Construction All Risks (CAR)

In this chapter of our Annual Insurance Review 2024, we look at the main developments in 2023 and expected issues in 2024 for Construction All Risks (CAR).

Key developments in 2023 

The construction industry has seen mixed fortunes in 2023. 

On the positive side, a strong pipeline of projects has been accompanied by an easing of supply issues, shorter delays in delivery times, and (more recently) inflation beginning to ease. 

Conversely however, the persistently high interest environment has impacted contractors, many of whom rely on credit and are now threatened by insolvency. Public debt has soared, endangering infrastructure projects which many governments have committed to. Many of these projects have now been delayed or in some cases cancelled in response to cost pressures (the less said about the UK Government's flagship HS2 project the better!). 

Raw materials remain significantly more expensive in contrast to the pre-pandemic position and labour shortages (and labour cost inflation) have continued apace. It has been a particularly challenging year for the residential sector, with homebuilders struggling in many jurisdictions - the UK, Germany and China being notable examples. Furthermore, the construction industry has not obviously escaped the impact of natural catastrophes and extreme weather events in 2023, with floods and severe weather impacting timelines on numerous projects.

How has this translated to the insurance space? The market has remained stable, albeit we have begun to see softening of rates in certain markets with abundant local capacity as the year has progressed. The issues described above have meant higher construction costs and, by extension, claims inflation. Those seeking extensions to existing cover have typically been faced with significant additional premium as insurers repriced risks in the face of high inflation, with terms of cover sometimes restricted and higher deductibles imposed.

Notably, September 2023 saw the first court decision on the LEG3 defect wording in South Capitol Bridgebuilders v Lexington, heard in the District of Columbia in the US. From an (English) common law perspective, the court's finding that there had been physical damage (as opposed to the merely defective property from the moment it was completed) is highly questionable, as was the court's ultimate finding in favour of the insured. Notably, the court was less than complimentary about the drafting of LEG3 (terming it "egregiously ambiguous") and, given the widespread adoption of the LEG clauses in CAR policies, the decision will be important, notwithstanding its controversial nature.

What to look out for in 2024

Hot topics for 2024 include, first, the use of new technologies in construction. Generative AI has been the big disrupter this year. How will the construction industry further engage with AI and digitalisation? Will smarter equipment, better scheduling and project management tools, etc. bring about greater productivity and enhanced safety on projects? Will underwriters support innovative contractors when pricing the use of untested technologies?

ESG also remains important to all stakeholders. While construction has inherent challenges in this arena, being a high carbon process, improvements are being made and the nature of risks are changing as a result. A focus on the "embodied carbon" of buildings is driving a conversation around the benefits of retrofitting buildings rather than demolishing them. Governments are also legislating to mandate the sustainability of new projects and cap emissions from public works. Construction companies are investing in greener materials. However the push to improve the sustainability of projects is likely to have a significant impact on cost and ongoing support from insurers will be vital.

Extreme weather events continue to become more frequent and more severe. In addition to one-off events, climate change is physically impacting site conditions, including changes to ground conditions and design decisions. As a consequence, projects in certain parts of the world may increasingly struggle to obtain adequate cover.

However, the demand for infrastructure is not dissipating. Instead, the construction industry is forecast for strong growth in the coming decades, particularly in emerging markets, China and the US, leading to obvious opportunities for insurers.

Written by Helena Payne.