Construction – risks and insurance issues from COVID-19

COVID -19 presents new challenges to the construction industry:
  1. we have experienced new projects being put on hold, and many contractors’ “pipeline” diminishing. There is an overarching fear of a decrease in asset values following the social, economic and financial effects of the crisis. The genesis here is a reluctance of equity and debt providers to commit to projects given the economic uncertainty. That said, we do note that the Government (Federal and State) have moved forward some projects.

  2. parties to projects have started to rely on force majeure clauses (events beyond the parties’ control meaning the contract cannot be performed). However, where a party wrongfully relies on such a clause, it could mean they have repudiated the contract, are in breach of contract and may be liable for damages.

  3. Sites are experiencing delays due to core materials being unavailable. Considerable pressure has been placed on project sites to conform with new and evolving work health and safety procedures[1], which is causing or contributing to delays. Parties may be entitled to extension of time clause, but that will depend on the construction of the clause in the relevant contract. Where an entitlement exists the notice provisions must be strictly adhered to.
Steps to take
  1. It may be that project funding, bank guarantees and other finance costs increase due to delays.

  2. WHS: see workers’ compensation and statutory liability as regards obligations of worker safety. Also take advice as regards obligations to workers under industrial instruments.

  3. Directors duties: ensure business feasibility assessment is undertaken and steps taken with regard to impacts from COVID-19.

  4. Premium considerations:

    • contract works is rated directly on “estimated turnover”. This means, subject to any minimum premium conditions, reduced turnover will yield a reduction in premium. We opine that there is scope for downward adjustment of premium proportion to revenue. This takes place at the end of the policy period but may happen sooner (if necessary) to protect cashflow. Undertaking a review of your forward order book and determining your expected turnover should be undertaken and potential return premiums requested (without the need to cancel the policies) should cash flow concerns exist. Workers compensation is also rated on estimated wages and the same approach can be taken.

    • Claims made policies will not have the benefit of such adjustments (i.e. professional indemnity, directors’ and officers’ liability, etc).

    • Static assets such as plant and equipment still need to be insured, and no discount is generally applied if the machinery is in use or idle.

    • There may be additional premium for contract works, liability and professional indemnity policies where there are delays and project policies are in place, they will need to be extended if possible.

  5. As regards delays with materials:

    • Developers may wish to protect against delay in the supply chain for materials which they could do by provisioning for additional costs to unsatisfied purchasers about alternate materials being used, where changes have had to be made due to late or non-delivery of items from overseas countries, build these costs into any rate for liquidated damages within your contracts

    • Contractors should ensure that their agreements with owners/developers provision for title passing on payment, then delivery, of offsite materials. This will assist to mitigate against potential increased costs from delay of deliveries of materials

  6. Contracts: Review rights under various contractual documents as regards force majeure. Understand the required notice you must give to request Extension of Time under existing contracts. Make sure that where coverage is required for other parties under any contract, that adequate cover is extended and no exclusions apply for COVID-19 “risks”.