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Construction Insurances

Construction Insurances

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Sections

  • RICS guidance notes
  • 1 Introduction
  • 1.1 Introduction
  • 1.2 Rights and obligations of principal parties
  • 1.3 Contract conditions
  • 1.4 Overseas issues
  • 1.5.1 Contractors’all risks insurance
  • 1.5.2 Consequential loss
  • 1.5.3 Directors’and officers’(D&O) liability insurance
  • 1.5.4 Employers liability (EL) insurance
  • 1.5.5 Environmental insurance
  • 1.5.6 Existing buildings
  • 1.5.7 Latent defects insurance
  • 1.5.8 Non-negligence insurance
  • 1.5.9 Professional indemnity (PI) insurance
  • 1.5.10 Public liability (PL) insurance
  • 1.5.11 Surety bonds
  • 1.5.12 Unexpected archaeology discovery insurance
  • 2 Insurances personal to members
  • 2.1 A surveyor’s guide to professional indemnity (PI) insurance
  • 2.1.1 Where and how is the cover obtained?
  • 2.1.2 What does PI insurance do?
  • 2.1.3 What is the right level of cover?
  • 2.1.4 When should I consider cover and what will it cost?
  • 2.2 Professional indemnity insurance for project managers
  • 2.3 Directors’and officers’liability (D&O) insurance
  • 2.3.1 What is D&O exactly and who is covered?
  • 2.3.4 Obtaining terms for a D&O policy
  • 2.3.5 Market trends
  • 2.3.6 Key issues
  • 3 Construction risk insurances
  • 3.1 Consequential loss insurance for construction risks
  • 3.1.1 Three important points
  • 3.1.2 Relevant events
  • 3.1.3 Specified perils and force majeure
  • 3.1.4 Extensions of time
  • 3.1.5 Measurement of liquidated and ascertained damages
  • 3.1.7 The developers’choice as to basis of settlement
  • 3.1.8 Expediting costs (additional cost of working)
  • 3.1.9 Costs incurred in raising or extending loans
  • 3.1.11 Higher cost of development finance
  • 3.1.12 Additional increase in cost of working cover
  • 3.1.14 Damage at suppliers’premises
  • 3.1.15 Time excess
  • 3.1.16 Unusual consequential risks
  • 3.1.17 Key issues
  • 3.2 Contractors’all risks or contract works insurance
  • 3.2.1 The cover
  • 3.2.2 Joint Code of Practice on Fire Prevention
  • 3.2.3 Additional cost of construction of unbuilt works
  • 3.2.4 Defective design, materials and workmanship
  • 3.2.5 Defective design, materials and workmanship clauses
  • 3.2.6 LEG clauses
  • 3.2.7 Legal challenges
  • 3.2.8 Key issues
  • 3.3 Employers’liability insurance
  • 3.3.2 Workplace legislation outside the UK
  • 3.3.3 Social security
  • 3.3.4 Compensation funded by insurance policies
  • 3.3.5 Summary of schemes
  • 3.4 Environmental insurances
  • 3.4.2 Environmental exposure
  • 3.4.3 Insurance solutions
  • 3.4.4 Historical contamination
  • 3.4.5 Operational contamination
  • 3.5 JCT non-negligence insurance
  • 3.5.1 History
  • 3.5.2 Perils insured
  • 3.5.3 Activities giving rise to loss
  • 3.5.4 Policy exclusions
  • 3.5.6 Position under ICE contracts
  • 3.5.7 Key issues
  • 4.4.3 The Pressure Systems Safety Regulations 2000 (PSSR)
  • 4.4.5 The Electricity at Work Regulations 1989 (EAW)
  • 4.4.7 Inspection service providers/the competent person
  • 4.5.1 The means by which other interests are recorded
  • 5.2.3 Is latent defects insurance a panacea for developers?

RICS Practice Standards, UK

Construction insurance
1st edition, guidance note

Construction insurance RICS guidance note
1st edition

Published by the Royal Institution of Chartered Surveyors (RICS) under the RICS Books imprint Surveyor Court Westwood Business Park Coventry CV4 8JE UK www.ricsbooks.com No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in this publication can be accepted by the author or RICS. ISBN 978 1 84219 499 7 Produced by the Project Management, Construction, and Building Surveying Professonal Groups of the Royal Institution of Chartered Surveyors. © Royal Institution of Chartered Surveyors (RICS) July 2009. Copyright in all or part of this publication rests with RICS, and save by prior consent of RICS, no part or parts shall be reproduced by any means electronic, mechanical, photocopying or otherwise, now known or to be devised. Typeset in Great Britain by Columns Design Ltd, Reading, Berks

He has spent nearly 50 years in the insurance industry. Executive Director. Directors and Officers John Dexter. Aon Limited. Employers Liability Teresa McAuliffe. Aon Limited. t: +44 (0) 207 623 5500. At various times his career has focussed on insurances for property owners. Account Executive. Environmental Simon Johnson. Surety and Guarantee. latent defects covers and consequential loss.Acknowledgments RICS would like to express its sincere thanks to the following for their contributions to this guidance note: Editor and co-author Ray Robinson. www. Public Liability Teresa McAuliffe. CONSTRUCTION INSURANCE | iii . The editor and fellow contributors from Aon can be reached by contacting Aon 8 Devonshire Square.aon. Technical Consultant. Construction. Ray Robinson. Director. Peter Sharpe. Aon Limited. including over 30 years with RSA and has held management positions in underwriting. Aon Limited. Director. Laurence Gilmore.com. Account Director. Aon Limited. Account Executive. Mark Courtneidge. Financial Services. Aon Limited. business development and technical development. London EC2M 4PL. working for the Commercial Property Group. Aon Limited. Engineering Derek Cornwell. Director. is a technical consultant with Aon Limited. He is a member of the Steering Group of the RICS Insurance Forum. a Fellow of The Chartered Insurance Institute. Technical Consultant. Associate Director. Environmental Services. Aon Limited. which specialises in the insurance requirements of property owners and developers. General Construction Tom Wylie. Surety bonds Shane Foley. Aon Limited. Aon Limited. Risk Management. Director. Professional Indemnity Christine Paine. Aon Limited. Construction. Construction. Aon Limited. Director.

Construction.com John Parsons.wedlakebell. and Building Surveying Professonal Groups. Construction Lawyer and Partner. Wedlake Bell T +44 (0) 207 395 3073 www. iv | CONSTRUCTION INSURANCE . RICS Project Management.Other acknowledgments Latent Defects Joe Bellhouse.

5 When the various insurance covers need to be considered and when each cover starts and finishes 1.5.3 Directors’ and officers’ (D&O) liability insurance 1.9 Professional indemnity (PI) insurance 1.1 Contractors’ all risks insurance 1.6 Key issues 3 Construction risk insurances 3.1.1.4 Overseas issues 1.3 Specified perils and force majeure 3.5.2 Relevant events 3.5 Environmental insurance 1.3.3 Contract conditions 1.1.1.1.4 When should I consider cover and what will it cost? 2.1 Introduction 1.6 Existing buildings 1.3.1 A surveyor’s guide to professional indemnity (PI) insurance 2.1 Where and how is the cover obtained? 2.3.Contents RICS guidance notes 1 Introduction 1.12 Unexpected archaeology discovery insurance 2 Insurances personal to members 2.2 What type of company should be purchasing D&O cover? 2.5.1 What is D&O exactly and who is covered? 2.4 Obtaining terms for a D&O policy 2.8 Non-negligence insurance 1.1 Three important points 3.2 Professional indemnity insurance for project managers 2.10 Public liability (PL) insurance 1.3.5 Market trends 2.5.4 Extensions of time 3.3 What should I be looking out for to ensure I have adequate cover? 2.3 Directors’ and Officers’ (D&O) liability insurance 2.5.5.11 Surety bonds 1.1.3.4 Employers’ Liability (EL) insurance 1.1.5.1.5.5.5.2 What does PI Insurance do? 2.2 Rights and obligations of principal parties 1.7 Latent defects insurance 1.3 What is the right level of cover? 2.1 Consequential loss insurance for construction risks 3.5.1.2 Consequential loss 1.5 Measurement of liquidated and ascertained damages 1 2 2 3 3 3 4 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 8 9 11 11 14 14 14 15 15 15 16 17 17 17 18 18 19 19 |v CONSTRUCTION INSURANCE .3.5.

7 Legal challenges 3.2.3 Social security 3.3.1.4 Historical contamination 3.5 Relationship to material damage and public liability policies 3.3 Activities giving rise to loss 3.5 Summary of schemes Environmental insurances 3.1.2 Workplace legislation outside the UK 3.2 Environmental exposure 3.3 Insurance solutions 3.1. including assessment of indemnity period 3.3.1.3.2.2 Perils insured 3.4.7 Key issues 20 21 21 22 22 22 22 23 23 23 24 25 26 26 27 27 27 28 29 29 29 29 29 30 31 31 31 32 32 33 34 35 35 36 36 36 37 37 37 38 38 vi | CONSTRUCTION INSURANCE .1.6 Position under ICE contracts 3.4.1.2.3 3.5.12 Additional increase in cost of working cover 3.4 Defective design.3.4.16 Unusual consequential risks 3.13 Damage away from the site including prevention of access 3.3.6 Loss of rent and loss of use of sale proceeds.10 Additional overhead costs (sometimes referred to as ‘soft costs’) 3.1 History 3.8 Expediting costs (additional cost of working) 3.1 Environmental and underwriting information – understanding the risk 3.1.2 3.5.5 Defective design.6 LEG clauses 3.3 Additional cost of construction of unbuilt works 3. materials and workmanship clauses 3.1.5.4.5 Operational contamination JCT non-negligence insurance 3.2.1.5.15 Time excess 3.2.2.2.1.8 Key issues Employers’ liability insurance 3.4 Policy exclusions 3.17 Key issues Contractors’ all risks or contract works insurance 3.4 Compensation funded by insurance policies 3.1 The Employers’ Liability (Compulsory Insurance) Act 1969 3.9 Costs incurred in raising or extending loans 3.3.5 3.11 Higher cost of development finance 3.5.4.1. materials and workmanship 3.2 Joint Code of Practice on Fire Prevention 3.2.1.4 3.5.1 The cover 3.7 The developer’s choice as to basis of settlement 3.14 Damage at suppliers’ premises 3.5.

3 One sum insured for both contract works and the existing buildings 4.8 International bonds 3.3 Risk management and insurance 4.1.7.7.1 Extent of cover 3.8.8.7.1 Stage 1 – Risk identification 4.1 A word of warning 4.1 Types of bond 3.5 Key issues 4 Further guidance on construction insurance issues 4.2 Project insurance and property developer all risks policies 4.3.8.3 Identifying the risk of unexpected discovery 3.6.6.1 Implications for current cover on existing buildings 4.1 In the UK 38 38 38 38 39 40 40 40 40 40 40 41 41 41 41 42 41 42 42 42 43 43 44 45 45 45 45 46 46 46 46 46 47 48 48 48 48 49 49 49 49 | vii CONSTRUCTION INSURANCE .2 The problems with joint names insurance on existing buildings 4.9 Key issues 3.2 Stage 2 – Risk evaluation 4.2 Performance bonds 3.5 Key issues 4.3.7.4 Who should be covered? 3.7 The benefits 3.5 Maintenance bonds 3.3.6 Bonds and counter indemnities 3.4 Advance payment bonds 3.2.3 Stage 3 – Risk control and elimination 4.1.6.3 Retention bonds 3.6.3.4 Stage 4 – Risk transfer 4.7.1.5 Stage 5 – Risk monitoring 4.1.2 Risk management 3.2 The advantages of employer controlled insurance 4.7 Surety bonds 3.6 Key issues 3.7.3 Limits of liability 3.6.4 Potential cover requirements 3.5 Premium implications 3.7.8 Unexpected archaeological discovery insurance 3.4 Advantages of insuring existing buildings under a CAR policy 4.6 Public liability insurance 3.8.3.2 Restrictions in cover 3.8.7.1 The process 3.2.7.1 Insurance of existing buildings undergoing refurbishment or redevelopment 4.4.6.4 Statutory inspection of plant and machinery 4.1.3.

