Remember when Storm Emma clashed with the Beast From The East? It might sound like an epic WWE showdown, but this was something far more dramatic: a meeting of two monstrous weather fronts in early 2018 that ended up costing the UK economy a calamitous £1bn a day.
When adverse weather hits, construction projects can be badly affected through skyrocketing costs and dented profits. Increasingly, risk is being transferred with contractors all risks insurance policies tailored for periods when projects are affected by adverse weather.
These inclement weather policies also have a hidden advantage. Not only do they offer protection if building works are delayed, say, during a heat wave or when the skies darken and days (or even weeks) of bad weather arrive, but savvy contractors are using them to drive down costs and reduce risk, thus adding weight to their bids when tendering for future construction projects.
HOW ADVERSE WEATHER AFFECTS CONSTRUCTION PROJECTS
The weather affects contract works in many ways. Projects are most commonly affected by rainfall, which can disrupt site operations, including ground works and excavations. Site safety is a concern. In addition, some materials might not be suitable for assembly while it is raining (or snowing).
The following could also impact on a project’s profits.
Heat: High temperatures, such as the scorching 35.3C experienced during the summer heatwave of 2018, present a risk to worker welfare. Work might need to be suspended in the event of extreme heat, impacting productivity.
Wind: Storm Emma, in early 2018, saw wind speeds of up to 77mph. Cranes and other construction equipment have safe operating parameters, including wind speed. High and / or gusting winds can interrupt on-site lifting operations and have a negative effect on the programme.
Extreme cold can affect materials, while wave heights could impact on sea defence work. Depending on the location of the project, consideration may need to be given to the equipment, employee safety, the structure itself and/or the schedule of work, all of which could be impacted by rainfall, wind speed, snow fall, temperature and/or precipitation.
Weather-related construction risks are many and varied. Talk to your project broker for further information about the nature of weather risks.
HOW DOES WEATHER INSURANCE WORK?
Historically, contractors have managed exposure through a combination of contract pricing and programme contingency. Today, insurance products provide an alternative means of protection. These policies offer coverage up to a pre-agreed value in the event of certain defined weather conditions.
The policy is designed in partnership between the client, construction insurance broker and the underwriter to respond to the risk issues facing the business or project. The insurance scenario below explores how coverage was designed to mitigate extreme rainfall.
How weather insurance could mitigate rain-related delays
A construction company is awarded a 12-week project in Asia. The project owner has allowed seven days’ contingency in the programme, after which time the contractor will owe the project owner USD 50,000 per day in liquidated damages.
The project is scheduled to take place on the cusp of the wet season, meaning an extended period of heavy rain could result in a delay of longer than the grace period. This would result in penalty payments that will erode the profitability of the project.
Using available rainfall data the insurer works with the client to define an adverse weather day and estimate how many should be expected during the construction period. Given the time of year and geographical location, an adverse weather day is defined when rainfall is above 10mm on any calendar day.
An adverse weather insurance policy is designed to pay a rate of USD 50,000 for every day during the project period for which recorded rainfall is above 10mm. Payouts would start after seven adverse weather days have been recorded. With a limit of USD 1 million, the construction company is protected for a total of 20 adverse weather days.
The contractor is not required to evidence their loss in the event of a claim. During the pre-placement (underwriting) phase, the amount insured needs to be justified as a fair and reasonable assessment of the estimated loss which could occur.
COST CERTAINTY: HOW WEATHER INSURANCE BENEFITS THE TENDER PROCESS
An effective bespoke adverse weather insurance policy transfers risk in a way that mitigates potential losses faced by the construction companies.
Before contract formation, during the bidding phase, contractors are looking at ways the product can improve their tender.
The most common way of doing this is by using a specially designed insurance product to transfer the non-expected element of weather risk.
By doing this, the contractor has greater certainty in relation to their costs and profit margins when negotiating with the owner.
HOW TO GET COST EFFECTIVE ADVERSE WEATHER COVERAGE
Data is crucial. An insurer’s appetite can be established quickly with reliable and considered analysis of information sourced from global meteorological agencies.
When arranging building site insurance, it’s advisable to work with a specialist construction broker. Your broker will undertake much work before the policy is placed to ensure it is designed appropriately to provide the expected protection in the event of adverse weather.
Your broker can also advise on information required by insurers, plus issues such as excesses, coverage limits and the scheduling of premium payments.
TALK TO AN EXPERT
To find out more about adverse weather insurance for construction projects, along with all other aspect of construction site risk management and insurance contact: