11 July 2022

Stockpiling and sums insured

The construction industry continues to experience significant shortages, delays and rising material costs against a backdrop of increased activity and demand. Crombie Lockwood Head of Construction, Mark Taylorson, cautions that some companies may be unknowingly impacting their insurance cover as they stockpile to help fulfil future contracts.

According to recent industry figures, building supplies are currently taking an average of between eight to 11 weeks to arrive in New Zealand. As a result, construction companies are stockpiling goods in order to safeguard against potential material shortages for projects scheduled later in the year.

“This bulk ordering approach adds to both the shortages and the costs,” says Mark Taylorson.

Costs are heading skywards fast, with building product prices in New Zealand rising by 34 percent on average during the past 12 months.

“With an anticipated global construction boom just around the corner, there is likely to be strong global competition for materials across the board over the next year. As New Zealand construction companies compete for supply, even greater price rises are anticipated,” comments Mark.

Many companies have not increased their stock sum insured to reflect the increased value of materials they are holding on to for future use.

More New Zealand contractors have been focused on securing materials to make sure they can fulfil contracts and to help protect themselves from further price rises. But Mark says many contractors may not have considered the construction insurance implications stemming from this approach.

“Contractors will insure their materials under the stock section of their property damage policies, or cover will be provided under the offsite storage clause within their contract works policy,” he explains.

“Unfortunately, many companies have not increased their stock sum insured to reflect the increased value of materials they are holding for future use.

“The insurance cover of stock levels needs to reflect both the increased cost of the goods due to inflation and the rise in freight costs to import these goods from overseas.”

What stockpiling can mean for insurance cover

Mark says construction companies should also be aware that insurance cover is only provided under an offsite storage clause if the insured company can prove the materials have already been allocated to a specific contract and the contract must have commenced.

“With companies stockpiling goods to ensure they have them on hand for potential future contracts, they may not be able to demonstrate the materials are for a specific contract already in place. This is likely to mean they have no cover under the contract works policy.”

Companies stockpiling goods may not be covered under their contract works policy.

Keeping cover adequate and updated

Mark says companies that have not updated their sums insured to reflect the increased value and quantity of goods face the potential for significant loss, particularly as theft and vandalism hit the industry hard.

“Companies with inadequate insurance for their stock are at risk of underinsurance, which has consequences for their balance sheet. Underinsurance could mean they are unable to complete the contracted work on time, or at all.”

The materials shortage has also resulted in contractors recommending alternative solutions to complete contracts on time, which unknowingly exposes them to a greater professional indemnity risk, and it is imperative contractors closely monitor this risk with their broker.

With the jump in commodity prices for everything from timber to petrol, as well as escalating shipping costs, Mark also says companies risk being underinsured if they do not also account for higher construction and rebuild costs in the event of building damage or loss.

“When renewing insurances, ensure the stock sum insured reflects the increased value of construction materials, including those being held for future contracted work.

“We advise that clients who own commercial buildings obtain a professional valuation every 12 months to ensure buildings remain correctly insured at the right levels. Increases in property valuations of up to 20 per cent are not uncommon these days,” he concludes.

Crombie Lockwood can help

• Our Construction Practice team are specialists in construction and engineering risks, with experience that ranges from residential developments to infrastructure projects.
• As experts in risk analysis and mitigation across multiple risk exposures, we aim to ensure companies achieve optimum protection at a competitive cost for the total lifecycle of every project.
• We can also advise on and arrange trade credit cover for companies that provide goods and services on credit terms to cover commercial clients’ inability to pay for products or services.

Corporate insurance      Client Advisory