Understanding construction risks and solutions

Introduction
Willis Towers Watson has compiled this document to provide a general overview of the 5 main stages of a construction project, each stage identifying the typical issues encountered during Purchase, Design, Contracts, Build and Operation.
This document is a guide only and provides a high-level overview. It is for general discussion and/or guidance only and is not intended to be relied upon. We would strongly recommend you make contact with the Willis Towers Watson contacts shown on the last page of this guide if further advice is needed.
Rollover each process below to see the considerations for each stage of the project cycle.
Construction risks and solutions throughout the construction process
Construction risks and solutions throughout the construction process
Public and Products Liability (PPL)
Protects against liability for injury to third parties (non-employees) or damage to their property. Including liability arising from products supplied, manufactured or even imported. Limit of Liability can differ depending on type of work and proximity to surrounding third party parties.
Contractors All Risks (CAR)
Provides cover against loss or damage on an “All Risks” basis to permanent or temporary works and site materials to be incorporated into the works. This is taken out in the joint names of the employer and contractor up to the full replacement value of the works.
Professional Indemnity (PI)
Cover provides against claims for loss or damages arising from professional negligence or negligent advice. If you provide advice or hold design responsibility for a site then you should consider PI.
Latent Defects (LDI)
A structural warranty provides building owners with 10 or 12 years of protection from “latent defects” to the structure of a building. These are defects that occur during the build period but are not discovered until after completion. Structural warranties are usually bought by the developer. The warranty itself will provide cover for the party who purchases the completed building under a full repairing lease. It is fully transferable onto a new owner in the event the owner sells the building.
Contractors Pollution Liability (CPL)
Construction activities that exacerbate existing pollution or harm biodiversity are not covered under traditional insurance policies but environmental insurance covers all this, in particular, gradual pollution. This is important to review at prepurchase, contracts and operation stages of the build.
Employers Liability (EL)
Protects against liabilities of the Employer for death, injury or illness to their employees during their employment.
If you are an Employer, EL is compulsory to arrange for all employees including bona fide and labour only sub-contractors.
About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.
Willis Towers Watson offers insurance-related services through its appropriately licensed and authorised companies in each country in which Willis Towers Watson operates, for example:
In the United Kingdom, Willis Limited, registered number: 181116 England and Wales. Registered address: 51 Lime Street, London, EC3M 7DQ. A Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority for its general insurance mediation activities only. Willis Towers Watson SA/NV, Quai des Vennes, 4020, Liège, Belgium (0415.981.986 RPM Liège) (registered as a branch in the UK at 51 Lime Street, London, EC3M 7DQ UK Branch Number BR021056) in relation to all EEA-regulated business. Authorised by the Financial Services and Markets Authority (FSMA) Belgium, and authorised and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our authorisation and regulation by the Financial Conduct Authority are available from us on request. For further authorisation and regulatory details about our Willis Towers Watson legal entities, operating in your country, please refer to our Willis Towers Watson website. It is a regulatory requirement for us to consider our local licensing requirements prior to establishing any contractual agreement with our clients.
Copyright © 2021 Willis Towers Watson. All rights reserved. FPS1629448/WTW267102
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This publication off ers a general overview of its subject matter. It does not necessarily address every aspect of its subject or every product available in the market. It is not intended to be, and should not be, used to replace specifi c advice relating to individual situations and we do not off er, and this should not be seen as, legal, accounting or tax advice. If you intend to take any action or make any decision on the basis of the content of this publication you should first seek specifi c advice from an appropriate professional. Some of the information in this publication may be compiled from third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such. The information given in this publication is believed to be accurate at the date of publication shown at the top of this document. This information may have subsequently changed or have been superseded, and should not be relied upon to be accurate or suitable after this date. The views expressed are not necessarily those of Willis Towers Watson.
