Know the Drill - March 2021
Know The Drill - March 2021
Welcome to the March issue of Aon Construction’s Know the Drill. In this issue we:
- share an Insurance Market Update on what insurers are doing with insurance renewals and single project covers in Q1 of 2021 (and potentially for the rest of 2021);
- discuss the Communicable Disease Exclusion arising from Covid-19, our concerns with it and how insurers are responding;
- discuss insurance considerations and Warranty and Indemnity insurance if you are buying or selling a business.
Insurance Market Update
The construction insurance market continues to tighten from where it finished in 2020. This means we are seeing policy coverage restrictions continue, coupled with premium and excess increases. This may lead to a requirement to retain more risk. In addition, we have had insurers retreat from providing lines of insurance in New Zealand and/or to the construction market segment, reducing competition between the remaining insurers for construction based risks.
In the last 5 years, the insurance market has been very competitive. We have taken advantage of a previously soft market by passing more risks onto insurers with wide policy coverage and cheaper premiums.
Insurers providing insurance to construction related companies continue to have their own ‘pinch points’ at present (outside of premium) - examples of these include:
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Directors and Officers Liability insurance; – driven by insolvencies of construction companies;
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Reluctance to either increase limit beyond what is currently purchased or offer terms on new business.
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Full financial and underwriting submission required
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Contract Works insurance:
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restricting cover for defects – LEG3/06 either not available, or available at higher excess with additional premium applicable;
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Recent large losses mean there is now greater focus on hot work procedures and permits;
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Public Liability insurance:
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restricting cover for damage to contractor’s own product after completion/handover (product to product damage);
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Insurers require quality assurance around the use of products incorporated into construction (more underwriting) and the application of non-conforming product exclusions;
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Professional Indemnity insurance:
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Pushing for negligence-based policy coverage rather than providing (wider) civil liability coverage; and
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Project specific professional indemnity insurance is getting harder and significantly more expensive to obtain.
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Large amounts of capacity simply not available.
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The ability to transfer some risk to insurers is either more expensive or not available, therefore we would suggest other methods of transferring or mitigating this risk are considered. These items mean that contractors need to offset these changes where they can:
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Consider how risk is transferred or retained contractually;
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Tighter scrutiny on subcontractors and suppliers’ activities and procedures;
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Compliance with insurance policy conditions (i.e. hot works conditions);
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Your own insurances, with “back to back” cover requirements with the head contract and subcontractor requirements being even more imperative.
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Accepting higher excesses to ease the risk on the Insurers and to internally manage smaller claims;
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When tendering, allow sufficient cost for insurance. Consider getting in touch with Aon if project commencement is not imminent for a rough estimate.
Whilst retraction in policy coverage continues, it is imperative that contractors look to price for any uninsured risk/include contingency in the bidding phase. We recommend contractual positions are also reviewed and advice sort from legal providers where required.
There is no ‘silver bullet’ however, these challenges emphasise the importance of a strong relationship with an experienced broker to assist you in understanding and navigating the current insurance market.
Covid-19 | the new policy wording exclusion
The insurance market does not have the capacity to insure the substantial financial losses as a result of Covid-19, and it is now a known risk to businesses. Insurers have started to introduce a Communicable Disease exclusion. The exclusion is primarily to protect insurers from loss of revenue arising from Business Interruption losses on property insurance programmes. Contract Works insurance falls within the same wider classification of insurance as Business Interruption. The application of the exclusion is being driven both by the insurer and the reinsurers. As the exclusions are applied by reinsurers, this often makes the application of the exclusion and its format non-negotiable. Just like you must comply with conditions of your policy wording, the insurer must also comply with the conditions on their capital provided by their reinsurers.
Application to Contract Works policies
We have been advised by insurers that the intent of this exclusion under Contract Works policies is to exclude loss, damage, and associated costs arising from a Communicable Disease.
Our concern with the wording of these exclusions is that the wording is rather broad in what it excludes, varies from insurer to insurer, and incorporates language to exclude losses occurring concurrently with (i.e. at the same time as) as a Communicable Disease. The definition of a ‘Communicable Disease’ is practically any disease that is transmissible and the exclusion would arguably exclude all loss and damage if, at that time, there was a disease present somewhere, regardless of where the disease is located or whether it has caused the relevant damage. This presents a clear and obvious risk to the construction sector.
Aon continue to discuss these with insurers to amend these in order to minimise the risk of an unfairly broad exclusion. Insurers have so far largely refused to amend their position (likely due to the need to align Insurers policy exclusion language with their re-Insurers). Insurers have advised (when challenged) that it is not their intent for the words to be used so that claims that are not directly related in some manner to Communicable Disease are excluded; however, the words of the exclusion remain.
Most property and contract works policies require physical loss or damage to occur for cover to be activated. It is difficult to envisage the damage or loss scenario from a Communicable Disease that would cause a physical loss or damage claim however the broad nature of the exclusion applied and our concern around the reference to ‘occurring concurrently’ remain.
Are you buying or selling a business?
Under the current dynamic economic environment, we expect there to be an increase in merger and acquisitions (M&A) through 2021.
There are a number of bespoke insurance solutions designed to facilitate and support M&A transactions including Warranty & Indemnity (W&I) insurance. In short, W&I insurance markets stand behind warranty breaches instead of the Seller. This means the Seller can achieve a “clean break” from the exit of their business, and the Buyer has “peace of mind” in the event of any future warranty claim.
Aon also provides specialised insurance due diligence services in the context of a M&A transaction. Potential points for consideration:
- Ensure all of the Target’s existing insurance policies have sufficient limits and adequate coverage for its main risks; How will these transfer upon a change of ownership?
- Determine whether the Target has any potential liabilities that are not insured.
- Review change of control provisions in-bedded in various types of insurance policies to ensure the transaction doesn’t automatically trigger the cancellation of insurance coverage.
As a minimum, it is important to speak to your insurance broker about your current annual insurances and any potential impact on them as a result of any M&A transaction.
If you are going through a M&A transaction, don’t leave the insurances to the last minute as we may be able enhance your position as either a Buyer or Seller.