• Construction struggling as demand for PI grows

    "We are predicting tremendous growth," says insurance law expert

The rising number of insolvencies and statistics showing relatively flat building activity indicate that the construction industry is struggling with economic challenges including inflation and rising costs. However, according to Clyde & Co, the industry’s professional indemnity (PI) insurance market is improving. Demand from building firms for insurance related services is also strong, says the international law firm, and could be about to skyrocket.

 

“This area has seen – and we are predicting – tremendous growth,” said James Rigney (pictured above), a partner with the law firm who focuses on defending construction firms and their insurers.

 

Sydney-based Rigney is part of Clyde & Co’s Construction PI Group.

 

He suggested that insurers and brokers in the construction space are seeing a shift in some of the risks facing their customers.

 

From combustible cladding issues to regulatory pressures

“As to trends, many of the combustible cladding claims that once dominated the courts are gradually resolving and will likely all be resolved within the next five years or so,” said Rigney.

 

Regulations have also tightened and regulators are becoming more proactive.

 

“The construction PI sector has become more heavily regulated since the building defects crisis in 2018/2019,” he said. “This has resulted in increased scrutiny on building professionals.”

 

Rigney said it is now common for the NSW building commissioner to take regulatory action against builders or developers at the same time as legal proceedings are going on.

“There are also more onerous requirements on the construction, design, and approval process, adding to the costs of construction,” he said.  “This has had a flow-on effect in the increased insolvencies of builders.”

 

These insolvencies, said Rigney, often pull in architects, engineers and their insurers, who can end up contributing significantly to the judgement’s costs.

 

Rigney explained the types of insurance related disputes his team gets involved in.

 

“The team regularly acts directly for large engineering firms,” said Rigney. “The work often involves acting in defence of claims that typically arise out of design issues on large infrastructure projects such as roads, bridges, and tunnels.”

 

For example, according to his firm’s website, Rigney helped defend an engineering firm in a PI claim concerning the design of bridge abutments in a large NSW infrastructure project.

 

His construction PI team also acts directly for insurers and their insureds.

 

“These matters range from small claims against engineers, and building inspectors on houses, all the way up to defending multi-party residential construction and commercial disputes,” said Rigney.

 

Brokers can also be partners when their construction clients are pursuing a claim.

 

Softening PI market and long term growth

Rigney said the construction insurance market has suffered in recent years from “constrained” underwriting capacity.

 

“However, the softening of the market has brought several new entrants to the Australian insurance market,” he said. “That is making insurance for construction PI clients cheaper and easier to obtain - particularly for mid-level and larger organisations.”

 

Rigney also pointed to several major construction projects that he expected to boost industry growth, including renewable energy projects and the Brisbane Olympics in 2032.

 

“These factors combined indicate that the construction and engineering sectors are expected to experience sustained growth over a long period of time in Australia,” he said.

 

Construction challenges remain

However, Rigney said serious issues remain.

 

“The challenge moving forward in Australia will be matching housing and labour supply with demand, caused by the influx of migration into Australia,” he said.

 

Insolvencies are rising

Insolvencies are also going up as rising costs and inflation start to really bite.

 

According to the Australian Bureau of Statistics (ABS), construction industry insolvencies are up by more than 30% compared to 2023. The statistics up to May show that more than 2,500 construction firms have gone insolvent this financial year.

 

“It's certainly not doomsday by any stretch, but it is showing a deteriorating trend across the SME landscape,” said Daniel Gronert, CEO of Arteva Premium Funding.

 

Other key economic indicators also reflect the current economic troubles. ABS figures also show that the economy grew a modest 0.1% in April and gross domestic product (GDP) per capita has fallen for five consecutive quarters.

 

Insurance Business NZ
 

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