Our partner Antonio Rubilar spoke with Diario Financiero about the risks and new insurance demand brought about by the boom in complex projects for construction companies.
Faced with the expansion of increasingly complex industrial, energy, and urban projects, Chilean developers are confronting a new legal and technical layer that redefines the conditions for building and insuring.
Today, there is “a growing perception of the legal risks associated with projects,” says Eduardo Cordero, an administrative law scholar at the Pontificia Universidad Católica de Valparaíso (PUCV), particularly in the wake of pronouncements by administrative and judicial bodies “that have involved substantive changes in criteria, often without a transition process that allows for adequate temporary adaptation.” Among the factors that have driven the increased demand for insurance, guarantees, and mitigation mechanisms, Cordero explains that it is not only the higher costs associated with financing or delays in payments linked to projects promoted by the public sector that have had an influence, but also environmental aspects that continue to generate significant contingencies.
Antonio Rubilar, lead partner of Albagli Zaliasnik’s (az) public law and regulated markets group, explains that ‘it is not that recent regulations are generating greater demands’, but rather that many clients and contractors have had problems related to the pandemic, social unrest, and changes in input prices. And, in this scenario, ‘especially in terms of the solvency of construction companies, greater guarantees are being demanded as a result of many construction companies experiencing financial difficulties with their cash flow,’ Rubilar points out, adding that ‘negotiations are becoming difficult’ given the heightened perception of risk that exists among the parties in relation to permits.
Regarding regulatory gaps, Cordero suggests that ‘it would be interesting to explore the liability regime on the part of urban planning authorities’, especially in cases where measures have been adopted that are subsequently declared illegal and cause enormous damage, often resulting from the paralysis of works or delays in projects. For his part, Rubilar points to the excess of permits, regulations, and agencies that are ‘poorly coordinated and have varying criteria among authorities,’ which causes delays and legal uncertainty. The insurance perspective Andrea Lepe, technical and product director at Reale Seguros, explains that engineering companies are the ones that ‘take out professional liability and performance bond insurance during the study stages, as well as civil liability, personal accident, and engineering line insurance in more advanced stages of execution.’
In this regard, it should be noted that coverage has become more sophisticated in order to comply with regulatory standards and the application of new techniques. In addition, the increase in the intensity and frequency of natural disasters “makes it more complex to determine the premium amounts to be charged for a project, considering that highly complex projects—such as the Chacao Bridge, a new copper mine, a hydroelectric power plant, among others—are projects lasting three or more years,” Lepe points out. In the energy sector, “the greatest demand today comes from the construction of photovoltaic parks, which account for a significant portion of construction insurance programs,” says Héctor Gacitúa, director of corporate risks at Southbridge Seguros. Along with traditional “all-risk construction and assembly” coverage, he says that in this industry there is a special emphasis on coverage for theft and natural hazards, particularly forest fires and floods.
Meanwhile, in the industrial sector, “projects such as distribution centers, warehouses, and manufacturing plant expansions predominate,” says Gacitúa, where once again the standard is to contract comprehensive insurance programs, along with civil liability and specific coverage depending on the type of business and exposure to each risk. In the executive’s view, the ‘most challenging new risk’ being observed in energy projects is battery energy storage systems, known as BESS. ‘They involve several complexities: there are still no consolidated standards or fully mature fire protection systems for this type of facility at the scale at which they are being developed,’ says Gacitúa, adding that reinsurance markets are still adapting their appetite and conditions to these technologies. “It’s not that they can’t be insured, but they do require specialized risk engineering, in-depth analysis, and precise coordination of capabilities,” he concludes.
