Corrosion Exclusions: A Transitioning Market

A steep contraction in the construction market is affecting the extent to which corrosion is covered. Now is the time for insurance and risk managers to review the detail of their insurance policies.

The coverage that the construction insurance market provides for corrosion has come under pressure, primarily due to a recent major claim.

As a result, some underwriters are now imposing stricter and more wide-ranging exclusions than might have recently been available.

For example, while the 'simple rusting' of equipment and materials has always been excluded, coverage has sometimes been sought within construction insurance wordings for ‘abnormal’ corrosion. The availability of such coverage depends on construction insurance market dynamics, but has become less common.

Market contraction

The insurance market contraction was triggered by a huge 2019 Australian corrosion-related claim, estimated to be circa $2.5 billion ^{[note 1]}. Such a claim would always have affected the market, but its effect has been amplified by a spate of additional corrosion claims ranging from ‘small’ $10 million claims to some ranging between $50 million and $100 million.

This claims activity has taken place alongside a long-running industry debate about such policy clauses and coverage exclusions.

The extent to which a policy covers corrosion has been discussed for more than two decades. In the past year, the insurer consultative body London Engineering Group released a new set of corrosion exclusion clauses intended for use by construction insurance companies.

Some brokers believed the exclusions to be too broad, and there is now a 'patchwork quilt' of coverage depending on the insurer or broker. Discussions about coverage and exclusions are set to intensify now the market is contracting.

How to proceed

The speed of the market change has caused issues in contract drafting, and the current landscape is confusing for owners in particular. Owners, developers and contractors must all consider the contractual matrix, and work closely with their construction insurance brokers to ensure the evolving situation is reflected in the drafting of the contracts for their construction insurance.

Construction risk professionals working for both owners and contractors need to understand the rationale and background behind the rapid contraction of corrosion cover. Their contract drafting should reflect what is commercially and reasonably available.

They should also brief their project teams about insurers' increased focus on the subject, and ensure project practices and processes are robust and fit for purpose.

Moreover, the diversity of clauses available needs careful examination and evaluation by insurance buyers given the specific project nature, environment, materials, process, and work practices. Working closely with their broker will help buyers ensure that positive practices and processes are reflected when determining exclusions, and that the most suitable (and available) clause for each project construction insurance is offered by the market.

[1] Insurance Insider: Construction Market Braces for 14bn Ichthys Losses