Why are construction-related insurance disputes on the rise?

Why are construction-related insurance disputes on the rise? | Insurance Business New Zealand

Why are construction-related insurance disputes on the rise?

While litigation predictions at the start of the year pointed to a ‘perfect storm’ in the D&O insurance space, another area of insurance disputes has been slowly on the rise, and lawyers say it is not looking likely to stop.

Construction sector insurance litigation has been slowly rising over the past decade, and Duncan Cotterill partner Tanya Wood said it has also become increasingly complicated, with a significant amount of work coming through around building integrity and structural defects.

She said the construction sector has been hit with many challenges over recent years, and this has come through in the increasing amount of disputes - something which will also ultimately means more claims for insurers.

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“What we’re seeing is an ongoing increase in construction-based insurance litigation, and that often means defective building claims with more nuances,” Wood said.

“Technical consultants have had a lot of learnings over the past 10 years in terms of what needs to be done to ensure a structurally sound building, and so we’re seeing a lot more structural defect-related work, seismic strength related design issues and fire defect work coming through.”

“Fire design in particular is a bit of a black box, and it can be very subjective from one engineer to another,” she explained.

“That can create some real problems in terms of the build environment, and we see fire defects popping through in almost all our major pieces of building-related litigation now. I see those trends as very much continuing.”

Wood said that the environment now is similar to the ‘rapid growth’ phase of the early 90s, which also saw a rise in defective construction and insurance disputes. She said that while some aspects of the Building Code are under review, it is important for the sector to ‘get the basics right’ first if it wants to avoid costly litigation.

“There’s been a perfect storm of pressures in the construction industry for quite a while now, and I think the impact of that for insurers and insurance litigation is that there will be more claims,” Wood said.

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“There will always be issues with workmanship when contractors and construction professionals are under pressure, both in terms of timing, and lack of margins and profit in a project.

“We saw that in the early 90s when there was some really rapid development growth, and we really have a similar environment now which will lead to more design and construction defects, coupled with some issues with the durability of the materials being used.”

“The Building Code has an annual review, and one of the things they’re looking at this year is around improving the energy efficiency of buildings,” she concluded.

“I personally think we should be looking at getting the basics right first. If we’re still building defective buildings that aren’t meeting water tightness and durability requirements at a basic level, then it’s very important to prioritise those essentials.”