Aon Construction Solutions – Q1 Update

Our quarterly construction insurance updates are about starting important conversations, sharing industry specific perspectives, and using our insights and capability as a global leader to share informed risk management and insurance solutions, ensuring you are better informed and better advised to make better decisions.

In our Q1 update, we focus on three topics:
•    2024 Construction Insurance Market Update
•    Hot Take on Hot Works – Procedural Improvements Needed
•    Two different pieces of a puzzle: Marine Cargo Insurance and Incoterms

Construction and Insurance – A 2024 Outlook

The construction sector remains challenging for the New Zealand insurance market. With the continued close scrutiny of underwriting being coupled with a tightening risk appetite across the various insurances, we are seeing a new emphasis and importance on data.

Contract Works insurance, as a result of the 2023 New Zealand weather events, is seeing an increased focus on the adverse impacts of flooding. Insurers are evolving their analytical models to better reflect these risks, with project location, site-specific flood risk analysis and client mitigation processes being required as minimums for quotations. Insurers are also under pressure to deliver rate and premium increases to cover resulting increased costs from these claims and subsequent reinsurance costs. 

Positively, core policy coverage offering and base excess levels have stabilised for the time being. We do envisage that over time we will see more specific excesses come through arising from weather and other claims such as water ingress or defects. We encourage increased oversight of policy excesses under contract works insurance when provided under contract by the principal/client or the main contractor. We encourage you to consider the appropriate risk sharing of excesses with your principal/client where possible and certainty where a claim does not arise from your act or omission.

Construction Liability insurance also continues to be a strained market with rates and premiums being driven up through claims inflation and rising reinsurance costs (in addition to natural premium increase off the back of revenue growth). There are small signs of new market participation and capacity, resulting in some competitive tension being applied to the market, which is positive. 

Following several industry claims on projects arising from hot works which resulted in fire, public liability insurers are starting to adopt their own hot works conditions similar to those that have been applied to contract works policies for some time. Because these hot work conditions are very prescriptive in nature, and the conditions which must be met in order for the policy to respond, it is our recommendation that these clauses are reviewed and overlaid against the companies own hot work permit system to ensure absolute alignment. It is not uncommon for a site visit to be requested as part of the renewal process to see hot works being undertaken and to view the system and controls in action.

Overall, there are pressures for the sector and its insurance buying needs but with early engagement and allowing additional time will position you to describe your story in detail, subsequently, building underwriter trust and confidence in your risk. 

Hot Take on Hot Works – Procedural Improvements Needed 

The construction sector and how it undertakes hot works has been at the forefront of insurers considerations for the past year. 

After several large hot work related fire losses, insurers paid well in to the millions in claims costs as a result of poor hot work procedures. These losses also spanned across both the contract works insurance and existing building (general/public liability) insurance, sparking concern.

What does this mean?
One of the sectors main insurance providers of general/public liability has now set a higher bar around hot works procedures and the insurance response if a fire claim was to succeed. This hot work condition for the general/public liability policy is now aligned with what has typically been seen on contract works insurance. 

Who does it impact?
The impact of this for Principals to the contract, is that there may be no recovery against the Contractors general/public liability policy leaving the fire loss on the Principals Material Damage policy.

For Contractors and Sub-Contractors, you could be left with an uninsured loss and it would be up to the business itself to pay for the loss to the Principals (and neighbours) property damage.

For Sub-Contractors, typically their general/public liability policies already have a hot work condition contained within them – they may simply not be aware of it or the conditions and requirements contained within them.

How do we mitigate the risk?
When undertaking a new project involving hot works, consider:
•    If their alternative products that can be used that avoid the need for hot works?
•    Reviewing and improving the hot work procedures on site. Anecdotal evidence is that there is room for improvement on the majority of project sites and procedures.
•    Review the tools used.  Rather than the “trusted” grinder is there a better tool?  Consider handheld tools that use cold-cut technology.

The sector needs to take the fire risk from hot works seriously as it is not just the fire damage that can impact business but many other factors like:
•    delays to the project
•    financial risk of the contractor/ sub contractor
•    emotional stress to the business owners/ employees and;
•    project team change and disruption that are affected when an incident happens.

Knowing your insurance obligations and the risks associated with hot works is important. Reach out to your Aon Construction broker today for more information. 

