July 2024 Market Update – Construction Liability

Australia’s insurance market is experiencing a resurgence of interest from international insurers who recognise the potential of the region and are establishing operations here. This increased competition will benefit local businesses with more options and potentially better deals.

The Australian construction liability market is showing positive signs, with increased competition from the existing insurers and new entrants to the market, this should result in the current trend of rate increases easing and opportunities for reductions emerging.

Current key trends

Improved profitability: Insurers are reporting better results, making them more open to writing construction liability insurance.

New players: Overseas insurers are entering the market, increasing competition, and leading to more competitive rates, and broader coverage particularly for good quality projects.

Market stabilisation: The cost of insurance is stabilising offering more certainty for contractors when budgeting insurance costs.

Focus on risk mitigation: Insurers are placing more emphasis on risk management practices when evaluating projects. Businesses with strong risk mitigation plans may see better rates.

Claims: Insurers continue to show limited tolerance to contractors with a history of high insurance claims (poor loss ratios) from demonstrably poor work practices or defective workmanship. They can expect higher premiums and deductibles (excesses).

Positive outlook: Overall, the outlook for the construction liability market in Australia is positive. With more competition and a focus on risk management, construction companies may benefit from more favourable insurance terms in the coming months.

Worker to worker claims

Worker-to-worker claims continue to be a growing concern in the Australian construction industry. These claims arise when a worker employed by one company, such as a subcontractor or labour hire worker, is injured on a worksite and seeks compensation from another party involved in the project, like the principal contractor.

Several factors are contributing to the rise of worker-to-worker claims. Firstly, insurers are reporting a significant increase in the average cost of these claims compared to traditional bodily injury claims. This trend is partly attributed to the growing prevalence of psychological injury claims.

Secondly, workers are becoming more aware of their legal rights and the potential benefits of pursuing a worker-to-worker claim. Unlike workers’ compensation schemes, which have limitations on payouts, worker-to-worker claims can potentially lead to higher compensation awards. See our article here.

Finally, the rise of labour hire arrangements is seen as a contributing factor. In these situations, injured workers may have grounds to sue the host employer or other contractors involved in the project for negligence.

The increasing difficulty insurers face in defending such matters is a significant concern, leading to higher premiums and excess structures for contractors. However, if an insured party can demonstrate thorough record keeping, safe work methods, effective incident response, and efficient claims processes, it can positively impact their renewal outcomes.

Market challenges for specific trades

Trade contractors, especially plumbers and fire service contractors, are facing difficulty obtaining insurance due to a rise in water damage claims, often caused by faulty installation or product defects. This trend is unlikely to improve in the near future.

Looking ahead

Overall, the future looks promising for the Australian construction insurance market, with more competition and a focus on risk management. However, contractors, especially those with a history of claims, should be aware of the remaining challenges. To summarise:

Increased competition from new insurers is leading to lower rate increases, broader coverage and more options.

Those with a history of poor work or high claims will face higher costs, higher deductibles and may struggle to find coverage.

The rise of worker-to-worker claims is putting a strain on insurers, leading to increased deductibles and premiums for policyholders.

Negotiations with your current insurer are likely to yield the best result, particularly where such a relationship is long standing and claims experience over the period has been good. Alternative markets are only likely to improve outcomes where insurers’ internal underwriting appetite has changed, or where the incumbent insurer has paid significant losses and is seeking to issue unpalatable terms that constitute a “soft decline”.

As always, to avoid surprises, it is essential to provide detailed information and clarification to potential markets to differentiate risk and ensure the best possible terms and conditions of cover are obtained. Given the workload of insurers in this space, we have observed that by engaging with the market early to allow sufficient time for negotiation prior to your renewal date, more favourable outcomes are achieved.