How are insurers reacting?
With construction insurance delivering unprofitable results for insurers, we have seen that insurance market transition. This has recently impacted several specific areas, professional indemnity being the most obvious example. However, since the start of 2019 the general construction insurance market has also been affected, with increasing premiums, excesses, and more restrictive terms applied. (These have recently been highlighted in our biannual insurance market updates, Constructive Insight.)
The most recent example of this market change is the release of a new water damage guidance note by the Construction Insurance Risk Engineers Group (CIREG). The first iteration of this document was issued in March 2008 and the most recent, fifth edition, was made available in November 2019. CIREG is an industry group representing construction insurance risk engineers and is also supported by a similar group representing UK CAR underwriters.
Causative factors that CIREG lists for the many recent losses include:
- A lack of awareness and insufficient risk management from design stage through to operation.
- Insufficient on-site management and assignment of responsibility.
- Absence of permit systems and other management systems, with water risks treated less seriously by contractors than fire or other safety risks.
- Poor workmanship and the use of inexperienced or untrained personnel.
- Inadequate verification of individual plumbers' installations through initial joint testing.
- Increased high-rise developments and vulnerable fit-out works.
- A lack of understanding of the myriad plumbing systems now available and the lack of bespoke training.
- Sub-standard pipework testing regimes.
- Inadequate mitigation and emergency planning delaying the response in protecting assets.
The document has major implications for both contractors and project owners. The principal recommendation is that all developments should have a water management plan (WMP), for both the temporary water supply during the project period and the permanent systems incorporated into the works. CIREG has identified the following minimum requirements for a WMP:
- Appointment of 'responsible persons' to manage the escape of water risk.
- A risk assessment process for mitigating exposures at the design phase.
- The selection of competent contractors.
- Quality control throughout material storage, installation, and testing.
- Mitigation measures, and identification, implementation, and maintenance of those mitigation measures.
- Emergency response plans.
- Regular review of the risk assessment and water management plan to ensure mitigation measures remain appropriate.
How will this affect my project?
The CIREG guidance states that a WMP should be prepared for all developments, but how realistic is it that this will be required or enforced by all insurers? For now, we expect that the new requirements are most likely to affect more significant projects where additional underwriting scrutiny is inevitable.
For these larger projects, the approach adopted will vary for each insurer depending on its loss experience and appetite for risk, although some insurers are already avoiding tall buildings altogether with one imposing a limit of eight-to-ten storeys. Also likely to arouse greater attention are residential projects where the issues highlighted above are more likely to occur and can lead to more substantial losses. At the most conservative end of the spectrum, insurers are imposing observance of the guidance note through some form of condition or warranty.
Smaller projects may be insured under a contractor's or developer's annual CAR policy, covering projects up to a specified value. This naturally leads to less examination of risk conditions than would be the case with a major project, which must be insured under project specific insurance.
The practical effects are likely to be as follows:
- Increased requests to provide more detailed underwriting information, especially in relation to higher value/risk projects.
- Mandatory requirements for WMPs – be prepared for underwriters to withhold quotations until this information is available.
- More prescriptive coverage in relation to water damage by linking indemnification to implementation and observance of WMPs and the introduction of automatic shut off valves.
- Increased excesses – these were previously £10,000–£25,000 for project-specific policies but we are seeing these increased to £50,000–£75,000.
Should the industry fail to address these concerns and losses persist, more stringent actions will likely be taken by insurers with much greater scrutiny on all projects, even those of much lower values.
How to improve your risk profile
Talk to your construction insurance broker about appropriate risk management for this peril. In the previous environment (which persisted for well over a decade), competitive pressure prevented the application of basic risk management standards for water damage. Despite recent losses and general unprofitability, a reasonable number of underwriters still operate in the UK construction insurance market. The current transitioning market may catalyse improvements in this area. By applying sensible risk management now, construction companies can assure their underwriter that escaping water damage is being mitigated appropriately.
1. Polygon Group: How Much Water Can You Lose From a Leak?
2. Marsh JLT Specialty: Water Damage: How to Stem the Flow of Devastating Claims
