The problem with insurance
March 1, 2013 by David Bowcott
Some of you may think there are several problems with insurance, but for the purposes of this article I’m going to focus on one problem that relates to construction projects and the operations of those projects after substantial completion. What I am referring to is fragmentation.
The insurance industry offers several separate products that cover various risks. As insurance evolved, the industry started excluding risks under policies with broader covers. Then, these excluded risks became separate policies onto themselves, with separate underwriting disciplines.
It has evolved to the point that there can be more than 15 lines of cover involved in managing the risk of a single construction company. The following is a sampling of some of those covers:
-Property insurance (real estate, office contents, etc.)
-Builders’ risk/course of construction (Property for the project)
-Wrap-up general liability
-Subcontractor default insurance
Note: These are just the covers that directly relate to the construction phase of an asset’s development.
There are also covers in place during construction and after construction that are procured by the owner.
So, we have singular risks and multiple covers. If the world were black and white, this could be a sustainable way to manage risk. As we all know, risks are rarely ever simple and therefore it is time for the insurance industry to consider
revamping the design of the product offerings.
As an example, let’s look at a defect issue and the risk tools potentially involved to resolve the impact created from the defect. A defect is either caused by faulty design or faulty workmanship (either workmanship in installation or workmanship in material manufacturing).
Immediately, this brings into play potentially seven policies: the design firm’s practices professional, the contractor’s professional, the project’s professional, subcontractor default insurance, subcontractor surety bonds and prime contractor surety bonds as well as subcontractor/supplier insurance covers.
Further, the defect may have caused damage. This damage, in the construction phase, should be covered under the Builders Risk policy. Or, if the damage occurs after construction, project-specific or practice-liability policies of the contractor could come into play (in addition to the owner’s property policy). So we have more than 10 policies potentially involved.
I think you get my point on the problem with fragmentation of cover. Risks rarely manifest in a black-and-white manner—they are quite frequently grey. Insurance policies are, to some degree, designed to cover black-and-white risk issues.
As a contractor, you need to ensure you take the following measures to manage the risk facing your balance sheet optimally:
Know the likelihood and impact of risks facing your project, company, directors, officers, shareholders and employees.
Know how those risks have been allocated based on the contracts you entered into.
Know all the tools available to manage risk (don’t limit this to insurance—think of risk controls, bank instruments, capital market solutions, contractual transfers, etc.)
Know how each of these risk tools needs to be integrated to manage risk. As mentioned, risks will not always be covered by one risk tool. There will often be multiple risk tools involved, so ensure they integrate without leaving coverage gaps.
Know how quickly these tools respond in order to manage the cash flow impact to your project effectively.
Ensure you have top-level risk advisory services that have the battle scars to ensure you gain maximum solution in the event risks manifest within your company or on one of your jobs.
The insurance industry provides an invaluable service to the development and operations of assets. The products it designed are critical to our economy. Several within the insurance industry recognize that fragmentation is of major concern. Those leading insurance companies are looking at ways to better integrate their solutions in order to accommodate the grey world we live in. Pay close attention to these evolutions, they could mean the difference between the success and failure of your company.
David Bowcott is senior vice-president, national director of large/strategic accounts with AON Reed Stenhouse Inc. Send
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