Contractor insolvency: risk and insurance implications for construction developers

Key points:

  • In February 2022, building contractor Probuild collapsed

  • Johannesburg-listed builder Wilson Bayly Holmes-Ovcon put the Australian business into administration after it had “severely depleted” its resources and piled up losses

  • Insolvency is one of the biggest issues facing the industry and has significant insurance, risk and business implications (and considerations) for developers

What happened?

Probuild is the latest casualty in an increasing string of contractors facing insolvency in recent years. This is only becoming more common for an industry which is inherently risky, for sometimes too little reward.

What do the events mean for construction developers?

For developers, this is yet another timely reminder as to why developers should consider controlling their own insurance(s).

Should the contractor be left responsible for the procurement of insurance coverage; and in the event the contractor is rendered insolvent, their insurance policies are automatically lapsed, leaving the project uninsured.

Why does this happen?

Traditionally the procurement of insurance coverage has been passed to the contractor. However, principals have recently been recognising that by procuring a principal arranged insurance program, they can have oversight and visibility to ensure their risks are adequately covered in a way that protects their interests.

Lockton recommend taking a more proactive role in the identification of the insurable risks and in the procurement of a (principal arranged) insurance solution that recognises and protects their interests as opposed to those of the contractor.

Impacts for contactors

  • In the event a contractor becomes insolvent, owners and principals that are relying on a contractor’s annual insurances are unlikely to have any protection for their projects moving forward.

  • Even where "project specific" policies have been arranged by the contractor, owners and principals will need to urgently access those policies and ensure that they remain in force for the period required under the contract (i.e. ensuring all conditions, subjectivities and other policy obligations are continuing to be met).

  • Some construction policies have "cessation of works" exclusions and/or conditions meaning that even where owners/principals have arranged their own insurances, cover may cease after a period of inaction at the project site (which is possible as owners/principals negotiate terms with new construction contractors).

  • Even if replacement insurance policies are ultimately arranged, there are likely to be some exclusions and/or limitations relating to works already completed by the contractor.

Whilst owners/principals will still have potential recourse directly against consultants and subcontractors engaged by a contractor, this course of action is far more difficult to pursue. These actions are likely to take longer and require more time and resources to pursue. Additionally, they are unlikely to ultimately result in owners being fully compensated for their loss.

Looking ahead: what developers should consider

Property developers have been increasingly enquiring about Lockton’s Project Specific Principal Controlled Contract Works solution which gives the control back to the principal/developer.

What are the benefits?

  • Developer has full control over the policy with the ability to tailor to suit needs to cover interests beyond the contractor’s interests

  • Broader and consistent coverage across multiple projects, especially if arranged on a multi project (annual) basis

  • Protection against contractor insolvency

  • Removes exposure to coverage restrictions or high premiums that may be in place to penalise a contractor with a poor claims history

  • Removes opportunity for ‘contractor mark up’ on insurance cost

  • Removes exposure to aggregate limits within a contractor policy that may be reduced by active claims on other projects

  • Allows visibility through the claims adjustment process

  • Oversight of policy administration and control

  • Principals become the loss payee; claims monies are paid allowing control over how this is used in the reinstatement process

  • Ability to protect against delays in the project through cover for Delay in Start Up/Advance Loss of Profits/Loss of Rental cover

  • Coverage for additional interest costs associated to a loan following damage

This method should not incur additional costs as the contractor’s contract price should have the insurance cost removed.

Act now

Lockton can place insurance to cover the developer’s loss of revenue, additional financing costs, associated direct costs, contractor insolvency, bank finance, dispute, replacement of contractor, claim and loss of revenue.

Talk to us

For more information, contact:

Stephen Cooper
Head of Global Real Estate & Construction, Australia
+61 401 322 358