July 2022 Market Update – Construction Liability
Construction Liability continues to provide challenges. Key markets have reduced their capacity and appetite for construction contractors after a decade of unprofitable underwriting performance. There is almost no appetite from local markets in certain sectors. However, this trend is beginning to wane. As a long tail class of business, remediation taken by insurers will not begin to materialise for several years.
Worker to worker claims (which commonly only appear 4 to 5 years following the incident) continue to impact claims frequency. See our article “Why worker to Worker Claims are on the rise”. Premium and excess structures for contractors for these claims continue to increase. The difficulty of insurers defending such matters is the cause of the concern, and if an Insured can demonstrate good record keeping, safe methods of work, demonstrated incident response and streamlined claim processes it will improve renewal outcomes.
Mid-market contractors have generally had significant premium uplifts over the past 3 years. We have experienced more stable pricing in 2022, though insurers still continue to seek moderate increases.
Smaller contractors are likely to see premium increases and larger deductibles applied. 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 – particularly in the commercial space. 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 – creating greater competition for that business albeit at higher rates.
Insurers continue to request, and comprehensively review, policyholders’ contract documents (both upstream and downstream). In doing so, they are scrutinising detrimental contracting provisions. Policyholders with poor contract administration processes and those who provide ‘no-fault’ indemnities or otherwise prejudice defence/recovery of claims, will face policy limitations to reduce insurers’ exposure to such indemnities. Where a policyholder can demonstrate good contracting regimes insurers will look upon this favourably. Insurers are moving away from offering blanket contractual liability cover except where rigorous risk management is embedded in the organisation.
Clients in this sector should ensure they are reviewing the contracts (with input from legal advisors) that they intend to execute. The broker’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 of our pointers are included in our article “Commercial contracts and insurance part 1: principal’s indemnity, cross-liability, waiver of subrogation and non-vitiation clauses”.
We note from contract reviews undertaken that a number of risks seeking to be transferred will not be provided by a general liability policy. Cyber and environmental risk in particular are now being transferred to contractors by principals, with a general liability policy not providing adequate protection. 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 costs.
Trade contractors, particularly plumbers, remain 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 claims are 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 less ‘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 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 which constitute a “soft decline”.
As always, in order 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 workloads 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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