Contact Purchase, Contracts and Build Jon Thacker D: +44 20 3124 8271 [email protected]
Steve Cox D: +44 20 3124 8979 [email protected]
Design Adam Power D: +44 20 3124 6180 [email protected]
Latent Defects Julia Bince D: +44 20 3124 8894 [email protected]
Andy Kirby D: +44 20 3124 6867 [email protected]
Operation Pauline Goreham D: +44 1473 222 426 [email protected]
Pedro Valero D: +44 20 3124 6647 [email protected]
Environmental Jo Newsom D: +44 20 3124 8317 [email protected]
For more construction risk thought leadership, visit our online insights library here
Risks and soltions
Owners and developers generate huge amounts of paperwork and incur not insignificant fees negotiating fitness for purpose obligations
and other rights of recourse against design and build contractors and other construction professionals relating to construction projects. Often this requires these obligations to be backed up with professional indemnity insurance. But will this provide them with the protection they need?
The demise of Carillion in early 2018 highlighted that even the largest and most reputable contractors can fail. When a contractor, sub-contractor or other design professional fails, any party with a new claim against the failed entity will join the list of creditors and potentially only be able to recover a fraction of its loss.
What’s more, as professional indemnity insurance is usually purchased on an annual basis and always on a “claims made” basis, it is likely that the policy will lapse at the next renewal date after the demise of the relevant entity, meaning that there is no insurance pot available to meet future losses from building owners or other claimants. In addition, the recent significant hardening of the professional indemnity insurance market has meant that design and build contractors and other construction professionals are in many cases having to reduce the quality of the cover they are purchasing from renewal date, in turn making it more likely that they will not have the funds available to deal with future claims and fail.
How can you ensure you are protected?
A potential solution is to purchase latent defects insurance. For those unfamiliar with the cover and how it is arranged, insurers (in return for a
non-refundable deposit premium paid at the start of the construction phase), agree to provide protection for the cost of repairs following a structural defect manifesting itself during either a 10 or 12 year period after Practical Completion, provided that the Insured agrees to a monitoring process paid for out of the deposit premium during the construction phase and this reveals no undue concerns, and further provided that the Insured pays the balance of the premium at Practical Completion.
In addition, to cover against latent structural defects, the policy can be extended to provide protection against failure of the weather-proofing envelope, water ingress into basements and the cost of replacing mechanical and electrical equipment during the period of insurance. Insurers are also prepared to offer terms to cover loss of rent or other business interruption costs following latent structural defects.
Policies can be freely assigned to future owners of the building and/or tenants. As the policies are “first party” policies providing the insured (i.e. the owner or tenant with protection), all the insured has to do to receive the policy proceeds from insurers is to demonstrate that insured damage has occurred and quantify its loss, allowing the insurer to in turn try to establish whether it is able to exercise rights of recovery against the design and build contractor and/or any other party.
Why you should consider latent defects insurance
This publication offers a general overview of its subject matter. It does not necessarily address every aspect of its subject or every product available in the market. It is not intended to be, and should not be, used to replace specific advice relating to individual situations and we do not offer, and this should not be seen as, legal, accounting or tax advice. If you intend to take any action or make any decision on the basis of the content of this publication you should first seek specific advice from an appropriate professional. Some of the information in this publication may be compiled from third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such. The information given in this publication is believed to be accurate at the date of publication shown at the top of this document. This information may have subsequently changed or have been superseded, and should not be relied upon to be accurate or suitable after this date. The views expressed are not necessarily those of Willis Towers Watson.
Willis Towers Watson is a trading name of Willis Limited, Registered number: 181116 England and Wales. Registered address: 51 Lime Street, London, EC3M 7DQ. A Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority for its general insurance mediation activities only.
Copyright © 2019 Willis Towers Watson. All rights reserved. WTW306703/0819 FPS701
With a wide range of services and dedicated professionals to serve you, Willis Towers Watson can help construction organisations with virtually any risk or people-related issue.
How is latent defects insurance developing?
Although there has been a reduction in the total capacity available in the insurance market for this type of cover over the last 12 months, we have not
seen the same very significant hardening of the insurance market, that has impacted professional indemnity terms for design and build contractors and other construction professionals.
