In the construction sector, many smaller and mid-sized contractors are so focused on securing the next contract that they overlook crucial details in their contracts and construction insurance, which could put them at a serious disadvantage.
Source: Supplied. Dan Payton, chief executive officer of CivilSure.
This is the warning from Dan Payton, chief executive officer of CivilSure, a niche risk adviser offering a wide range of insurance products and advice to the construction industry. CivilSure has partnered with the Master Builders Association North (MBA North) to help contractors mitigate risk through its legal advisory and insurance consulting services.
Payton notes that risk has changed in recent years, with climate change influencing weather patterns, and failing municipalities and utilities putting construction projects and timelines at risk. Insurance is part of proactive risk management and should be non-negotiable in the construction sector, he says. “It should be seen as a survival tool for construction contractors of all sizes.”
He notes that the consequences of being uninsured include legal liability, reputational damage, financial strain, and loss of business continuity; as well as difficulty in securing tenders without appropriate insurance.
However, he says: “The devil’s in the detail when it comes to contracts like insurance and guarantee contracts, and if you don't know that devil, it's going to catch you unaware. Our main focus is to drive trust and awareness, and to bring all parties together to the understanding of the multiple risks that are now facing building contractors.”
Unexpected risks and liabilities
Payton says too many contractors find themselves liable for the costs of events they were not prepared – or covered – for.
“It might rain for seven days in a row and take another few days for the site to dry out before work can resume. Projects can be put at risk by urban flooding, and municipal failures might leave contractors without electricity or water for days or weeks. On top of that, theft and petty theft has increased. There is a lot of new risk in the landscape,” he says.
Payton cites the example of the National Veld and Forest Fire Act, which makes landowners liable for damages resulting from veld fires that start on or spread from their land. Contractors can also be held liable, as seen in a case where a worker’s discarded cigarette in Matjiesfontein sparked a week-long fire that spread as far as Laingsburg, destroying property and livestock and resulting in significant compensation claims.
Another potential risk contractors overlook is liability as it pertains to security. “We see this all the time – contractors hire security to protect the site and only when something goes wrong do they learn that they are held liable for the security company's actions. You've got to read your security contract. So we say: send us the security contract for review, to help mitigate your risks.”
Payton also points out that plant equipment is hired under the custody and control of the contractor; therefore, separate Plant Hired-In insurance is required. Contractors should also be aware of their potential liability if their work damages a fibre cable and causes downtime in nearby businesses.
“Those businesses are going to hold the contractor responsible for their loss of profits and their reduction in revenue. It's the contractor’s problem and they need very specialised insurance to cover them,” he says.
While most contractors or principals do take out some form of insurance, these policies may not adequately cover them, Payton says.
Penny wise, pound foolish
Payton says many contractors don’t properly assess their risk and ensure that they have the appropriate cover to mitigate it.
“Some don't believe in insurance and they don't engage with their risk. Sometimes, they simply look for the cheapest insurance product, not understanding their exposure. In other cases, the employer takes out the insurance with policies designed to cover three parties: the employer, the main contractor, and subcontractors.
"This can result in contractors blindly walking into the employer's insurance without knowing what it covers or doesn't cover, and where it leaves them. They don't have sight of that policy and have no idea what the deductible or the excess is – so they end up with insurance that’s very expensive when the cover is needed. Ideally, contractors should send a copy of the policy to CivilSure so we can analyse it and advise the contractor where they are at risk.
“For example, copper remains one of the most targeted materials on construction sites. It is not unusual for petty thieves to cut and pocket a meter of cable at a time. By the time you need to install 250m, you may find only 100 left. While many insurers do provide cover for copper theft, they usually impose strict conditions, cap the limit for this cover or apply high deductibles.
"Loss that occurs gradually over a period of time is typically not covered. Instead, there usually needs to be an identifiable single event, in line with policy conditions such as proof of 24-hour site security. Ultimately, if the policy conditions are not met, the contractor loses money. People buy insurance and they don't engage their risk, so they often lose out when disaster strikes.”
He emphasises: “In the world of contracting, if you want to keep your margins alive, you have to be awake. You've got to engage with your risk, and that's where you need more than one mind. This is where we come in. We take that risk upon ourselves. In fact, we engage with our clients by saying: You get your quoting right. You have a look at the site risks. But when it comes to contractual readings, send us a copy of the contract. Let us review what your requirements are. Let the guys who work in risk give you the answers on your risk.
“We welcome the opportunity to work with the MBA North, to help contractors identify their liabilities and reduce the risks associated with insurance, unfair guarantees and other contracts,” Payton concludes.
CivilSure will partner with MBA North in future webinars to inform members about hidden risks and liabilities in contracts and insurance, and advise them on how to proactively reduce their risk.
