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How rising Construction Insolvencies affect Risk Management

The construction industry is facing a challenging time. With insolvencies on the rise, it's crucial for insurers, brokers and businesses to collaborate effectively. Here's a breakdown of the current situation and what construction companies need to consider.

1. The Current Landscape

  • The construction sector is highly susceptible to insolvency. A recent report from Red Flag predicts over 6,000 company insolvencies in the UK's construction sector in 2023. This could lead to bad debts rising from £300m to £1bn by early 2024.

  • In 2022, the construction industry saw the highest number of insolvencies in England and Wales, accounting for 19% of all company insolvencies. The situation might worsen in 2023, with over 100 firms in the sector potentially collapsing each week.

2. Regional Impact

  • Notably, several high-profile construction companies in the North of England faced insolvency in early 2023. However, data suggests that the North East isn't faring worse than other regions. This indicates that insolvency is a UK-wide issue.

3. Factors Contributing to the Crisis

  • A combination of the COVID-19 pandemic, the Russian-Ukraine Conflict, inflation, and rising energy prices have created a "perfect storm" for the construction sector.

  • Energy prices and inflation of goods and services are major concerns for construction businesses. With the UK experiencing 40-year high inflation levels, profit margins are under pressure.

  • The industry is grappling with labour and material shortages due to COVID-19 and Brexit. This has led to increased costs for materials and wages for skilled workers.

4. Insurance Implications

  • Insolvency affects not just main contractors but also subcontractors and suppliers. This can impact the main contractor's insurance claims.

  • Collateral Warranties are essential for protection in the supply chain. However, they can lead to complex legal issues. It's crucial to ensure that these warranties include clauses that cap liability.

5. Key Considerations for Business Owners

  • Ensure rigorous checks on the solvency and experience of subcontractors.

  • Ensure that subcontractors have adequate professional indemnity cover.

  • From a claims perspective, early risk management is vital. Understand the contracts and insurance details of all parties involved.

6. Emerging Claims Trends

  • There's an increased use of adjudication in contracts, offering a quick cash-flow remedy.

  • Direct claims against insurers due to insolvency are on the rise, with third parties relying on The Third Parties (Rights Against Insurers) Act 2010.

  • Speculative claims are increasing due to uncertainties in the construction industry, potentially leading to a surge in insurance claims related to construction.

7. The Way Forward

In these turbulent times, collaboration between insurers, brokers and businesses is more crucial than ever. By understanding the challenges and taking proactive steps, construction companies can navigate the storm and build a resilient future.


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