The Custodian Insurance Industry Blog

May 15, 2020

COVID Insurance Risks to Construction Professionals

Despite the construction industry’s exemption from Government lockdown, many contractors took the difficult decision to stop work on 23 March 2020 as a result of the COVID-19 pandemic.

With approximately 3.3 million people employed in the UK’s construction sector, the success of your industry is clearly critical to the UK’s economy. Many suggested this was the reason behind the UK Government’s decision to exempt construction workers from the widespread lockdown.

However, a wide number of contractors are taking the difficult decision to stop work on sites all around the country. The impact of those decisions is being felt by the whole industry, from the largest contractors through to self-employed sole traders.

As you know, the industry is experiencing immense pressures to continue to deliver; cash flow issues, resource shortages, site restrictions and a vulnerable supply chain are putting projects and your business in jeopardy.

The most immediate consequence is the financial pressures placed on those businesses. When faced with short-term cash flow issues, undoubtedly your employees were the first casualty, with many furloughed or laid off altogether.

Where projects do continue, you’re no doubt experiencing significant resourcing pressure given your reduced workforce, as well as both sickness absence and a reduced pool of migrant workers to call upon. We are already hearing from clients that although sites are open, key personnel are not necessarily on site. This is likely to have a detrimental effect on build quality. Worse still, a considerable number of small-medium sized businesses will be unable to weather the financial impacts of the ongoing pandemic.

Insurers of construction professionals are likely to see a major rise in notifications from quality and resource issues, delays and financial imperatives.

Potentially, a perfect storm is brewing for both you and your Insurers. Even if your business can survive the effects of COVID-19, you may need to claim for:

  1. Being unable to properly fulfil inspection duties and being held responsible for not picking up bad workmanship.
  2. Over-certifying the value of current works.
  3. Poor design or coordination of design because of professional resources shortages.
  4. Being held responsible if sites are not safe where you’re acting as Principal Designer under the CDM Regulations.

With projects being delayed or stopped altogether, there is likely to be a spike in the number of circumstances being notified to Insurers even if only on a precautionary basis at this stage.

Insurers will need to deal with blanket notifications, difficulties in pricing future risk and the knock-on effect the industry slow-down will have on profitability.

Although, at least in the short term, notifications of circumstances are unlikely to quickly develop into claims, any circumstances being notified now are likely to be long tail, making it difficult for Underwriters to assess and price future risk. There are already blanket and vague notifications of circumstances regarding COVID-19, presenting further problems for Insurers.

Given the number of construction businesses that will simply not survive the financial impacts of COVID-19, there is likely to be a reduced pool of clients seeking renewal terms from Insurers. In turn, this is likely to make it difficult to generate profitable revenue from premiums given the increased level of competition between Insurers.

The future will see a significant lack of new developments and further financial pressures on the sector, but the industry will look to technology as a means of protecting itself against such events in the future.

Looking to the future, the development of new projects must currently be on the backburner for many. Indeed, where architects cannot visit sites to develop new plans, and local planning authorities are halting planning applications as they cannot conduct site visits, projects where construction was scheduled to start next year and beyond are also likely to be impacted.

Given the precarious state of the economy, it will be difficult for developers to secure the necessary financing for future projects. On the flip side, if your business can weather the current pandemic, recent events could permanently change the landscape of the construction sector. New technology is likely to become more prevalent to futureproof the sector from subsequent events like COVID-19. To decrease the number of people required on site, you may need to consider an increased use of robotic delivery or drones for site monitoring purposes.

With technology possibly reducing your overheads, such ideas would pose yet further questions for Insurers trying to accurately price future risk.

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