November 6, 2024

Understanding risk in an evolving insurance landscape: advice for SA engineering and construction companies

South Africa’s socio-economic and geographical landscape poses several unique risks to businesses in the engineering and construction sectors. These risks relate primarily to the nature of the work undertaken, the complexity of construction projects, labour force challenges and climate-related challenges. With sound risk mitigation strategies, complemented by adequate commercial insurance, excessive damages resulting from these types of risks can be minimised.

Offering his insight on this topic is Jan-Hendrik Botha, head of Underwriting at Western National Insurance, who says engineering companies are tasked with fending off multi-directional threats. As he explains: “Engineering and construction companies face a complex array of insurance risks that stem from their operating environment, which involves designing, managing and executing intricate projects. 

“To mitigate these risks and protect their financial standing, engineering and construction companies need a comprehensive insurance portfolio that covers professional liability, property damage, bodily injury and other potential liabilities. Collaborating closely with experienced insurance brokers can help tailor insurance solutions that address the specific risks inherent in these industries.”

The biggest risks facing the sector?

Two of the most immediate risks facing engineering and construction companies involve ongoing environmental shifts and unpredictable weather conditions. The torrential rain and flooding that occurred throughout KwaZulu-Natal in 2022 is a prime example: Recorded as the most catastrophic natural disaster to occur in the region, the floods had a major impact on sites under construction. Similarly, the disastrous flooding in parts of the Cape Winelands and Cape West Coast this year dealt a significant blow to the engineering and construction sectors.

And, as Botha explains: “With the imminent risks we are facing, as a result of climate change, these weather-related hazards will remain one of the key concerns for businesses in the industry. From a geographical and geological standpoint, mitigating these risks should be a number-one priority.”

Engineering companies, which are often involved in construction projects, also face the risks that come with unforeseen delays due to on-site incidents, as well as design flaws, or supply chain disruptions. Furthermore, engineering designs that fail to meet performance expectations or safety standards can lead to accidents, injuries and property damage.

Another key consideration that these companies need to make involves contractual obligations. When contracts do not fully cover the full spectrum of eventualities and are not formally agreed upon, this poses a significant risk to the parties involved and can disrupt business operations or result in long-term reputational damage.

“We also need to consider that times of economic downturn place everyone under undue strain. One of the knock-on effects of a turbulent economic climate, exacerbated by unfortunate realities such as unemployment, is a rise in theft. The theft of construction materials is a serious issue that costs contractors millions of rands every year. For this reason, measures to prevent theft and to protect valuable materials is an important consideration to make,” says Botha. 

Policies to consider

Some of the major engineering and construction-related prospects that Western National Insurance has seen over the past few years involves the building of domestic dwellings, infrastructure refurbishments and solar energy installations. For these types of projects, a tailored selection of risk-specific policies can make a tangible difference in providing companies with protection and peace of mind. 

More specifically, Contractors’ All Risks (CAR) policies play a large role in helping engineering and construction companies put the necessary insurance measures in place. CAR policies typically cover sudden and unforeseen physical loss or damage to the insured property, which includes the permanent and temporary work and all materials intended to from part of the structure. This encompasses damage from various causes such as fire, explosion, natural disasters (like earthquakes and floods), theft, vandalism and accidental impact.

CAR policies will also cover the cost of replacing stolen building materials. Although, as Botha advises, insurance needs to be employed in tandem with risk management strategies to mitigate the ripple effects caused by construction site theft.

The CAR policy also includes indemnity for damages for which the insured may become legally liable to pay following on accidental bodily injury to or illness of third parties (whether fatal or not) and/or accidental loss of or damage to tangible property belonging to third parties, occurring as a direct result of the contract work. For instance, if a construction-related incident leads to injury of a passerby or damage to neighbouring property, the CAR policy may cover sums for which the insured may be legally liable.

The value of good advice

Policies can be tailored to a specific project’s needs and can have their own coverage limits, exclusions and deductibles. In this regard, as Botha explains, brokers can fill the gap, bringing much-needed expertise and market-related experience to the insurer-insured relationship.

As he concludes: “Brokers play a crucial role in helping engineering and construction businesses safeguard their operations by providing expertise, guidance and tailored insurance solutions that address the unique risks and challenges faced by the industries. Company owners and decision-makers are therefore encouraged to work closely with their brokers who can help them navigate the complexities involved.”

Leave a Reply