% growth estimated for 2022.3 To help ensure they are able to complete their contracts, construction firms have been stockpiling materials when they become available.

With cash flow under pressure for many firms, larger construction firms are at an advantage with stockpiling materials, which has only further added to the supply chain issues for smaller and medium-size firms, estimated to make up 99% of construction businesses.4

Insurance implications of increasing and holding stock

The focus of contractors has been to secure materials to ensure they can fulfil contracts, and to help protect themselves from further price rises—but many contractors have not considered the insurance implications.

Contractors will insure their materials under the stock section of their property damage policies, or cover will be provided under the offsite storage clause under the contract works policy. Unfortunately, many firms have not increased their stock sum insured to reflect the increased value of materials they are holding. It is also worth noting cover is only provided under an offsite storage clause if the insured can prove the materials have already been allocated to a specific contract. Inner limits also apply to the cover, which limits the cover provided to a specific amount or a percentage of the contract value (generally always the lesser amount).

With firms stockpiling goods to ensure they have them in stock for potential future contracts, they will not be able to demonstrate the materials are for a specific contract in most cases, which will result in no cover being provided under the contract works policy. In cases where firms have not updated stock sums insured to reflect the increased value and quantity of goods being held, many firms are significantly exposed to stock losses and possible consequences of underinsurance.

With theft and vandalism being one of the main risks faced by the firms in the construction industry, if firms do not have their stock insured adequately, their balance sheet will be exposed to a significant loss and they may not be able to complete their contracts.

The materials shortage has also resulted in contractors recommending alternative solutions to complete contracts on time, which unknowingly exposes them to a greater professional indemnity risk, and it is imperative contractors closely monitor this risk. For example, if the contractor recommends an alternative cladding solution to complete a contract, they could be facing a greater professional indemnity risk.

Further cost challenges as red diesel banned

Construction firms are also facing the additional costs associated with the red diesel ban, resulting in costs doubling at a minimum—which only adds further to the problems the industry is facing with materials and labour costs.5 The consensus in the construction industry is that the changing regulation will result in an increase in instances of theft of white diesel from construction sites, as the fuel can be used in cars, unlike red diesel. With margins already under pressure, it is imperative firms manage the risk of fuel being stolen.

Many contractors previously relied on extensions under their engineering policies to provide cover for fuel in bowsers, but with the increased cost of white diesel, these extensions can no longer be relied on. It is imperative that firms are providing their brokers with a detailed understanding of the quantity of fuel being held to help ensure cover can be arranged to protect the company.

How Gallagher can help

At Gallagher, not only do we advise our clients on how to insure their materials but we can also offer property surveys which review your security and risk management at your premises. We can also offer business continuity reviews which helps put a plan in place to respond to a loss.

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