The insurance arrangements underpin all building projects and are the cornerstone on which the risks inherent in designing and constructing works are allocated and accepted. The insurances are also critical to ensuring that a "marketable" package of construction documentation is available for funders, purchasers and tenants.
The insurance provisions for building contracts and professional team appointments are to a large extent standardised in line with the products offered by the insurance market. However, each project should be considered on its own merits and consideration given at the outset to whether any additional insurances or variations to the "standard” position are required. Some of the common insurances that are relevant to building projects are as follows:
Contractor's "All Risks" (CAR) insurance
Insureds: Building contractor and employer (and sometimes others such as funders and third party site owners).
Also referred to as works, contract or construction insurance, a CAR policy, despite the "All Risks" badge, only covers a defined set of risks such as fire, storm, flood, escape of water, riot and civil commotion. A CAR policy will typically indemnify both the construction client/employer and the contractor against physical loss or damage to work executed and site materials, and consequential costs such as removal of debris and shoring up the works where an insured risk occurs. The obligation to maintain CAR insurance generally ceases on practical completion.
The CAR policy is to be taken out in the joint names of the employer and the contractor either by the employer or contractor in a new build scenario or by the employer where the work relates to existing structures (e.g. refurbishment). In the case of existing structures the policy will extend to loss or damage to the structure and contents caused by insured risks.
It is often a requirement of funders that they are also named as joint insured on the policy or at least have their interest noted. Similarly site owners (who are not the employer under the building contract) will often wish to be included as joint insured on the CAR policy.
There can be circumstances where the CAR insurance arrangements for a project require extra thought, for example where significant tenant works overlap with the main build. Building owners will wish to make sure that there are no gaps in the insurance package for the various works.
Under many construction contracts the contractor will be entitled to an extension of time if an insured risk occurs. However, this is not always the case, most notably in the case of the New Engineering Contract (NEC).
Professional Indemnity Insurance (PII)
Insured: Professional consultant or works contractors undertaking design.
A PII policy will cover the insured for professional negligence, for example negligent design by an architect or sub-contractor; or the negligent performance of professional services by a quantity surveyor. PII will be the key insurance for any claims relating to latent defects in properties (caused by negligent design) during the contractor’s or consultant’s liability period.
PII clauses are subject to much scrutiny in construction contracts and collateral warranty agreements in favour of third parties such as purchasers and tenants. Although PII does not directly protect an employer or beneficiary of a collateral warranty, these parties will have an interest in making sure that the contractor or consultant has PII in place and maintains it so that a source of funds is available to the contractor or consultant in the event of a claim.
PII clauses will set out the financial level of cover to be maintained; a duration (such as 12 years after practical completion); and the basis of cover. PII may be held for each and every claim or may be subject to an annual aggregate (with or without automatic reinstatements) either in its entirety, as is often the case with contractors, or for specified risks such as asbestos, pollution or contamination claims.
As PII is usually held annually, and is written on a claims made basis, i.e. the policy in force at the time a claim is notified will respond, it is important to check that cover remains in place for the required duration.
Although PII clauses are important in construction contracts, employers and beneficiaries of collateral warranties may be able to take comfort from the rules of consultants’ professional bodies, which in many cases require consultants to take out a certain level of insurance as a condition of membership.
As an alternative to, or in addition to, PII those involved in the supply of proprietary products (such as lifts and elevators) may carry product liability insurance. Product liability insurance is intended to insure against liability for injury to third parties or damage to their property arising from the supply of products.
Latent defects insurance
Insureds: Depends on policy – typically site owners and/or tenants.
In essence this is an insurance product that will respond to certain latent defects in buildings usually appearing during the first 10 years after construction. We have recently written about latent defects insurance policies looking at whether they provide an adequate substitute for collateral warranties and their role in defects claims.
There are some drawbacks with latent defects insurance policies.
- claims are subject to a deductible or excess;
- liability is capped at the sum insured and is subject to the exclusions in the cover provided (often excluding consequential losses and mechanical and electrical elements of the building); and
- cover is dependent on the general issues surrounding insurance contracts including disclosures made at the time the policy was obtained (and indeed it may be the case that the party seeking to rely on the policy is not the party who took out the policy in the first place and completed the disclosure form).
Latent defects policies should be considered at the outset of the project because they tend to be much more expensive if sought "after the event". This is because insurers seek to audit the works as they are carried out to check that designs, systems, materials and construction/installation meet the required standards.
Adjoining properties: non-negligent damage insurance
Insureds: Building Contractor and employer.
This is a policy that should be considered where there is a risk of damage to adjoining or surrounding properties. The policy will respond to loss caused by events such as collapse, subsidence, heave, vibration or lowering of ground water where this does not arise due to the contractor’s default.
Public liability insurance
Insured: Professional consultants and works contractors.
Public liability insurance covers legal liability to pay damages to third parties for death, bodily injury or damage to property. It may or may not extend to product liability as described above. Such insurance is voluntary in the UK but it is good business practice to maintain it.
Employer's liability insurance
Insured: Professional consultants and works contractors.
This is compulsory insurance against liability for injury or disease to a party’s employees arising out of their employment. This is highly relevant in the construction sector where health and safety risks are inherent. The minimum level of insurance is £5 million, however it is common for insurance to be taken out at higher levels.
Those engaging a building contractor or a third party to procure works on their property will wish to ensure that public and employer’s liability insurance are maintained with an accompanying indemnity from the contractor or third party developer in favour of the site owner against claims due to death, personal injury or damage to property.
There are a number of other insurances that might be relevant to a construction project (e.g. insurance against loss of liquidated damages, project insurance and business interruption insurance). The key for any party involved in a construction project will be to make sure that the appropriate insurances are in place from the outset and that the insurance “package” is considered for every project rather than simply assuming that a “standard” position will suffice.