4.4.3 Protection of bank interests 4.6 Clearing up the misconceptions 5.9 Outside the UK 4.4.1 The cover in brief 5.7 Inspection service providers/the competent person 4.6 The Provision and Use of Work Equipment Regulations 1998 (PUWER) 4.5.2.2 The Lifting Operations and Lifting Equipment Regulations 1998 (LOLER) 4.8 Further information 49 50 50 50 50 50 51 51 51 51 52 52 54 54 55 55 55 56 60 60 61 62 62 62 63 66 66 viii | CONSTRUCTION INSURANCE .5 Third party interests and ‘joint names’ under construction policies 4.5 The Electricity at Work Regulations 1989 (EAW) 4.2.7 Key issues 5.2.2.1.1 The rationale for collateral warranties or third party rights 5.4.4.5.2.1 The means by which other interests are recorded 4.4.1 Introduction 5.4 The Control of Substances Hazardous to Health Regulations 2002 (COSHH) 4.4 Outside the UK 4.2 The cover in more detail 5.5 Some questions answered 5.2.5 Key issues 5 Latent defects insurances 5.2.2 The degree of protection afforded 4.2 Latent defects insurance and collateral warranties/third party rights 5.4.1.3 Is latent defects insurance a panacea for developers? 5.5.2.4.2 The drawbacks to reliance on collateral warranties and third party rights 5.4.8 Legal responsibility 4.5.4 Getting best value from the policy 5.3 The Pressure Systems Safety Regulations 2000 (PSSR) 4.5.

it does not follow that a member will be adjudged negligent if he or she has not followed the practices recommended in this guidance note. In the opinion of RICS. procedures which in the opinion of RICS meet a high standard of professional competence. members have the responsibility of deciding when it is appropriate to follow the guidance. they should do so only for good reason. On the other hand. They should. a member conforming to the practices recommended in this guidance note should have at least a partial defence to an allegation of negligence by virtue of having followed those practices. CONSTRUCTION INSURANCE |1 . these are intended to embody ‘best practice’. guidance notes are relevant to professional competence in that each surveyor should be up to date and should have informed him or herself of guidance notes within a reasonable time of their promulgation. the court is likely to take account of the contents of any relevant guidance notes published by RICS in deciding whether or not the surveyor has acted with reasonable competence. that is. If it is followed in an inappropriate case. In addition. However. however. In the opinion of the approving professional bodies this guidance note represents best practice. Members are not required to follow the advice and recommendations contained in the guidance note. However. Where procedures are recommended for specific professional tasks. the court may require them to explain why they decided not to adopt the recommended practice. When an allegation of professional negligence is made against a surveyor. It provides advice to members of RICS on aspects of the profession. where members depart from the good practice recommended in this guidance note. In the event of litigation. the member will not be exonerated merely because the recommendations were found in an RICS guidance note. It is for each individual chartered surveyor to decide on the appropriate procedure to follow in any professional task.RICS guidance notes This is a guidance note. note the following points.

just because a contract states that a particular insurance should be arranged by one party does not mean that that arrangement is necessarily best for everyone with an insurable interest in the works. the arrangement of material damage cover on the contract works by the contractor is not wise if the employer requires any form of consequential loss insurance It is the intention of these guidance notes to help readers find their way through the maze. Further. and often in adverse conditions. engineers and the lawyers.1 Introduction Introduction These guidance notes are written for project management surveyors. For example. To make matters worse the responsibility for arranging the insurances will usually rest with several different parties and. The insurance covers for any site will need to protect all parties against a range of possibilities that embrace material damage. as they do not necessarily deal with all the covers required or available to transfer risk. is no easy task. Pulling it all together to make sure any particular party has the protection it needs. with different ideas. A construction site has been described as a place that often brings together many people. The only other strong recommendation is that insurance should be taken seriously and consideration should be given to insurance covers early on in the procurement and construction process. consequential losses. third party liabilities stretching far into the future and even non-negligent liability. It is rather an obvious statement but it is essential that everyone seeking the protection of a policy should have its name shown as an insured in the schedule to the policy. Various types of insurance that may be required are introduced and some of the problems that can arise are explained. In many ways those responsible for the insurance requirements of such a site face a similar range of problems. building surveyors and all other property professionals who need a better understanding of the many classes of risk that are available under the general heading of ‘construction insurance’. in the hope that they can be avoided. whilst avoiding too much reliance on other parties’ insurances. be they JCT. the timescale involved and the financial arrangements.1 1. Insurance is a mystery to many people and construction insurance is probably one of the most complex classes of business there is. Make sure they are aware of all the parties involved and have an opportunity to comment on all 2 | CONSTRUCTION INSURANCE . arguably. NEC or FIDIC. We recommend that the notes are read in conjunction with the relevant contract conditions. who have never worked together before. There will be different interests to be protected and each party will have its own way of doing things and its own insurance advisers. Spend time helping them to understand the precise nature of the works being undertaken. to build something that has never been built before. quantity surveyors. Let the insurance professionals be part of the team. Otherwise they may find they have no valid claim. the insurance requirements of the contract conditions are not always helpful. alongside the architects.

There is then a greater possibility of securing adequate protection at the best price and with the minimum of inconvenience. However. overseas employers and others. 1.2 Rights and obligations of principal parties The principal parties to any development will depend on the nature of the development but. prospective purchasers. This may be unacceptable to lenders. Contracts and the relevant local laws govern the rights and obligations of the above participants. party wall and/or rights of light consultants and sometimes others). Undeveloped countries may have an insurance market made up of insurers that have low security ratings. earthquake in Japan or windstorm in parts of the USA. Whilst the risks faced may be similar. other governments and private developers in Europe tend to use FIDIC. stonework. the actual cover arranged will vary considerably according to the relative sophistication of local insurance markets and to the natural hazards in the area.3 Contract conditions Whilst the UK government has its own set of conditions. 1. project managers and/or employers’ agents.relevant documentation before it is signed off. if any. In the USA they also prefer an international version of NEC. could include funders. Insurer security may also be an issue. tenants. CONSTRUCTION INSURANCE |3 . Capacity may also be a problem as local insurers may not be able to write larger risks and additional capacity or reinsurance may have to be sought from global markets. mechanical and electrical engineers and often others such as specialist acoustic consultants). any limit specified does not act as a limit of liability. design consultants (architects. The main variants will depend on the legal and commercial frameworks within which each country’s construction industry operates. structural/civil engineers. The touchstone for these rights and obligations is usually the relevant contract. e. and so forth).g. wherever they are.g.4 Overseas issues As these guidance notes have been written in the UK it is inevitable that they have a UK bias. under which risk and responsibilities and rights are allocated between the various parties. 1. often London. and construction sites. The old colonial countries often use a hybrid version of FIDIC and an international version of NEC. for piling/ground works. non-design consultants (cost/quantity surveyors. guidance on when to consider each element of cover starts on page 4. To assist those readers who are responsible for arranging insurance in good time. a main contractor and a number of important subcontractors (e. apart from the developer. Whatever conditions are used it is rare for them to specify all the insurance that should really be arranged and it is also unlikely that any policy limits will be specified. NEC or FIDIC. main frame. face the same risks. M&E services. All other contracts used around the world are normally based on either JCT. the insurance requirements of contract conditions used throughout the world have much in common. However. cladding. planning supervisors.

They are available to any party involved in the construction process that could suffer a loss of revenue or profit of any nature if completion of a project is delayed by fire or any other insurable peril.5. The cover is effective during the period that the works are carried out until practical completion but is also effective during the agreed maintenance period. There may be an extension for retired directors. we recommend making a decision as to whether cover is required early on as this may influence whether the employer or the contractor is to place the contract works’ insurance. However. 1. a decision on whether it is to be arranged by the employer or the contractor ideally needs to be made before contracts are finalised.5. 1. most of the problems encountered overseas can be overcome. as explained above. See section 2. Particularly in the case of illness.3 for further details. Specialist advice may be necessary. 4 | CONSTRUCTION INSURANCE . 1. 1. 1.5.1 Contractors’ all risks insurance This is a physical damage all risks policy on the materials used in the construction works. Expensive mistakes can be avoided. However.4 Employers liability (EL) insurance An EL policy covers the legal liability of the employer for any illness. However. there is more time to find the best markets and less chance of duplicating covers or paying unnecessary premium. In this note more specific guidance is given for each class of business. the claim may not be made until many years after the illness or disease was caused so the insurance effectively remains live long after the period of insurance has expired. Cover should commence at the same time as the contract works and will continue until practical completion. most EL policies are issued on a ’causation’ basis.2 Consequential loss There is a wide range of consequential loss covers to suit different requirements. it may be difficult or even impossible for the employer or other parties to buy consequential loss cover if the contractor arranges the contract works’ insurance. costs or settlements (including defence costs) for which a director or officer is legally liable resulting from a claim made against them during the policy period for any act. EL insurance is always on an annual basis so it is divorced from specific projects.5. As the relevant guidance note explains.5 When the various insurance covers need to be considered and when each cover starts and finishes As a general rule the earlier that decisions are made about insurance. the better it is.3 Directors’ and officers’ (D&O) liability insurance Cover is provided under the D&O policy for awards of damages. error or omission whilst in their capacity as a director or officer of the company (whether committed prior to or during the policy period).With the exception of risks that are outside the scope of standard construction covers acceptable to insurers. This means that it is the policy in force at the time any event giving rise to a claim is caused that will have to meet the claim. injury or death suffered by their employees.

5. The defect may be caused by a failure of design workmanship or materials. this depends on all the information being available and therefore more usually the process takes place over two or more weeks.5. however.5. 1. It is worth considering the need for such cover as soon as the nature of the work being done is known. Ideally. In this case an early decision is required as this may influence contract conditions.6 Existing buildings If there are any existing buildings on site that are not being demolished. and which parties are to be protected. the contractor. The architect usually makes the decision. although the policy wording may automatically restrict or exclude elements of the normal cover depending on the nature and extent of the works. 1.8 Non-negligence insurance This cover is designed to cover existing buildings or neighbouring buildings (and consequential losses) that could be damaged by some of the hazardous activities that are inevitable in construction no matter how much care is taken. The insurance cover is site-specific for policy periods up to ten years on a ‘claims made’ basis. It can take as little two to three days from the date of proposal to the inception of cover. This is because the existence of the cover may impact on the fees being charged and the terms of appointment of those parties responsible for seeing any development through. usually 10 or 12 years. The actual cover does not commence before practical completion and continues for the agreed period thereafter.5. it may be beneficial to insure both an existing building and the contract works under one material damage policy with one sum insured. Cover will need to commence when work starts and continue until practical completion. the commencement of the policy should coincide with the start of those responsibilities so we recommend early consideration be given to insurance matters. even before the professionals are appointed. CONSTRUCTION INSURANCE |5 . However.7 Latent defects insurance The basic policy covers actual physical damage to a building (including the internal and external services) caused by inherent defects that originate in the ‘structural parts’ of the building. The owner of a site becomes responsible for the site from the date of purchase whereas a contractor is responsible as soon as they start work on it.5 Environmental insurance Environmental insurance can be used to cover historical conditions that manifest themselves during the period of insurance. with an automatic extended reporting period of three months to enable late claims to be notified. or existing conditions exacerbated by. they may remain insured under an existing policy for the duration of the works.1. is made at the conception stage. Although this class of business is dealt with at the end of this publication. In the case of a policy taken out by a contractor the cover will also include new conditions created by. 1. By then the activities likely to lead to a claim will have ceased. we recommend that a decision on whether or not it is to be taken out.

5. 6 | CONSTRUCTION INSURANCE . The policy may be annually renewable or project-specific. Issued by insurers. It is because of this that PI insurance is described as being on a ‘claims made’ basis. It is worth considering other bonds as and when required and the period of cover will last as long as the beneficiary is at risk of any default.1. The event giving rise to the claim may have occurred during the same period of insurance but is more likely to have occurred before (perhaps many years before). We recommend this element of cover be considered very early on in the procurement process. costs or settlements (including defence costs) for which the practice is legally liable resulting from a claim made against them during the policy period for any act. the actual cover does not commence until work starts on site and it will continue until practical completion and then beyond to the end of the defects or maintenance period.12 Unexpected archaeology discovery insurance No matter how much is known about the archaeological history of a site and how much investigation is done there is always the risk that unexpected remains will be found once works starts. It can prove valuable to consider performance bonds at an early stage in proceedings as they feature in the tendering process. 1. Standard PL policies are issued on an ‘occurrence’ basis which means that the policy in force at the time of the injury or damage will respond.8. Refer to ‘Key issues’ at the end of section 3. The period of insurance should commence when cover is first required and will need to continue until practical completion and then beyond to cover any relevant maintenance period. Cover is for matters notified to the insurers in the policy period.5.11 Surety bonds A surety bond is a financial guarantee that the contractual obligation of a principal will be fulfilled. This can have all sorts of financial consequences that can be insured.9 Professional indemnity (PI) insurance Cover is provided under PI policies for awards of damages.5. 1.10 Public liability (PL) insurance The standard cover will provide indemnity in respect of liability at law for damages or compensation arising from accidental injury to third parties (not employees) or accidental damage to their property arising in connection with the project. 1. However. error or omission arising out of the conduct of the business. as decisions made about who is to purchase what cover and in whose names should be reflected in the contract conditions. they are an alternative to bankers’ guarantees.5.

