Off-site storage of construction materials: Risk and insurance considerations

Supply chain management for construction projects has become even more challenging over the last 18 months. With increasing lead times, potential product shortages, and rising escalation, some principals and contractors are looking to manage these risks by ordering materials well in advance of the expected need, to mitigate threats to the critical path and project budget.

Supply chain management for construction projects has become even more challenging over the last 18 months. With increasing lead times, potential product shortages, and rising escalation, some principals and contractors are looking to manage these risks by ordering materials well in advance of the expected need, to mitigate threats to the critical path and project budget.

Selecting a suitable storage location

Early ordering and delivery of materials to protect the project programme can result in materials being stored for long durations, and a typical project site will not have the space to store large quantities of materials, so suitable off-site storage locations will be needed. These locations need to be appropriate for the materials (so that there are no quality control issues when the material is used) and have adequate security and protection taking the nature of the materials into account.

The suitability of a storage location depends on many factors including:

What materials are being stored and are there specific requirements (e.g. perishable components, sensitivity to damage from water or mould, need for controlled temperature or environment conditions, specific support or packaging etc.)
What handling will be required for loading and unloading or preparation for transport to the site?
Does the storage location have sufficient space to inspect materials on arrival to check for damage that occurred during transit?
Are there any transport constraints on the intended route from the storage location to the site (e.g. maximum bridge loads, height or width restrictions, or time of use restrictions)?
What is the potential for denial of access to the storage location (due to road closures or other events occurring in the vicinity) and what mitigations or contingencies are there?
Is a dependency on utilities a concern for the materials (e.g. temperature control requirements) or operation of the location (e.g. would a power cut prevent access to the location or are there manual back-ups available)?
What natural hazards is the location exposed to (e.g. nearby rivers, threat of bushfire, potential for landslip or subsidence)?
Are there any third party or neighbouring activities to be considered (e.g. nearby operation of pressure vessels, hot works activities, or the potential for fire or contamination to spread from neighbouring properties)?
What fire detection and fire suppression systems (e.g. fire sprinklers) are installed at the storage location and are they appropriate to the materials intended to be stored?
How good is the site security (e.g. access controls (card, hard key), periodic patrols and/or static guards, inspections, perimeter fencing, intruder detection, cameras, other monitoring)?
How good is the building/facility maintenance (e.g. roof leaks, gutter and downpipe cleans, wall inspections etc.)?
What other materials are being stored at the location and could they affect the project materials?

Materials being stored off-site in large quantities or for long durations will likely need to be discussed with the project’s insurers – while a contract works policy can cover off-site storage of materials within New Zealand, some policies will contain restrictions on the value per location or the duration of storage. Even if the policy does not contain specific restrictions on off-site storage, insurers may consider extended storage to be a material change in the risk profile and require additional information to be provided before they are comfortable with the risk – especially if there is a significant value accumulation at any one location.

Risks to consider when materials are stored by the supplier

Where materials will be held by suppliers until the site is ready to take delivery, responsibility for insuring these materials will depend on the supply agreement – if the storage is at the supplier’s risk, a contract works policy will not provide cover; however, if the storage is at the insured’s risk then a contract works policy would provide cover subject to the insurer being satisfied with the details of the storage.

Other factors to consider for materials being stored by suppliers include:

Can the materials be sufficiently identified as belonging to the insured? I.e. are the materials in a consignment that is specifically identified and allocated to the insured’s project, or are the materials just part of the supplier’s unallocated stock on hand?
Is the manufacturing process complete and the materials ready for shipment, or are the materials still considered to be work in progress or require finishing or packaging?

Supplier insolvency

Materials being held by the supplier can mean that a supplier insolvency could significantly delay the release of materials or result in the loss of deposits paid to secure the materials. If title to the materials passes prior to the materials being released it would be prudent to consider registering the interest under the Personal Property Securities Register.

If a deposit payment has been made and title has not passed, then anticipatory credit insurance can be used to mitigate the loss of deposit due to supplier insolvency.

Anticipatory credit insurance

Anticipatory credit insurance insures loss of deposits paid for the supply of materials where there is a failure to supply the materials resulting from insolvency of the supplier.

Subject to the amount of cover required and the usual credit underwriting of the suppliers to be insured, the cost of this cover is expected to be approx. 3% of the limit purchased (i.e. the amount of the milestone payments made prior to delivery).

Anticipatory credit insurance will only provide cover for 90-95% of the loss, and can only cover the loss of the deposits paid – there is no cover for any delay to the project that results from a supplier insolvency.

Potential impact on product warranties

Construction contracts usually contain requirements for product warranties with durations that can be as high as 25 to 50 years. Care needs to be taken to ensure that the storage conditions or duration will not breach the warranties or trigger their early commencement.

Moving construction materials from storage to site

Off-site storage will also mean that the transit (or “marine cargo”) insurance will usually cease on delivery to the off-site storage location. Most contract works policies will cover materials in transit to the project site (provided that the transit commenced within New Zealand), so movements from the off-site storage location to the project site will be covered by the contract works policy, albeit a sub-limit per conveyance can apply.

If there is a sub-limit for transit, then this needs to be reviewed to confirm whether the sub-limit is sufficient for the value of materials being carried on any one vehicle including an allowance for load recovery and the cost of transport. Contract Works insurers have some flexibility in the transit sub-limits they can provide, however, in some cases where the value or nature of the materials being transported has an unusual risk profile a separate inland transit cover may be more appropriate.

Storage prior to commencement of works

The insurance of materials prior to the commencement of the works on site presents its own issues, and can trigger the need for contract works insurance to commence earlier than anticipated, unless other arrangements are made to insure the materials prior to the contract works policy commencing.

One such option would be to insure the materials under a static risk policy such as a material damage policy until the work on site commences and then transfer the cover for the materials to the contract works policy at that point, although there may be debate as to how concealed damage should be addressed. Whoever is responsible for insuring the contract works needs to be aware of any early storage so that they can arrange the appropriate cover.

Commencing the contract works policy from the start of materials storage prior to the works commencing will avoid debates on concealed damage between a material damage policy and a contract works policyhowever the additional duration that the policy will be required for will have implications for FENZ¹ levies. With insurers’ reinsurance arrangements limiting the maximum policy duration they can offer, an extended period of pre-construction storage could also affect their ability to provide the length of cover needed for longer duration projects, or projects requiring an extension to the original duration as a result of variations, delays, or insurance claims.

Conclusion

In summary, advance purchasing of construction materials can mitigate program risk and escalation pressures on budgets. However, there are insurance implications to be addressed when doing so and proactive engagement with insurers is recommended, especially where extended use of off-site storage or significant accumulations of materials per location will be involved.

¹Fire and Emergency New Zealand levies, which are payable on all policies insuring property located within New Zealand against the peril of fire.