Peril Paralysis – Building Industry under the magnifying glass

Jonathan Kaiser , Claims Manager at SHA Risk Specialists

In George, thirty-four people died when a partially completed five storey residential building collapsed. This event is tragic, and albeit the worst building disaster in South Africa, is by no means an isolated incident of professional incompetence. Whenever disasters of this magnitude unfold, questions are rightly asked around why disasters of this magnitude persist in today’s age of technological advancement and education. Are we doomed to repeat history or are we able to distil lessons and learn from them??

The building industry faces a myriad of challenges with well-known companies going into business rescue and some liquidation. It is no secret that developers push for the cheapest designs and engineers are left holding the bag when this gamble falls through. An already distressed built environment is further aggravated by adverse insurance claims, which threatens the sustainability of professional indemnity insurance within the built environment.?

By analysing claims data over the last few decades, the proximate cause for prolific and severity claims against professionals in the built industry. In this article, we explore what lessons should have been learnt and ought to be re-emphasized. Insurers are in a unique position where we have a bird’s eye view of most claims and therefore can advise on trends and risks within this space.?

Build cheap, build twice – design cheap, design again

This expression (borrowed from buy cheap, buy twice) unfortunately finds application in a distressed economic environment. The tender process is already fiercely competitive, leaving professionals provisioning ‘bare bones’ designs to win contracts and thereafter assigning inexperienced staff to projects with an absolute minimum number of professionals to maintain oversight and review designs. This is a recipe for disaster. Inexperienced professionals being assigned to supervise high-risk, complex construction projects due to insufficient deployment of resources is a worrying trend that has already given rise to high severity losses.

An apathetic attitude around supervision often emerges as the root cause for many avoidable errors. Supervision undertaken contractually requires professionals to inspect and ensure that buildings are constructed in accordance with the designs. Supervision does not guarantee that construction errors will be discovered, but arguably if carried out with due care, should mitigate most. Regrettably, we are seeing far too many claims where professionals appear to have, all but abandoned their oversight responsibilities. Insurance covers fortuitous loss, and if risk is courted through professionals deserting their duties, Insurers will be entitled to reject such claims. Egregious conduct of this nature, harms not only the public confidence in the built industry but it also undermines the sustainability of the insurance market to provide affordable insurance cover to professionals.

It remains inexplicable to us why professionals are reluctant to undertake geotechnical investigations. Establishing the true soil conditions is paramount to ensuring that the correct foundation is designed. Often properties move, owing to expanding or contracting soil conditions and where the foundation did not appropriately anticipate this in the design. This leads to cracks forming and structural damage. Countless engineers and building developers appear unwilling to incur the cost (miniscule by comparison to the cost of structural collapse) of a geotechnical report to ensure structural efficacy. This problem is especially rife within the residential housing developments.

Costs exceed the tendered amount

There is an alarming trend gaining traction in South Africa, more especially amongst governmental departments and those special ‘recovery’ institutions, to sue professionals on the basis that the project cost more than what had been budgeted for. The basis of the claim being, since the professional undertook to bring home the project at a certain cost (irrespective of external factors), any additional or unforeseen costs to bring the project up must be carried by the professional team. This problem is amplified where the professional team conducted only cursory feasibility studies. Fixed price contracts pose the same risk.

Why is it raining indoors?

Time after time, claims are notified owing to water ingress into buildings. The apparent lack of proper consideration and application of waterproofing is extremely concerning. Aesthetic designs should never trump functionality. Tried and tested methods should be preferred over experimental solutions.

The Climate Change effect

Recent studies have shown that human-induced global warming has contributed to increased flooding. Over the last century, and with a specific focus on KZN, catastrophic flood events have risen from an average of 1.1 occurrences per year to an average of 1.7 per year. The April 2022 KZN flood, where over 300mm of rain fell in one day, was the most catastrophic flood event in South Africa in recent years resulting in estimated ZAR 35 billion worth of damages.?

Historic data though points to the fact that KZN has habitually been at the receiving end of catastrophic flooding. More than a hundred years ago a similar event occurred which resulted in rainfall of over 1000mm over the span of a few days. So called ‘one in a thousand’ year events are becoming all too frequent for that classification to remain relevant. Engineers are often not called upon to design for 1:1000 events. Are modern designs accommodating this risk? To us, it appears not.

One of the biggest problems we see in the built industry relates to construction designs not factoring in the increased levels of water/rainfall and with inadequate drainage systems. We must improve city infrastructure, particularly drainage systems, to better prepare for heavy rainfall and flooding that we now know, not just as a matter of historical perspective but future climate analysis, will happen.

Underwriting to build a sustainable line of insurance

The sustainability of liability cover in the built environment is at risk as insurers can no longer shoulder the exponential cost of claims. Reinsurers have increased rates and applied more cover restrictions and exclusions, making Professional Indemnity (PI) insurance rates for the built environment more and more unaffordable, potentially leaving more professionals exposed.

Casualty insurers and brokers need to collaborate and share learnings with our professional insured clients to mitigate against this high-risk landscape. Applying better risk management measures will result in fewer claims and therefore lower premiums. Underwriting criteria must enforce better risk management to ensure not only the future sustainability of the industry, but safe, quality developments and increased economic activity.