1 Where and how is the cover obtained? This is.2 2. although it can supply a list of brokers in your area. before you embark on any of these actions it would be wise to consider the following. both as a requirement of membership and to protect themselves in the event of allegations of wrongdoing being made against them. Alternatively you can approach an insurance company yourself and ask them for a quotation. Is the insurance broker I am talking to experienced in arranging PI insurance? PI insurance is a specialised area of expertise. or is he going through another intermediary? Many brokers will tell you that they can obtain a quotation from a Lloyd’s syndicate. However. especially if the broker you are dealing with is inexperienced in PI insurance. A full list of these can be found on the RICS website. the simplest of the queries to answer. this may lead to misunderstandings and/or incorrect or inadequate passing on of information on both sides. In this guidance note the cover itself is examined and advice is given on arranging a policy. CONSTRUCTION INSURANCE |7 . Does RICS approve the insurance company? RICS has compiled a list of approved insurers. or you can pick one from the phone book. Many brokers pass the enquiry onto one of these authorised brokers to obtain terms for them.1. The need is clear-cut. and many high street brokers either do not deal with this type of cover. RICS does not recommend any particular broker. Whilst RICS do not recommend any particular company all the names they supply will be experienced in arranging PI insurance for surveyors. who are a mix of Lloyd’s syndicates and insurance companies. As part of your duty to comply with RICS requirements. Quite often the brokers who are the most experienced in this area are not found on the local high street.1 Insurances personal to members A surveyor’s guide to professional indemnity (PI) insurance Any member of RICS will be aware of the need for PI insurance. but only certain authorised brokers can obtain figures directly from Lloyd’s. all of whom have agreed to provide a minimum level of cover to RICS members. or to contact RICS who will supply a list of experienced brokers in your area. 2. It is important to check that the Financial Services Authority regulates the broker selected. or deal with it so rarely that they are not experienced in the various nuances of the cover. You can approach any insurance broker and ask them to arrange PI cover for you. Before making any decisions regarding brokers or insurers it is a good idea to talk to other members to see if they can recommend a particular organisation. we recommend that you place your insurance with one of these approved insurers. Is the broker I have chosen arranging the cover direct with insurers. on the face of it.

as it often does.000 in total.500 of each and every claim but rising to £5. There will be a limit of indemnity shown in the policy and this should be on an each and every claim basis.2 What does PI insurance do? The policy wording should be on a civil liability basis. seem daunting as they do run to several pages.200. if there is protection for £1m for any one claim and the claimant successfully claims £900. and some of them are. The task is made easier if worked through systematically. amend if necessary. There is no limit to the number of claims that can be made in any one year of insurance. It is important not to be tempted to conceal any matters that might be felt detrimental to the proposal. which you are advised to check. 8 | CONSTRUCTION INSURANCE . are in addition to the amount of cover purchased. and can. Costs and expenses incurred by insurers in dealing with the claim. and any omitted information that would have influenced a decision made by insurers and that later comes to light. Not all questions will be relevant to everyone as certain sections of the form apply only to people carrying out certain disciplines. We recommend that you answer all their questions fully and completely as otherwise any quotation may not subsequently be valid. These forms follow a fairly standard format. insurance brokers find them just as daunting if they are unfamiliar with them. for example expert witness fees.Once a choice has been made it will be necessary to complete a proposal form. There will be a claims excess on the policy. solicitors fees. could mean that the policy does not respond to an otherwise legitimate claim. If the insured is VAT registered they may be asked to pay the VAT applicable to their costs and expenses and claim this back on their VAT return. in other words the amount of cover selected is the maximum amount that insurers will pay for any one single claim. so if insurers incur fees in defending a claim and no payment is made to a claimant the insured is not asked to pay the excess. neat and tidy form makes a favourable first impression and may save you some money. Insurance is a contract of utmost good faith. and will almost always be a higher amount for higher risk work. so there could be a policy where the excess is the first £1. as this is the information on which the underwriter will set the premium.000 and the costs to insurers in various fees. It is extremely important that forms are completed fully and legibly. Legally this is exactly the same as completing a proposal form. are another £300.1. This excess normally applies only to the actual claims payment. a well-completed. sign and send back to them. For example. This is the amount that the insured has to pay in the event of a claim. at first sight. Some companies will offer a quotation over the phone. Any company operating in this manner will usually send a written quotation and a full copy of the information given in the telephone call. This will vary from insurer to insurer. etc. If it is any consolation. Forms that are badly completed or illegible. which means that it covers claims from third parties for matters arising out of the conduct of the insured’s professional business.000 for each and every claim arising out of mortgage valuation work. If it is considered necessary to elaborate on certain aspects of the work then it is advisable to put extra information on separate sheets of paper. give a bad impression. 2.000 then they will pay £1. The insured does not have to have been negligent to have a successful claim made against them.

is also covered.000 each and every claim £500. This claims made basis means that it is imperative that continuous cover is maintained.000 and £200. such as for the local church or school. . It is very important that the full extent of activities is declared on the proposal form to ensure that everything done is fully covered. Some insurers do give wider cover than the minimum in certain areas. and we recommend that proposers always ask if the cover is the approved minimum or if it is wider and. even into retirement. Pro-bono work carried out on an individual basis.000 Cover required Cover required Cover required £250. adjudication and arbitration. Cover automatically extends to all partners/directors/LLP members and employees. in which areas. provided insurers have been told about it. On the other hand a large company doing mortgage valuation work on properties with a value of several million pounds would need to carry a much higher limit than the £1m minimum laid down by RICS. or as declared to insurers on the proposal form dated . This means that it is the policy in force at the time the claim is made or notified that deals with it. RICS and its approved insurers have agreed a policy wording that will be offered as a minimum by all approved insurers. Indeed.000 per annum dealing with low risk work. such as expert witness.The insured’s professional business will be defined in the policy as ‘work normally carried out by a member of RICS. these are minimum levels only and may not be appropriate for particular member’s circumstances. This is in direct contrast to virtually all other UK insurances. One thing to be aware of is that PI policies are almost invariably written on a ‘claims made’ basis. not the one that was in force when the work was done. A sole practitioner earning around £20. which are on an ‘occurrence basis’. planning and development (where there are no detailed plans) or land agriculture management would be happy at the minimum limit of £250. As mentioned previously. CONSTRUCTION INSURANCE |9 .000 each and every claim. It also includes personal appointments such as.3 What is the right level of cover? RICS has laid down minimum levels of cover for members to carry in order to be compliant with its requirements.000 Fees between £100. if so.1. . RICS require members to maintain cover for a minimum of six years from the date of cessation of any practice.000 Fees over £200. but not limited to. However. where the insurer at the time of the incident pays no matter when the claim is made or notified. The minimum levels are based on fee income bands and are as follows: Fees up to £100. quinquennial inspections (which are always an individual appointment).’. 2. The watchword for any insured is: ‘If in doubt always tell your insurers what you are doing’ – you cannot be wrong for giving as much information as possible.000 each and every claim £1m each and every claim The definition of fees excludes VAT and disbursements.

for example. or negligent valuation (under or over valuation). the contract needs to be of a size. One type of work that must be mentioned separately is anything connected with asbestos. CDM work (Construction. is survey and valuation work. Given that there are very high minimum premiums for this cover. a missed defect in the property). missing some asbestos lagging in a loft or similar). which will attract the highest premiums and claims excesses. Low risk work is quantity surveying. and attracting a fee of the size. and the potential cost of claims. property management.rics.e. RICS has arranged such a policy for its members. require anyone contracted to them to carry at least £5m any one claim. Commercial valuation work is a higher risk than residential as this leads to higher value claims. Medium risk work encompasses such things as estate agency (commercial and residential). loss assessing/adjusting. Experience has shown that this is the area that produces most claims. The exception to this is if the contract is of such a size that single project cover is attractive to underwriters. usually 12 years. This extra cost needs to be factored in when deciding the fee for such a contract. and their requirements are extremely stringent. whether commercial or residential. If a collateral warranty is required then this will mean that the higher cover has to be kept in place for a minimum period of time from practical completion.000 in the aggregate (meaning that all claims in a year cannot come to more than £250. The cost of insurance is directly related to fee income. auctioneering. again 10 | CONSTRUCTION INSURANCE . Valuations for matters such as probate. Most local authorities. This cover is designed to give indemnity purely for incidental asbestos exposure (i. and details can be found on the RICS website: www. agricultural disciplines and architectural work. The wording agreed between insurers and RICS limits cover for claims arising out of asbestos to £250. expert witness work.Some clients may insist on higher levels of cover. No insurer or broker can advise on the level of cover required as only the insured can assess their potential exposure. asset register. and in particular valuations for lending purposes. the level of cover and past claims experience.e. project management and project supervision and land surveying. most underwriters are not prepared to increase the cover just for one contract. or the more specialist areas such as milk and sheep quota valuations are not regarded as such high risk and do not attract such high premiums. The very highest risk work. Working with asbestos is a very specialist area and is regarded as such high-risk work that only a very few insurers offer the specialist cover needed. and insurers rank these from low risk through to high risk.000 in total) and it specifically excludes claims arising out of asbestos surveys. and has also produced more fraud claims. normally £25. it has to be done for all work. Surveying encompasses a range of disciplines. that justifies this level of premium. reflecting the risk involved in working with this material. Design and Management (Health and Safety) Regulations). divorce.000 upwards. As may be expected the premiums are also very expensive. the type of work done.org. From time to time a contract will come along where a higher limit of indemnity is required. be it a negligent survey (i. compulsory purchase. Unfortunately.

An error in the policy that is not noticed or that is not queried and corrected may affect cover in the event of a claim. the policy excess. local authorities and similar bodies have not purchased PI cover on the grounds that all work is internal (i. but usually they are appointed to larger contracts such as. or specific to an insured. you cannot claim against yourself). it is a specialist area written by some Lloyd’s underwriters. Finally. The documents received should comprise a full policy wording. etc. for example asbestos lagging or unmentioned subsidence or dry rot. comes to light the council could be sued by the purchaser for the cost of rectification. and a defect.2 Professional indemnity insurance for project managers The remaining paragraphs are devoted to construction project managers.000 any one claim for a sole practitioner with fees of around £50. and their duties may include: CONSTRUCTION INSURANCE | 11 .1. a schedule and any applicable endorsements. They are appointed by the client.bearing in mind the potential 12-year cover period. schools and hospitals. if the proposal form revealed a potential claim on a previous insurer then the new policy will exclude anything related to this as the previous insurers are already dealing with it. Endorsements can be either general updates to the policy wording that apply to everyone taking out such a policy. However. For example. as well as being asked for financial restitution for loss of rental income. hotels. Once cover has been arranged and paid for a policy document should be received within 30 days of inception of the cover. housing developments. The cost will vary according to your fee income and type of work carried out but starts from as little as £495 per annum for a limit of £250. mention must be made of surveyors working in the public sector.e. Such managers are responsible for co-ordinating the construction of building projects of various sizes. It is important that all the documents sent to you are read through immediately and if anything is incorrect or not understood it is worth querying straightaway. who is often. The schedule will show the amount of cover (limit of indemnity). the insured’s name and address. which are later sold to the occupiers (or others). If subcontractors are to be covered under the policy then there will be an endorsement noting them by name. Other typical endorsements will confirm that previous trading names used by the insured are still covered. if work is done for any outside agency then cover for this is needed. but not always. the developer. Very few insurers offer this cover. For example. 2. as the nature of their work requires special consideration. and it is worth remembering that even if the work is internal an independent third party could make a claim. factories. Traditionally.4 When should I consider cover and what will it cost? We recommend that you ensure adequate cover that conforms to RICS’s minimum requirements is in force before you carry out any work. but not limited to. the effective dates of the insurance and who to contact in the event that a potential claim needs to be reported. alternative accommodation. if a surveyor carries out condition surveys on council houses. 2. or will include work done overseas (the standard policy wording covers work in the UK only). office blocks.000 per annum doing low-risk work.

these are dealt with swiftly and efficiently. and the head lessee has sub-let several units. + supervision of the construction site itself and the direct site managers and sub-contractors. if the firm for which he is working is a non-regulated company he should ensure that: (a) the company has professional indemnity insurance. + keeping the client advised at all times so that if there are delays. However. + ensuring that building regulations. As mentioned earlier. + controlling payment to sub-contractors by way of valuation of completed works. many local authorities. governmental departments and the like do not carry professional indemnity insurance on the grounds that their work is internal and you cannot claim against yourself. Many construction project managers work in private organisations such as large construction and development companies. comes into contact with a vast number of external organisations and people. 12 | CONSTRUCTION INSURANCE . + estimation of costs and quantities of material needed. a contract on a new office block being built to let by the local council over-runs by six months due to the contractor failing to put sufficient labour resources on site. + planning constructions methods and procedures. and he comes to the project manager for recompense. + ensuring that the contract is completed on time and within budget. For example. but equally a good number are employed by government/local authority departments/housing associations. architect. etc. structural engineer and other sub-contractors needed to complete the contract. The pitfalls come for project managers who are employed by public sector employers. The council for whom the project manager works have already signed a lease on the building. The delay means that the head lessee is failing to receive rent for the period of the over-run. housing associations. + interpretation of plans. any and all of whom could make a claim against him if things go wrong. budget discrepancies. + co-ordination of the supply of labour and materials. engineers and other technical workers to ensure that design intentions are met.+ the appointment of the contractor. The project manager. Where the project manager is a direct employee of a private sector construction or development company then the professional indemnity insurance taken out by that firm should automatically cover these activities. however. standards and by-laws are enforced in building operations. or are self-employed. and (b) the project management activities have been fully declared to insurers and are indemnified. + controlling the preparation of costs estimates and other documentation for contract bids. + consultation with architects. + negotiation with building owners and sub-contractors where necessary. as he should have ensured that the contractor supplied sufficient labour to complete the contract on time.

the project manager is in charge of the building of a major new housing development. stating that the project manager should have ensured that any asbestos was identified and removed during the refurbishment process and he has therefore been negligent. even where he is a public sector employee where such cover is not normal. The final scenario is where the project manager is a public sector employee but is appointed by a private sector company. as he is giving advice or design for a fee and again professional indemnity insurance should be purchased to cover such claims. CONSTRUCTION INSURANCE | 13 . anyone outside the public sector employer. Or. i. Six months later it is discovered that there is harmful asbestos in the properties and everyone has to move into alternative accommodation while the asbestos is safely removed and replaced with a suitable material. such as new school. Under these circumstances the contractor/developer can make a claim against the project manager. and a fee is charged for this. some will be sold to private purchasers. Everything is successfully completed. The private purchasers all sue the local authority for their losses citing the failure of the project manager to identify the mine workings in the preliminary investigations of the site as the main cause of their loss. It is perfectly possible to arrange cover that limits claims to those emanating from an independent third party. but a few months later the occupants of the houses find that their properties are subsiding badly. The housing association come to the local authority for reimbursement of their outlay on safe removal and alternative accommodation costs. the project manager is in charge of a refurbishment project involving social housing. This can happen where a local authority or similar invite tenders from the private sector to carry out a project. new hospital etc. the local authority hand the properties over to a housing association and the tenants move in. These are. the housing development is finished on time.e. Investigation reveals that there are disused mine workings under the development site which are collapsing. of necessity. The local authority will retain some of this for social housing.Or. and the contractor/developer appointed has the services of the local authority project manager. Everything is completed on time. Because of the interaction of project manager and organisations/persons outside of the organisation for which he works it is essential that professional indemnity insurance is arranged. The houses become uninhabitable and unsellable and will eventually have to be demolished. only brief scenarios of the pitfalls for project managers.

