Insurance and risk management components to consider

Major construction projects are more likely to be undertaken by clients with a global footprint, attracting investors to local economic development projects. And while there is currently a strong focus on smaller commercial projects such as office blocks or manufacturing facilities, the investment is welcomed in an industry that remains under pressure. According to the latest StatsSA findings, the construction industry remains 23.1% smaller than it was before the pandemic, with 2022 marking construction’s sixth consecutive year of decline.

“When planning a construction project of any size, insurance and risk management are crucial components that need to be factored into the planning stages of a project, as these costs need to be included in the construction budget,” says Santesh Pillay from Aon South Africa’s Construction & Engineering team.

“A construction project usually comprises of three distinct disciplines which is engineering, procurement and the actual construction of the project. The spectrum of cover required across these disciplines can be vast, ranging from core lines such as property, general liability, marine, business interruption and directors and officers insurance; through to specialty lines such as cyber, environmental liability and stand-alone riot, strikes and civil commotion cover,” Santesh explains.  

Santesh highlights the importance of having adequate cover in place. “We know that insurance is viewed as a grudge purchase, but in an industry where a loss can amount to millions if not billions of Rands, it is imperative to do your research thoroughly and to make sure that your sums insured are correct for all your identified risks.”

Aon unpacks salient risks to consider in the making of a well-rounded construction and engineering insurance schedule:

• Construction materials procured for a construction project are subject to the risk of theft, with materials such as copper wire and other high-value items frequently targeted. Many insurance policies are specific on how items need to be stored in addition to having 24-7-365 security personnel on site.
• The risk posed by Strikes, Riots and Civil Commotion (SRCC) needs to be considered. From a South African perspective, Sasria SOC Ltd offers insurance against such risks in terms of various Sasria products in accordance with the Public Finance Management Act No 1 of 1999. It is important to speak to your broker about including Sasria SOC Ltd cover relating to property damage, business interruption, money, goods in transit, motor and construction risks. ‍
• Adverse weather affects 45% of construction projects globally, a 2021 report from the Air Force Institute of Technology found, resulting in billions of Rands of additional expenses and lost revenue related to project delays, supply chain shortages and even impacting worker safety on site. The adoption of a robust Business Continuity Management (BCM) plan is key in addressing the issue and finding workarounds.‍
• Defect in design from an engineering perspective is usually tied to costly legal liabilities and can severely damage the reputation of the engineer(s) and/or construction companies involved. An example is a bridge that is not adequately designed to span a river or is not sufficiently enforced to carry the weight. Many construction companies are paying closer attention to contractual wording related to engineering contracts and are including liability clauses for defect of design, which in turn highlights the need for Professional Indemnity cover for professionals in the field.‍
• Specialised plant or machinery refers to ‘yellow metal equipment’ which are designed and built for specific tasks or functions such as excavators, bulldozers and cranes. These types of equipment are often costly to manufacture and purchase, and they require specialised knowledge and training to operate. Needless to say, cover for these items often needs to be very specific and bespoke taking into account the replacement value of the item; especially in instances where a piece of equipment was designed to fulfil a specific need and cannot be easily replaced.

Renewed focus on renewable energy projects:

With energy disruptions being front and centre, there is healthy interest in the construction of renewable energy projects. The sheer scale and urgency of these projects bring significant and complex risks into play that span across financial requirements, right through to contractual liabilities.

“Renewable energy insurance products cover the main lines of insurance such as property, engineering, marine and liability while additional special types of insurance can be made available such as credit insurance, political and weather risks, Errors & Omissions, and Directors & Officers cover,” Santesh explains.

“While the cover is similar to construction, it also addresses the specialised needs that come with a renewable energy project and the liabilities it entails, that looks at specific extensions, limits and endorsements that we can negotiate on behalf of clients,” he adds.

Any construction project needs to be undertaken with a clear understanding of the risks that the project may be faced with. “Ensure that you are adequately covered so that any mishap along the way does not put you or your business under any financial strain. It is crucial to engage the services of a broker who has a deep understanding of the construction, engineering and renewable energy landscape, so that the only thing you need to worry about is finishing your construction project,” Santesh concludes.