Comment: Construction across the globe – managing the risk

Comment: Construction across the globe – managing the risk | Insurance Business

Comment: Construction across the globe – managing the risk
The scope, ambition and impact of civil engineering projects across the globe have never been bigger, and this creates very real problems and risks for underwriters in London. Mike Walsh, founder of Walsh PI loss adjusters, which is now part of Triton Global explains that however carefully the reporting or notification clauses were drafted in a policy, in the real world the insurers are often the last to know that there are disputes or delays affecting the project, which could in turn lead to an insured loss. 

The needs of vibrant and emerging economies around the world for new transportation, health, education, housing and commercial infrastructure are driving a buoyant, albeit competitive, worldwide construction industry.  In countries gifted with significant oil and mineral resources, such as the Middle East and Australia, there is additional demand for investment in associated infrastructure.
Construction is an international business, in terms of nationalities and location of work.  The insurance industry is equally global in reach, albeit based in centralised locations such as London, Chicago, Singapore and Sydney.
The global insurance structure, and London in particular, supported by regional insurance centres, is well versed in dealing with construction notifications across the globe.  With modern technology, there should be no communication issues arising out of distance.  The problems which do arise usually occur out of a lack of mutual understanding between the construction and insurance industries.
Large infrastructure projects demand clarity of contractual roles, and risk allocation.  However, unexpected events arise and, given the multi-party nature of such projects, there is a risk of disputes which can be disruptive to progress, and detrimental to all parties, including insurers and policyholders.
There is therefore an advantage in covers being written on a joint names single project basis, whereby the contracting parties effectively share the risks, through their proportion of premium.  From an insurer’s perspective, whilst the prospects of subrogated recoveries are waived, the costs associated with blame allocation and dispute resolution are avoided.
There may also be a growing willingness on the part of some underwriters to provide comprehensive annual or project insurance, incorporating contract works, general liability and professional indemnity cover under one policy.
However, irrespective of the insurance structure, the size, lengthy duration and often remote location of major engineering projects present challenges to an underwriter.  To a construction professional intent on completing on time, protecting the interests of insurers may not be a priority.
Site problems tend to be expensive to correct, with potentially greater cost of delay, from an extended period of site establishment and the extended cost of employed capital before project returns can be realised.
Contractors’ All Risks policies respond to damage or loss to works, plant and materials, although there can be an element of cover for defective design.  They will exclude delay losses.
Professional indemnity (PI) policies, written to cover contractors’ design and build responsibilities, provide an indemnity against liabilities to third parties and, in general terms, against the policyholder’s costs of repair to the extent that doing so mitigates a potentially greater liability to a third party.

PI policies will generally respond to a client’s delay loss, which may be less than the level of liquidated damages, but will not respond to contractors’ own prolongation losses, except perhaps to the extent that establishment costs are commensurate with, and part of, the costs of repair.
Hence, there may be elements of loss which can fall outside insurance cover and it is in the interests of both policyholders and insurers that any problems on site are efficiently resolved, and that insurers are notified as early as possible.
From an insurer’s perspective, late notification gives rise to fears of costs being incurred without prior agreement, losses not being mitigated, and potential consequential losses not being recognised. 
On prolonged and remote locations, there is real merit in insurers appointing a project insurer representative, probably on a visiting basis, to establish working relationships, monitor progress, identify and investigate any problems as they arise, keep insurers advised and deal with any unavoidable claims under the policy(ies).
Such a role demands experience of design and construction, contract law and insurance law, and there is a cost to insurers, which inevitably is reflected somewhere in the cost of insurance.  However, this is modest relative to the cost of losses which are not mitigated and policy disputes which are not avoided.
An experienced representative will draw upon experience gained from investigation of construction failures and disputes, both technical and contractual, in finding ways to reconcile the immense pressures for construction progress to be maintained, with the legitimate needs of an insurer.
The demands of international infrastructure projects may be the catalyst for a long overdue improvement in the interaction and understanding between our two industries.

Mike Walsh is the director of Triton Adjusting's Asia-Pacific business.