3. 2. stock options backdating allegations and extradition proceedings have all highlighted the risks that directors face. error or omission in their capacity as a director or officer of the company. 2. This purchasing philosophy has changed radically over the years and now it would be extremely unusual for any UK listed company not to buy D&O. the cover provided by the D&O policy is for awards of damages. Further. This has resulted in many private companies also purchasing this cover as 14 | CONSTRUCTION INSURANCE . The Company Reform Bill and well-documented increases in DTI investigations.2 What type of company should be purchasing D&O cover? When D&O cover was first made available it was only the largest publicly listed companies who sought to purchase it. costs or settlements (including defence costs) for which a director or officer is legally liable resulting from a claim made against them during the policy period for any act.e. Retired directors are commonly also provided with an automatic six-year period to cover claims made against them for acts committed whilst they were a director or officer of the company in the event the policy is non-renewed (for whatever reason). The dramatic downturn in the economy starting in 2008 magnified these risks even further. In the notes below the cover is explained. Cover is provided for past. Such period should be provided for no additional cost and would apply from the date of such non-renewal. Unsurprisingly. D&O is also a ‘claims made’ cover (i. there are many other third parties that can look to bring actions. it then automatically provides protection for all directors and officers of any subsidiary companies on a global basis. which are arranged on an occurrence basis. Fines and penalties are typically excluded.3 Directors’ and officers’ liability (D&O) insurance Company directors on the boards of both publicly listed and private companies are becoming more wary than ever of their potential exposures to litigation. although the policy is usually taken out in the name of the holding company. only claims notified during the policy period are covered) as opposed to the large majority of insurances. It also provides protection for employees who are acting in a managerial capacity or who are named as a joint defendant in an action against a director or officer.2.1 What is D&O exactly and who is covered? In essence. It is also more common for prospective new board members to instruct their lawyers to undertake a thorough examination of a company’s D&O policy prior to accepting a role on a new board to ensure the cover provided is satisfactory. but the main beneficiaries of the policy are the individual directors and officers (as well as the company should they indemnify a director for such loss).3. present and future directors and officers. this has led to greater scrutiny of the cover provided by a companies’ D&O liability insurance to ensure that directors that are making decisions on behalf of the company are sufficiently protected should they be named in litigation arising from these roles. D&O cover is taken out in the company name. Although it is common for a high percentage of claims to be brought by shareholders.

2.standard.3.3 What should I be looking out for to ensure I have adequate cover? Care is needed because the breadth of coverage provided by D&O policies can vary enormously between insurance carriers. Insurers started being far more selective about the companies that they would be prepared to insure and companies in certain sectors have been affected more CONSTRUCTION INSURANCE | 15 . this time also saw early signs that the majority of these insurers were looking to reverse this softening in light of some significant losses sustained for their financial institutions clients. + transactions (cover will often cease if the company is sold or the majority of its shares sold). employees. + cover for pollution-related claims.5 Market trends The five years prior to 2009 saw a dramatic softening in premium rates in the London market for D&O insurance combined with a dramatic influx of insurers offering capacity to this product in light of the relatively benign claims environment in the UK during this period. Specific to the property/construction sector. 2. competitors. + automatic cover for new acquisitions (often restrictions for size/domicility of acquired company).3. co-venture partner companies and liquidators. An example of these third parties would be regulators/government bodies. + non-rescindable contract language. However. Such additional exposures are often not automatically covered as standard.4 Obtaining terms for a D&O policy In order to procure terms for a D&O policy for companies with less than £750m total assets it is possible to obtain terms with just the company registration number. customers. At the beginning of 2009 there were in the region of 35–40 insurers that could offer D&O cover in the London market and this has been a considerable factor in driving premiums for this product down. There are many differentiators that can have a substantial impact on the extent of cover provided. + public/private offerings of securities (these will often be excluded). The following are just a few of the coverage areas that can vary substantially between insurance policies: + definition of insured person. + insured v. 2.3. insured (claims by one insured person against another). We recommend that you ensure cover is provided under a company’s D&O policy for any wrongful acts committed by the directors and officers associated with such capital raisings that occur during the policy period. in the first quarter of 2009 several high-profile companies in this sector sought to shore up their respective balance sheets through significant rights issues. For companies larger than this a copy of the company’s latest report and accounts as well as a completed proposal form would be required.

We recommend that care is taken over ‘new’ wordings offered by insurers as these may contain onerous limitations in cover which if accepted could have serious implications for covered persons. if accepted by the broker/company.3.than others. the imposition of ‘insolvency exclusions’ on their renewal terms. have the potential to expose directors and officers to a significant un-insured risk. 2. This onerous limitation seeks to exclude any cover for the directors and officers for any wrongful acts arising out of or based upon the insured company becoming insolvent. 16 | CONSTRUCTION INSURANCE . It is important therefore in challenging market conditions that companies seek to partner with a broker that has both the depth of experience and resource to combat such pressures being imposed by the market. For example. Certain insurers also sought to use this opportunity to attempt to impose more restrictive policy conditions following several years of their policies offering continually greater breadth of cover. Given that this is when the directors would most likely seek to call upon the D&O policy (due to indemnification from the company unlikely to be available) this provision should be vehemently resisted at all times.6 Key issues Whenever market conditions are challenging it is far better to prepare a renewal strategy with a broker earlier than usual to ensure insurers are furnished with all information necessary to provide competitive renewal terms. The construction/property sector was targeted by many insurers for premium increases in light of the particularly tough trading conditions that companies in this sector experienced. Ensure also that suitable provisions are contained within the policy to make certain that in the event of a subscribing insurer becoming insolvent during the policy period the broker has arranged solutions to enable swift replacement of said insurer should this be required. It is worth ensuring that your broker provides latest information relating to the security credit ratings of each insurer quoting renewal terms.

making recovery of a genuine loss uncertain. If any party involved with the construction will require consequential loss cover of any kind it is very unlikely that any insurer will be willing to assist unless it also holds the material damage insurances on the contract works. Faced with the problems of changing contract conditions. that it can buy the contract works insurance more cheaply than the employer. In any case the contractor may prefer to arrange its own cover on the works so that it has control over any claims that arise. any employer could be forgiven for giving up the idea of arranging consequential loss cover. It is usually very difficult. arranging cover on the works and.1 Three important points There are three important points to be made at the outset. if the contract conditions call for the contractor to arrange insurance on the works. it may be impossible for the employer to arrange any consequential loss cover. possibly with some justification. If it is not correctly assessed there may be underinsurance or an unnecessarily high sum insured that results in far too much premium being paid. The focus is on the development of buildings that are to be let or sold but potential occupiers and others may also need to consider the implications of any delay and at the end some interesting variations on the usual theme are included. there is the possibility that the contractor will be entitled to an extension of time and will not be liable to pay any damages anyway.3 3. This is understandable and the contractor may also argue. paying more premium for the privilege. This is reasonable because it is only by the insurer controlling the settlement of the material damage claim that the size of the consequential loss can be minimised. which is that it is not good practice to rely on liquidated damages instead. The employer will then have to arrange its own cover on the contract works in order to secure that consequential loss protection. To avoid the possibility of the employer effectively paying enhanced premiums for such contract works cover it is worthwhile making clear to the contractor from the outset that the employer is paying for its own cover. Apart from the fact that the contractor may find it impossible to purchase insurance against liquidated damages. The consequential loss risk on a construction site is a high one as there are so many factors that could delay completion and then so many headings under which additional expense or actual loss of anticipated income could arise.1 Construction risk insurances Consequential loss insurance for construction risks Developers are used to carrying risk. this brings us to the second point. to persuade the contractor to reduce its price at a later date. The measurement of each potential loss can be a problem.1. The contract price quoted by the contractor should then reflect this. if not impossible. It is part and parcel of their business. However. possibly. 3. if this is the intention. Therefore. CONSTRUCTION INSURANCE | 17 . In this guidance note the potential losses and the measurement of them are considered.

For insurance purposes the principal force majeure perils include: fire and allied perils. manufacture or transportation of any of the goods or materials required for the works. storm. However. labour disputes. At one time it was possible to buy cover for the consequential losses flowing from late completion or permanent abandonment of a project following the occurrence of force majeure perils or restricted to ‘specified perils’ (howsoever 18 | CONSTRUCTION INSURANCE . bursting or overflowing of water tanks. 2 exceptionally adverse weather conditions. apparatus or pipes. lockouts. Section 6 of the Standard Form of Building Contract 2005 Edition deals with damages if the contractor fails to complete the works by the completion date. although.The final point is that a properly arranged insurance on consequential loss will more accurately reflect the employer’s loss than liquidated damages can and by arranging both contract works and consequential loss insurance with the same insurers there is the added advantage that the insurers will be looking for a quick resolution to the works claim in order to reduce the size of the consequential loss. 4 civil commotion. riot and civil commotion. local combination of workmen.1. radioactivity and pressure waves. 3. This may have premium implications but may be the best value for money. explosion. Contract conditions do vary and therefore the proposal that an extension of time may be available is not necessarily correct in every instance. by and large. aircraft and other aerial devices or articles dropped therefrom. The range and variety of building contracts is immense. 5 terrorism. Subject to certain conditions the contractor is obliged to compensate the employer to the extent of liquidated and ascertained damages at the rate specified in the contract. The excepted risks include. In that event the damages do not have to be paid. These ‘relevant events’ typically include the following: 1 force majeure. 3.1. lightning. earthquake. when considering property development work. strike or lock-out affecting any of the trades employed upon the works or any of the trades engaged in the preparation. tempest. if the delay is due to certain ‘relevant events’ an extension of time for completion of the building will be given. amongst other things. it is prudent to consider the nature of the risk exposure that developers can face. There is no definition of ‘force majeure’ perils in JCT contracts although they are usually specified in PFI contracts. one of the standard JCT forms will be utilised as a basis. strikes. 3 loss or damage occasioned by any one or more of the ‘specified perils’ (see below).2 Relevant events Before considering policy covers and providing some advice to avoid common pitfalls.3 Specified perils and force majeure The ‘specified perils’ are usually defined as: fire. change of law. order of any court enforcing a change of law and any other cause beyond the control of the contractor. flood. Where it is known that an employer is effecting a delay in start-up insurance the contractor may be able to agree a waiver of liquidated damages in circumstances where the insurance coverage is available. but excluding excepted risks.

for example. 3. possibly. Whilst every effort is made to set the level of damages at an appropriate level. Whilst it is not the subject of these notes. leading to ‘bursting or overflowing of water apparatus’. they may preclude the contractor from undertaking the development or. in addition. heave and. even if liquidated and ascertained damages can be applied to any delay scenario. it can be the case that on smaller projects it is difficult to reach agreement with the contractor involved for an appropriate level of damages.1.1. another avenue for shortfall and irrecoverable losses for the developer arises. or is likely to be. the possibility for the developer sustaining the loss is clear to be seen. Unfortunately. For example. alternatively. The contractor is obliged to give notice as soon as it becomes reasonably apparent that the progress of the works is being. The notice must give details of all material circumstances and state whether or not. Consequently. if set accurately. a situation could easily arise where a pipework joint was improperly made. even if the delay has been caused by an otherwise permitted event of delay. a traders’ dealing room where actual losses for delays may be truly significant.5 Measurement of liquidated and ascertained damages Equally. landslip. Leaving aside those clauses that deal with loss and expense caused by matters materially affecting regular progress of the works that may leave resultant loss and expense claims sitting firmly with the contractor. the imposition of such damages would adversely affect any tender submitted.specified in the policy document) but following some huge claims it appears that cover of such breadth is no longer available. One example of such a scenario would be the fit out of an existing office building to accommodate. This is because. other accidental damage. so that whilst a peril operated. The specified perils in a lease may be defined differently to above. developers should be aware of some differences with the Standard JCT Form of Management Contract (2005 Edition). subsidence. It is worth mentioning at this point that care is needed with the term ‘specified perils’.25 of the JCT form is also relevant as it deals with applications for extensions of time. malicious damage. impact. the reality of the impact upon the developer’s financial position can often be beyond the level of liquidated and ascertained damages set during tender negotiations. the event is a ‘relevant event’. The case for the developer undertaking a careful risk analysis and then securing appropriate insurances for potential exposure is clear. 3. Under this. the full consequences are not often appreciated until a loss is sustained. in the contractor’s opinion. the certifying officer will not consider such an extension to the extent that the delay arises from any omission on the part of either the management or works contractors.4 Extensions of time Clause 2. Not all of the remaining exposures can be insured so the developer has a significant amount of risk itself. Equally. workmanship error could deny the management or trade contractors being absolved from liquidated and ascertained damages. delayed. Reference to ‘all risks of specified perils’ will almost certainly include not just those mentioned above but. In addition clause 22D has been deleted from the 2005 JCT form. developers often carry more CONSTRUCTION INSURANCE | 19 . The effect of the relevant events is that the contractor is not responsible to the developer for the consequences of delays in completion that are outside its control.

including assessment of indemnity period Loss of rent is considered first. This figure would be the sum insured. In other words. a loss of £2. The developers’ real loss may continue for more than three years so a longer indemnity period may be chosen.7m is suffered. Assessment of indemnity period The indemnity period is defined in the policy and. If a developer is unaware whether the completed building is to be sold or let it is usual to calculate a sum insured for both possibilities and insure for the higher 20 | CONSTRUCTION INSURANCE . to invest in another project. even though insurance cover can be purchased. They lose the use of those funds that they could have put to good purpose. there may be other factors to consider. or merely to put in a deposit account in the bank to earn interest. Suppose that a complete rebuild would take three years taking into account all factors. In practice such a loss is unlikely. However. If they do the premium will be higher and the developers would still have to prove any loss is entirely due to the original damage. insurers may not be willing to grant cover for the longer period. i. For example if a prospective and definite tenant is lost as a result of the delay it may be that another tenant cannot be found when the building is finally ready. Loss of use of sale proceeds If the developers intend to sell the development on completion and the sale is delayed in consequence of damage. rent will begin to be paid three years later than originally planned. The basis of settlement is the loss of that income and the sum insured should be calculated on the basis of the anticipated annual rent multiplied by the indemnity period in years. For example. broadly speaking. completion of the development may be delayed. the developers no longer receive the sale price on the date expected. the cost of new projects and the interest lost on investing the balance.1. Of course. For a developer intending to let. If insured damage occurs.6 Loss of rent and loss of use of sale proceeds.e. Settlement of any claim for loss of use of sale proceeds would be based on a combination of the continuing cost of financing existing loans. The highest loss would arise if the whole of the sale proceeds were due to be invested immediately in the purchase of another site and the completion of the first site was delayed for the maximum indemnity period. An examination of the potential losses that may be insured begins below. to pay back a loan. if the sale proceeds would have been £10m and that sum of money has to be borrowed at 9% interest for three years whilst the insured development is rebuilt. another tenant may be found in time but at a lower rent than the original would have paid. The minimum indemnity period is therefore three years and that is the number of years’ rent the developer could expect to recover from insurers if the worst happened. the first consideration is how long would it take to repair damage to the development occurring at the worst possible time? This will usually mean contemplating a total loss just before completion.risk than is necessary by failing to insure at all or failing to insure adequately. the lessee cannot move in on the date expected and the developer suffers a loss of rental income for the period of the delay. it should represent the maximum period after a loss that the insured’s business will be affected in consequence of insured damage. 3. Alternatively.

