Cost pressures hitting the construction industry are triggering insurance claims and will have implications for reserving levels, policy limits and claims handling, legal firm Clyde & Co says.

A number of construction companies have failed as they have battled supply chain delays, labour shortages and rising freight and materials costs, while at the same time many have operated under fixed price contracts.

Insolvency affects developers, property owners and employees, as well as leaving sub-contractors and suppliers out of pocket. Contractor insolvency will lead principals and liquidators to look at ways to claw back funds, and where defect claims are concerned, warranty insurers and professional indemnity (PI) insurers will be left to resolve matters, Clyde & Co says.

“In our practice we are definitely seeing an increase in the number of professional construction PI claims that are coming through,” Partner Nicole Wearne tells insuranceNEWS.com.au.

“Especially where you have got insolvencies involved and policies are about to expire, you will see that everyone is notifying everything they can possibly imagine.”

PI claims are being seen in areas such as engineering, building surveying and in design and construct, and the volume of claims is likely to remain high as the difficult conditions persist.

“I think it will continue to rise whilst we have rising inflation and these ongoing labour shortages, and the continuing increase in costs of building supplies,” Special Counsel Sarah Metcalfe says. “There are still construction companies going into administration in Victoria and NSW so that is a sign as well that these problems are continuing.”

Clyde & Co say accountants who have signed off on financials required for builders’ warranty insurance may come under scrutiny. Other issues include whether contractor progress claims have been approved prematurely or incorrectly, and have architects or project managers failed to detect non-compliant work.

Lawyers advising owners and developers will also face additional scrutiny and potential claims over their roles.

In an article on the firm’s website Ms Wearne and Ms Metcalfe say insurers need to be mindful of claim reserves given inflation and the rising cost of supplies, and there are implications for policy limits.

It’s estimated residential construction costs rose 9% over the 12 months to March, the highest annual growth rate since 2001, and rectification works carried out now compared to a year ago are likely to cost at least 10% more.

“Insurers need to be cognisant of the real potential for policy limits to be exceeded, as a claim drags on exposing an insured to uninsured loss which may have been avoided if the claim was resolved earlier in the life of the claim,” the article says. “Questions of the insurer’s duty of utmost good faith in managing the claim may come under scrutiny.”

Ms Wearne says the difficult environment is an opportunity for insurers and brokers to be speaking with clients about managing risks through the coming period.

“Now is a good time for insurers and insureds to engage with one another and to get a better understanding of the risks, for insurers to be speaking to builders about the terms of the contracts they are entering into, and suggesting perhaps that they look at opportunities to not sign up to fixed cost contracts,” she said.