Even prior to Carillion’s liquidation and the recent hardening of the professional indemnity insurance, market contractors were increasingly arranging latent defects cover on large UK construction projects. We expect recent events will only serve to increase the demand for this cover
Andy Kirby Executive Director, UK Construction Practice T: +44 20 3124 6867 E: [email protected]
Julia Bince Account Director, UK Construction Practice T: +44 20 3124 8994 E: [email protected]
For further information please contact:
For over a decade a soft insurance market within the Construction sector has meant Contractors and Developers have enjoyed low premiums and broad cover for both Annual and Project insurances. This began to change in the latter part of 2018 as the construction insurance market started to harden and this trend has continued through 2019. The catalyst has been the fact that a number of insurers have chosen to withdraw from, or reduce the line size they are willing to write for Construction business as they have increasingly struggled to make a profit.
While there are a number of factors impacting underwriters’ profitability this commentary focusses on water damage claims and their increasing impact on underwriters.
Fire claims are high profile and have always grabbed the headlines. In 2018 there were several large fire claims most notably, the Glasgow School of Arts, Mandarin Oriental in London and Primark in Belfast. But look beneath the surface and it is clear that water damage claims are causing insurers sleepless nights as the frequency and cost have started to escalate out of control.
A single incident of a burst pipe in a multi storey multi tenanted building has cost one insurer over £30m this year and add to that the attritional effect of numerous lower value water damage events, that has eroded insurers bottom line results.
What are insurers doing about it and how can clients manage the risks?
In the 1980s and 1990s there were several significant fires in buildings under construction. The issue was seen as so significant that many
parties came together and created the Joint Code of Practice for Fire Prevention on Construction Sites.1 As a result, the last 25 years has seen a dramatic reduction in the frequency and size of fires in buildings under construction.
Fast forward to 2019, and whilst water damage has now taken over as insurers main concern for Building Projects, there has not been the same action taken to try and reduce water damage claims. The Construction Insurance Risk Engineers Group Best Practice Guidance for the Avoidance of Water Damage on Construction Sites prevention document (CIREG)2 is a great starting point and all employers should be considering this when appointing their contractors. But this has not yet been implemented into the construction working practice in the same way that the Joint Code of Practice has, nor has it been imposed by insurers.
Instead we have seen insurers take control in their own way using the tried and trusted carrot and stick approach. Workshops and training sessions have been offered to clients to educate them on better risk management of
Water damage is the new fire damage
1 Joint Code of Practice for Fire Prevention on Construction Sites 2 The Construction Insurance Risk Engineers Group Best Practice Gidance (CIREG)
This publication offers a general overview of its subject matter. It does not necessarily address every aspect of its subject or every product available in the market. It is not intended to be, and should not be, used to replace specific advice relating to individual situations and we do not offer, and this should not be seen as, legal, accounting or tax advice. If you intend to take any action or make any decision on the basis of the content of this publication you should first seek specific advice from an appropriate professional. Some of the information in this publication may be compiled from third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such. The information given in this publication is believed to be accurate at the date of publication shown at the top of this document. This information may have subsequently changed or have been superseded, and should not be relied upon to be accurate or suitable after this date. The views expressed are not necessarily those of Willis Towers Watson.
Willis Towers Watson is a trading name of Willis Limited, Registered number: 181116 England and Wales. Registered address: 51 Lime Street, London, EC3M 7DQ. A Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority for its general insurance mediation activities only.
For more information please contact:
Copyright © 2019 Willis Towers Watson. All rights reserved. WTW306320/0819 FPS702
With a wide range of services and dedicated professionals to serve you, Willis Towers Watson can help construction organisations with virtually any risk or people-related issue.
water damage whilst the stick has been shown in the form of increased policy excesses. Contractors All Risk (CAR) and Third Party Liability (TPL) sections for one off projects are seeing more higher excess levels of GBP100k, GBP50k and GBP25k for water damage claims.
It remains to be seen what effect this will have and until the CIREG or an alternative standard document becomes universally implemented across the construction market, water damage claims will continue to occur on construction projects.
We expect to see further insurer action over the next 12 months with a greater emphasis on how clients propose to manage water risks for their projects. Inevitably this will mean more information to be provided within the broking details and water management plans being provided. Insurers will decide on the adequacy of the measures in place to manage water damage risks with a reduction in applicable excesses being the likely prize for clients.
So what more is in store? The construction insurance market continues to harden further with terms still on the increase
– particularly on project business. Premium rates have increased by as much as 50% in the past 6 months with further pain anticipated and higher excesses imposed for water damage under both CAR and TPL sections. In fact rates for multi tenanted buildings with significant water damage exposures have seen rises of more than the 50% suggestion.
