UK construction firms face an insurance crisis that may force them to abandon projects or even go out of business, a London-based insurance consultant, Mactavish, has warned.
It says firms face "sharply reduced cover levels irrespective of cost", which could disqualify them from accepting new contracts, drive them into non-compliance with existing contracts, or even prompt a distressed sale of the entire company.
Firms may find their premiums increasing by up to five times, with excess payments on a claim going up by a factor of up to four, Mactavish predicts.
Its warning was confirmed by a small structural engineering firm, which has written to GCR complaining of extraordinary new difficulties in obtaining cover.
The changes are being caused by the ever-increasing complexity of construction projects, and the difficulty insurers face in pricing their risks.
Mactavish gives the example of professional indemnity (PI) insurance, where "the risks have skyrocketed in recent years as projects become larger, technically more advanced and involving more stakeholders and more demanding contracts".
After years of sustained losses, several underwriters have withdrawn from PI cover in the construction sector, leading to a tightening of the insurance market not seen for 15 years.
Mactavish chief executive Bruce Hepburn said the net effect "will be catastrophic".
Firms will be hit in two ways: one, by insurers challenging far more claims in the hardened market, and two, by "exposure to wild, punitive shifts in pricing and available limits, particularly pronounced in blackspot sectors".
Independently of Mactavish’s warning today, the managing director of a small structural engineering firm wrote to GCR last month complaining of a struggle to renew continuity of PI cover.
He said underwriters were imposing new conditions, limiting cover provisions and removing from cover the liability of third party damages. Policy excesses had gone up 50% on structures above a certain value, while historical cover is being undermined by new clauses and caveats.
An area of particular concern is substructure (basement) construction, a major part of London commercial property investment.
"There are many small firms like mine who will or may not be able to find appropriate cover at all," he said, adding: "Believe me, when everyone who is a business owner wakes up to realise the full extent of this latest imposition the faeces is going to hit the fan."
Image: The £350m Royal University Hospital Liverpool, which cost Carillion more than £50m more than estimated (Rod Hull/CC BY-SA 4.0)