The proposed wording should be examined. Rather than rely upon liquidated damages from the contractor. 3. £3m would have been used to purchase another site for future development and the balance of £2m would have been banked in their deposit account.5% interest for 2 years = £0.58m There is also the possibility that any delay in completion may result in a lower sale price because of an economic downturn during the period of delay. These wordings allow the insured to select the basis of settlement at the time of the damage in the light of circumstances at that time. which it is difficult. the insurance should provide an adequate indemnity. Such protection will include the specified perils but will not. based on the figures of £10m and 9% just mentioned.8 Expediting costs (additional cost of working) Cover under the above item should also include provision for expediting costs (over and above any amount recoverable under the construction insurance covering the contract works).5%.7 The developers’ choice as to basis of settlement The best market wordings for developers’ consequential loss assume that at the time the insurance is taken out the insured does not know for certain if the development will be sold or leased. The developers then sell the building at last and receive their £10m. cover all the circumstances in which those provisions would require payment by the contractor. 3. 3. say.amount. However. to obtain insurance for. No separate sum insured for this element of the risk is usually necessary because it is included within the cover under the loss of rent item. The losses detailed above clearly fall on the developer. that they would have earned on the £2m on deposit is lost. In simple terms the measure of this loss is: £8m at 9% interest for 2 years = £1. i.1. say. it was 50% occupied. They were going to use £5m of this money to pay back an existing loan of £5m on that development. This is similar to the so-called ‘economic limit’ under other business interruption policies. The interest of. Provided the developers’ insurance advisers are given sufficient information to measure the potential loss properly and provided they understand the workings of the policy being purchased.1. Assume that the developers expected to receive £10m on the sale of a completed development on 1 January 2010. The other advantage of the flexibility of such wordings is that the claim may be based on loss of rent for the initial period and loss of use of sale proceeds if the building was due to be sold when. An example of a ‘loss of use of sales proceeds’ claim follows. The sum insured has to be based on the higher of the two figures mentioned earlier.e. the amount recoverable is limited to what is reasonable compared to the saving produced on the claim for loss of rent or loss of use of sale proceeds. In practice this means that insurers will be reluctant to pay for expenditure that did not produce at least a corresponding saving on another part of the claim. the annual rent or the annual cost of borrowing the sale proceeds. it would seem sensible for the developers to buy protection themselves on an all risks basis. if not impossible.14m Total claim = £1. Assume that the sale of the damaged building is delayed two years until 1 January 2012 whilst the damage is reinstated. CONSTRUCTION INSURANCE | 21 . Instead they have to continue to borrow the £5m at 9% and they borrow another £3m also at 9% interest per annum. of course. in both cases multiplied by the indemnity period.44m £2m at 3.

3. These may be included within the basic cover outlined above without the need for a separate sum insured. To the extent that these will be incurred in order to diminish a loss of rent claim they may be recoverable under expediting costs.1. the developer may be able to borrow.12 Additional increase in cost of working cover Under the heading of ‘expediting costs’ it was explained that the reasonable cost of expediting completion of the works is covered under the basic policy but the amount that may be recovered is limited by the so-called economic limit. say. There may be a requirement for the insured to contribute a percentage to each claim. Underwriters are entitled to extra premium for this. They are sometimes insured by a separate item. The problem is that many policies do not provide the cover at all. Each case has to be examined separately and a post-loss situation considered. These two consequential losses should be insured against. 3. Even if more money can be borrowed against the new development the cost of finalising the project will be higher. The policy wording should provide for this under the basic loss of rent/loss of use of sale proceeds cover. selling and legal costs. 3. When the development is finished it may be the developer’s intention to borrow more money against the completed development thus releasing some of its own funds towards a further new development.11 Higher cost of development finance Many covers that are arranged ignore the fact that development finance can cost more than completed building finance and the fact that it is usually possible to borrow more against a completed building than it is against a planned development. The consequences of this are twofold. the rate of interest on that loan may go down to reflect the lower risk that the financier is running. If the original project is delayed.1. In the first place if a developer borrows to finance a new development then. No separate sum insured should need to be calculated and there is not usually anything in the policy that would restrict the amount recoverable.1. when it is completed and let. If completion and letting is delayed the developer not only loses the rent but also loses the benefit of the lower rate of interest. 70% of the cost of a development and then use its own funds to finance the other 30%. unless there is a separate sum insured.1. We recommend that the proposed policy wording is examined to make sure. However. the developer cannot do this. The developer should consider the possibility of a loss under this heading and ensure cover is in force if necessary.10 Additional overhead costs (sometimes referred to as ‘soft costs’) Any delay in completion of a letting or sale may involve an increase in marketing.3. The expenditure 22 | CONSTRUCTION INSURANCE .9 Costs incurred in raising or extending loans The legal and other costs incurred in continuing existing loans or raising new ones as a result of delay by insured damage should also be covered. insurers’ overall liability will be limited to the sum insured on the basic cover for loss of rent or loss of use of sale proceeds. There may be circumstances in which an insured wishes to spend money or may incur costs over and above those they feel could be justified under expediting costs. Secondly. No specific premium should be charged. leasing. It is possible to obtain cover over and above this to further expedite the works by means of an additional item although sometimes the matter is dealt with by means of an extension with an inner limit.

accidents on site. not all damage by an insured peril will necessarily delay completion. will apply. if there is damage by CONSTRUCTION INSURANCE | 23 . 3. This may be cheaper. an inner limit. £1m it is better to name the supplier or suppliers in the policy with a specific limit or limits. an additional premium will be charged. the longer the period of the contract. This is the period immediately after a loss during which insurers will not pay for the consequential losses described above. Cover can be purchased for delays as a result of damage to all suppliers to the development not named on the policy. boilers. say. Some large losses have been incurred following damage at suppliers’ premises where the free cover given has not been enough. The reason for the time excess illustrates why construction consequential loss covers are difficult to write and why some insurers do not willingly write the cover at all. It may be possible for the developer to change the sequence of working so that any potential delay is negated or to catch up with the programme of work anyway.under this cover is limited to what is necessary and reasonable without reference to any corresponding saving in the indemnity that would otherwise be payable for loss of rent or loss of use of sale proceeds. usually a low one.1. difficulties in obtaining supplies. the ability to make extra payments to speed up completion may enable them to avoid losses in the future that would fall outside the indemnity period and would therefore not be recoverable from insurers. labour shortages. 3. This could be damage to contractors’ offices. The excess should apply to the total of all delays caused by insured perils and not individually to each loss. bad weather. We recommend that developers consider this cover. Construction projects are subject to delays for all sorts of reasons. Whatever the circumstances. However. Generally speaking. The ability to make a claim under expediting costs might give them useful options in the event of a loss. This can be very expensive and where the anticipated loss from particular suppliers could exceed. the range of free covers can vary.14 Damage at suppliers’ premises The basic cover will sometimes include cover for delays incurred following damage at the premises of suppliers of materials to be used in the contract works. the longer the time excess will be. If underwriters require a separate sum insured. 3. windows and cladding. etc. vehicles or plant in transit or whilst stored and damage to other phases of development. Some policies may include cover for denial of access and/or failure of utilities although care is needed to ensure whether losses are subject to only a 24-hour excess or the much higher time excess imposed by underwriters referred to below. The most serious losses are likely to occur if there is a delay in the arrival of crucial or bespoke supplies such as lifts. When there are several buildings the time excess may be applied separately to each one. Clearly the maximum time excess should be 24 hours if the cover is to be worthwhile.1.1. For example. materials or equipment stored off site. However.13 Damage away from the site including prevention of access Most insurers’ policies include free extensions of cover under the advance profits covers to pick up losses that result from damage off site. The minimum time excess is usually 14 days but expect to see 28 days or more. Further.15 Time excess Almost invariably cover will be subject to a time excess that varies according to the length of the contract.

the compensation sought has to be based on indemnity rather than some arbitrary amount plucked from the air and the precise measurement of that loss can be difficult to calculate let alone define in a policy wording. a letter from the lessee explaining that the lease was not going to be taken up because of the delay in completion of the site next door would have been hard for insurers to counter. The reason was that the lessee did not want to move in if construction work. Further. Project managers. However. if not impossible at times. but the trigger was damage at the site next door rather than the insured’s own premises. was still going on next door. If the new building was ready on schedule the bank would be able to terminate the two existing leases at no cost to them. prospective tenants and others may stand to make money from a development if it is completed on time or to suffer a financial loss if it is not. adequate site records and data works against the developers in substantiating a claim. investors. or even the absence of. The first development had already been let but there was concern that the lessee might exercise a right not to take up the lease if the completion of the site next door was delayed beyond a certain date. backed up by real substantiated records where possible. Sometimes they are quite surprised that there is an insurance solution. but different funders. understandably.1.16 Unusual consequential risks The above paragraphs have covered pretty thoroughly the consequential risks faced by a developer when damage occurs on site. to the insured damage. Generally speaking there has to be physical damage as delays by strikes or other non-damage perils are difficult to insure against. They 2 24 | CONSTRUCTION INSURANCE . 1 Two developments with the same project managers.an insured peril and the final completion date is subsequently delayed the developer will. If completion of the new premises was delayed the bank might have been obliged to renew the two leases and then incur penalties when they finally moved out. were being built on adjoining sites. any kind of consequential loss can be covered by anyone who stands to suffer a loss as a result of damage by an insurable peril. A bank planned to move from two existing leased properties into new premises being built. Often the poor quality of. But they are not the only party on site that may benefit from such insurance. In principle. or all of it. Early advice of a claim is essential. want to allocate a fair portion of the delay. with the attendant noise. dust and inconvenience. It may be difficult to prove the loss at the best of times if there have been other delays before or after the damage. The basis of settlement was loss of rent. Attempts to track the progress of a development against the programme of works are not as straightforward or successful as everyone would like. The time excess serves two purposes. Cover was agreed for loss of rent at the first development following damage by an insured peril next door if such damage led directly to a delay in completion and a decision by the lessees to invoke their right not to take up the lease. although insurers may require this monitoring to be done. Below are some examples of what has been requested in the past. It eliminates small claims and assists the insurer’s hand in negotiations. It was pointed out to the insured that proof of cause of loss might be difficult. In the worst scenario they might have been left paying the rent on the two properties until the leases finally expired many years later. 3.

CONSTRUCTION INSURANCE | 25 . 2 Consequential loss insurance is a more certain route to recovery than reliance on liquidated damages. This had been agreed in advance based on an agreed formula. 3. The project manager’s ‘profit’ from the deal was to be calculated according to a formula that meant that the sooner the 50% letting was achieved the more money he made. would therefore have affected that ‘profit’ adversely. In order to secure adequate insurance cover at a competitive price we recommend that those arranging the policy have a full understanding of how the development is to be financed. Delay by fire. Cover for payment of this loss as a capital sum was agreed and the formula used in the policy wording as the basis of settlement. their lawyers and the managing agents in order to do this. would have adversely affected the purchase price.1. etc.17 Key issues 1 Any employer seeking consequential loss insurance will be better off arranging its own contract works cover. The concept was simple but in practice an accurate assessment of the bank’s potential loss had to take into account a lot of factors. Their replacement by other tenants with lesser covenant strength. It needed the full cooperation of the client.or over-insurance. There was concern that severe damage and failure to finish the development by an agreed date would cause the lessees to trigger an opt-out provision. The challenge was to calculate the sum insured correctly and present insurers with an accurate assessment of the risk so that they could arrive at an equitable premium. A project manager was responsible for the construction and letting of a development and when 50% of the premises were let the developer was selling the building to an insurance company for their property investment portfolio. Appropriate insurance was purchased. albeit at an equal rent.3 4 were able to buy insurance that would cover their additional costs if such a delay occurred. the programming of the works and the financial implications of any delay. A developer was building a shopping arcade most of which was pre-let to top quality tenants whose covenant strength was reflected in the purchase price agreed by a pension fund. In the worst instance the formula would have reduced the agreed purchase price by several hundred thousand pounds. An accurate assessment of the sum insured is essential to avoid under. 3 Consequential loss insurance will be a more accurate reflection of the employer’s loss than liquidated damages.

