The impact of the extension of construction duration on construction insurance
Jul 11, 2022
By: Ganit Michaeli
Construction Duration in Israel is Increasing – What It Means for Contractor Insurance and How to Cope
Construction starts in Israel continue to break records. According to the Central Bureau of Statistics, the annual rate of construction starts reached approximately 80,000 in 2022 (estimated).
These are impressive achievements by any standard, but there is a downside. A closer look at the data raises bright warning signals, the most significant of which is the substantial increase in construction duration in Israel. There is a consistent growth in the gap between the number of construction starts and the actual completions.
How much longer? In 2015, the average construction period for a building in Israel was approximately 28.1 months. By 2022, this had increased to about 31.6 months. This roughly 12% rise can have widespread implications, including for insurance considerations.
Why is construction taking longer? The reasons are many and varied:
Delays in adopting new construction technologies
Regulatory requirements
Economic feasibility issues
Planning that leads to slower construction
Consumer expectations
Selection of professionals who are not suitable for their work (including compromises in contractor selection to maintain competitiveness and financial viability)
In recent years, labor shortages and supply chain problems have also contributed
Duration of insurance – not forever, of course
The extension of the construction period conflicts with contractor insurance, which is known to be a limited-term policy. In most cases, contractor policies are sold for a pre-limited coverage period of 36 months and rarely, in large projects, up to 48 months. The insurance company will prefer to limit the policy to the shortest possible period for two main reasons:
· More time, more risk – as the duration of the work increases, the risk of an insurance event occurring increases accordingly.
· The rate of risk itself increases – the rates of risk and damage increase in correlation with the length of the project. Whether in terms of bodily harm (the risk of falling from a height, for example, is greater at a stage when the project is rising higher) or in terms of property damage (including danger to the structure itself as a result of, for example, a fire on site).
The extension of the construction period is an insurance issue not only at the stage of purchasing the policy but also in "real time." That is, in a situation where the project is delayed and is about to cross the purchased insurance period, and the insured must find a solution by requesting an extension.
When submitting a request for an extension, additional factors come into play. For example, whether insurance events have occurred at the construction site, and if so, of what magnitude. The insurance company may not be in a hurry, to put it mildly, to extend the policy, may demand a high payment, and of course the extension will not be permanent but limited in time.
Very important: Often the premium that the insurance company will demand for the extension will be higher and will not be calculated in proportion to the original policy (pro rata).
Extension of Construction Duration vs. Contractor’s All-Risk Insurance
The extension of construction duration conflicts with contractor’s all-risk insurance, which, as is well known, is a policy for a limited period. In most cases, contractor policies are issued for a pre-defined coverage period of 36 months, and only rarely—on large projects—up to 48 months. Insurance companies generally prefer to limit the policy to the shortest possible period for two main reasons:
More time, more risk – The longer the construction work continues, the higher the risk of an insurable event occurring.
The risk rate itself increases – Both the likelihood and severity of potential damages rise with project duration. This applies to bodily injury (e.g., the risk of falling from height is greater as the project rises) and property damage (including risks to the structure itself, such as fire hazards on-site).
Construction delays bring insurance issues not only at the policy acquisition stage, but also “in real time”. In other words, if the project is delayed and approaches the expiration of the purchased insurance, the insured must seek a solution by applying for an extension.
Several additional factors come into play when requesting an extension. For example: have any insurance events occurred on the construction site, and if so, what was their magnitude? The insurer may not be quick—mildly speaking —to extend the policy, may demand a high premium, and, of course, the extension will not be indefinite, but rather limited in time.
Important: Often, the premium required by the insurer for the extension will be higher than the original policy and may not be calculated proportionally (pro-rata) based on the original coverage.
Requests to extend contractor work insurance following project delays may encounter real obstacles. And in the event of a refusal to extend - to the point of difficulty in finding insurers who are willing to "take the risk" (the more the project progresses, the more strongly this is said).
In exceptional situations and in particularly large and/or complex projects, there may even be no escape from directly contacting reinsurers (the overseas insurance companies that provide Israeli insurance companies with financial backing).
Refusal of a request to extend contractor work insurance due to delays
The issue of extending the duration of construction unfortunately characterizes many urban renewal projects according to TAMA 38, especially those of the reinforcement type (TAMA 38/1). Analysis of the issue shows that the trend is not positive and that the time periods are getting longer over the years.
If in 2013 the time from the actual permit to occupancy was about 1.6 years in TAMA 38/2 and about 1.8 years in TAMA 38/1, in 2021 we are already talking about about 3.2 years in TAMA 38/2 and about 3.1 years in TAMA 38/1. Since this is only an average, it is easy to understand that many, very many projects may cross the ceiling of the insurance coverage limit.
Delays are caused by various reasons, such as inadequate preparation, incorrect estimation of the duration of the execution, selection of unprofessional and unsuitable contractors, failure to take unexpected events into account, and more.
The special complexity of urban renewal (Tama 38/1 and Tama 38/2)
In TAMA 38/1 projects that are based on renovation and expansion, the tenants usually remain to live in the place. The insurance company that is required to extend the policy (or in extreme cases, "replace" a previous insurer that refuses to extend) will take into consideration the dangers posed to the tenants and their guests by virtue of their residence on an active construction site.
In projects according to TAMA 38/2 based on demolition and reconstruction, the delay in the project can burden the developer/contractor with many expenses following the payment of the alternative rent. A financial burden may lead to problematic follow-up reactions, including attempts to shorten schedules by "cutting corners" and creating unnecessary risks. It should be emphasized that a contractor's policy does not provide coverage for these consequential damages and does not constitute a solution for the overpayment of the alternative rent.
Difficulties on the part of insurance companies
In conclusion,
The extension of the construction period in Israel presents many entrepreneurs and contractors with a complex issue and significant insurance exposure. Whether at the initial stage when they purchase the time-limited contractor policy (and they should strive for as long a period as possible), or when the project is delayed and there is no choice but to submit a request for an extension. At our insurance agency, which has been dealing with construction insurance for over 30 years, we provide our clients with a wide range of tools in this regard.
The extension of the construction period in Israel presents many entrepreneurs and contractors with a complex issue and significant insurance exposure. Whether at the initial stage when they purchase the time-limited contractor policy (and they should strive for as long a period as possible), or when the project is delayed and there is no choice but to submit a request for an extension. At our insurance agency, which has been dealing with construction insurance for over 30 years, we provide our clients with a wide range of tools in this regard.
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