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Disagreements now common about the level of projected business growth in the context of BI claims

Insights from Crawford Forensic Accounting Services

"The substantial spike in construction costs, that occurred after Cyclone Seroja in Western Australian in 2021 and the mass flood events in Northern NSW and Queensland in early 2022, has moderated considerably. However, the knock-on effects are still being felt.

A significant concern is on longer tail claims, which arose during those above mentioned events, but where the price surge was not reflected in recommended Reserves. This has resulted in claim cost increases late in the claim life. In instances where reinstatement was delayed, this situation is exacerbated and has led to compounded growth in reinstatement costs. Our contacts across the market are reporting that as final settlements are calculated, some nasty surprises are on the way.

On the business interruption claims front, there is an unfolding dynamic centred around the level of projected business growth in the current volatile market. We are seeing similar cost overruns on business interruption claims stemming from reinstatement periods being longer than initially forecast.

Although now abating, with general inflation surging over the past two years, it has led to surges in revenue (and costs) for many businesses. The combination of post-covid trading patterns where turnover has surged, added to a price hiked environment, means we are seeing arguments for substantial trends in business growth, sometimes argued at 25% growth or more.

There is no doubt that after many years of comparatively stable growth in many businesses, there is far greater volatility and more room to argue for substantial growth trends. Where excessive growth trends are being argued, this is making it much more challenging to agree business interruption losses.

It is important to note that Crawford generally agrees that a growth trend is appropriate, but we rarely agree to the same extent argued by some claimants. A recent claim I reviewed is case in point; we are perfectly agreeable to a growth trend of about 10%, but the claim preparer is chasing 25%+. The impact of such differences is substantial, often running to hundreds of thousands of dollars."

Graham Peters, National Executive Adjuster/ Head of Class Actions

The cost of settling public liability claims

Insights from HBA Legal

"There are quite a number of factors contributing to the steep rise we are seeing in the cost associated with casualty cases. I have one client in which 48% of claims are now considered large claims (ie claims over $150k). It was nowhere near that level just a few years back.
​Some of the reasons for the increases in claim value include:

1. 1.Cost of living and inflation: the cost of medical care and treatment for which plaintiffs are claiming in casualty cases has increased. Doctors are being forced to charge more to compensate for the increased cost of doing business. And while these costs have gone up, Medicare reimbursements on those amounts have remained static. The situation is the same when it comes to the cost of domestic assistance and home maintenance which are all costs that feature in personal injury claims.
2. 2.Health system delays: it is taking longer for plaintiffs to receive medical treatment. We are seeing people on waiting lists for much longer and this prolongs the time it takes to settle claims. The evidence becomes stale and new evidence needs to be obtained. The longer a claim takes to settle, the more it ends up costing.
3. 3.Cost of living pressure and increased community knowledge of the claims landscape: with the amount of information publicly available on the internet with just a few clicks of a button, claimants are becoming much more knowledge about their rights. This is driving more people to seek the help of lawyers to maximise compensation which, in turn, increases costs. Where previously “simple” claims might have been handled and then subsequently settled before lawyers became involved, we are now seeing higher rates of engagement of lawyers by claimants, and increased litigation of claims which historically could be resolved by the TPA or internal claims departments before having to be defended in Court.
4. 4.Systematic challenges: in some jurisdictions, the threshold for certain heads of damage are indexed, yet costs caps and penalties are not. Therefore, there is more incentive for lawyers to encourage their clients to pursue litigation for a “good case” as there is less risk that their recoverable costs will be capped. This is a significant shift from five to ten years ago where costs were capped on many more claims because the value of the claim was much lower. The difference can be tens of thousands of dollars. A recent case on point was slip and trip matter where the plaintiff’s lawyers costs, up to the point of a settlement conference (not including disbursements), were around $230,000.
5. 5.”No win no fee”: these types of fee agreements tend to encourage plaintiffs to “roll the dice” even when there is fairly strong evidence in support of the defence. Whilst these types of fee agreements have been in place for decades and are nothing new, our experience is that we are seeing more enthusiasm from plaintiffs to run these types of cases to trial."

Iona Sjahadi, Partner & National Practice Group Leader (Casualty & Commercial)

Other risk factors in the construction sector

Insights from our Construction & Engineering unit within Specialty Loss Adjusting

"The lack of skilled labour in the construction industry is not confined to any one country; it’s a global problem right now. But, within Australia, the lack of current housing availability, in terms of owning or renting, is creating issues because even if Australia could entice skilled labour from overseas, the lack of available housing means there is very little chance of being able to house that overseas labour.
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​Housing approval rates recently decreased to their lowest levels since 2012, falling by 10.4% in Q3 2023. This will remain a significant problem in planning new major projects, which in turn will drive longer construction periods and therefore increase risks associated with those projects.
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​The high cost of financing projects within the private sector, brought about by high interest rates and inflation over the past few years, is placing pressure on contractors to reduce potential delays. Unfortunately, what that can lead to is structural defects that are not being fully investigated and properly remediated. Therein lies the risk because those defects won't reveal themselves until much later.
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​What I’m describing is especially notable in traditional construction contracts where the developer or principal is responsible for the design. This can lead to situations where that developer is not willing to delay the project to fully investigate the cause and may instead implement a remedial solution that does not fully address the failure mechanism.
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​Insurers seeking to apply an exclusion, such as market standard defects wording “DE” (UK CAR Group defect exclusion) or "LEG” (London Engineering Group defect exclusion), can be left with a situation where their appointed experts are not able to fully investigate cause in instances where remedial repairs have already commenced, or are left with identifying a different cause or causes to that considered by the developer or contractor, to which a remediation solution has already been adopted.
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​Design and Construct contracts are also prone to significant risks associated with a lack of resourcing by the professional consultants engaged by the contractor. Adequate resourcing by professional consultants, in particular engineers, can often only be achieved where there is less budgetary constraints on professional fees.

David Boots, National Technical Head, Construction & Engineering/ National Executive Adjuster