The collapse of Carillion: The risks and implications for insurers
Carillion, the UK’s second largest construction company, entered compulsory liquidation on 15 January 2018, with estimated debts of £1.5bn and a pension deficient of c£800m, following three profit warnings in 2017.
The company employs 20,000 people in the UK and 43,000 people worldwide. It is thought that some 30,000 companies may be affected by the liquidation.
Carillion owed in the region of £2bn to its 30,000 suppliers, sub-contractors and short term creditors. UHY Hacker Young predict that creditors can expect to receive less than 1p for every £1, with many receiving nothing at all due to the hierarchy of creditors.
Following the collapse, Insurers have said that they will pay out more than £30m to businesses owed money by Carillion. Sums from £5,000 to several millions will be paid to firms who had trade credit policies to protect against bad debts.
A significant insolvency, such as Carillion, can trigger a domino effect, as a lack of payment travels down the supply chain. With this in mind, the key areas of exposure that could arise and impact insurers are summarised below.
- Risk of further administrations/liquidations as Carillion fail to pay their subcontractors.
- Employers may put more emphasis on suing their consultants for alleged failures to warn, inspect or review on the basis that they won’t get anything back from the contractor that made the error.
- Limitation issues – where a company goes into liquidation time stops running for limitation purposes.
- Where the limit of indemnity is not suffcient to cover the claim, there could be issues about whether Insurers are defending for their own purposes, rather than the Insureds – see case of Chapman v Christopher  1 WLR 12.
- Policy coverage issues: in particular, was the error design or workmanship; what is the impact of an insolvency exclusion?
- Attempts to bring other types of claims: D&O claims, third party claims, Contractors All Risk claims, use of performance bonds, use of project specific indemnity policies.
- Delay claims are likely to increase.
As more becomes known about Carillion’s collapse and its impact on the market, it will be interesting to follow how both the construction and insurance industry will react and respond.