Construction and Engineering

UK and global inflation sits at a 40 year high. All aspects of construction costs have increased. Finance costs are also significantly higher. Even with the imposition of prudent economic policies, 2023 is unlikely to see much improvement. As a result, projects or their particular sub-limits may now be underinsured. Adjusted reserves for existing claims may also now be too low and require a more regular review (and increase) in the context of macro-economic conditions and global political instability. Long standing projects and old claims (based on old thinking) will be most at risk. They require revisiting by insureds, brokers, underwriters, adjusters and insurance claims teams.

The construction industry had a short-lived post-pandemic resurgence but the current political and economic environment is proving too much for many in an industry that exists on notoriously thin margins. Construction company insolvencies are at their highest level in over a decade. A ‘perfect storm’ of labour and material shortages, high inflation, rising interest rates and slowing demand is likely to see insolvencies spiral further during 2023. Those with weak balance sheets, who are overly leveraged or are on longer fixed price projects, will be especially vulnerable. In turn, successful project and programme delivery could be at risk due to supply chain failures.

The Building Safety Act 2022 will create additional exposures that insurers need to consider carefully, but its ambition is to be applauded and it lays the foundation to improve quality and accountability in the design, construction and refurbishment of buildings. Change will come thick and fast. Those involved in designing, constructing, maintaining, refurbishing or managing relevant buildings will need to work hard throughout 2023 to stay informed as the scope of the Act is clarified. They will also need to respond quickly with appropriate operational and procedural change. Those who do not get their house in order early will leave themselves, and their insurers, exposed.

Building and construction accounts for more than one third of the world’s carbon emissions, so the industry has a significant role to play in the drive to net zero. Unfortunately, for the unscrupulous or naïve, the opportunity for personal gain or necessity to survive is likely to result in an increase in greenwashing claims. Some designers, engineers, builders or manufacturers, intentionally or foolishly, will flaunt green credentials or make bold claims, but take shortcuts, embellish the truth or not live up to expectations. When the build does not live up to environmental assurances, claims from owners, developers or tenants will follow, particularly where their own ESG (environmental, social and governance) commitments have been compromised.

In times of difficult economic conditions, cash remains king in the construction sector and an upward trend of adjudications being commenced against construction professionals, including architects, engineers and quantity surveyors, may well be the upshot. While adjudication may not be the ideal forum within which to resolve complicated allegations of professional negligence, it may be increasingly turned to due to its speed and the prospect of making even a partial recovery. Insurers may have mixed feelings about adjudications and they will need to consider the scope of cover afforded by their policies carefully. On the one hand it may offer a quicker resolution to a claim which would otherwise have gone down the Protocol route. However, the downsides can include significant irrecoverable costs, the lack of flexibility over involving other culpable parties, and the professional firm finding itself on the end of rough justice.

Some of the first provisions to come into force under the Building Safety Act 2022 (BSA) are likely to have an immediate and substantial effect on construction professionals. From 28 June 2022, limitation periods for claims under the Defective Premises Act 1972 (DPA) and the Building Act 1984 are extended prospectively from six years to 15 years. But the BSA also extends the limitation period under the DPA retrospectively to 30 years, dramatically shifting the goal posts. Claims once considered time-barred may be resurrected and construction professionals (including design and build contractors) and their insurers could find themselves facing new limitation dates far into the future. Investigating such claims will give rise to serious practical difficulties. Witnesses will have moved on; papers will have been lost or destroyed; and increased expert input will be required to piece together the evolution of a development. At best, defending these claims will be expensive. At worst, it may be impossible.