We expect to see water damage excesses increase and the cover provided become more restricted not only on project business but also Annual covers with insurers continuing to pull away from the sector by minimising their exposures.
Jon Thacker Executive Director, Business Development, UK Construction Practice T: +44 203 124 8271 E: [email protected]
Property ownership, investment and development can be fi nancially rewarding but it is rarely without diffi culty. As well as the range of products for traditional legal defects, we continue to innovate and drive the markets we work with to provide comprehensive transaction support solutions in the UK and throughout Europe to enable you to maximise deal potential and de-risk challenging projects.
Our team has extensive knowledge gained through years of legal, underwriting and broking experience.
Willis Towers Watson has invested in specialists, creating a large and experienced team in the market, who provide service excellence in legal indemnity insurance to a wide range of clients.
We work with property developers, owners, occupiers, lenders, fund and asset managers to provide solutions which can speed and smooth transactions, secure fi nance, enhance value and even allow the distribution of money from a closed fund to take place much sooner.
We take great pride in striving to deliver an outstanding service, utilising our knowledge and experience to grasp situations quickly, working with you to design not just any solution, but the right solution for you or your client.
Rights of Light
We are now all too familiar with the risks associated with a development that aff ects third parties’ rights to light; negotiations, payments, delays and in a worst-case scenario, an injunction forcing a stop to the work or even compelling the demolition of completed work.
Rights of Light insurance in the UK and Ireland is designed to provide a risk transfer mechanism whereby the insured party benefi ts from being able to cap the potential liability by way of indemnity for a variety of insured losses, such as legal costs, compensation payments, loss in value, the costs of amending a scheme, costs due to delay, loss of income/profi t etc.
Polices were often provided on the condition the insured party did not approach any neighbouring property owners to discuss Rights of Light, party wall issues, oversailing lights or any other “neighbourly matter”.
However, Rights of Light insurance has evolved a great deal and it is now accepted that an insurance solution will be tailored to the insured’s needs and the strategy suggested by their professional and legal advisers.
Approaches to aff ected properties for party wall, oversail or other required discussions or proactively approaching aff ected parties with a view to obtaining a deed of release, (subject to a policy excess) can all be catered for in the policy.
The insurance puts the insured in control of their negotiations with a third party whilst providing the reassurance of a cap on their potential liability with the insurer covering any costs over this amount or covering the “worst-case” scenario of a successful injunction preventing or requiring the scheme to be “cut-back”.
We are always seeking ways to help our clients take advantage of the available options and often propose the use of staged policies to ensure cost is tailored to risk exposure. Having seen them applied successfully in Rights of Light cases we are utilising them in all risk classes whenever the circumstances allow.
Legal Indemnities and Title Insurance Real Estate Practice
Transaction Support
Insurers now offer policies which are designed to reduce or replace the reliance on warranties and indemnities in a sale and purchase agreement by providing cover for risks such as:
• Title to property
• Title to shares
• Contingent risk
This cover provides greater security for buyers and in turn enhances the ability to refinance.
For sellers, these policies reduce the need for escrow arrangements and permits faster distribution to investors when closing funds by minimising ongoing liabilities.
We have extensive experience of working with deal teams and providers of Warranty and Indemnity insurance products to ensure that this cover dovetails with and facilitates the transaction.
European Title
Buying or investing in one or multiple properties in Europe can present very different challenges with a range of complex legal issues such as restitution, uncertainty over planning or zoning permissions or even ongoing disputes causing headaches.
Our team have experience of working with local lawyers and insurers to ensure a policy is created to fit the circumstances, whether it is purely title cover required as a safety net against anything unknown coming to light, cover against defects that have been identified, or a combination of the two.
Of course, title to shares policies are also available throughout Europe, providing yet another layer of comfort and enhanced security.
Portfolio Insurance
Portfolio insurance provides cover against title defects (known or unknown) in a large volume property transaction. It can be used to complement or largely replace the solicitor’s usual due diligence (including searches) and replace the need for title reps and warranties. It is usually available in a fraction of the time and cost of traditional due diligence.
