The intervention of reinsurers in construction projects is challenging Israeli contractors
By Ganit Michaeli, Head of Complex Projects Department
The ongoing trend of global reinsurers withdrawing from the Israeli Contractors All Risks market has been addressed extensively in our website, and continues to form an integral factor in the underwriting of insurance for construction projects in Israel.
The change of heart on the part of reinsurers, which started in 2019 and continues to dictate the agenda, is having a very major impact on developers and contractors who require accurate, adequate and effective insurance cover, partly due to the increasing intervention of reinsurers even on mid-size projects with total contract values of US$ 10 million or less.
Until a few years ago, the Israel insurance companies had the capacity to write cover for projects of up to NIS 100-150 million at their discretion with the support of reinsurance treaties or semi-automatic facilities. Over the last few years, the situation has changed beyond recognition, and specific conditions are now often dictated by reinsurers, even for much smaller projects.
One of the most prominent changes is the huge increases in premiums and deductibles. The premiums required nowadays are often so onerous that they render certain projects uneconomical from the outset, and this is further exacerbated by the very high deductibles that the insured has to budget for in the event of a claim.
Another critical element that emanates from these trends is the across-the-board and stringent restrictions to policy conditions. There are many examples, a few of which we shall highlight below:
Hot works procedure
Until a few years ago, Contractors All Risks policies were subject to a standard hot works procedure, the wording of which was basically uniform in Israel. We are now having to cope with much more stringent conditions. If reinsurers are involved in underwriting a project, the hot works procedure is often tailored to include specific requirements that the contractors and developers have to familiarise themselves with and implement on sites.
Handling water damage claims
Construction sites in Israel have a tendency to generate water damage events, arising from groundwater leaks, defective plumbing, taps left open, storm damage and more, sometimes resulting in claims reaching hundreds of thousands if not millions of Shekels.
The increasing intervention of reinsurers in construction projects is manifested in demands to implement stringent and creative procedures to prevent or mitigate water damage, such as pre-surveys, altering construction methods, using state of the art systems to detect and monitor losses, implementing specific rehabilitative measures at different stages, exclusions to the policy and more.
The increasing intervention by reinsurers means that in many cases the Israeli insurance companies have to obtain prior approval from their reinsurers for procedures which were dealt with in-house in the past. One of the natural consequences of this is longer waiting times to deal with requests, requirements to complete forms and reports, delays and even refusal to agree to the request. For example:
Extending policies – A typical Contractors All Risks policy is issued for a period of 24-36 months. If the project is delayed, and in Israel this is a fairly frequent phenomenon for reasons out of the control of the contractor or developer, it is possible to request an extension to the policy. In the current market, in which reinsurers are more increasingly involved in projects, extending the period of insurance can turn into a saga. Unlike in the past, the Israeli insurance companies cannot automatically confirm extensions, and in certain cases the reinsurers impose new conditions or restrictions to the detriment of the insured and demand substantial additional premiums to extend the policy.
Amendments to policies – The increasing intervention of reinsurers means that in many cases relatively straightforward amendments to policies have to be approved by reinsurers.
What can developers and contractors do to make things easier?
Developers and contractors often ask us what they can do to make things easier in light of the complex situation that has arisen, and despite the changes to the equilibrium between insureds and insurers, there are several ways to make things a little easier.
First and foremost, developers and contractors can and should present their point of view, especially after reviewing the demands imposed on them and their ramifications, with reference to their practical ability to comply with them from a design and construction perspective.
Specific feedback from the developer/contractor should be provided as soon as possible, as any delay in doing so can lead to inattentiveness in real-time, and delays in obtaining a response from the insurers and/or their reinsurers.
Whenever the contractor or developer has difficulty with implementing a certain requirement, they can and should notify the insurance company. In certain cases, especially with the assistance of an experienced and professional insurance agent, the requirements can be moderated and/or adapted to the practicalities of the contractor.
It is important to bear in mind that merely protesting is insufficient. The developer/contractor has to justify and substantiate their position with professional documents such as expert reports, comparisons with past projects or market conditions etc. It is quite often worthwhile to suggest alternatives as part of the dialogue process, with the aim of enabling the contractor to carry out the works in a feasible manner on the one hand and the insurers to issue a policy at conditions they are satisfied with on the other hand, to the benefit of all parties.
The ongoing intervention of reinsurers in construction projects, even small ones, is a challenge that the insurance market in Israel will have to get used to in the years ahead.
It is important to acknowledge this fait accompli in the preliminary stages of arranging insurance for construction projects. It is advisable and vital to consult with an experienced, professional insurance agent who specialises in construction insurance. Adequate preparedness can avert critical errors at the outset and costly complications later on arising from arranging inadequate insurance cover, such as arranging partial cover for the first stage of the project only which can make it difficult or impossible to secure cover for the rest of the project and/or disproportionately high premiums.
If the insured is inflexible, the whole experience will be much more challenging. Bear in mind that effective solutions can be found and implemented. A tip to conclude – Begin with the end in mind to maximise your potential.