Broker cautions construction firms on stockpiling materials

Supply chain crisis could lead to costly exposures for businesses

Broker cautions construction firms on stockpiling materials

Construction & Engineering

By Gabriel Olano

The global supply chain crisis, coupled with increased activity and demand in New Zealand’s construction industry, has caused construction materials to be in short supply and more expensive.

Industry figures showed that imported building supplies usually take between eight and 11 weeks to arrive in New Zealand and that costs rose by an average of 34% over the past 12 months. As a result, many construction firms are stockpiling materials to help fulfil future contracts. However, brokerage Crombie Lockwood said stockpiling could end up impacting these firms’ insurance cover.

“This bulk ordering approach adds to both the shortages and the costs,” says Mark Taylorson, head of construction at Crombie Lockwood. “With an anticipated global construction boom just around the corner, there is likely to be strong global competition for materials across the board over the next year. As New Zealand construction companies compete for supply, even greater price rises are anticipated.”

Taylorson warned that companies may encounter exposures in their construction insurance because of this behaviour.

“Contractors will insure their materials under the stock section of their property damage policies, or cover will be provided under the offsite storage clause within their contract works policy,” Taylorson said. “Unfortunately, many companies have not increased their stock sum insured to reflect the increased value of materials they are holding for future use. The insurance cover of stock levels needs to reflect both the increased cost of the goods due to inflation and the rise in freight costs to import these goods from overseas.”

Taylorson said that construction companies must be aware that insurance cover is only provided under an offsite storage clause if the insured company can prove the materials have already been allocated to a specific contract and the contract must have commenced. Stockpiling for future projects means that the company may not be able to demonstrate that the materials are for a specific contract already in place. This could mean that the materials will not be insured by the contract works policy.

“Companies with inadequate insurance for their stock are at risk of underinsurance, which has consequences for their balance sheet,” Taylorson said. “Underinsurance could mean they are unable to complete the contracted work on time, or at all.”

Due to the materials shortage crisis, some contractors are recommending alternative solutions to complete contracts on time, which exposes them to greater professional indemnity risks.

To ensure that companies in the construction industry have adequate cover, Taylorson said it is critical that they keep in close contact with their broker.

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