Once in place it can aid securitisation, secure value and help speed subsequent sales as well as helping to minimise title- related contingent liabilities post-sale.
Willis Towers Watson has been at the forefront of utilising historic certificates of title as the basis for a title policy, to avoid the need for updated certificates or lengthy fresh due diligence.
Defective Leases
Poorly drafted leases can lead to a range of problems such as difficulty in enforcing repair and maintenance obligations, downward rent reviews or even disputes regarding the extent of the demise.
The threat of forfeiture is also a real and apparent threat to lenders and tenants. Tenant insolvency (or liquidation in the case of a company), breach of tenants covenants contained in the lease, or a breach of covenant contained in the superior lease (by a third party) triggering forfeiture of the leasehold interest, are all instances whereby insurance is available to lenders and in some instances the tenant.
A defective lease policy provides cover against the losses that can be suffered as a result of any such defects and in many cases the cost of applying for relief against forfeiture and the losses suffered as a result of determination.
Judicial Review / Legal Challenge
The risk of a challenge to the lawfulness of a decision made by a public authority on which you need to rely can often be insured. Delays to or even cancellation of projects caused by a successful challenge can lead to substantial losses.
Legal challenge insurance creates financial certainty for investors and funders enabling them to start work within the period that any decision is open to challenge. It provides cover against the financial losses suffered, such as abortive costs and reduction in land value in the event that a challenge is successful.
Increasing “known” risks for Wind and Solar projects
Legal challenges, such as judicial reviews to planning applications / permits, have increasingly been seen in the UK, France, Germany, Sweden and Ireland as projects continue to attract divided sentiment amongst the population.
For example, Sweden requires an “environmental permit” which can expire, so fresh permits must be applied for and the application processes can be lengthy.
This protracted process can lead to more uncertainty over potential challenges that could be mounted, so seeking protections against future challenges would provide a level of certainty.
Third party rights and title ownership discrepancies need to be fully considered at the earliest possible stage in the project lifecycle process.
Increasing “known” risks for Wind and Solar projects (cont/d)
Project principals and lenders need to identify who are likely to mount a challenge; recent experience shows that this can range from individual third parties and landowners to environmental groups. In certain territories, ‘serial challengers’ have caused considerable delays and financial loss to renewable energy projects.
What’s exciting is that a number of project opportunities for developers and investors could come back into play if such long-term liabilities can be removed - whether it be through asset protection, defective title liability, judicial review policies or legal liability risks, all these solutions protect projects against known and unknown risk in the long term.
Typical Legal Defects
We have years of experience of arranging what we call the typical legal defects policies, although we recognise that no situation is ever standard and even a historic covenant can cause significant problems:
• Restrictive covenants – existing or future breaches
• Absence of easement – where your property needs access services over or through third party land
• Third party rights – your property is subject to rights for third parties e.g. access
• Adverse possession – you cannot prove title to all of the land you are buying / selling
• Search insurance – you do not have the time to obtain local authority, water or other searches
• Mines and Minerals – your property does not include the rights to underground minerals and a third party may seek to enforce the right to extract, or more likely, claim any excavations trespass into their property
Innovation
Willis Towers Watson has led the way in applying mechanisms such as staged policies (as above) or the use of proactive agreed conduct to a wide range of risk types.
This is especially effective where the exposure to a difficult and otherwise uninsurable risk can be capped for the insured and a transaction or scheme can progress with the benefit of a safety net.
Out of the Ordinary
Despite this long list of risks and situations in which we can help, you may still encounter a problem which does not fit with any existing solutions.
The experience, expertise and relationships that we can utilise means that we may be able to create a new product specifically tailored for your situation.
If you would like to discuss any of the ways in which we may be able to help, please contact any of the team.
Mark Swallow
Rudi Hare
About Willis Towers Watson
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.
This publication offers a general overview of its subject matter. It does not necessarily address every aspect of its subject or every product available in the market. It is not intended to be, and should not be, used to replace specific advice relating to individual situations and we do not offer, and this should not be seen as, legal, accounting or tax advice. If you intend to take any action or make any decision on the basis of the content of this publication you should first seek specific advice from an appropriate professional. Some of the information in this publication may be compiled from third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such. The information given in this publication is believed to be accurate at the date of publication shown at the top of this document. This information may have subsequently changed or have been superseded, and should not be relied upon to be accurate or suitable after this date. The views expressed are not necessarily those of Willis Towers Watson.
