Construction inflation and the ‘ripple effect’ of underinsurance

Construction inflation and the ‘ripple effect’ of underinsurance

Amid challenging economic conditions, it’s crucial for construction contractors to review their insurance coverage to avoid a ‘ripple effect’ that could threaten their business.

The construction industry is facing myriad challenges as we enter the second half of 2023, but perhaps the most fundamental is the dramatic and persistent increase in the cost of some raw materials. Worldwide shortages caused by political, environmental and economic factors have led to supply delays and unreliability, pushing up prices.

This, in turn, has led to changes in sourcing and contractor buying habits. To deal with delays and potential shortages, contractors are more likely to order larger volumes of materials when they’re available at a reasonable price. Unpredictable deliveries can mean contractors needing to store high-value items with little notice, and these remain the contractor’s responsibility until they have been accepted by the end customer. At the same time, climate change is causing more frequent extreme weather events and increasing flood risk, while tough economic conditions can often drive heightened levels of theft and other crime.

The ripple effect

In these conditions, insurance is more important than ever, as is ensuring the right level of cover. “Insurance policies will often provide coverage to maximum limits and sums insured, including – but not limited to – maximum contract values; temporary storage limits; stock sum insured limits; plant limits; and hired plant limits”, says Paul Young, Underwriting Manager at Markel UK. “The increased cost of raw materials could impact all of the above. Businesses should ensure that their cover is still adequate, and that it will remain adequate for the whole insurance period, in case of a claim occurring towards the end of a contract.”

If a claim is made but the limits of the policy or security protection is inadequate, the value of the claim could be reduced relative to the level of underinsurance, or the claim could not be covered at all, says Paul, which can have a dramatic ‘ripple effect’ on the business.

“The contractor could end up having to pay for the items which were underinsured or not covered, which could be a substantial cost. Time spent negotiating with insurers is a distraction from the contract itself, and delays in delivering the work could result in contractual penalties, which are often not insurable. Increased business finance might then be needed to cover losses”, says Paul. These factors can cause tensions with customers, leading to a loss of confidence, and ultimately put the business under strain.

Finding the right cover

Under these circumstances, it’s important for contractors to review their insurance cover and make sure it continues to reflect their business requirements. “An independent insurance broker will be able to guide contractors through their cover, and highlight any limits and restrictions they should consider.”

Published on
August 18, 2023