In both cases the policy will need to be extended to provide protection in respect of damage by terrorists. The policy will normally respond to any physical loss or damage unless the cause is specifically excluded so the term ‘all risks’ whilst commonly used. It is normal for the project contract to stipulate who will provide this cover. + automatic reinstatement of the policy limit following a loss. as defined in the contract.g. Nevertheless the cover is very wide and embraces protection against fire. + debris removal. The term is sometimes used to refer to both the material damage and liability covers required by a contractor.2 Contractors’ all risks or contract works insurance There are several terms used in the insurance world that mean different things to different people and one of these is contractors’ all risks (CAR) insurance. All policies will have an excess that will be deducted from any claim settlement. Anyone using the term. defect period and description of the works. burst pipes. misleading.3. + discovery of munitions of war. The following extensions of cover should be included in the policy but may be subject to inner limits that may be amended by negotiation with insurers prior to the project starting: + professional fees.g. storm. 3. 26 | CONSTRUCTION INSURANCE . should make their intention clear. earthquake. However. impact and other accidental damage.1 The cover A CAR policy responds when the works being constructed. e. On occasions insurers will apply more than one excess under a policy for specific losses. The policy should always be in the joint names of the employer and contractor although the contract may stipulate that other parties. construction period. are also named in the policy. so as to avoid any ambiguity in interpretation. is to some extent. explosion. e. should responsibility fall upon the employer then cover would normally be under a policy arranged specifically for that project.2. In either case it is imperative to fully understand what exclusions apply or which perils are listed to ensure that the cover gives sufficient protection to the employer and the contractor. policies can be issued covering loss or damage by particular and specified perils.g. Most insurance practitioners would regard CAR as referring only to the material damage cover on the contract works unless the real intention was obvious from the rest of the text. fire. However. If it were the contractor then it would be normal for them to have an annual policy covering all their contracts up to a specific limit. malicious damage. flood. In this guidance note only the material damage cover is examined. financiers. + free issue materials. storm. riot. When arranging the cover. flood. flood claims may have a higher excess than any other claim where the risk of flooding warrants this. e. we recommend that care be taken in identifying the correct contract value. aircraft. whether verbally or in writing. are damaged by an insured peril and require replacing and/or repairing.

3.+ inflation clause.2 Joint Code of Practice on Fire Prevention Insurers themselves may impose certain conditions on the employer/ contractor in respect of specific requirements. by the time that work is completed the cost of building the upper four floors may have increased as a result of inflation. repairing or rectifying any part of the works that are in themselves defective in either design. + public authority clause.2. 3. Suppose that an eight-storey office block is being constructed but it is badly damaged by fire after only four storeys have been completed.3 Additional cost of construction of unbuilt works There are two elements to this cover as explained below. materials and workmanship It will often be the case that the ‘material damage’ covers available under either an annual or project-specific contract works policy will be subject to a standard defects exclusion.4 Defective design. The basic cover of loss or damage to the works can also be extended to include the following additional costs. 3. which must reflect the worst possible scenario and the insured’s estimate of future inflation on building costs. plan. Care is needed in assessing the sum insured. CONSTRUCTION INSURANCE | 27 . + plans and documents.g. It is possible to insure this risk but. 1. materials or workmanship. This exclusion can only be properly understood if we consider the wordings of the exclusions used in the contract works policy and the practical effect of the exclusions in use. 2. However. Out of sequence working Successful delivery on time of a development depends on all site activities running to time in the right sequence. Expect insurers to apply the Code and seek compliance with its terms. This was introduced by the Fire Protection Association after full consultation with interested parties and has proved successful in combating the huge losses being suffered by insurers. specification.2. The effect of this will depend upon the precise exclusion used but a typical ‘DE3’ wording (see below) will exclude the cost of replacing. The contract works material damage cover will pay for the cost of reinstating the damage (including any inflationary aspects). Care is needed as the breadth of cover offered by insurers is restricted by standard exclusions.2. Inflation only The need for this cover is best illustrated by an example. e. Underwriters normally require the insured to bear a proportion of each claim. Insurance brokers specialising in this class will also have their own list of extensions that they will negotiate with insurers. If this sequence is thrown out by damage the cost of development can increase substantially. the insured will almost certainly have to bear a proportion of each loss subject to a minimum contribution. compliance with the Joint Code of Practice on the Prevention from Fire on Construction Sites and Buildings Undergoing Renovation. again.

The actual wordings are set out below and the practical effects are below that. It is DE3 that is standard to most policies. Any variation on this will save premium in the case of DE1 or DE2 or cost more for DE4 or DE5 (see below). 3.2.5 Defective design, materials and workmanship clauses 1. Outright defect exclusion (DE1) ‘This policy excludes all loss of or damage to the property insured due to defective design, plan, specification, materials or workmanship.’ 2. Extended defective condition exclusion (DE2) ‘This policy excludes the costs necessary to replace, repair or rectify any of the property insured which is in a defective condition due to a defect in design, plan, specification, materials or workmanship, or which relies for its support or stability on any of the remainder of the property insured which is in itself in a defective condition. This exclusion shall not apply to the remainder of the property insured which is free of such defective condition but is damaged as a consequence of such defect.’ 3. Limited defective condition exclusion (DE3) ‘This policy excludes the costs necessary to replace, repair or rectify any of the property insured which is in a defective condition due to a defect in design, plan, specification, materials or workmanship, but this exclusion shall not apply to the remainder of the property insured which is free of such defective condition but is damaged as a consequence of such defect.’ 4. Defective part exclusion (DE4) ‘This policy excludes the costs necessary to replace, repair or rectify any component part or individual item of the property insured which is defective in design, plan, specification, materials or workmanship, but this exclusion shall not apply to other parts or items of the property insured unintentionally damaged as a consequence of such defect.’ 5. Design improvement exclusion (DE5) ‘This policy excludes the costs necessary to replace, repair or rectify any defect in design, plan, specification, materials or workmanship, but should unintended damage result from such a defect, this exclusion shall be limited to the additional costs of improvements to the original design, plan or specification.’ Example of the application of the aforementioned exclusions Imagine a site with a steel-framed building. The perimeter boundary wall around the site and the roof has been completed. The cladding has been partially completed. The bolts used in the construction of the steel framework prove to be inadequate and the whole structure collapses, damaging everything. The various defect exclusions would pay as follows: + DE1 – all the damage would be excluded; + DE2 – all damaged items would be excluded except the perimeter wall; + DE3 – the steel framework would be excluded. The roof, cladding and perimeter wall would be paid for; 28 | CONSTRUCTION INSURANCE

+ DE4 – only the nuts and bolts would be excluded; + DE5 – all damage would be paid for. The improvement costs would be excluded. 3.2.6 LEG clauses The London Engineering Group (LEG) has developed their own version of these clauses known as LEG 1⁄2/3 which effectively mirror DE1, DE3 and DE5 above. 3.2.7 Legal challenges Various legal challenges are ongoing as to the effectiveness of these clauses and therefore whilst the description of coverage above may not reflect the current or future legal interpretation. As with all contractual documentation, we recommend you seek professional advice. 3.2.8 Key issues If the contractor arranges this cover it restricts or even removes the ability of the employer to purchase any consequential loss covers required.

3.3

Employers’ liability insurance
Throughout most of the developed world, employers are legally responsible for providing safe working conditions for their employees and they also need to ensure compensation will be available if the employee suffers death, injury or disease. In this guidance note the implications for employers are explained. In the UK all employers, other than a few specified public bodies and, since 2004, sole traders, are required by the law to take out an employers’ liability (EL), insurance policy. An EL policy covers the legal liability of the employer for any illness, injury or death suffered by their employees.

3.3.1

The Employers’ Liability (Compulsory Insurance) Act 1969 EL insurance was made compulsory under the Employers’ Liability (Compulsory Insurance) Act 1969. In this way, the government ensured that compensation would be available to employees who suffer illness or an accident in the workplace. + It’s not just accidents. Employees can contract work-related diseases – from dermatitis through contact with certain chemicals to mesothelioma through inhaling asbestos fibres. + It’s not just current employees. Employees who moved on many years ago may have contracted a work-related disease that has only just come to light and been diagnosed. + It’s not just employees under a contract of service or apprenticeship. The courts will define an ‘Employee’ to be someone working under the employer’s control so it is worthwhile making sure that the definition of an ‘Employee’ is as wide as possible – and that the same definition is used on the employer’s public liability policy. In that way, injury or damage caused by ‘an employee’, for which the employer is vicariously liable, will be insured. + It’s not just head office. It doesn’t matter where the accident happened or the illness was caused – whether it was on site or off site: if the employer is
CONSTRUCTION INSURANCE

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legally liable, the EL policy should apply. The only exception is drivers suffering a motor accident whilst at work. EU harmonisation means that compensation for work-related motor accidents is now covered under a motor policy – another class of insurance made compulsory by law to ensure compensation is available. + It’s not just UK companies. Foreign companies sending their employees here need to purchase the cover if they have a ‘place of business’ in the UK. Such a place could be a building site or just a nameplate. Indeed, EL policies are unique in that insurers are severely restricted by law in the exclusions and conditions they can apply. Trade exclusions can be applied, e.g. work above a certain height or below a certain depth, work with explosives or asbestos, demolition activities or work offshore. However, these exclusions are designed to make sure the employer has shared all the information about the risk with his insurer and the correct premium is charged for hazardous activities. And, if the employer is working offshore, for example, he must take out EL cover for such work, otherwise he is breaking the law. The Employers’ Liability (Compulsory Insurance) Act 1969 ensures that the employer has at least a minimum level of insurance cover against any such claims. The statutory minimum amount is currently £5m any one occurrence although, in practice, most insurers offer cover of at least £10m. However, with court awards for serious injury to just one person exceeding £10m in the UK, employers should look carefully at their risk exposures and consider whether higher limits are needed. Particular attention should be given to the maximum number of employees on site at any one time. Further information regarding cover in the UK may be obtained from the Health and Safety Executive website (www.hse.gov.uk/pubns/hse40.pdf). This includes advice on what is required for employees working abroad and the categories of employers that need covering. Similar government websites may be found in other countries and we recommend that these are consulted for the latest requirements. But, just because an employee is injured at work, it doesn’t necessarily follow that the employer will have to pay compensation. The employer has to be legally liable for the illness or injury: in essence this will usually involve some form of negligence on the part of the employer. This type of legal system is ‘fault-based’. 3.3.2 Workplace legislation outside the UK The UK and the Republic of Ireland are unusual in having a fault-based system of unlimited damages in tort and/or breach of statutory duty as the remedy for claimants suing for injuries sustained in the course of their employment. Most other industrialised nations, where compensation is available to those injured or contracting disease as a result of their employment, have ‘no-fault’ systems, usually with pre-determined (liquidated) damages according to the nature and extent of such injury or disease. Most of these allow for regular amounts to be paid during the period of disability rather than a lump sum. Some of these schemes are funded by the state, others are financed by private insurance purchased by the employer. In the following paragraphs a few of the schemes are explained and the differences between these systems and the system used in the UK and Republic of Ireland are examined. 30 | CONSTRUCTION INSURANCE

of amounts paid by the government from negligent or grossly negligent employers. but where the insurance is provided by policies purchased by the employer from a commercial insurer. and + many European countries – such as France. and Australia are examples of territories that have workers’ compensation statutes that provide scale benefits as outlined above. and provides uncertain results in the form of a single monetary payment. Spain and Germany – operate similar systems with a scale of benefits according to the severity of the disability. The cost is similar to no fault. the differences between these systems are as follows: + The fault-based system requires the claimant to be able to prove their case and afford to mount the action. It costs the government nothing to administer. + The no-fault-based system with private insurance provides certainty to the injured party.5 Summary of schemes To conclude this brief outline. Italy and Spain are two examples of this. It is a choice of government policy whether the scheme is funded out of general taxation or from specific employment taxes.3. and. can be tailored to social needs and is a lot more expensive for the employer to buy than cover under a fault-based system. but suits do not arise because there is no point. each of the states of the USA. Some of these schemes allow recovery.3.3 Social security The most common system is government-funded social security. 3. in whole or in part.4 Compensation funded by insurance policies Belgium. 3. CONSTRUCTION INSURANCE | 31 . it is mainly a question of who pays. provides the government with a prospect of recovery of social security payments and hospitalisation costs from the compensator.3.3. These systems do not proscribe civil action by the injured party. + The social security schemes share the same benefits for the employee as the no-fault scheme. Italy. workers’ comp or WCA. These schemes are commonly known as workers’ compensation. For example: + New Zealand operates a scheme that provides benefits for all injury/disease regardless of cause and precludes the injured/affected from suing in New Zealand courts. Denmark. It is relatively cheap for the employer. in the case of Great Britain.

seller. bodily injury or even loss of business.4 Environmental insurances Government policy in the UK over the last decade or so has been to promote the economic reuse of previously developed land. i. which will depend on whether the proposer is a buyer. Such data will include maps showing previous uses. become available for redevelopment as the nature and needs of industry. will also be of interest. Phase I: ‘Desk-top’ reporting In this phase historical data is collected and interrogated. clean-up of contaminated ground/water or the restoration of environmental damage. 3. Environmental reporting is typically split into three phases. particularly heavy industry. which. proximity to sites of special scientific interest. each of which can be iterative.1 Environmental and underwriting information – understanding the risk Before quoting for any environmental insurance the insurers will require underwriting information specific to the risk that is being proposed. can be supplemented by a site visit in order to gather more direct information. and (b) exposure to regulatory action by an authority that requires investigation. Environmental sensitivity. change and will continue to change. some degree of contamination of the ground and underlying groundwater. A general description of each phase is set out below. if necessary. and will continue to be found to have. A third category of loss protected by environmental insurance is the legal and other costs associated with defending an alleged claim by a third party or a requirement to take action by a regulator. information from local authorities such as the proximity of landfill sites to the site in question. In simple terms this means: (a) exposure to third party claims for property damage. There are a number of providers of these types of report. At this first stage potential risks are identified. commonly referred to as brownfield sites. The types of insurance policy available are addressed in later paragraphs. many formerly occupied for a range of industrial uses. This guidance note examines environmental insurance and the role it can play in protecting and facilitating the reuse and redevelopment of such sites.4. The information required has to be sufficient for the underwriter to understand both the nature of the risk(s) and the context of that risk. For the purposes of the following paragraphs environmental insurance is defined as protection against an insured’s exposure to the legal liabilities arising from the ownership and/or development of brownfield land and any consequential loss and damages. geological and hydro-geological maps. with well-documented and specific targets set for the number of residential developments to be built on such sites.3. previous environmental incident and planning history. A good example is the coalfields legacy.e. owner or developer. These brownfield sites. Following this interrogation a site-specific report will be produced. A qualitative assessment of 32 | CONSTRUCTION INSURANCE . where significant areas of brownfield land have been redeveloped over the last 10 to 15 years. for example the possibilities for site contamination as a result of its previous use. A consequence of our industrial heritage is that many brownfield sites have.

