Risk management advice brokers can offer construction/design insureds amid COVID-19

A key theme is clear communication – for both brokers and their clientele in this industry

Risk management advice brokers can offer construction/design insureds amid COVID-19

Construction & Engineering

By Alicja Grzadkowska

Like many industries in Canada, the construction sector has been hit hard by the COVID-19 pandemic. According to the Canadian Construction Association (CCA), which is urging the federal government to create an emergency COVID-19 construction cost reimbursement program, many operations have been impacted by supply chain disruptions, staff shortages, the increased cost of materials, as well as loss of productivity.

For brokers working with clients in the construction/design industry, Beazley recently provided insights on key items to keep an eye on during ongoing risk management conversations as the coronavirus continues to impact the sector. First on the docket are project stoppages and delays.

In these circumstances, “The key issue brokers need to think about is communicating to their clients about documentation,” said Nancy Brady (pictured), A&E and construction underwriter at Beazley Canada. “It’s extremely important for firms to document in detail the status of the project at the time of delay or stoppage. In addition, firms will likely be faced with many change orders, such as larger separated hallways for one-way movement, touchless door entries, sanitization stations – any and all changes, regardless of the significance, need to be detailed in writing and signed off on. We see miscommunications surrounding verbal agreements are a primary source of claims at the best of times.”

Furthermore, construction and design professionals should incorporate a force majeure provision into their agreements. Doing so ensures that the firm won’t be held responsible for delays caused by reasons beyond their control. This could include anything from acts of nature to widespread infectious diseases, such as COVID-19, according to Brady.

The approval of payment applications should likewise be top of mind for construction and design insureds right now, especially given that during the last recession, Beazley saw an uptick in claims where a contractor had gone out of business and the design professional had approved the contractor’s payment applications for work not yet completed.

“Given that [the last] recession was led by the mortgage crisis, there were certainly a higher number of residential claims on residential projects, rather than on commercial or industrial type projects,” noted Brady. “But I think this recession is much different – it spans the globe and it won’t be limited to select project types or disciplines. We’re going to see general contractors, sub-trades, design professionals, and their clients all facing financial hardship and potential insolvency.”

To safeguard against these risks, Brady says that it’s important for design professionals to protect themselves against the insolvency of the subcontractors. This means that they have to be diligent in approving contractors’ payment applications and making sure that the work is completed to the point stated in the application. She continued: “It isn’t a rubber stamp-type exercise. They’ll be left with incomplete work and no budget to pay another contractor, so it’s a very important thing to note.”

Other risk management procedures that construction and design professionals should be implementing during this time include appointing a COVID-19 representative to keep up on changing rules and regulations, and having contracts reviewed by appropriate legal representation.

Furthermore, “They need to put in place measures for internal or external peer review of documents, plans, and change orders,” said Brady. “That communication, both internally and externally, is key.”

She added that design and construction companies need to be upfront about any limitations in completing work and should not be taking on projects that are beyond their normal abilities. They also need to have contingency plans in place, should anything go wrong, or they be stricken with COVID-19 in their workplace.

Finally, amid this ongoing crisis – and considering the fact that the insurance market has been hardening – it’s important for brokers to communicate with their clients long before their insurance renewal date.

“There’s reduced capacity in the marketplace, with some carriers completely exiting from professional indemnity business, while others are reducing limits or refusing to write certain classes of business,” said Brady. “The broker needs time to remarket these risks and underwriters require time to assess the risk appropriately. They need to provide as much information as possible and that is the key to success. Your applications are not always enough – it’s important to provide full claims information with lessons learned from previous claims, as well as any risk management processes the firm has implemented to prevent future similar claims.”

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