Willis Towers Watson offers insurance-related services through its appropriately licensed and authorised companies in each country in which Willis Towers Watson operates, for example:
- In the United Kingdom, Willis Limited, registered number: 181116 England and Wales. Registered address: 51 Lime Street, London, EC3M 7DQ. A Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority for its general insurance mediation activities only.
- Willis Towers Watson SA/NV, Quai des Vennes, 4020, Liège, Belgium (registered as a branch in the UK at 51 Lime Street, London, EC3M 7DQ UK Branch Number BR021056) in relation to all EEA-regulated business. Authorised by the Financial Services and Markets Authority (FSMA) Belgium, and authorised and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our authorisation and regulation by the Financial Conduct Authority are available from us on request.
For further authorisation and regulatory details about our Willis Towers Watson legal entities, operating in your country, please refer to our Willis Towers Watson website. It is a regulatory requirement for us to consider our local licensing requirements prior to establishing any contractual agreement with our clients.
Copyright © 2020 Willis Towers Watson. All rights reserved. FPS821
Global FINEX - Professional Indemnity Insurance UK Construction Professional Indemnity Insurance (PI) Update June 2020
The current climate UK PI market conditions have deteriorated rapidly since late 2018, especially in the construction sector, and the deterioration looks set to continue. Whilst the impact of market conditions has been toughest on contractors, consultants have suffered too.
It is still too early to understand the likely extent of the impact of the COVID-19 pandemic on the UK insurance market, and on the UK PI market more specifically. However, growing reference to what could potentially be ‘the biggest insured loss in history’ suggests that the effects will undoubtedly filter through to impact PI market conditions.
What has caused current construction UK PI market conditions? Ultimately, underwriting UK construction PI in recent years has not proved profitable. Premium rates in the protracted soft-market conditions which preceded have been driven unsustainably low as a result of abundant insurer capacity, persistent competition and weak underwriting discipline. Profitability has been eroded further by an increase in the number and the severity of claims, adverse historic claim developments and loss cost inflation. Lloyd’s has led the way in seeking to address profitability concerns, and they continue to scrutinise the performance of syndicates.
Beyond existing claims performance, construction PI insurers have numerous concerns. These include fears about financial viability, which clearly the COVID-19 pandemic will exacerbate. Challenging financial conditions will be conducive to disputes, and wafer-thin margins in the construction sector have resulted in relentless value engineering and cost-cutting. Vicarious liabilities borne of D&B procurement and lengthy supply chains are concerning Insurers, as effecting recoveries from the parties at fault is increasingly challenging and costly. The procurement environment remains extremely tough, with onerous contractual obligations passed down throughout. Insurers also have well-documented concerns about fire safety, and the perceived inadequacy of Building Regulations and testing regimes. Economic and political uncertainty seems conducive to further claims activity, and the impact of the COVID-19 pandemic will be profound to say the least.
2 Document title
More selective underwriting There is greater scrutiny, and less underwriting flexibility. Many insurers are looking to cut the capacity they deploy and don’t want to increase their overall premium income or market share. The underwriting process seems to be taking considerably longer, with more frequent internal referrals, and more regular and comprehensive requests for information. Underwriters are ensuring they ask the right questions so as not to take on specific exposures, with an eye on the audit trail too. The current pandemic has seen almost all PI insurers start to demand information about insured’s contingency plans, and for comfort about their liquidity.
The market for multi-year ‘single project’ PI policies has contracted significantly, with many insurers having pulled out completely, and those remaining being far more selective.
Capacity reduction An estimated USD130m potential capacity has been lost from the UK construction PI market in the last 18 months or so. In conjunction with this, insurers are frequently restricting the capacity they deploy on individual risks, by cutting ‘line’ sizes, meaning more insurers can be needed to build a programme. ‘Subscription’ placements (whereby multiple Insurers share the risk on individual policy layers) are more prevalent.
