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Construction insurance claims and supply chain issues

The availability of construction materials is a serious concern for the construction industry at present.

Supply chain issues are not a new risk by any means. In addition, the construction industry has had to face a battery of assaults in the past 18 months, such as the impact of COVID-19, Brexit, cladding and fire safety risks (arising from Grenfell), the blockage of the Suez Canal by the Ever Given in March 2021 and, most recently, a plethora of supply and transportation obstacles. Availability of requisite insurance may of itself be considered a supply chain issue. These various challenges are causing and will continue to cause additional costs and losses on projects, which in turn may impact the claims that are presented to insurers.

At times there may be an entanglement of these impacts, obscuring the actual cause of the loss that is presented when a claim is made, for which insurers need to keep an eye out.

Supply of materials and delay claims

The availability of construction materials is a serious concern for the construction industry at present, in particular materials sourced from the EU such as cement/concrete and timber. The source of the shortages has been due, in part to:

  1. The closure of manufacturing premises due to COVID-19 repercussions. For example, the need for staff to isolate so that manufacturing became unviable;
  2. The increased costs of cross-border transportation of materials due to Brexit; and
  3. More recently, the inability to obtain fuel and haulage personnel in order to, quite literally, transport materials.

The difficulty in sourcing and transporting materials has resulted in severe price increases. These have been most acutely felt by SME construction entities, less able to absorb the increased costs and/or without the financial resources to bulk buy and store materials. This in turn runs the risk of SME contractors being unable to fulfil construction contract obligations.

The impact extends beyond SME contractors of course. If an SME is unable to deliver their contractual obligations, that may have an upwards impact and potentially prevent a main contractor from successfully delivering on time. This could result in, for example, a delay to completion and consequent liability for liquidated damages payable to the employer.

Substitution of materials to overcome supply chain impediments or escalating material costs has been suggested as a possible solution. It is not that simple though. The substitution, for example, of pre-cast concrete joists in place of timber joists is not necessarily an answer — both materials may be equally difficult to source and substitution may not be acceptable, or even permitted, under the existing contract provisions. Substitution could give rise to claims for negligent professional advice as the replacement material might be inferior, or even cause damage.

Availability of PI insurance

In addition to difficulties in sourcing materials, there is the issue of the availability of professional indemnity insurance. The IUA survey (reported on in September 2021) examined insurers’ appetite to offer construction professional indemnity cover, with particular reference to the Grenfell Tragedy. The survey revealed that three quarters of the underwriter respondents expressed concerns regarding accountability, management of the supply chain and a culture of preference for the lowest cost.

Access to affordable and suitable professional indemnity insurance for consultants has been a real concern for some time. Architectural practices, for example, have reported unavailability or unaffordability of such cover, even before the Grenfell Tower tragedy. Due to the “claims made” nature of such policies, there will usually be an aggregate indemnity limit. As a result of the volume of both current and anticipated claims relating to cladding, insurers may be presented with claims notifications, well before the expiry of the indemnity period, that may exhaust or will already have exhausted that aggregate limit, with the prospect of more claims to follow. The interaction between claims and underwriting should be considered going forward as, should the exhaustion of indemnity limits result in insured practices becoming insolvent, that could affect the availability of business for PI underwriters. If there are fewer insureds to underwrite, that may affect the future of the construction insurance industry.

Considerations for insurers

When assessing a claim that has been presented, insurers should consider:

  • Presentation of delay claims under CAR policies — are these really claims for delay, or are they in fact disruption claims (or possibly even simple inefficient use of resources)?

The various factors described above, some of which may be contemporaneous and some of which may be factors that exacerbate the value of a claim, mean that the critical cause of delay needs to be carefully examined when a claim is presented.

  • Does the cover include a supply chain insurance extension?

If yes, what is the quality of the supply chain information that was presented? Have business models and procurement policies changed in response to the recent supply challenges?

If they have, does that affect the basis upon which the risk was written, and could that have an effect on policy response due to the change in risk?

Supply chain insurance extensions often have a very narrow scope, and require detailed record keeping for the purposes of claims presentation before the extension can be considered by insurers. There is a low uptake of such extensions, often because of their cost, or because the business finds analysis of their own supply chains to be arduous and does not recognise the value of engaging a consultant to assist with the task.

  • If a claim is being presented, does that claim arise from damage or loss due to substitution of specified materials due to supply chain issues and, if so, is the substituted material of inferior quality or reliability?

If that is the case, the validity of the claim presented should be considered as it could be a deliberate or reckless, rather than negligent, breach of the underlying contract. If the breach is not deliberate or reckless, investigation of the circumstances of the procurement of the substituted material may reveal a possible claim against the supplier of the material.

  • Has a potential defendant consultant, such as an architect, exhausted their limit of indemnity?

If they have, then there will be no possibility of a recovery by an insured main contractor against the consultant’s PI insurance. An attempted recovery against the (now uninsured) consultant might at best be a pyrrhic victory.

Sadly, these issues are not going to go away any time soon. Collaboration with the insured and its brokers upon renewal to understand the insured’s needs, and express insurers’ concerns, is a key step to obtaining the best result for both insurers and insureds in light of the challenges the construction industry is currently facing.

For more information on construction insurance claims, contact our insurance solicitors.

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