Construction insurance claims have never been the easiest of claims to resolve for a host of reasons, and they generally have a longer tail than other claims. But why? asks Peter Newall
How are construction claims any different from regular property claims? They are surely just property claims for assets being built? Technically yes, but they are somewhat different in that a Contractors All Risks (CAR) policy provides cover for damage to property under construction, for liability towards third parties and sometimes for losses sustained when the intended date of start-up for investors is not met as a result of delays caused by an insured incident.
The interests of several different parties, including financiers, owners, sponsors, contractors and sub-contractors are all covered by the one composite insurance policy, the effect of which is to provide each with a copy of the policy to regard as his own. Some easy to deal with and some not.
On that very point, one of the most common failings at the outset of claims handling is the scrutiny of the terms and conditions of the main contract. Often claims handlers breeze ahead and assume that the interests of all parties are covered by a blanket policy for the entire contract works, without verifying insured parties and responsibilities to insure.
Values on site naturally increase as the works progress and often exponentially if production equipment is to be installed. As the project grows, so does the proximity and the number of workers on site, raising the potential for accidents and the risk of more costly damage. The calibre of site workers presents a real risk too.
The practice in Asia has been to employ less expensive, and less experienced overseas workers, but with that comes the challenge of increased supervision by an unavoidably expensive international EPC contractor, failing which there is an elevated risk of costly workmanship errors.
Natural and manmade catastrophes
CAR claims arise from two main sources, either manmade or from natural catastrophe causes, both of which can wreak devastating consequences. Nat cat perils are particularly damaging to sprawling civil works projects, whereas manmade incidents, most commonly result from defective workmanship and/or defective design, for instance poorly chaperoned welding activities, or escapes of water from faulty plumbing installations. These incidents can be catastrophic in high-value concentration areas, such as those in the electronics industry.
A dominant and increasingly severe major nat cat risk in Asia is flooding and landslides, particularly in the early stages of civil works contracts. Interestingly, reports from McLarens CAR adjusters in Indonesia over the past few years have identified a latent attendant risk caused by ‘expansive soil’. This occurs when certain types of soils shrink and/or swell, and thus change in volume, in relation to changes in their moisture content, causing serious damage to contract works. Resulting claims, not obvious at the outset, may therefore be extremely technically challenging and the adjuster’s early recognition of the potential for complexity and the need for expert engineering assistance, is paramount.
Add to that the not infrequent challenges of determining the meaning of ‘damage’. For example, is a pipe damaged when it is blocked, or has defective glazing installed in a building caused damage to the building? These are all themes that have challenged CAR insurers in the past and variations of the same can usually only be resolved with the aid of specialist legal advice. This again is best recognised by the adjuster early in a claim’s development, rather than later.
Cognisance of potential difficulties, which comes with experience, is important since whatever the cause of damage, the window of opportunity for inspection and measurement on site is limited. In construction, time is of the essence and the project must move on.
Trouble is therefore surely invited if the damage is not properly scoped and recorded with the affected (sub)contractor at the outset. This avoids a situation where repair works to damage are executed alongside continuing contract works and the allocation of costs between the two become blurred.
It is also a fact that in many instances repair methodology may prove more complex than the original construction.
Conflict of interests?
A peculiarity of construction claims is that the contractor or sub-contractor is undoubtedly going to repair his own property himself, perhaps creating a marginal conflict of interest. CAR policies rarely dictate how and on what basis an indemnity should be formulated, but the parties often agree on a cost-plus formula, meaning basic labour rates plus materials at cost. But then comes the matter of the interpretation of “plus” as in “cost-plus”.
McLarens construction adjusters across Asia invariably cite this topic as a ubiquitous source of friction, since a contractor will undoubtedly wish to maximise the overhead percentage applied to his claim and many a contractor has been known to suggest that if Insurers wish to dispute the overheads claimed then an appropriate, but clearly impracticable solution is to invite an independent contractor to quote for the repairs necessary.
It would therefore undoubtedly be to Insurers’ advantage and the loss adjuster’s delight, if all CAR policies prescribed a percentage for overheads claimable.
The production of supporting claim documentation is often a painfully slow process. Unless a claim is very large, it will probably not be at the top of the project managers ‘to-do list’ and therefore non-critical matters tend to drift if not chased up regularly. Damaged works once repaired must customarily be accepted and signed off by the owner and/or the main contractor and evidence of payment produced. Not until that occurs, can a settlement be agreed with the adjuster.
Finally, It should be remembered that construction projects have a finite life and that towards the end of that life individuals on site begin to drift away to new projects, leaving a sometimes voluminous number of claims in the hands of a junior employee in the (departed) project managers office. If the adjuster’s files are sparsely populated then problems will of course surface.
The challenges highlighted represent but a few of the hurdles facing construction claims adjusters. All take time to manage and perhaps go some way to explain the longer tail associated with CAR claims. The required skillset to manage these matters differs from those necessary for property claims and it is here that construction claims experience is invaluable.