Depending on the outcome this may be all the technical data an underwriter will require to make a decision and offer terms. in terms of what was done and the data obtained. There may be a requirement imposed by the authorities for post-completion monitoring. for owners of brownfield and contaminated sites and land.g. e.the risk. particularly where there is ground gas or contaminated ground water. Any remediation will be required to be documented as a full remediation plan before execution and then end-result validated. the authorities may require the latter. so that the authorities can be confident about the long-term situation. is listed below. 3. warranty or indemnity exposure Cost certainty. in terms of what are the implications of the data.2 Environmental exposure A range of possible exposures. cost cap on planned remediation – cost overruns in remediation and clean-up can result. + Historical pre-existing gradual pollution – – – – – – – – – – – Third party off-site property damage and loss of use of property Third party off-site bodily injury Third party on-site property damage and loss of use of property Third party on-site bodily injury Regulatory/legal liability for off-site clean-up costs Regulatory/legal liability for on-site clean-up costs Legal defence and expenses Change of law Migration from off-site third party property leading to on-site third party damage and/or regulatory or other legal action Contractual liabilities. Indeed. Phase III: Remediation and validation At this stage any problems identified through phases I and II are remediated appropriate to the proposed use and the surrounding environment. digging trial pits or boreholes. from finding more contamination than the investigations suggested or higher concentrations and either may change the nature of the treatment or the cost of disposal CONSTRUCTION INSURANCE | 33 . Phase II: Site investigation In this phase.e. The interpretative report may also contain some form of qualitative and quantitative risk assessment. medium or high. and interpretative.4. i. to environmental risk and liability. for example. However. a more detailed assessment of the site is made. which is both factual. taking soil and water samples. The outcome will be a report. as low. may also be made. This will often necessitate some level of intrusive investigation. which require a further level or phase of investigation. it is common for questions to be raised. Where a site is particularly contaminated the level of risk will need to be formally demonstrated and argued through the planning process together with any remediation (clean-up) proposals.

There is no fortuity to any loss. It has proven particularly applicable in the context of the sale and purchase of land and property. + the site remains in a suitable for use condition even with these known conditions. it is important to distinguish between known issues which have been clearly identified. Known issues are those which insurance is unlikely to be able to cover because they are (i) known to the insured and (ii) will have to be addressed. When considering the types of risk that are insurable. known pollution conditions or contamination can be covered as long as: + the known conditions are defined and understood by the underwriters (this requires information). and 34 | CONSTRUCTION INSURANCE . Where the risk is unexpected and fortuitous.4. Whilst separate policies can be purchased to cover pre-existing pollution conditions (historical contamination) and new pollution conditions (future contamination) it is possible to purchase both policies to provide seamless cover for a site. 3. which can range from the suspected but unproven to the totally unexpected. Environmental insurance has proven a valuable tool for the transfer of the risk of environmental legal liability. for example.3 Insurance solutions There is a range of insurance policies to cover the environmental exposures of developers. even if not immediately. if the contractor inadvertently provides a new pathway for pre-existing contamination to migrate and cause a loss or damage + New gradual pollution – – – – – – – – Third party off-site property damage and loss of use of property Third party off-site bodily injury Third party on-site property damage and loss of use of property Third party on-site bodily injury Regulatory/legal action off-site clean-up costs Regulatory/legal action on-site clean-up costs Environmental and biodiversity damage and losses under the EU Environmental Liability Directive (ELD) Legal defence and expenses – In addition. losses or damages are both unexpected and fortuitous. This could arise. The nature of environmental insurance is that there will always be some intrinsic level of residual uncertainty by the very nature of the problem it is trying to address. When assessing the liabilities and risk of exposure. Where this is not the case then the insurer is underwriting the cost of known conditions and expected or anticipated works. it is important that any claims. property owners and contractors as described above. qualified and quantified and unknown issues.Construction risk of the contractor creating new contamination on site or exacerbating an existing situation. just a question of when and how much. all these exposures can create significant and consequential business interruption.

4 Historical contamination Pollution legal liability insurance can be purchased to cover environmental liabilities associated with the ownership or transfer of ownership of contaminated land. Contingent cover can be provided for developers. £20m cover and with deductibles (excesses) of between £25.+ the known conditions are not causing harm or have a significant probability of causing harm to the environment. fortunately. New sites can be added to the portfolio as they are acquired.000. 3. a sudden and accidental pollution incident caused environmental damage under the EU Environmental Liability Directive. Generally cover is for the period of the development and the limits will match those on the pre-existing conditions cover. demonstrated that costs for action by the regulators. where this is no property damage and no claim. This case is currently being investigated and final losses determined.5 Operational contamination Often insureds believe that their public liability (PL) insurance provides sufficient cover for ‘sudden and accidental’ events but understand and take the risk that it excludes any cover for gradual pollution. Such a policy will.4. They cover on-site and off-site bodily injury. Warranty and indemnity wraps: These provide cover for indemnities not being fulfilled. First. legal and professional fees. future legislation. or deductible. Portfolio cover: As for property transfer above but the policy will cover a portfolio of sites and is annually renewable. 3. in France. The agreed level is the estimated cost of remediating the contamination plus a buffer. As an example. Business interruption for loss of rental income can also be covered. Remediation cost cap: This is cover for remediation costs that exceed a level agreed by the insurer up to the limit of indemnity provided in the policy. Contractors pollution liability: This provides cover for exacerbation of pollution conditions during development including on-site and off-site bodily injury. property damage and clean-up costs. These policies are often called ‘contaminated sites/property transfer policies for pre-existing pollution conditions’. also cover new pollution conditions as well as pre-existing pollution conditions. the Bartoline case (Bartoline v. it is not that simple and this is illustrated by two recent examples. where there is a known condition that is assessed to be adequately controlled and contained by an engineered cap and cover. In a second case. which was not covered by the general liability insurance programme but. future legislation and legal and professional fees as a result of pre-existing conditions. property damage and clean-up costs. Policies can be purchased for periods of up to ten years. generally speaking. human heath or controlled water.000 and £100. was picked up by their additional EIL programme. which becomes apparent only after the insurance is incepted and in place. Royal Sun Alliance) which went to the High Court. However.4. then the insurance can be provided for the unexpected and fortuitous event that the control mechanisms fail to adequately contain or prevent damage. CONSTRUCTION INSURANCE | 35 . might not be covered under a PL policy.

claim or proceedings incurred as a result of damage to property (other than the constructional works) arising from the works being done and due to collapse. can also be requested. however this was done. 3.5. Cover from the perils of explosion. 36 | CONSTRUCTION INSURANCE . Contracting risks. they succeeded in a claim against Gold on the grounds that the damaged property had acquired a right of support from Gold’s land and that Gold removed that support at his peril.5. heave. However. 3. which can also be adopted within an owner-controlled insurance programme if required. Combined solutions can be constructed to cover both pre-existing and new conditions. arranged such cover in their own names but not in the name of Gold as well. although there is nothing to stop the developers arranging cover for themselves. Cover is not always taken out as the kind of activities which give rise to such losses may not be present. in fact. Gold tried to recover from the contractors who had. This landmark case and the cover it gave rise to are summarised below. 3. subsidence. Nobody has been negligent but nevertheless the owner has suffered a loss for which there is almost certainly no cover under their material damage insurance.1 History Gold was the owner of a property that was to be modified. vibration. as they had not been negligent. Although the policy is issued in joint names it is the developer who is indemnified. The insurance provides an indemnity to developers in respect of any expense. the adjoining third party property suffered damage as a result of their piling activities due to the weakening of support. It is usually left to the architect to recommend whether or not the cover is required but sometimes no consideration at all is given to the matter.2 Perils insured This case led naturally to the inclusion of a clause in some contracts that requires the contractor to take out a policy that protects the developer in these circumstances. No matter how much care is exercised there is always the possibility that such property will suffer damage.5 JCT non-negligence insurance Construction is an inherently dangerous process. The wording of the contract had not required them to procure a joint names’ policy. but limited to ‘new’ conditions. flood. can be covered using a contractors pollution liability form (CPL). The defendants entered into a contract with Gold to carry out the work and it included piling. weakening or removal of support and lowering of ground water. particularly when it involves working on or near to existing or neighbouring buildings or other structures. liability. The owners of the property had no right of action against the contractors. Although the contractors were not negligent in any way. backing up of drains and bodily injury to third parties caused by an insured peril. It was this set of circumstances that led to the legal case of Gold v Patman & Fotheringham in 1958.The range of products available for operating new conditions is similar to those for historical pollution providing similar coverage. loss. The cover may be in respect of existing buildings being worked upon and/or property on adjoining land. particularly for contractors actually causing gradual pollution or exacerbating an existing problem.

there will be an exclusion of these perils under any public liability policy. piling. therefore. such policies will include a ‘change of risk’ or similar condition requiring the insurers to be advised of any works that increase the risk of damage. + which can reasonably be foreseen to be inevitable having regard to the nature of the work or the manner of its execution. there may be an outright policy exclusion. Alternatively. Similarly.5 Relationship to material damage and public liability policies Some of the perils referred to in the ‘perils insured’ at section 3. The insurers will then have the opportunity to exclude the cover from the said material damage policy on existing buildings until the risk returns to normal on completion of the work. There is also an exclusion in respect of penalties incurred under contract and damages for breach of contract.5. However.5.5. The limit of indemnity selected should take account of the value of the surrounding property at risk.3. For example. this cover may be purchased if required by payment of an additional premium. These can arise where a developer enters into contracts affecting the developer’s liability to the owners or tenants of neighbouring property. omission or default of the contractor or any subcontractor. but it is work involving any of the following that is more likely to cause such damage: + + + + + demolition close to neighbouring property. + work affecting the load-bearing capacity of an existing structure. However. the perils of subsidence and accidental damage will always exclude such cover when any property is undergoing construction or structural alteration or repair. However. de-watering.3 Activities giving rise to loss The insured perils can arise in a number of ways. excavation works near to existing foundations. + attributable to error or omissions in the designing of the works.1 above may appear to be covered by any material damage all risks policy on existing buildings.4 Policy exclusions This is a ‘non-negligent’ cover and the exclusions are. important to help understand the intention of the wording. underpinning. The main ones are damage: + caused by the negligence. CONSTRUCTION INSURANCE | 37 . The cover is not that expensive bearing in mind the nature of the business but insurers will normally require a survey before they agree to anything. + work on listed buildings and buildings in poor condition. This type of insurance is exclusive to JCT contract forms and in the 2005 Edition is contained within clause 6.1. + shoring. other contract forms could have a similar requirement brought in as an amendment.5. 3. 3.

