Water Damage Is The New Fire Damage
For over a decade a soft insurance market within the Construction sector has meant Contractors and Developers have enjoyed low premiums and broad cover for both Annual and Project insurances.
This began to change in the latter part of 2018 as the construction insurance market started to harden and this trend has continued through 2019. The catalyst has been the fact that a number of insurers have chosen to withdraw from, or reduce the line size they are willing to write for Construction business as they have increasingly struggled to make a profit. While there are a number of factors impacting underwriters’ profitability this commentary focusses on water damage claims and their increasing impact on underwriters. Fire claims are high profile and have always grabbed the headlines. In 2018 there were several large fire claims most notably, the Glasgow School of Arts, Mandarin Oriental in London and Primark in Belfast. But look beneath the surface and it is clear that water damage claims are causing insurers sleepless nights as the frequency and cost have started to escalate out of control. A single incident of a burst pipe in a multi storey multi tenanted building has cost one insurer over £30m this year and add to that the attritional effect of numerous lower value water damage events, that has eroded insurers bottom line results.
What Are Insurers Doing About It and How Can Clients Manage The Risks?
In the 1980s and 1990s there were several significant fires in buildings under construction. The issue was seen as so significant that many parties came together and created the Joint Code of Practice for Fire Prevention on Construction Sites. As a result, the last 25 years has seen a dramatic reduction in the frequency and size of fires in buildings under construction. Fast forward to 2019, and whilst water damage has now taken over as insurers main concern for Building Projects, there has not been the same action taken to try and reduce water damage claims. The Construction Insurance Risk Engineers Group Best Practice Guidance for the Avoidance of Water Damage on Construction Sites prevention document (CIREG) is a great starting point and all employers should be considering this when appointing their contractors. But this has not yet been implemented into the construction working practice in the same way that the Joint Code of Practice has, nor has it been imposed by insurers. Instead we have seen insurers take control in their own way using the tried and trusted carrot and stick approach. Workshops and training sessions have been offered to clients to educate them on better risk management of water damage whilst the stick has been shown in the form of increased policy excesses. Contractors All Risk (CAR) and Third Party Liability (TPL) sections for one off projects are seeing more higher excess levels of GBP100k, GBP50k and GBP25k for water damage claims. It remains to be seen what effect this will have and until the CIREG or an alternative standard document becomes universally implemented across the construction market, water damage claims will continue to occur on construction projects. We expect to see further insurer action over the next 12 months with a greater emphasis on how clients propose to manage water risks for their projects. Inevitably this will mean more information to be provided within the broking details and water management plans being provided. Insurers will decide on the adequacy of the measures in place to manage water damage risks with a reduction in applicable excesses being the likely prize for clients.
So What More Is In Store?
The construction insurance market continues to harden further with terms still on the increase - particularly on project business. Premium rates have increased by as much as 50% in the past 6 months with further pain anticipated and higher excesses imposed for water damage under both CAR and TPL sections. In fact rates for multi tenanted buildings with significant water damage exposures have seen rises of more than the 50% suggestion.
We expect to see water damage excesses increase and the cover provided become more restricted not only on project business but also Annual covers with insurers continuing to pull away from the sector by minimising their exposures
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