Contractor insolvency - are you at risk?

Construction Risk
Attention all Developers – Are you at risk? Contractor insolvency is one of the biggest issues facing the Australian construction industry.

Published Jan 2018

Recently the construction market was rocked by the news that Carillion – The 2nd largest contractor in the UK with 20,000 employees (43,000 globally) have gone in to liquidation. Carillion won £1.3bn of new contracts in the last 12 months which consisted mainly of government contracts.

Construction is an inherently uncertain area and contractor insolvency is unfortunately not that uncommon as on average, contractors in Australia generally make $10,000 for every $1m of work they do (1.00%) and the contractual risks they take on is substantially large.

Insolvency represents one of the biggest contemporary issues facing the Australian construction industry. No other single industry sector in Australia is blighted by the scourge of insolvency anywhere near to the same extent as is the construction industry. Over the period 2013 to 2017, the construction industry accounted for 18% of all external administrations in Australia and 1,509 corporate insolvency events were recorded in the construction industry in the 2016/17.

This highlights one of the many reasons why the Developers should be controlling their own insurance(s) as if they rely on the contractor, in the event of the contractor going insolvent during or shortly after the build, they will be uninsured and potentially uninsurable.

Benefits of developer controlled contract works insurance

Lockton has created a Developer Controlled Contract Works insurances policy which gives the control back to the Developer.

Benefits of the policy may include:

  • Developer has full control over the policy with the ability to tailor to suit needs to cover interests beyond the Contractors interests;
  • Broader and consistent coverage, especially if arranged on a multi project (annual) basis;
  • Protection against contractor insolvency;
  • Potentially lower insurance premiums due to leverage from multi projects (annual cover) and/or Contractors previous claims experiences;
  • Improved quality of claims handling, loss control and risk management;
  • Efficiency of policy administration and control;
  • Claims monies can be paid direct to give control over how this is used to reinstate the loss;
  • Ease of protecting interests in insurance without needing to undertake negotiations;
  • Ability to protect against delays in the project through cover for Delay in Start Up / Advance Loss of Profits / Loss of Rental Cover;
  • Coverage for additional interest costs associated to a loan following damage; and
  • Elimination of coverage disputes and subrogation issues.

Developers should not incur additional costs as the Contractors contract price should have the insurance cost removed.

Lockton can provide a solution to the Developers financial exposure. Working closely with the Developer and their professional team, Lockton can place insurance to cover the Developers loss of revenue, additional financing costs, associated direct costs, contractor insolvency, bank finance, dispute, replacement of contractor, claim and loss of revenue.

If you would like to discuss this further, get professional advice or a no obligation quotations, please contact us here for further information on how Lockton can assist you.

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