Article by Insurance and Risk
Construction insurance is a complex beast, capable of rocking the foundations of myriad projects, whether it’s run by an owner/builder, SME or multi-million dollar company. But with knowledge comes power – brokers who take the time to study the fine print will be well positioned to reap the rewards from this burgeoning segment.
THE DEVIL’S IN THE DETAIL
Before attempting to tame the beast, brokers need to know the basics. Firstly, there are two different types of construction policies – a single project policy that insures a one-off project, and an annual policy that insures various works that take place within a 12-month policy period.
There are two insurance options when it comes to annual policies, the first of which is known in the business as a run-off policy, or a projects/ contracts commencing policy. This insures all projects that meet the characteristics specified in the schedule and begin during the policy period, right up until the construction and its defects liability period is complete.
All construction insurance policies are going to have a defects exclusion, but it’s understanding what covers are written back in that’s important.
The second option is called a turnover policy, sometimes referred to as a transfer or cut-off policy. This insures all projects being, or planned to be, worked on during the policy period. Any projects completed within the 12-month policy period are followed by the cover provided during the defects liability period (a set period of time after a construction project has been completed, during which a contractor has the right to return to the site to remedy defects). However, if the project isn’t completed within the allocated timeframe, no defects liability period will attach – meaning all projects underway will cease to be insured.
Knowing the difference between the policies can make or break a broker’s client, and it’s something Rob McNab, Underwriting Manager, Construction at Berkshire Hathaway Specialty Insurance has seen all too often.
“My advice for brokers would be to investigate the expiring policy in terms of the two insurance options, and review which cover applies. I’ve seen brokers pick up a new client through a mainstream insurer, who base a lot of their policy wordings on run-off, shifting the new client to a run-off policy without realising the client was previously on a transfer policy,” explains McNab.
“Subsequently, a claim can take place and the client is not indemnified under that new policy, simply because the broker failed to take the time to understand the policy wording that was previously in place.”
Given the rapidly-evolving world we live in, where new technology is released daily and travel-related threats such as terrorism and natural calamities are all too common an occurrence, keeping up to speed with policy wording can be a challenge in itself. And while policies have always addressed natural calamities and terrorism in their basic from, the new challenge is more entrepreneurial cover.
“A new policy is not necessarily out of date when it’s launched, but it can be plagiarised and become outdated very quickly. If you come up with a product that’s entrepreneurial, unique or new, it will invariably be copied within a short period of time,” says Glenn Ross, MECON Insurance Group CEO.
THE BENEFITS OF BOLT-ONS
From there, the plot thickens. Clients also have the option to choose between a standalone construction policy or a bolt-on approach – in other words, an extension to the existing policy.
The majority of standalone construction policies have been specifically drafted to the Australian construction environment – that is, with a view to meeting the insurance requirements of the standards in Australian construction contracts. A standard ISR (Industrial Special Risks) policy offers about $500,000 worth of construction cover, but the gaps in those can be considerable in comparison to specialised, tailored products, says McNab.
Seek out exactly what is available to your client and ensure you’ve got the most comprehensive cover possible.
Some of the key policy wording components to consider include:
- a cross-liability clause – states the insurer will view every single insured like they’ve got their own policy, providing the insurers’ limit of liability doesn’t get any bigger. This is a requirement under the Australian standard of contracts.
- a waiver of subrogation – states that you can’t sue any of the people you have insured as the insurer.
- a non-imputation clause – states that you can’t prejudice one insured party for the breach of a policy condition of another. This is a crucial requirement for a lot of banks and financial institutions in particular, as it ensures they will potentially be paid what they’re owed, even if a subcontractor has breached the conditions stipulated in the contract.
- adequate cover for a vibration removal and/or weakening of support – provides cover up to an adequate limit of liability for vibration damage or third party property damage that results from certain activities that cause vibration. This includes deep excavations, underpinning or the removal of supports.
Whether the project is being run by a high-net worth individual, a big business, SME or owner/builder, the type of language used within construction insurance policies can indeed be overwhelming – leading them to seek professional advice. It’s here brokers who take the time to educate themselves on the segment can separate themselves from the pack and capitalise on this thriving market.
“You’re making a connectin with the client immediately if you can speak their language,” says Ross.
“The biggest area that I think is crucial for brokers is education around these policies, seek out exactly what is available to your client and ensure you’ve got the most comprehensive cover possible.
“There’s a huge opportunity for brokers who are prepared to put some focus and resources into it to really benefit from this offering – as long as you’re aware of the risks involved too.”
Ross goes on to explain that the prime risks to a business’s bottom line include defects in workmanship designer materials, natural perils and products liability. McNab agrees, encouraging brokers to check the definition of all complex wording in a contract, paying particular attention to practical completion and the exclusion for defects of material, workmanship, design, plan or specification.
“The defects exclusion is particularly important. All construction insurance policies are going to have a defects exclusion, but it’s understanding what covers are written back in that’s important,” explains McNab.
“In addition, the exclusion for wear, tear and gradual deterioration and finally ensuring that an adequate level of third party liability coverage is provided for vibration removal and/or weakening of supports.”
Other primary threats brokers need to keep front of mind for businesses of all sizes include theft, malicious damage, third party property damage and third party bodily injury.
LEAD THE WAY
Stakeholder understanding of construction insurance varies, but what they do know tends to be focused on what they’re exposed to in the contract between the principal and the builder.
But it’s the finer details, the contract extensions and current policy wording where brokers can really step in to lend a hand, whether it’s a family-owned business or a million-dollar organisation. Tackling the beast hand-in-hand will put you both on solid foundations for whatever lies ahead.