COVID-19 Construction Risk Update

Published:21/08/2020

COVID-19 Construction Risk Update

Risks and Potential Financial Impacts for the Construction Sector

On the 11th of March 2020, COVID-19 was declared a Pandemic by the World Health Organisation (WHO). Alarming levels of spread, severity and inaction were among the reasons cited for the change in characterisation¹.

This document lists key risk factors, potential financial impacts with a focus on insurance, to businesses within the Construction sector that may occur as a result of the COVID-19 outbreak.

Considering the risks ahead of time is important. A well-planned understanding of the risk, and response can help protect the future of your business by reducing the impact on your projects, your reputation and those who you employ.


Key Risk Factors

Risk type Comments

Additional Office Risk - Own staff
  • Salaried/ Full time Staff absenteeism due to quarantine periods, post infection
  • Salaried/ Full time Staff absenteeism due to fear of infection
  • Salaried/ Full time Staff absenteeism due to complete office shut down
  • Wages paid/ non-productivity of office staff, resulting in construction project delays

Project Site Risk - Own staff
  • Salaried/ Full time Staff absenteeism due to quarantine periods, post infection
  • Salaried/ Full time Staff absenteeism due to fear of infection
  • Salaried/ Full time Staff absenteeism due to complete site shut down
  • Wages paid/ non-productivity of site staff, resulting in construction project delays

Project Site Risk - Sub-Contractors
  • Sub-contractor absenteeism due to quarantine periods, post infection
  • Sub-contractor absenteeism due to fear of infection
  • Sub-contractor absenteeism due to complete site shut down
  • Non-productivity of Sub-contractors, resulting in construction project delays

Consultants/ Professionals
  • Consultants/ Professionals absenteeism due to quarantine periods, post infection
  • Consultants/ Professionals absenteeism due to fear of infection
  • Consultants/ Professionals absenteeism due to complete office shut down
  • Non-productivity of Consultants/ Professionals, resulting in construction project delays

Extension of Time Requests (Delay)

Unclear or Ambiguous definitions of 'delay' in head contracts

  • If an EOT is granted, does this cover costs?
  • If an EOT is granted but costs are not approved, this may have a material impact on cashflow and profitability

Supply Chain
  • Imported Products. Delay in obtaining or receiving directly imported products.
  • Local Products. Delay in obtaining products from local suppliers, where products are obtained from overseas.
  • Local Products. Delay in obtaining products from local suppliers, due to an increase in demand for locally manufactured product.
  • Inability to acquire product, resulting in construction project delays.

Workplace Health and Safety
  • Potential liability to Directors & Officers for inadequate preparation


Financial Impacts

Risk typeComments

Contract Works
  • Additional costs of insurance if Project Specific policies are in force, where extensions of cover are required.

Public Liability
  • Additional costs of insurance if Project Specific policies are in force, where extensions of cover are required

Project Funding/ Financing
  • Additional interest and holding costs as a result of extended construction periods

Surety Bonds
  • Additional interest and charges as a result of extended construction periods, and therefore extension of bonds.
    NOTE: If cashflow deteriorates and companies are unable to meet their debts as they fall due then Directors may be left with no option but to appoint a VA. Surety Bonds will be called and the Surety providers will seek recourse.

Bank Guarantees
  • Additional interest and charges as a result of extended construction periods.

Extension of Time (Delay)
  • If EOT is granted and a company has the financial means to get through this period, irrespective if available cash will diminish, profitability reduced, or the project will be loss making and therefore the balance sheet will likely take a hit. This will have an impact on the availability of Surety or Bank Guarantee facilities, and a high chance that facility limits may be reduced exacerbating a company's ability to win new work to get through the loss making or low profitability period.

Liquidated Damages & Contractual Penalties
  • Liquidated Damages and Contractual Penalties as a result of extended construction periods.



Insurance Impacts

Construction Specific Products

  • Project Delays/ Liquidated Damages/ Contractual Penalties are generally not insured
  • Contract Works and Liability Insurers are unlikely to offer policy extensions on single project policies free of charge
  • Surety/ Bond providers will not offer policy extensions on single project policies free of charge (refer above)

Business Interruption

Many businesses, particularly those who deal with China or rely on Chinese suppliers, are asking whether they will be able to claim for business interruption and revenue losses as a result of the COVID-19 crisis and its associated disruptions to travel, import and export activities.

We can confirm Business Interruption coverage under Property Insurance, where Gross Profit cover is selected does not respond to COVID-19 claims. COVID-19 was listed under the Biosecurity Act 2015 on 24th January 2020, triggering an industry wide exclusion.

Also, on a general note, human infection with COVID-19 will not, of itself, constitute as 'physical damage' which is the triggering requirement for cover under traditional business interruption policies.


Corporate Travel Insurance

A typical Corporate Travel Insurance policy will provide cover for cancellation costs where the travel destination has reached DFAT Advice of Level 4 - Do Not Travel and was not at this level at the time of booking. You can check the current DFAT Advice levels on https://www.smartraveller.gov.au/, the Department of Foreign Affairs and Trades website.

Fear of travel is not a covered event under a Travel insurance policy. This includes travel to areas that have known cases of COVID-19 but have not yet reached DFAT Advice Level 4.

The coverage provided on each policy and the position taken by different insurers can vary. If you have concerns, it's a good idea to contact your insurance broker or insurer directly.

Important Note: COVID-19 became a known risk on January 24, 2020 and, as such, some insurers may look to decline claims arising from COVID-19 if the trip was arranged on or after January 24, 2020. While not all insurers are taking this position at this time, it should be taken into consideration when making future bookings.


