Author: Tracy Keep
In the event of a significant loss, insufficient insurance cover can lead to financial strain, project delays and even potential bankruptcy, so it is crucial for construction companies to regularly reassess their insurance policies to ensure they have adequate protection.
Building reinstatement—more than the rebuild costs
The costs of every aspect of a building reinstatement have been driven to the highest levels on record,1 making it more important than ever to gain an accurate reinstatement value. This is not just for the building materials and labour costs involved but everything from demolition to the transportation of materials and plant, to the energy needed to manufacture materials for construction. While index linking may be applied to the buildings sum insured at renewal, this will not provide the certainty of a required claims outcome without an accurate sum insured provided by a professional reinstatement valuation. Index linking will also only provide protection if the sums insured were correct in the first place, so any underinsurance in the original values would be exacerbated further.
The rising cost of building materials
Commodity prices have not yet returned to pre-pandemic levels and China’s relaxation of its zero-COVID policy is expected to increase global demand. This will continue to affect the cost of building materials. In the past year alone, the UK Construction Materials Price Index increased by 10.4%, driven by increases in the price of insulating materials (41%), gravels and sands (20%), and concrete products (16%).2 In addition, iron and steel costs are up by over 70% from pre-pandemic levels.3 Construction firms must factor this in not only when evaluating the total building reinstatement cost but also for materials on-site or in storage in case of damage or theft.
What can underinsurance mean?
When a company is underinsured and needs to make a claim on their insurance policy, there can be numerous consequences. It’s not as straightforward as just receiving a slightly lower amount than you would hope for. Here’s what you could be up against in a claim scenario if you are underinsured:
Project disruption: The business would need to cover the additional expenses unmet by an insurance settlement. In the current climate, this could end up being more costly and disruptive as you try to source the appropriate suppliers, transportation, materials and/or labour. All of these things can have a ripple effect on project timelines and costs. Any delays could also lead to an increased possibility of LAD’s which would not be covered by an insurance policy, but could significantly increase the cost and may mean that the project is no longer profitable.
Application of the average clause: The average clause in an insurance policy essentially pays out a proportional settlement, meaning the policyholder must bear part of the loss. Usually, this will be the same proportion as the level of underinsurance. This percentage would be applied regardless of the size of the claim. In cases where this insurance gap is significant, such as a property claim, this could have a devastating impact on the business—perhaps even leading to insolvency.
Voided insurance policy: In the worst-case scenario, if the level of underinsurance is significant, the insurer could void cover on the grounds of misrepresentation. For example, if you are uninsured by around 50%, insurers could argue this is a reckless or deliberate misrepresentation of your cover needs and declare the policy void, leaving you with no cover when you may need it the most.
To mitigate these challenges, construction companies must conduct regular assessments of their insurance policies, ensuring they accurately reflect current reinstatement values, account for potential disruptions in the supply chain and factor in market volatility.
Many construction companies assume that if they do suffer damage to their own premises, they would simply rebuild it themselves at cost. However, it is important to consider that this might impact on projects being undertaken for paying customers, so the potential disruption to the business could be greater than expected. And with margins currently extremely tight in the construction sector, the cost price of rebuilding is likely to only be a very small amount less than the market rates.
Securing sufficient cover for your business
As a specialist in the construction sector, Gallagher helps firms of all sizes to gain a better understanding of the current construction insurance market and respond appropriately to secure cover for their risks.
We can help you protect your business by conducting an in-depth review of your insurance programme to highlight gaps in cover or areas of underinsurance. We can also arrange property surveys and valuations through our partnership with a RICS-approved company to provide up-to-date building reinstatement values, as well as supporting you with your risk management and contingency planning.
Please contact our Construction team if you would like to know more.