July 2023 Market Update – Construction Liability
Conditions for contractors in relation to Construction Liability continue to improve during 2023 but challenges in certain sectors remain present.
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.
There remains minimal appetite from local markets in certain sectors (particularly residential high-rise development) however in other sectors this trend is reversing with project home builders and renovators generally seeing steady renewal outcomes and improved policy terms and conditions.
The long tail nature of this class of business (where claims are often not incurred for many years after the period of insurance expires) means remediation taken by insurers in the past few years (in terms of price, increased excesses or coverage restrictions) has started to adduce profitability.
Worker to worker claims (which commonly only appear 4 to 5 years following the incident) do continue to impact profitability. See our article “Why worker to worker Claims are on the rise”. Premium and excess structures for contractors where these claims are prevalent continue to increase. The major difficulty for insurers in defending these actions is contemporaneous and accurate evidence. As such an insured that can demonstrate good record keeping, safe methods of work, incident response and streamlined claims management will have the benefit of broader insurer interest.
Mid-sized principal contractors have experienced premium uplifts over the past 3 years, and for the second part of 2023 this is expected to ease. The trend is that stable pricing has become evident in the past 6 months.
Smaller contractors continue to see moderate premium increases on renewal however there is a trend for insurers to apply higher deductibles to manage costs of claims rather than simply increasing premiums. Trending suggests smaller contractors and subcontractors are more exposed to significant losses. This is particularly evident where they don’t have access to work health and safety resources that usually exist at larger firms. Furthermore, they are ordinarily bound by contractual conditions imposed upon them by principals.
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.
Similarly, insurers are viewing workers compensation claims data to assess whether there is sound safety management (as often those clients with workers compensation claims will be affected by general liability losses over time). It is important that contractors review and manage their workers compensation policy in terms of claims management and claims reserves annually – see our article here for further details.
Contractors should ensure that they are reviewing any contracts (with input from legal advisers) 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. This is particularly relevant as insurers have been amending their base wordings to reduce covers which were automatically included during softer market conditions. It is important that coverage provided keeps you in compliance with future work and projects on foot at the time of renewal.
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. Further commentary is provided in our series of articles on commercial contracts and insurance which can be found here.
We note from contract reviews we have undertaken that several risks seeking to be transferred by upstream parties will not be provided by a general liability policy. Cyber/data privacy and environmental risk 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. Contract amendments should be negotiated to avoid the need to purchase additional insurance cover if such cover is not seen as being part of your operational risk profile.
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 because of water damage claims in the sector. Scaffolders are also seen as undesirable with most needing to place their liability business in the London market due to a lack of capacity available locally. Given recent large claims in this sector we would expect appetite to deteriorate further for scaffolding contractors, and pricing to continue to increase.
Insureds who have poor loss ratios over the past 5 years will be “claims rated” and should expect premium or 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. 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 construction liability continues to have challenges in terms of profitable underwriting, there are signs of improved conditions on the horizon. We expect to see pricing over 2023 stabilise, and while minor premium rate increases may still be experienced there is unlikely to be significant unexpected premium uplift for contractors during their next renewal period.
Whilst ensuring a competitive renewal process, negotiations with your current insurer are likely to yield the best result, particularly where the relationship is long standing and claims experience over the period has been favourable. Alternative markets are likely to improve outcomes where current 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”. In such cases it is worthwhile having detailed information in lessons learned and how losses will be mitigated in the future.
It may also be worthwhile considering a more layered approach to renewal, and rather than simply buying a single $20M or $50M tower, having a primary $5M insurer with excess liability cover above to increase insurer participation above the “working loss” limits of the primary carrier. This is particularly the case where overseas (Lloyds) capacity is being considered by an Insured.
As is always the case, the two key elements to avoid surprises are time and information. Due to increased workloads of insurers in this space turnaround times have been poor, stretching to many weeks to get an initial position. It is imperative to engage with the market early to allow sufficient time for negotiation prior to your renewal date, to ensure the most favourable outcomes are achieved. 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. Engaging the services of a broker who has a deep understanding of the construction space both from a commercial and insurance perspective will always yield better outcomes.
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