Workers Compensation

According to the State Insurance Regulatory Authority (SIRA), COVID-19 infection is covered under Section 4 of the Workers Compensation Act 1987 as a disease injury², under certain circumstances.

A claim would be successful where the virus is contracted during the course of employment and the employment is found to be the main contributing factor in contracting the disease.

Proof that employment is the main contributing factor is likely to be difficult to determine and each claim would need to be considered on its individual merits and evidence.

Employers are advised to take all appropriate preventative measures to eliminate the risk of employees contracting Coronavirus in the workplace, as with any other workplace health and safety risk.

Where employees are potentially exposed to the virus as part of their employment, employers should provide guidance and assistance to the employee to make a claim for workers' compensation.

Should you have further enquiries about Workers Compensation or the management of your businesses WHS risk in respect to the Coronavirus, please contact your Coverforce Workplace Services team directly on 02 9098 5500.


Force Majeure in Existing Contracts

A force majeure clause can excuse an affected party from contractual obligations where they are being prevented from performing them due to a force majeure event.

If your project is impacted by delay or disruption caused by COVID-19 and your existing contract has a force majeure clause, there is a possibility that you may be able to trigger this provision, depending on the way it is worded.

Even where the force majeure does apply it must be triggered in accordance with the contract requirements. If the correct notification is not given within the prescribed timeframe, you may be unable to rely on the force majeure provision.

To find out more about the force majeure clause and COVID-19 Source Legal have released a document on the topic:
COVID-19 Impacts on Supply Chains - How Force Majeure in Contracts May Apply

Should you require assistance with drafting or interpreting a force majeure clause Stanislav from Source Legal can be contacted directly on 0428 328 452, or via email at stanislav.roth@sourcelegal.com.au



Addressing the threat of COVID-19 in Head Contracts

Head Contractors can attend to further define the definition of the Force Majeure clause for future projects to specifically address the threat of COVID-19.

While this amendment will not assist projects already under contract unless agreed by amendment, we would recommend the following is considered in future contracts.

Option 1: Add the following under the Force Majeure Clause:

  1. Any occurrence of any prescribed human infectious or human contagious diseases under the Biosecurity (Consequential Amendments and Transitional Provisions) Act 2015 (Cth)
  2. Any occurrence of any local or international epidemic, pandemic or quarantinable event
  3. COVID-19 (Coronavirus)

Option 2: Add the following (simplistic version) under the Force Majeure clause:

  1. Any occurrence of any local or international epidemic, pandemic of infectious disease, including COVID-19 (Coronavirus).

To find out more about the force majeure clause and COVID-19 Source Legal have released a document on the topic:
COVID-19 Impacts on Supply Chains - How Force Majeure in Contracts May Apply

Should you require assistance with drafting or interpreting a force majeure clause Stanislav from Source Legal can be contacted directly on 0428 328 452, or via email at stanislav.roth@sourcelegal.com.au



Workplace Safety Risk Management Tips

Safe Work Australia advises an appropriate range of actions by employers could include:

  • Regular review of official Government sources for current information and advice
  • Updating and promoting your organisations policies and measures for infection control
  • Providing clear advice to workers about actions they should take if they become unwell or develop symptoms consistent with Coronavirus. This should be done in accordance with advice from the Australian Government Department of Health
  • Eliminating or minimising international work travel where advised on the Australian Governments Smart Traveller website.
  • Providing regular updates to workers about the situation and any changes to workplace policies and procedures
  • Providing workers with information and links to relevant services and resources should they require additional support

It is also the responsibility of all workers to take reasonable care for the health and safety of themselves and those around them. Workers should be reminded to always practice good personal hygiene to protect themselves and others against infection spread in the workplace. This includes:

  • Washing hands often, with soap and water
  • Carrying hand sanitiser and using it when needed
  • Covering their mouth when coughing or sneezing with a tissue or upper sleeve, not using their hands
  • Seeing a health care professional should they start to feel unwell or develop flu-like symptoms
  • If unwell, avoiding contact with others (including shaking hands or other touching, such as hugging)

Resources for Employers

Health Alert, Updates and Reports
https://www.health.gov.au/news/health-alerts/novel-coronavirus-2019-ncov-health-alerts


Information Sheet for Employers regarding COVID-19
https://www.health.gov.au/resources/publications/coronavirus-covid-19-information-for-employers


Managing Workplace Risks during the Coronavirus Outbreak
https://www.wolterskluwercentral.com.au/legal/managing-workplace-risks-during-the-coronavirus-outbreak/


Safework Advice for PCBUS
https://www.safeworkaustralia.gov.au/doc/coronavirus-covid-19-advice-pcbus


Latest DFAT Travel Advice and Updates
https://www.smartraveller.gov.au/news-and-updates/coronavirus-covid-19



Further Information

About your insurance
For further information in relation to your insurances, please contact your Coverforce Insurance Broker directly or call the Coverforce Sydney Head Office on 1300 503 503.

About COVID-19
For the latest updates or enquiries in relation to the COVID-19 outbreak you can contact the National Coronavirus Health Information Line on 1800 020 080. Calls can be made 24 hours a day, seven days a week. If you require translating or interpreting services, call 131 450.


The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact Coverforce directly.

This information has been published as at 17 March 2020 and may change over time as new information is made available.


References

  1. https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020
  2. https://www.sira.nsw.gov.au/news/bulletins/workers-compensation-bulletin-issue-88-march-2020

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