The construction industry in Australia is flourishing. But costs continue to be an issue, with builders using low cost, imported materials or subcontractors, that put their coverage into question if a claim occurs. Brokers are well-placed, if you are there at the start, to advise on the best way to safeguard your client.
One billion dollars’ worth of construction work is completed in Australia every two or three days1, 2 – not bad for an industry renowned for smokos.
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And whether those construction works be a reno to a termite-infested Queenslander, or laying the foundations for a the 90-storey skyscraper in Melbourne’s Southbank – they all need to be insured, providing opportunities aplenty for brokers.
Construction insurance in a nutshell
When it comes to construction insurance there are two main types of policies.
The first is a single project policy that covers the contractor until the contract is complete and handed over, says Cameron Holmes, Construction Manager at Berkshire Hathaway Specialty Insurance, while the second is an annual policy that covers all projects and/or works carried out during the policy period.
If you wish to obtain the optimum rates for your client you must ensure that underwriters are provided with ‘chapter and verse’ on the project.
The covers provided within policies can include contract works or material damage, construction risks legal liability (public and products liability), professional indemnity, plant and equipment insurance, and marine transit insurance.
“The definition of the Insured in a construction policy is generally very broad and will usually cover all the parties with an insurable interest in the project for their respective rights and interests,” adds Holmes.
The main difference in policy coverage between the big end of town and the smaller projects is that generally, large corporations look for more bespoke wording with endorsements, says Peter Campbell, Senior Account Executive of Construction at Arthur J. Gallagher.
“These endorsements would generally involve an additional cost but would safeguard the builder against significant loss in the event of a claim,” Campbell adds.
So, who needs construction insurance?
Well, anyone who has assets or liabilities exposed as a result of carrying out building work will need some form of construction insurance, says Chris Bovill of Bovill Risk and Insurance Consultants.
However, when it comes to convincing potential clients that they need quality insurance, Bovill says brokers in the construction insurance market face the same issues as brokers in other industries.
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“Primary focus is often on price and not the cover being provided. We find this very frustrating but it’s our role to provide them with the understanding about why one policy is better than another,” Bovill says.
Alister Burley, National Construction Practice Leader at Aon Risk Solutions Australia, adds that each project also needs to go through a careful examination of who should be procuring the insurance.
“Over the last few years we have seen a large growth in principal/owner controlled insurance programs as the principals become more educated on the benefits for them to control the insurance procurement,” he says.
Trends, emerging risks and challenges
Ian Duthie, Senior Account Manager at PNO Insurance, says the construction insurance market is showing signs of firming rates, but they are still at historic low levels.
“Insurers are experiencing a very competitive environment with new players adding to the mix. A spin-off from this competitive environment has been a broadening of policy covers,” he says.
Holmes agrees that profitability is a major issue facing the construction insurance industry.
“With the pace at which capital now moves around the globe it’s a market in which margins are very thin,” Holmes says.
Competition is also fierce in the construction industry itself, adds Burley, and so many projects are based on design and build models where the contractor takes on a greater proportion of risk.
Structuring an insurance and risk management program is more than a tick box, compliance exercise.
“Coupled with extremely tight margins, this scenario presents the potential for quality to be compromised as contractors are tempted to take short cuts in areas such as design, validation or even safety,” Burley says.
Adds Holmes: “This risk is inevitably passed onto insurers so one of the key challenges for brokers and insurers will be to stay abreast of a rapidly changing and highly sophisticated contractual landscape.”
Meanwhile, Burley says worker-to-worker claims under public liability policies continue to be a construction-based insurance concern.
“These types of losses reflect the increased utilisation of subcontractors by contractors, which in some instances has led to cost being the determinant for the hire, rather than quality or reputation,” Burley says.
Angela Vella, Practice Leader of Construction at Arthur J. Gallagher, adds that the use of substandard materials to drive profitability also carries implications for construction insurance.
“In the wake of the London Grenfell Tower tragedy, a review is underway of building product safety and the general use of combustible materials in high-rise building developments. This is naturally of concern to both insurers and brokers,” Vella says.
Adds Bovill: “This stuff is just so hard to tell from the supposedly non-flammable cladding that one can only wonder how the authorities will keep it out of the country.”
And with the sheer volume of materials being imported from overseas, consideration should always be given to marine risks, notes Duthie.
Brokers take note
For brokers keen to enter the game, Duthie says you need a complete understanding of construction projects.
“If you wish to obtain the optimum rates for your client you must ensure that underwriters are provided with ‘chapter and verse’ on the project,” Duthie says.
“This entails providing underwriters with a full description of the works, site conditions, surrounding property and the like.”
Meanwhile, Vella highlights the need for brokers to be involved in construction projects from day dot.
“It’s difficult to provide effective advice when a broker is briefed at a later stage or in response to an insurance-related event,” she says.
“Structuring an insurance and risk management program is more than a tick box, compliance exercise.”
Bovill adds: when in doubt, seek assistance from a construction insurance specialist.
“I truly fear for the young broker starting out who is given a construction risk policy to negotiate for their first time experience at broking,” Bovill says.
“If a broker only dabbles in this area they may well find themselves in trouble due to the complexities. They can still look after their client and get expert advice by seeking out a wholesale broker.”