Angel in the details — effective strategies for construction loss adjusting

Loss Adjusting in the construction industry is a unique and intricate process. Unlike other areas of insurance, it involves claims where damage has occurred to works currently under construction.

This specialist field of loss adjusting presents challenges that require tailored expertise and strategies to manage effectively. From contractual obligations to the scale and complexity of projects, construction claims stand apart in several key ways, including:

• Contractual obligations: The insured clients are often contractually required to complete repairs themselves, precluding the use of third-party builders.
• Time sensitivity: Repairs are sometimes completed before potential claims are lodged, often due to the insured preferring to focus on completing the contracted works.
• Recurring costs: Since the damage has been sustained to completed works, costs are incurred twice, necessitating scrutiny for potential improvements/betterment potentially added to the policy to prevent claims for this kind of loss in the future. 
• Scale of projects: Projects often span several kilometres, particularly in civil works, making assessments more time-consuming and challenging.
• Multiple events: Long project durations increase susceptibility to damage from multiple events at different stages of construction.

This article explores how to manage such complexity in construction and engineering loss adjusting, through a real-life civil roadworks case study in New South Wales (2021-2022).

The triggering event

The project involved rehabilitation work on two roads, covering approximately 5kms. The triggering event involved significant rainfall between January and March 2022.

During a two-week period, the region received approximately 700 millimetres of rain. Roads under construction lacked a final seal, so were vulnerable to water damage and scouring.

Roads are particularly susceptible when sublayers have been laid but not sealed.

By the time the claim was lodged, the repairs were complete, reflecting one of the complexities of construction. Due to strict project timelines, the insured focused on the completion of works rather than initiating a claim in the normal manner. 

Loss adjusting process

The loss adjuster was faced with completed repairs, requiring extensive supporting documentation, such as photos, to comprehensively validate and assess the claim. A detailed request for information (RFI) was sent to the insured to support the claim, including:

• Invoices for materials to substantiate the claimed costs incurred during the repair phase.
• Timesheets to validate and differentiate between plant and labour efforts for repair works and contract works. 
• Site diaries to differentiate between the repair works and contracted works performed to enable a link to be established between repair work and the claimed costs.
• Original contract drawings of the project to provide accurate details and quantities that could be used to calculate and compare the actual cost with the figure claimed.
• Photos of the damage as visual evidence of the works pre-event, during the repairs phase and post-event. These assist in the assessment of the damage to the works and the correlation between the claimed costs and the repair works identified within the site diaries during the repair phase. 
• A copy of the contract for review in conjunction with the insurance policy to assist with the validation of claimed and contractual rates within the submitted claim. 

The process involved reviewing individual photos concurrently with the site diaries and contract drawings to understand the extent of the damage and the methodology of the repairs. This incorporated a detailed review of thousands of photos, material invoices, plant and machinery logs, and labour cost breakdowns to substantiate the insured’s claim.

Site-specific rainfall records were analysed alongside repair timelines to gain a complete understanding of the sequence of damage and subsequent repairs.

These were eventually cross-referenced with the invoices and claimed costs, allowing for adjustments where necessary.

This review process validated the claim and ensured compliance with policy terms, emphasising the insured’s responsibility for completing repairs independently and providing detailed supporting documentation as required by their policy and contractual obligations.

Extra factors for consideration 

• Material variations: The materials used during the repair works differed from those in the original contract works, as they were chosen to enhance weather resistance. This prompted scrutiny of potential improvement and the possibility of additional expenses and underscores the issue of recurring costs where additional analysis is needed to ensure repairs do not result in financial betterment or excessive expenses. In this instance, it was found that although the materials had changed, there were no cost implications that required adjustment. 
• Extent of damage: Assessing the impact of 700 millimetres of rain over a large area posed significant challenges due to the vast scale of the project and the extended period of rainfall. These conditions made pinpointing the exact location and timing of the damage particularly difficult. The overlapping weather events during the lengthy project duration added further complexity, requiring a thorough correlation of photographic evidence with repair costs to construct an accurate timeline and scope of the damage.
• Event attribution: The policy’s terms necessitated determining how many 72-hour events caused damage and the respective associated costs. This was particularly difficult when relying on the insured's photos; however, it was important to get the figure correct, as it would determine the number of deductibles ($100,000) applicable.

Working effectively with the insured

The loss adjusting challenges highlighted the importance of clear communication with all stakeholders. Effective collaboration between the insured, their claims preparer, and the loss adjuster proved pivotal. Regular communication involved multiple meetings to discuss progress, clarify repair and timeline details, and explain adjustments.

The insured provided extensive photographic evidence taken before the event, shortly after it and the resulting repair phase. These were mapped and categorised by date, location and damage type by the loss adjuster.

Timelines for original works and repairs were reviewed alongside the aforementioned photos, dated material and labour documentation, ensuring consistency.

This collaborative approach streamlined the assessment process, allowing the loss adjuster to complete calculations based on the amount of materials, plant, and labour claimed, cross-referenced with the extent of the damage and length of the road. 

In addition, the detailed information and timeline helped the insured demonstrate that a single 72-hour period (365mm of rainfall) was responsible for the vast majority of the damage.

In essence, it was clarified that the same repairs would have been necessary regardless of the rainfall subsequent to the initial 72-hour event, and only minor adjustments or deductions were therefore required.

Outcome and reflections

The original claim was submitted at around $AUS1 million, but following the loss adjuster’s assessment, incorporating the removal of the applicable $200,000 deductible(s), the settlement was agreed at circa $500,000. The insured understood the difficulty of the assessment and was pleased with the outcome, especially given the thoroughness and fairness of the resolution.

Demonstrating that only one 72-hour event caused the bulk of significant damage within the loss adjuster’s report was critical to gaining the insured’s agreement to the proposed settlement and getting the go-ahead to advise the insurers accordingly. A fair and reasonable settlement was achieved to the satisfaction of all parties involved.