Construction Risks - Is Liability Coverage Just a Commodity?
Europe’s construction industry is booming, with positive economic circumstances in many countries driving consistently strong growth.
In densely populated areas, demand for new living space continues to grow, alongside the need for professional modernisation of older buildings.
Low interest rates and strategic investments in the real estate sector are also stimulating the increase in building projects, as is public spending on repairs and upgrades to infrastructure such as motorway bridges, in order to meet modern safety standards and maintain public safety.
Here in Germany, the construction sector has been enjoying this upswing for several years now, with a turnover of EUR 114 billion generated last year, and a nominal turnover growth of 6% forecasted for both 2018 and 2019.1
This surge in construction is also stimulating demand for insurance solutions from all sectors - from building firms to architects and other technical experts. Simultaneously, more and more new products, such as hybrid policies consisting of diverse liability insurance and contractors’ all risks (CAR) insurance components, are being introduced into the market.
But underwriting construction risks poses a significant challenge. Not least as, in many sectors, many parties are often involved in delivering a single project - ranging from design to management to the construction itself.
Depending on the complexity, the same contractor can provide several services. And, subject to the legal conditions and the services that have been contractually agreed upon by the parties, the liability of the various agents can vary dramatically.
In-depth underwriting analyses are crucial
When underwriting construction risks, a number of important regulatory and project-specific factors must be taken into account. When examining and estimating the exposure and setting the premium, criteria such as the insured business (if the policyholder is a consortium or an independent enterprise), insured service (the work the policyholder will be performing that needs to be insured), and the contractual relationships between the policyholder and other parties involved in the project (in order to limit both third-party and first-party losses), must be analysed and classified comprehensively. This produces a more precise underwriting analysis of the project and ultimately allows the real level of risk exposure to be determined.
Appropriate insurance products lower the risk
A wide range of insurance solutions are available to cover the liability risks involved in construction projects. For example:
- Comprehensive general liability insurance and contractors’ all risks (CAR) insurance provide cover for third-party claims, but not for damage to the structure itself.
- Liability policies for architects and engineers provide cover for third-party losses, as well as for damage caused to the building under construction (owned by the constructor) resulting from defective designs.
- Design and construct (D&C) policies offer protection for companies who take on responsibility for both the design and subsequent construction of a project. They cover third-party losses and damage to the building itself (in this case, owned by the policyholder).
As mentioned, construction risks can prove particularly challenging for underwriters. This is in part due to building projects typically being unique in terms of their location, design, technical structure, and materials, but also because overall levels of complexity (both in design and location) are increasing.
This is especially true of large-scale building construction projects and those in urban areas. Here, consequential financial losses must not be ignored as the amounts generated in the event of a loss can be considerable. For example, cost pressures, which can lead to a decline in the quality of both the workers and materials employed, can increase the susceptibility of construction projects to losses.
Liability insurance should therefore not simply be viewed as secondary to property insurance, but rather an invaluable element in the underwriting of construction risks. As a global reinsurer, Gen Re has extensive experience in underwriting construction projects and is a partner that can provide reinsurance solutions. The following information is invaluable when starting a risk dialogue:
- A specific description of the project (what is being built, duration of the work, surrounding area)
- Past experience and loss statistics of the policyholder
- Policyholder responsibilities
- Structure of the cover
The construction industry is likely to continue to profit from demand for some time to come, but given its exposure to substantial claims on the basis of personal injury or damage to property, even small-scale projects can cause enormous losses - and catastrophic losses cannot be ruled out. Reinsurance can help to minimise the risk. Don't hesitate to get in touch.
- 2017 balance sheet of the construction industry, https://www.bauindustrie.de/presse/presseinformationen/bauhauptgewerbe-zieht-positive-jahresbilanz-2017/