Capacity restrictions have made completing large placements increasingly challenging, and some larger insured firms are having to accept purchasing lower limits of indemnity than previously. To complicate further, end- of-year placements can prove tough, with some insurers already having deployed all their available capacity before year end. Insurers need to manage their premium income capacity carefully (especially Lloyd’s syndicates with their annually enforced income restrictions), and permitted income budgets are exhausted more quickly when renewal premium rates are increasing.
There have been concerns as to how Managing General Agents (MGA’s) manage capacity on behalf of Insurers. Several Lloyd’s syndicates have removed their backing for MGA’s, and some MGAs have struggled to replace their capacity. Many capital providers to MGAs are enforcing more restrictions on the type of business / professions that they are permitted to underwrite.
Premium rates Insurer’s PI premium rates have continued to increase, and rates seem to be under constant revision. Increases have been especially pronounced for excess layers, which are widely deemed to have been set at unsustainable levels for many years. Excess layer premium increases regularly seem out of kilter with the primary layers, and 50% to 100% premium rate increases on excess layers have not been unusual.
Some Insurers seem to be focussed on implementing a specific rate increase across their whole books, whereas others seem more focussed on the adequacy of pricing on individual risks. We have noted a lack of consistency between insurers in the pricing of specific risks, which can have a huge bearing on final pricing. That said, regional underwriters seem to be starting to fall into line with London market guidelines.
Differential pricing (utilising different premiums quoted by participating insurers in respect of their participation, as opposed to asking all Insurers to simply agree to a premium set by the lead insurer) has become more prevalent throughout the broking community.
Coverage restrictions We have noted significant upwards pressure on the levels of self-insured excesses, with material increases enforced on many insureds, whilst others have elected to retain more risk in an effort to mitigate premium increases. Excesses are often made inclusive of defence costs, where previously an excess would only have been payable in respect of damages.
Combustible ‘cladding’ restrictions have become standard on construction PI policies, though these restrictions have become more onerous, and will generally tend also to apply to any situation directly or indirectly connected with ‘fire safety’. Typical coverage restrictions will limit cover to an aggregate amount (including defence costs), will exclude any consequential losses, will weaken the insuring clause to a negligence basis only, and a higher self-insured excess will usually apply (sometime applicable to each and every building or site as opposed to each and every claim, and almost always being on a defence costs-inclusive basis). Full cladding / fire safety exclusions are frequently applied, especially when an Insurer is new to a risk, as they simply don’t want to expose themselves to exposure in this rapidly evolving area.
What has been the impact on UK construction PI?
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Premium settlement In the current climate, insurers are acutely aware of the potential for businesses to fail, and consequently many insurers are seeking additional comfort when underwriting about the liquidity position of their insureds. They are evidently conscious of the potential for bad debts. We have already noted increasing reluctance from insurers to extend timelines for the payment of premiums, and they are unlikely to be keen to receive payment via instalments. Early consideration should be given as to how premiums will be settled so as not to breach policy payment conditions, and firms will need to bear in mind the additional costs incurred through third party premium financing facilities.
What should Firms do? Whilst UK construction PI market conditions are extremely challenging, it is possible to mitigate their impact. Being well prepared and well represented is paramount.
It now seems insufficient just to say that firms must engage with their brokers early in the PI renewal process. The landscape continues to change so quickly that frequent engagement with brokers throughout the policy period is a necessity. Given the continually evolving landscape, managing internal expectations will be crucial for those with PI responsibilities. Your broker needs to be your trusted advisor on this front, not afraid to deliver bad news, understanding of what battles can be won, and willing to roll up their sleeves to help you.
In the current climate, you need to ensure that your broker has the operational and technological resource to continue to work effectively, and to be able to represent your firm in the manner that market conditions now demand. Insurer meetings remain vital in the current climate (enhancing relationships and allowing underwriters to see beyond the paperwork and get a feel for the culture of a business). When face-to-face meetings aren’t possible, you need to engage a broker with the ability to chair virtual presentations to the necessary insurers and to the necessary standard.
