Barrister Professor Rudi Klein helps you get to grips with the standard construction insurance clauses.
Why have insurance?
The obvious answer to this question is that construction is a risk-laden activity. Property damage and personal injury are, unfortunately, risks associated with construction works. But there is also a less obvious answer. The basic obligation in construction contracts requires that the contractor carries out and completes his works. If a calamity befalls the contractor which results in damage to or destruction of his works he is obliged to re-instate it to comply with his contractual obligation. Insurance is, therefore, necessary to deal with this risk.
Risk and insurance
So, what should you be looking for when trying to understand the provisions in your contract dealing with insurance? The only reason we have policies of insurance is to have a means of recovering some or all of our losses in the event a risk materialises. The concepts of risk and insurance are intertwined.
The first thing to ask oneself is: Does the contract specify the risks? Unfortunately many contracts do not do this; some, such as JCT contracts, do not even use the word ‘risk’. The New Engineering Contract forms are up-front on risk. There are six categories of risk (e.g. risk of damage to works, materials and plant provided by the Employer) which are laid at the door of the Employer. All other risks are placed with the contractor.
This brings us to the second question to ask oneself. To whom is the risk allocated? In the case of a bespoke subcontract, the likelihood is that nearly all (if not all) risk has been passed to the subcontractor.
The final question is: Which party is required to take out the necessary insurance cover? Furthermore what is the extent and duration of the cover required?
Most contracts will have provisions to enforce insurance obligations. If a party does not take out the required cover the other will reserve the right to do so and charge the premium to the defaulting party.
Joint Contracts Tribunal (JCT):
Forms of Contract
JCT contracts have two general categories of risk:
- Risk of physical damage and/or loss to the works and site materials.
- Risk of injury/damage to persons and/or property.
In respect of these risks, two types of cover are required – ‘all risks’ cover for the first category and public liability insurance for the second.
Risk of physical damage and/or loss to the works and site materials
Here JCT contracts have three options:
- In the case of new buildings the contractor is to take out ‘all risks’ insurance (Option A).
- Alternatively the Employer is to take out ‘all risks’ cover (Option B).
- With regard to existing structures the Employer is to take out and maintain:
- a) insurance in respect of existing structures and their contents and,
- b) ‘all risks’ insurance of the works. (Option C)
Option C poses problems in large commercial multi-tenanted buildings. Landlords may be reluctant to extend their existing structures cover to include works (e.g. fitting out works) being carried out by a tenant.
Most contractors will take out an annual ‘all risks’ policy for all their projects. But on certain projects the Employer may have their own ‘all risks’ policies especially if they are serial clients such as the large supermarkets. With regard to existing buildings the Employer is likely to have his own buildings and contents policy. It will often be easier for him to add on to this policy ‘all risks’ cover for the construction works.
With Option C the Employer is required to insure against damage arising from the Specified Perils (e.g. fire, lightning, explosion, storm, flood, escape of water from water tanks).
‘All Risks’ cover should be put in the joint names of the Employer and contractor. This prevents the insurer exercising his rights to stand in the ‘shoes’ of his insured (called rights of subrogation) and recover some or all of the losses from the other party. It should be noted that many insurers are not comfortable with joint names policies. If the beneficiary of the policy (e.g. the contractor) goes into liquidation the policy will be solely in the name of the other party. If, for example, that other party has a poor claims record the insurer may not want him to ‘inherit’ the policy.
‘All Risks’ cover includes physical loss or damage to the works and materials, reasonable costs of removal and disposal of debris, and shoring and propping up the works (if necessary). The cover should be for full “re-instatement value of the works and professional fees”.
‘All Risks’ is a misnomer. The cost of repair, and replacement or rectification of the following are expressly excluded:
- property defects due to wear and tear
- defective work and materials
- loss or damage from Excepted Risks (e.g. contamination of the site)
The cover should be in place up to the issue of a Practical Completion Certificate or termination of the contract, whichever is the first.
Risk of injury/damage to persons and property
Under JCT the contractor is liable to and must indemnify the employer in respect of claims arising from personal injury or death (to people other than the contractor’s employees for whom he is legally obliged to have Employer’s Liability Insurance). For this purpose the contractor should have public liability insurance.
The contractor’s liability in this context is dependent upon the injury or death arising out of or caused by the carrying out of the works. In one case a claimant was injured whilst riding a scooter on the site. The court held that the contractor was not liable.
Furthermore the contractor is not liable where the injury or death was caused by some act or neglect on the part of the Employer or persons engaged by him such as his consultants. In a legal case a member of the public was injured by a structural collapse due to faulty design by a structural engineer appointed by the Employer. The contractor was sued but was able to be indemnified by the Employer in respect of the claim.
The contractor is also liable (and must indemnify the Employer) in respect of claims arising from loss or damage to property – structures and/or contents. For this purpose the works and site materials are excluded – they are separately insured. The contractor can escape responsibility if the loss or damage was not due to his negligence, omission or default. Omission or default, according to case law, is likely to involve a breach of contract.
In a legal case the Employer was held liable in an action for nuisance when piling work damaged adjoining property. The piling was carried out strictly according to the architect’s drawings and instructions. The Employer argued he should be indemnified by the contractor but the court held that there was no fault on the contractor’s part.
Where there is loss or damage to existing structures or contents this should be already covered by the Employer’s own cover under Option C.
Subcontractors should be protected against liability for damage or loss to the works from the Specified Perils. The Contractor’s Joint Names ‘all risks’ policy should also name subcontractors as being insured on the policy. Alternatively the policy should state that the insurer waives its rights of subrogation against the named subcontractors. Subcontractors should always check that this has been done.
There is no express requirement to protect subcontractors against loss or damage to existing structures and contents from the Specified Perils. In a recent case the court held that a subcontractor was not liable for the re-instatement costs of damage to an existing structure by the Specified Perils. He had priced his work on the basis that the cost of re-instatement would be met by the Employer’s insurer.
Summary of other policies that may be required Contractors and Employers are likely to be required to take out additional policies:
- Professional indemnity insurance – where the contractor is providing a service, especially design.
- The Employer may wish to have insurance to cover his loss of liquidated damages arising from extensions of time given as a result of loss or damage caused by the Specified Perils.
- Insurance to cover damage caused by the works to adjoining property arising from, for example, subsidence, vibrations, weakening or removal of support, or lowering of ground water.
- Insurance to cover full value of off-site materials included in an interim payment certificate in the event that such materials are damaged by the Specified Perils.
- Environment impairment/contractor’s pollution.
- General protection of liquidated damages and performance damages.
- Supply chain insurance – cost of supplier failure and disruption.
- Latent defects cover for 10 years after hand over (compulsory in France).