Winter storms and heatwaves – how construction insurers should navigate climate risks
Construction projects are vulnerable to losses. Materials and structures are, of course, unfinished and deadlines and budgets are tight. In the UK alone, the increase in frequency and severity of winter storms, flooding, heatwaves or periods of extreme cold all result in additional claims.
For those insuring international projects, a detailed understanding of the changing climate in that location is essential. Wherever the project, the sector is going to be exposed to further losses arising from the changing climate. So what can construction insurers do?
Encourage insureds to assess the risk
An assessment of the climate risk by insureds is a crucial step in understanding how to minimise exposure to climate related losses and to put in place measures to help safeguard against loss. With the publication of the FCA’s Policy Statement 21/24, it is now mandatory for all listed companies and larger asset owners and managers to disclose the steps they are taking to assess and manage climate change risk. They will be required for large corporates by the end of 2023 and it’s the government’s aim for mandatory disclosures to be in place right across the economy by the end of 2025. So the sooner insureds can start this process, the better. There is a wealth of information on the Task Force for Climate-Related Financial Disclosures (TCFD) website to support insureds when carrying out a climate change risk assessment.
A reduction/mitigation in risk is clearly in everyone’s benefit so underwriters could push those insureds not yet subject to mandatory disclosures in the right direction by considering policy conditions and/or questions in the proposal form. The Chancery Lane Project has brought together insurance lawyers to draft clauses on disclosure which insurers can look to incorporate in policies, as well as other clauses providing for the repair, rather than replacement, of damaged property and/or use of parametric insurance (where the policy is triggered if certain objective criteria, such as wind speeds, are met). There are varying disclosure clause options depending on the size of the insured e.g. assessments aligned with TCFD (Archie’s clause) or those that can be tailored to smaller organisations (Kitty’s).
Discuss the findings
Once this assessment has been carried out, a discussion between the underwriter and insured could be extremely beneficial for both parties. Insurers will have an understanding of the risks across the sector, sight of best practice and potentially the benefit of in-house climate modelling. Insurers will have undertaken TCFD aligned disclosures themselves so there is an opportunity for those who carried out this process to provide training and support to policyholders. The move to a low carbon economy will be a journey for all organisations so the more that best practice can be shared, the better this will be for everyone.
By assessing and understanding the risks that the project may face, steps to mitigate this risk can be put in place.
You insure the construction of a central London high-specification high-rise residential apartment block under a Construction Project All Risks policy. During the summer, London experiences a heatwave of temperatures in excess of 34ºC for eight consecutive days, followed by severe rainfall with 49mm falling within 36 hours causing localised but highly destructive flash flooding.
The heatwave causes heat damage to plant, defective concrete pours and delays due to restricted working hours. The flooding results in significant water ingress to the basement levels and further damage to plant and materials. The site could not be accessed for five days.
While the delay costs may not fall within the scope of cover, there are considerable costs arising from the damage to the works and results in a large insurance claim.
An assessment of the likelihood of the above scenario taking place, together with a cost/risk analysis might have resulted in measures, such as early warning systems, resilient materials and scheduling considerations, being put in place that reduce the site’s exposure and/or mitigate the consequences thereby reducing the loss considerably.
In August 2020, there was a major summer heatwave in England and Wales with temperatures exceeding 34ºC on six consecutive days (36.4ºC was recorded at Kew). Also in Kew on 12 July 2021, 47.8mm of rain fell in a single hour. In some parts of Kensington & Chelsea, nearly 76mm of rain fell in 90 minutes resulting in 120 residents being evacuated from their homes. Climate risk is no longer a future risk, it’s a current risk.
As well as adapting to the changing climate, in order for the UK to become Net Zero by 2050 and for the world to meet The Paris Agreement goals, it will be incumbent on all organisations to take steps to decarbonise over the next two decades. A key tool in decarbonisation is conservation of resources, such as water, to reduce the generation of greenhouse gases in the first place. A number of insurers, together with RISC Authority and the Fire Protection Association, have collaborated to publish a guide to minimise escapes of water arising from the design and installation of water systems. The guide includes details of the expected level of installer qualification, specification of products and a requirement to consider leak detection systems, among other best practice recommendations.
Encouraging insureds to promote and imbed these practices will improve efficiency. Paul Redington, Major Loss Property Claims Manager for London and the South East, who was involved in helping to shape this guidance said:
Water is a precious commodity but in 2020 alone there were 238,000 claim incidents involving its escape. Repairing those buildings inevitably has a carbon footprint – in the energy expended in drying and repairing the structures and the materials used in the reinstatement - materials which are now harder to come by, given the supply chain challenges we all face.
Certainly the majority of the larger water damage losses we see could simply have been avoided had an installation been correctly designed, installed and quality-checked. Zurich believes that robust loss prevention and mitigation processes and strategies are critical for property developers and owners in helping to achieve their sustainability goals.
John Kerry, the US special envoy on climate, is predicting that the shift to a green economy will entail “a bigger economic transformation” than the Industrial Revolution. In order to do this, it’s necessary to be aware of, and adapt to, the climate risks we face and to transition our activities to Net Zero.