Construction costs “may never come back to pre-COVID levels”

Supply chain, inflation and litigation funding piling on pressure, says Allianz's McNulty

Construction costs “may never come back to pre-COVID levels”

Insurance News

By David Saric

The current bout of inflation may leave a lasting impact on the construction industry, an insurance leader has warned.

“Construction supply costs may never come back to pre-COVID levels,” Bernard McNulty, Allianz Commercial chief agent and head of claims Canada, told Insurance Business.

While the price of concrete, steel, glass, insulation, and other components that are integral to construction projects have lowered somewhat, lags and supply chain issues are halting substantial cuts.

Drought continues to affect the Panama Canal and the resulting shipping lulls are creating delays in integral supplies getting into Canada, keeping costs high.

Elsewhere, higher-than-average interest rates are also influencing the financing of a construction project, also known as the soft costs.

“When there's a loss on the project that results in a halt, the client can claim the amount of interest for that extended period,” McNulty said. “That interest can be very different than when that project was first launched when rates were more favourable.

“If a claim were to occur now, it can be a significant loss.”

“Litigation funding mechanisms have come into Canada”

In the event of a loss, claims are rising across the board, even for more simple occurrences like a slip or fall.

“I think that rate is probably to the 15% to 20%, year over year,” McNulty said. “The fee for the plaintiff lawyer, their office where they have a staff, what the overhead is, the cost of rehab, chiropractic care and appointment travel all drive up the cost of a claim.”

A growing trend in court cases, litigation funding, is also proving a claims pain point.

“Litigation funding mechanisms have come into Canada in the last three to four years,” McNulty said.

In the event of a more complex, significant injury claim, some private equity groups are investing into a case to maximize the financial outcome for the lawyers involved in the case.

These firms ultimately receive a percentage of the settlement or procure other beneficial return on investments.

“It's no longer what's reasonable or fair,” McNulty said. “You're really just trying to control the amount that can be awarded to an extremely well funded plaintiff firm that is prepared to take all those cases to trial.”

This type of funding mechanism has influenced trial outcomes in Australia, New Zealand and the United States, and is legal in every province and territory in Canada except Quebec.

“The plaintiff lawyer is probably thinking if they could just pay one or two more experts, they could increase the value of this case,” McNulty said.

Thinking about risk prevention tips and tricks

It is more integral than ever for a construction project to employ best in class risk prevention techniques and technologies to sidestep any potential claims or court hassles.

“Technology is especially important for water-related damages, which can be extremely costly,” McNulty said.

Many insurers now insist that water shutoff mechanisms be installed in a building during its preliminary construction phase.

“Carriers that are approached to insure projects that are attempting to renovate or renovate an existing building or trying to achieve a LEED certification are also requesting this type of technology to secure coverage,” McNulty said.

“The more sophisticated insurance providers are also working with on staff civil and structural engineers to identify areas of concern and make sure schedules are being adhered to.”

Being cautious about new technologies

While innovations like water shut-off mechanisms are enthusiastically promoted by insurers, there is some hesitancy towards emerging technologies that do not have a lot of data supporting their effectiveness.

“Insurers are far more cautious about prototype building products,” McNulty said.

“We've seen a number of different products come into the Canadian market including insulating products, building cladding products, roofing products and others that have not been tested over a period of years and lead to losses.”

Due to the nation’s harsher climate and resulting losses, insurers are keen on sticking to tried and true building components and not take a gamble on products that have not withstood the test of time.

“If prototypes are going to be used, it is more prudent to use them on a smaller project first for a number of years before clients and insurers are confident it will be resilient in the long term and avoid any incurred losses or claims,” McNulty said.

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