Will new construction dispute options change coverage needs?

In addition to letting construction contractors and subcontractors recognize profits sooner, Ontario’s Bill 60 expands adjudication rules to include scope of work, and requests for contract price changes and time extensions.

Such additional legal risks could alter the insurance requirements for construction projects, since disputes can be more complex.

Adjudication related to large-scale construction work was introduced in Ontario in 2018 and while it was limited in scope at that time, it is often used, says Conor Smith, national surety leader for Marsh Canada.

He says surety payment bond claims will likely crop up in adjudication moving forward. “Surety companies will need to adapt their claims handling and their successive processes to deal with this faster and more broad adjudication environment,” he adds.

What’s more, rule changes mean adjudications are likely to increase.

“As a broker, it’s important to ensure that your client is aware of these processes. In my claims experience…documentation is key,” he says. “Making sure that your reports, change orders, and all relevant project documents are up to date, is a critical part of the defense or claim proposition as a contractor.”

Related: How Ontario’s construction stimulus law impacts surety

Change orders and time extensions happen in most construction projects and contract value changes are also common.

“This is [a] way to make projects more efficient. Those tend to come through with change orders or change in scope…so those things have always been considered part of the underwrite,” Smith tells CU.

“[I] wouldn’t expect much of a change in scope from the surety market in that regard. But just as adjudication is a new mechanism that can be utilized for a number of these aspects of dispute resolution, I think it’s important to ensure that the processes for delivering of information [and that] your [project managers] on site are ensuring that their files are well documented. [It’s] going to be a critical piece in either defense or in action.”

For smaller builders and some subcontractors, Smith points out surety is a credit product.

“The pre-qualification process is heavily based on the credit quality of the contractor. You [need a] certain financial capacity in order to qualify,” he says.

“The surety leverages your financials and provides support to get your business capacity to bid on and secure work. Typically, those small builders often face tighter cash flow and high reliance on external financing.”

Related: How labour shortages in construction could impact insurers’ profitability

And it does make them more vulnerable to payment disputes and delays.

Although Bill 60’s changes to holdback payments are expected to improve liquidity and potentially reduce the surety risk related to payment defaults, smaller builders tend to face increased pressure with respect to delivery of a project.

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“In some cases, they don’t have the surplus of resources to potentially put towards a project. It is critical that they’re managing their financials just as strongly as a contractor in a larger segment,” says Smith. 

“What we’re going to see from the surety landscape is that…critical analysis of not just the financials, but operational and managerial controls, which will prompt a deeper review and potentially additional security or collateral that’s required in order to obtain support.”

The aim will be to reduce reliance on external financing.

“To be able to secure the capacity that you require, it may require additional security that you need to provide the surety company,” he says. “In order to get a facility in play, they may be asking more of you.”

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.