When Competitive Construction Costs Became a $30 Million Insurance Risk

An energy company had recently completed construction of several major facilities, each built over an extended period using competitive contractor bids. While this approach delivered excellent capital efficiency and improved EBITDA, it also meant that the recorded construction costs were well below actual replacement values. As the client approached insurance renewal, they recognized - based on prior discussions with Kroll - that using these contractor build costs as the insured values would understate the true reinstatement exposure. The challenge was clear: how could they differentiate between what it cost to build the plant during favorable construction conditions and what it would cost to rebuild it following a loss? Without addressing this gap, the client faced significant underinsurance risk that could leave them exposed to major financial shortfalls.

The client adopted Kroll's updated valuation for their policy renewal and incorporated the figures into their Estimated Maximum Loss modeling. A year later, the merits of the decision were clearly demonstrated. The client suffered a significant insured loss of approximately USD 30 million, and the rebuild costs aligned closely with Kroll's valuation. This ensured the client received a 100% payout, validating both the methodology and the critical importance of using independent insurance valuations rather than contractor-based figures. The outcome eliminated the underinsurance exposure that would have resulted from relying on very competitive construction costs, strengthened insurer confidence through the transparent, defensible and accurate methodology, and enhanced the client's financial governance and risk reporting by aligning insurance values with true reinstatement costs. The engagement also led to continued partnership, with the client now relying on Kroll for periodic valuations across their entire asset base.