January 2024 Market Update – Construction Liability
After a decade of unprofitable underwriting performance, construction contractors were not seen by insurers as a desirable sector – but that view is starting to relax following premium increases in the past years.
The Construction Third Party Liability (TPL) market in the first half of 2023 started easing rating increases. This is the result of greater competition, with new primary and excess capacity entering the market, and improvements in insurers’ profitability following remediation of portfolios and increased investment returns. This has resulted in renewed appetite for Australian risks, primarily coming from the London/Lloyds market. The focus has been on an individual client’s loss history with this having the most significant impact on renewal rating. Clients with a poor loss history are receiving higher rating increases than those whose loss history is more benign.
On the other hand, local appetite continues to be limited in certain segments. There are few signs that this trend is starting to change. As expected with a “long tail class of business”, the effects of remediation efforts by local insurers may not be immediately apparent and will take some time to materialise—potentially several years.
Worker to worker claims continue to impact claims frequency. See our article “Why worker to worker claims are on the rise”. The difficulty of insurers defending such matters is the cause of the concern, therefore premium and excess structures for contractors for these claims continue to increase. If an Insured can show evidence of good record keeping, safe methods of work, demonstrated incident response and streamlined claim processes it will improve renewal outcomes.
The majority of contractors have had significant premium uplifts over the past 3 years. We have experienced more stable pricing in 2023, though insurers continue to seek moderate increases.
The insurance market has experienced that smaller contractors can be more exposed to larger claims. This is particularly evident where they don’t have access to OH&S resources that may exist in larger firms and where they are bound by contractual conditions imposed upon them by larger more sophisticated principals. However, there is more capacity in the market for smaller contractors, with underwriting agencies more able to support clients with a turnover of less than $50M.
Insurers continue to request, and comprehensively review, policyholders’ contract documents (both upstream and downstream). This scrutiny focuses on risk allocation within contractual provisions. Policyholders with low quality contract administration processes or those offering ‘no-fault’ indemnities that hinder defence and claims recovery may encounter policy limitations.
Where a policyholder can demonstrate good contracting regimes insurers will look upon this favourably. Insurers are very resistant to offering blanket contractual liability cover except where rigorous risk management is embedded in the organisation.
Clients with these risks should ensure they are reviewing the contracts (with input from legal advisors) that they intend to execute. The risk advisor’s input to ensure compliance with insurance provisions and advice to which there are uninsured (or uninsurable) exposures is critical.
Particular attention should be paid to the inclusion of principals as “joint named insureds” and exclusion of proportionate liability or blanket indemnities which could see a claim rejected by an insurer. Contracts with principals are generally becoming more onerous and need to be more heavily negotiated prior to acceptance. Some relevant pointers on this subject are included in our article here.
We note from the very significant amount of contract reviews undertaken in late 2023 a trend emerged wherein many risks sought to be transferred under contract, are not under a general liability policy.
Cyber and environmental risks are sought now to be transferred to contractors by principals: the scope of these exposures are not covered by a general liability policy.
Contractors need to be aware of the risk they are carrying by accepting indemnities in relation to data breaches resulting in loss of client data, and environmental clean-up and remediation costs.
Trade contractors, particularly plumbers, continue to be hard to place with no easing of pressure likely in the short term. There has been increased frequency in water damage claims. Many of these arise from failed crimping or product defects.
Fire services contractors have also experienced uplift as a result of water damage claims in the sector.
Insureds who have poor loss ratios over the past 5 years will be “claims rated” and should expect premium/excess uplifts. If the losses appear to be a result of poor work processes or defective workmanship the market has little appetite to support this at any price. In addition, there are fewer alternative insurers, particularly given some “traditional” insurers have exited the space. Insureds will need to be willing to negotiate increased excess structures or reductions in cover to mitigate against significant premium uplifts.
Whilst there is no doubt that this sector has been experiencing a significant correction in terms and conditions offered, there are signs of improved conditions on the horizon. We expect to see pricing moderate over the next 12 months, and while premium rate increases may still be experienced, there are unlikely to be significant unexpected premium uplift for contractors during their next renewal period.
Negotiations with your current insurer are likely to yield the best result, particularly where such a relationship is long standing and claims experience over the period has been good. Alternative markets are only likely to improve outcomes where insurers’ internal underwriting appetite has changed, or where the incumbent insurer has paid significant losses and is seeking to issue unpalatable terms that constitute a “soft decline”.
As always, to avoid surprises, it is essential to provide detailed information and clarification to potential markets to differentiate risk and ensure the best possible terms and conditions of cover are obtained. Given the workload of insurers in this space, we have observed that by engaging with the market early to allow sufficient time for negotiation prior to your renewal date, more favourable outcomes are achieved.
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