Two different pieces of a puzzle: Marine Cargo Insurance and Incoterms

One of the most misunderstood aspects of Marine Cargo Insurance (including cargo insurance for one-off Projects), is the interaction between the insurance contract and the Incoterms.

Its commonly assumed that cargo insurance will automatically cover the consignment until it reaches its destination, but this may not be the case depending on what Incoterm has been selected.

For there to be a valid claim under a Marine Cargo policy, there needs to be insurable interest at the time of the loss, and this is dependent on the contract of sale (Purchase or Sale invoice).

The contract of sale defines when title of the goods passes from the Seller to the Buyer and this in turn depends on the Terms of Sale.

What are Incoterms?
To facilitate trade, common contract conditions are published by the International Chamber of Commerce (ICC).

Incoterms rules are not a complete contract of sale but when incorporated into an international transaction, do say which party to the sales contract has the obligation to make carriage or insurance arrangements, when the seller delivers the goods to the buyer, and which costs each party is responsible for. 

Incoterm rules, however, say nothing about the price to be paid or the method of its payment or the consequences of a breach of contract. These matters are normally dealt with through express terms in the contract of sale or in the law governing that contract.

Choosing the right Incoterm is vital. The most common error is to choose Free On Board (FOB) or Cost Insurance and Freight (CIF) where the goods are not moving by sea to or from New Zealand.

The chosen Incoterms rule can also only work if the parties name a place or port and will work best if the parties specify the place or port as precisely as possible.  

What does this mean for cargo insurance?
What can be confusing when trying to fit these two pieces of the puzzle together is that the ICC’s use of the term ‘delivery’ differs from the Institute Cargo Clauses. The Institute Cargo Clauses are the primary insuring conditions for most cargo policies, and they are widely accepted and recognised in the international trade and shipping industry.

Delivery in the Incoterms means when the risk of loss or damage to the goods is transferred from the seller to the buyer. This may or may not coincide with a delivery by the seller’s carrier to the buyer’s nominated carrier, and it usually occurs whilst the goods are ‘in the ordinary course of transit’ i.e. outside of the direct immediate control of the seller and buyer. 

Marine insurance is assignable, so if it is arranged by the seller its benefits can transfer to the buyer (i.e. the buyer can claim) if loss or damage occurs after risk transfers.

Under the Institute Cargo Clauses, delivery occurs when the goods are released from the ‘ordinary course of transit’ into the buyer’s control. Under CIF, for example, the seller delivers (in terms of the CIF Incoterm) when the goods are placed on board the vessel at port of export. The seller, though, has contracted to pay for the goods to be carried to a named place of destination, which maybe the import port or a place further inland. The goods are delivered (in terms of the Institute Cargo Clauses) on delivery to the buyer’s final warehouse or place of storage, or a place nominated by the buyer. 

The Institute Cargo Clauses are broad enough in duration to be able to cover, in the one contract, both periods where first the seller and the buyer is at risk during the ‘ordinary course of transit’.

As this can be confusing, it is vital that the insurance arrangements agreed by the seller and buyer in the contract of sale set out when insurance cover starts and ends. The marine insurance certificate also states the port of loading, the port of discharge and the final destination. If the paperwork is unclear, the point at which the marine insurance ends can be contentious.

Further, the Incoterms only require a base level of insurance to be purchased by the seller on behalf of both parties, if the sales contract remains silent on this issue. Under a CIF 2010 Incoterm, for example, this is Institute Cargo Clauses (C), which only provides nominated risks cover. This insurance requirement is commonly negotiated in the contract of sales to a higher level, for example, an all-risks cover such as Institute Cargo Clauses (A).

How to make the pieces fit?
1.    Ensure the right Incoterm is selected for the transaction when negotiating the contract of sale.
2.    It’s recommended that parties name a place or port as precisely as possible.
3.    The insurance arrangements, including when cover starts and ends, and the level of cover (ie: Institute Cargo Clauses A etc) should be stated in the contact of sale to avoid confusion.
4.    This should be advised to your Insurer or Insurance Broker so they can arrange the appropriate insurance cover.

Want to learn more? Say hello to our construction team today: or contact your local Aon broker.

This website contains general information only and does not take into account your individual needs or financial situation. It is important to note that limits, excesses, terms and conditions and exclusions apply to the products and services outlined on this website. Please refer to the relevant policy documents for details of cover, the provision of which is subject to the insurer’s underwriting criteria that apply at the time. Please contact us if you have any questions.