Such presentations need to be slick, meaningful and appropriate. They must convey appropriate information to compliment the more standard renewal documentation. Addressing the concerns of the PI market is vital, and risk-focussed narratives should highlight entrenched and effective internal processes and all risk management systems (contractual risk management, supply chain management, technical risk management etc). Insurers expect their insureds to have such systems in place – they want to see how the systems work in practice and how they adapt when new risks emerge.
Underwriting actions to mitigate the extent of COVID-19 seem likely, and already some PI insurers have sought to attach onerous COVID-19 exclusions to policies going forward.
Limits of indemnity The basis of indemnity limit has historically differed between contractors (typically ‘aggregate’ limits, perhaps with reinstatements), and consultants (predominantly ‘Any One Claim’ (AOC) limits). However, AOC cover seems less readily available in the current climate, even for some consultants, as Insurers look to reign in their exposure and guard against multiple losses. Aggregated limits of indemnity with unlimited ‘round the clock’ reinstatements have become more widespread, for many consultants too. Where multiple or unlimited reinstatements are required, Insurers will frequently dictate the minimum ‘tower’ of cover that is purchased (the higher the overall tower purchased, the less likely their limit will be reinstated). The ‘cost’ of additional reinstatements has increased markedly, having essentially been un-costed in softer market conditions. PI Insurers are hugely cautious about offering any / multiple reinstatements for many contractors, especially D&C contractors.
We’ve also noted a tendency for Insurers to include defence costs within the indemnity limit, even on some AOC placements where defence costs were previously afforded in addition to the indemnity limit for damages.
Placement structures Due consideration to placement structure is critical. Low level excess layers are unattractive to insurers (especially large limits sitting above a low primary limit). Such layers are increasingly seen as ‘working’ layers, given the prevalence of multi-million-pound claims, with defence cost inflation to boot. Premium intake from these still isn’t deemed commensurate with the risk. This is even more the case on ‘aggregate plus round the clock reinstatement’ placements, where excess layers are even more exposed. Insurers are also paying far more attention to ‘ventilation’ (meaning that they will not subscribe to consecutive layers, especially lower down a placement, so that they have a gap in exposure in the event of a catastrophic claim which could erode a whole placement).
We have also noted an increasing tendency to ‘co-insurance’, whereby insureds ‘co-insure’ part of the risk. This entails taking on a percentage of the risk themselves (on specific layers or throughout the programme), but without utilising a traditional captive. This is sometimes driven by a shortage of capacity, but it can also be part of a deliberate strategy aimed at addressing an insured’s risk and premium tolerances.
Copyright © 2020 Willis Towers Watson. All rights reserved. FPS1165 WTW-FINEX 440403/06/20
In such a testing climate, creative, strategic broking can really help, and due consideration to programme re-structuring and to additional means of addressing risk retention could make a real difference. Innovative placement structures can sometimes provide the cover required if at first it does not seem available, or if it is prohibitively expensive. Your broker needs to provide you with their plan ‘A’, but also their plan ‘B’ and ‘C’. You need to engage a broker capable of thinking around problems and delivering solutions.
It is beyond the scope of this article but suffice it to say that worsening PI conditions have not been isolated to the UK, and some other geographies (most notably Australia and Canada) are suffering too. Many construction firms will have international offices / projects with their own territory-
For further information please contact:
Peter London Associate Director - Global FINEX +44 20 3124 6864 [email protected]
specific insurance requirements. Willis Towers Watson owns an extensive network of international offices in 140 or so locations. Not all brokers have the benefit of such an extensive ‘in-house’ network of global offices, and they may have to rely on associations with third party insurance brokers (in fewer territories). Having a large ‘in-house’ network can be of significant benefit to WTW clients, as the interests of our overseas offices are more aligned with our own, and consequently the interests of our clients can be better-served.
Disclaimer Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage.
The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.
COVID-19 is a rapidly evolving situation and changes are occurring frequently. The information given in this publication is believed to be accurate at the date of publication shown at the top of this document. This information may have subsequently changed or have been superseded, and should not be relied upon to be accurate or suitable after this date.
Willis Towers Watson is a trading name of Willis Limited, Registered number: 181116 England and Wales. Registered address: 51 Lime Street, London EC3M 7DQ. A Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority for its general insurance mediation activities only.
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Date post:	02-Oct-2021
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