Regional geopolitical instability has put both contractual risk allocation and insurance coverage under pressure. How do those two issues interact, and what does that mean for contractors, Karie Akeelah and Ian Brown, of Trowers & Hamlins, ask.
Karie Akeelah is a partner in the construction disputes team and Ian Brown is a partner in the insurance disputes team at Trowers & Hamlins
Regional geopolitical instability is putting two pillars of construction project management under simultaneous pressure: contractual risk allocation and insurance coverage. Understanding how these interact, and where the gaps between them lie, is now a practical concern for contractors, subcontractors and employers across the industry.
Construction contracts and force majeure
Most standard construction contracts contain force majeure or exceptional event provisions capable of entitling an affected party to an extension of time and, in some cases, additional costs. In the current environment, disruption to critical shipping routes, shortages of specialist materials and movement restrictions may all qualify as triggering events under these provisions.
“The contractual and insurance positions do not automatically mirror one another”
However, a critical nuance is that some construction contracts expressly limit the acts of war under the force majeure regime to the country of the project or only allow for extension of time relief in such circumstances. Where hostilities reach the threshold of an “act of war”, whether formally declared, a contractor may find that the very event causing disruption is the one excluded from relief. Parties should therefore review their contracts carefully to understand precisely what is carved out, and whether that exclusion extends not only to direct hostilities but also to their downstream consequences, such as supply chain failures attributable to the conflict.
Where force majeure is unavailable, alternative mechanisms may still apply: changes in law, cost fluctuation provisions or, in extremis, suspension clauses. Whatever the route, procedural compliance is essential. Most contracts impose strict notice requirements tied to the point at which a party became aware of the triggering event; failure to comply can result in the loss of any entitlement to relief.
Project insurance and acts of war exclusions
The insurance position presents a parallel challenge. Construction projects typically sit beneath a layered insurance structure – covering everything from contractors’ all risks and delay in start-up, through to marine cargo, liability and business interruption – and across that range of policies, war exclusion clauses are a near-universal feature.
The scope of these exclusions varies between policies and insurers, but they typically cover losses caused directly or indirectly by war and often extend to civil war, invasion, rebellion and insurrection. The breadth of such exclusions means that, even where a project suffers significant disruption attributable to regional conflict, an insurer may decline cover on the basis that the loss flows from an act of war, regardless of which policy is engaged.
This creates a potential gap between contractual entitlement and insurance recovery. A contractor may succeed in a force majeure claim under its contract – because the contractual definition is broader than acts of war – yet find that the corresponding loss falls squarely within the relevant policy’s war exclusion. The contractual and insurance positions do not automatically mirror one another.
Which will adapt first?
An interesting question looking ahead is whether it will be construction contracts or insurance policies that move first to close this gap. Both regimes have historically lagged behind geopolitical reality, with exclusions and carve-outs drafted for a world that no longer exists. But the current climate may accelerate change.
For insurers, there is a genuine commercial opportunity. The gap between contractual exposure and insured recovery is not simply a problem – it is an unmet risk that can, in principle, be priced.
Political risk and political violence products already exist, but are highly specialised, therefore often expensive with the consequence being that they often remain underutilised in the construction sector. Sophisticated insurers willing to model conflict-related construction risks accurately and offer tailored coverage at an appropriate premium stand to capture a market that is currently going unserved. It is, at its core, a question of matching risk with premium.
Whether contracts or the policies evolve first, the industry cannot afford to wait for the answer before acting. Identifying the interaction between contractual and insurance regimes – before a claim crystallises – remains the most effective risk management step available to parties operating in an unstable environment.