3.2 Restrictions in cover For some time. Other elements of cover usually provided include: + claims defence costs. + the use of plant on the site.6.6 Position under ICE contracts An ICE form of contract passes the non-negligent risk to the contractor. The employer submitted the claim to the insurers who refused to deal with it as the employer was not a named insured and therefore had no rights under the policy. Circumstances have arisen where a policy was issued in the name of the contractor only.6 Public liability insurance Contract conditions invariably make reference to public liability insurance in both the indemnity and insurance clauses. 38 | CONSTRUCTION INSURANCE . It may also cover liability for damages arising out of any nuisance or trespass committed by the insured and any rights (such as a right of way) with which the insured may accidentally interfere in the course of the development. They also state who is responsible for making sure such cover is in force and in whose names. many insurers have excluded claims arising from sources they regard as particularly hazardous.3. financial loss where there has been no ‘injury or damage’ as defined in the policy. potentially.6.5. It is normal for this limit to apply in respect of any one claim but some limits do apply to all claims in the period of insurance.7 Key issues It is important when arranging this cover that the policy is issued in the joint names of the employer and contractor. It is important to be aware of these and of whether they can be removed by payment of additional premium. A claim occurred by which time the contractor had gone out of business. 3. 3. asbestos.6. Insurers may restrict their liability for particular risks by imposing inner limits much smaller than the overall policy limit.1 Extent of cover A typical policy will provide indemnity in respect of liability at law for damages arising from accidental injury to third parties (not employees) or accidental damage to third party property arising in connection with the project.5. In this guidance note the extent of cover available and who should be protected is examined. such as terrorism. e-commerce transactions and.3 Limits of liability The policy may be arranged on an annual basis with a specific limit being the maximum amount payable in the event of any one claim or series of claims arising from one occurrence. 3. + legal defence costs in respect of prosecutions brought under the Health and Safety at Work etc Act 1984 and other specified legislation such as Consumer Protection legislation. Therefore provided that he has a contractual liability extension on his public liability policy the non-negligent public liability risk stays with the contractor and is insured accordingly. mould. gradual pollution. 3.

the project policy may pay claims up to £2. When deciding upon the limits to be purchased it is best not to rely on any figure requested within a contract document. + as above and all trade/subcontractors. e. and + the probability of loss. owner. The policy will be subject to an excess that will be deducted from the total amount claimed and may apply only in respect of claims for property damage or in respect of all claims. employer only. One option is to effect a project policy arranged by the employer/owner or developer. sudden and accidental pollution may be subject to lower limits of liability and/or separate aggregates. as more specifically described elsewhere in these guidance notes. all for the same period of insurance. Whatever type of policy is issued.g. + surrounding roads and railways. if a £50m limit of indemnity is required. or + as above and the main or management contractor. For example.5m up to £25m and from £25m up to £50m. For larger projects the policy will often be project specific with primary cover written as part of a construction insurance package. + the potential for third party injury or damage. it has to be asked if this is in the best interests of everyone. Additional responsibilities for each party will also be set out in the contract.There may be a limit on any one claim and then a separate aggregate limit. However. + the nature of the works being undertaken. Separate excess of loss policies would then be issued for the balance of cover required. + surrounding buildings. The indemnity can apply to: + the developer.5m with two other policies paying claims above £2. It is traditional and still common for the contractor to arrange a cover on behalf of the employer. Sometimes there are elements of cover that insurers may be particularly concerned about. 3.4 Who should be covered? Every party on site with a potential liability to the public will require an insurance policy. + the general public. particularly children. The limit of liability purchased is often determined by: + the cost of the cover. whether the employer who may find he has only nominal cover or a claimant who may find they are passed from one insurer to another if there are different policies in different names. + the proximity of third party persons and property. A construction site is potentially an inherently dangerous place for: + visiting third parties. + the values of surrounding properties. The parties protected by the policy will vary according to the developer’s requirements and the nature of the contract forms being adopted. CONSTRUCTION INSURANCE | 39 .6. it is the insured party or parties that decides on the level of cover to be purchased dependent upon the risk exposure arising from the work being undertaken. as this is normally the minimum amount required.

3. Bonds are usually effected for 10% of the contract price but could be more or less. There are numerous bond wordings to meet the needs of specific industries and the construction industry is one of the main purchasers of them. bonds are agreements between three parties for the benefit of one of them: the employer. Whoever is making the decision as to who must arrange the cover must consider all those who may need to be protected. 3. 3.7.6.Apart from the above there may be freeholders. which usually ranges from 3% to 5% of the contract price. The bond will be for the retention percentage.B. There may even be lease requirements calling for particular insurers to be used.1 Types of bond In the construction industry the following are the bonds most commonly found.6. Effectively. 3. financiers plus professional consultants and suppliers (on site exposures only) to be added to the list of insured. rather than just follow the provisions of the basic contract conditions.7. 40 | CONSTRUCTION INSURANCE . apart from financiers and they may have concerns about the insurers. 3.2 Performance bonds These guarantee that a project will be performed according to the terms and conditions of the contract and provide a cash indemnity to the employer in the event of a default by the contractor that leads to the employer suffering a loss.7 Surety bonds A surety bond is a guarantee from the surety in favour of the employer/beneficiary that the contractual obligation of the principal will be fulfilled.3 Retention bonds These are issued in favour of an employer that has agreed to waive its right to deduction of retention monies from sums owed to the contractor for work carried out. specifically to provide the insurer with all material facts. The list may well include freeholders and head lessees. The default is usually caused by the insolvency of the contractor. The policy will set out the names of all insured and specify in which policy covers they have an insurable interest. superior landlords.5 Premium implications Public liability insurance is not cheap and if one party does arrange cover in two or more names the cost of this and the potential savings to the other names needs to be reflected in tender prices. N.7. Any party listed as an “insured” under a policy has duties under that policy. 3. In this guidance note the purpose and benefits of bonds are explained.6 Key issues It is important to decide responsibilities for placing public liability insurance before contracts are signed.

6 Bonds and counter indemnities A bond is not the same as an insurance policy as risk is not transferred from the principal to the surety.7.g. e. Surety bonds do not reduce the working capital of the principal or restrict its borrowing capability. Such agreements are complex and can vary with each surety. If it did not the surety company would not be prepared to issue the bond. thereby giving the same peace of mind. A counter indemnity is a written agreement signed by the principal entitling a surety to reimbursement if it has to pay claims under any bonds it has issued. usually via a counter indemnity. 3. non-completion of a contract by guaranteeing that money will be available. They range from standard documents to indemnities incorporating undertakings and financial covenants. The surety bond can be a higher percentage of the amount at risk than a bank will offer. 3. Surety companies rely on a counter indemnity. They provide a remedy for defective workmanship or faulty materials discovered after practical completion during the maintenance period. 3. Banks usually issue ‘on demand’ bonds. The latter has a legal right to seek reimbursement from the former. However. The bond amount would be the sum advanced.4 Advance payment bonds These are appropriate where an employer makes a payment to a contractor or subcontractor in advance of construction. The bond amount would be assessed according to the risk. Further the employer is effectively being given an underwritten and independent opinion that the principal has the financial and operational ability to complete the contract satisfactorily.7 The benefits Bonds offer an alternative to bank guarantees so the benefits are best understood by a comparison of the two. which are payable on first demand and independent of contract conditions (which means the beneficiary does not have to establish any breach of contract). They are ‘conditionally worded’.7. This advance might be made to purchase an expensive piece of machinery essential to the work being done. which gives the principal the protection of the underlying contract conditions.5 Maintenance bonds These are a form of performance bond relating solely to the maintenance period.7.3. CONSTRUCTION INSURANCE | 41 . whereas banks often and additionally require a charge over the principal’s assets. like an insurance policy the bond does protect someone (the beneficiary) against an unwanted event.7.

It rests on the principle that archaeological remains are a valuable and finite part of our heritage that should ideally be preserved in situ even if they are not scheduled. Stage one – a desk-based study will assess the likelihood and extent of any remains on the site based on the archaeological and historical background of the site.8. Whereas some archaeological sites are scheduled ancient monuments or otherwise protected under specific legislation. This is arguably the most important publication relevant to archaeology and development in England. There are three likely outcomes of this study: + the local authority may approve the application with no further investigation. 3.1 The process The UK is very rich in archaeological remains and much of it still lies undiscovered. the extent of disturbance caused by any earlier construction work and the impact of the proposed scheme. PPG16 establishes procedures to ascertain the archaeological impact of a development so that the planning authority can make an informed decision about how best to safeguard archaeological interests. as explained.7. 3. It is protected by a host of legislation that is designed to trace and preserve it. a degree of risk is still left and it is this residue that may be insured. if requested. Basically. 3. a material consideration that cannot be ignored.7. This often means that an archaeological study of the site has to be commissioned and is where specialist commercial archaeologists such as MoLAS (the Museum of London Archaeology Service) come in. All these issues are dealt with below. 3. it requires the developer to discuss the proposed development with the planning authority and. on Archaeology and Planning.8 International bonds International bonds vary enormously depending on the legal framework in the country concerned and the nature of the guarantee. the potential losses that may be insured and the point at which insurance cover should be sought. The study may suggest options in accordance with the client’s wishes but it is the local authority that will have the last word. This evidence of our past is an irreplaceable national asset. This study should be designed to provide the local authority with all the information it needs to decide on the appropriate archaeological treatment of the site.2 Risk management PPG16 sets out a number of stages in ‘archaeological risk management’. assessed and mitigated but. most sites come under the government Planning Policy Guidance.9 Key issues The requirement for bonds needs to be considered early as the benefits of these may need to be compared to those issued by banks before irreversible decisions are made.3.8 Unexpected archaeological discovery insurance In order to appreciate the need for the above insurance it is necessary to understand the role played by archaeology in the planning process. Archaeology is an essential part of the planning process.8. 42 | CONSTRUCTION INSURANCE . to include relevant information with the planning application. Note 16 (PPG16). To a large extent the risks that the developer runs can be identified.

have to be set out in detail in an archaeological project design that may then be appended to the ensuing legal agreement between the archaeological contractor and the developer. This can involve a lot of expense in changing working methods on site in order to preserve remains or in redesigning the foundations and other parts of the works. once agreed with the authority and the curator.8. Their proposals. without being disturbed. Stage three – if further work is required. which could involve digging test pits and trenches and other physical work on the site. This third stage can go two ways: either the local authority will specify that archaeological deposits must be preserved in situ. the use of a legal agreement has the effect of placing most of the risk with the archaeologists carrying out the work within the agreed programme and budget. Money can also be saved by having professionals with experience in smoothly integrating archaeological fieldwork into complex construction programmes. followed by additional archaeological costs and cancellation. the developer remains at risk if there is an unexpected archaeological discovery on site that causes further delay or additional cost or even a permanent loss of site value.3 Identifying the risk of unexpected discovery It is worth pointing out that early consultation between developers and archaeologists is beneficial. CONSTRUCTION INSURANCE | 43 . Money could be saved by combining the desk assessment with the field study or by combining archaeological evaluation with geotechnical investigation work. It is against these possibilities that insurance can be taken out. along with the proposed research objectives and method statements set out in the project design produced by the archaeological contractor. for example. + permission may be granted subject to a planning condition or agreement to deal with the archaeological requirements. The evaluation – whether required pre-or post-determination – will then be submitted to the authority and they will either require further work or the archaeological planning condition will have been discharged subject to archiving of appropriate material and publishing results as specified. the developer and the archaeologist should now get together to identify measures to mitigate the impact of the proposed development on the archaeology. This could be difficult or even impossible prior to planning permission if access to the land is restricted and it will certainly add to costs. Stage two – a field evaluation may be required. The insurance requirements may be considered under the following headings. or they will specify that they should be excavated and recorded by professional archaeologists. 3. archaeological excavation takes place within standing buildings before demolition. normally under a planning condition. with no guarantee that planning permission will be granted. the authority may require the applicant to submit a field evaluation report.+ if the site is felt to have archaeological potential. Once the archaeological work has been agreed. Sometimes. This will usually be carried out in accordance with a brief set by the local authority. The most commonly purchased ones are delay and redesign. It may then be possible to anticipate events. However.

This is likely to be the most significant unexpected cost to the developer and would include additional interest payments.3.4 Potential cover requirements 1 Delay costs – additional costs incurred in relation to the delayed completion of the development.uk /documents/planningandbuilding/pdf/156777. Before any quotation for insurance can be given. References and contacts Planning Policy Guidance. The consultant’s fee.pdf). 44 | CONSTRUCTION INSURANCE . including fieldwork. Underwriters’ minimum premium for this class of business is £5.8. an independent risk survey by the underwriter’s archaeological consultant is required. 3 Cancellation costs – can be incurred as a result of the necessary cancellation of all or part of a project because of revocation of planning consent or the spot designation of unexpectedly discovered remains as a scheduled ancient monument.000. 5 Loss of profit – the nature of the ‘profit’ would vary according to the insured’s business but would include loss of rent. 1990 (www. which is usually between £500 and £2. but as soon as these are sorted out insurers should be in a position to get things done quite quickly.000. Archaeology and Planning. Note 16. 4 Redesign costs – the developer can incur this cost as a result of a requirement to revise the layout or constructional details of a project in order to ensure the preservation of unexpectedly discovered archaeological remains.8. There can often be delays while the local archaeological or planning authorities decide exactly what their requirements are. which the insured is legally liable to pay.5 Key issues Insurers do only cover the unexpected so it is important to get cover in place after the basic work described above but before someone starts digging foundation trenches. 6 Loss of value – in extreme circumstances an unexpected discovery might mean a loss of space or even a whole storey with the result that the market value of the development is reduced. Department for Communities and Local Government. 3.communities. has to be paid in advance and is non-refundable. In the sequence of stages set out above it makes most sense to deal with insurance requirements as soon as possible in stage three. 2 Additional archaeological costs – incurred in undertaking a scheme of archaeological work. as required by the planning authority or other statutory or curatorial organisation. post-excavation work and preparation of results to an agreed standard for publication.gov.

However. exclude subsidence occurring as a result of the works. If the contract does not involve much of an increase in risk the current insurers may be happy to continue the cover without additional charge but it will require reasonable precautions to be taken. A contractor working in a large building will worry about being sued if its negligence causes serious damage.4 Further guidance on construction insurance issues Insurance of existing buildings undergoing refurbishment or redevelopment Where an existing building is to be the subject of contract works care is needed by those drawing up the contract conditions and those responsible for insuring the building. Even if it could secure adequate public liability insurance. say. e. This is so-called joint names insurance. the premium may be prohibitive. There will be a number of conditions in that policy that will apply when works are being carried out and these should be examined.g. it is also possible that the current insurer will wish to exclude the cover altogether on the grounds that the building is now a construction risk and best insured under a construction policy. work involving welding equipment or blowtorches. Such a building will probably be insured under a commercial all risks property owners’ policy whilst occupied or temporarily unoccupied pending the works. On the other hand if there is hot work. If there are to be structural alterations. 4. This is all very well if the employer is also the insured under the policy and is prepared to pay any additional premium and/or to accept restrictions in cover and/or to pay for additional risk precautions during the contract period. particularly if they involve foundations. Either way it should be made clear that this is at the employer’s risk/cost. To get round this the contractor will seek to pass the risk to the building insurers by asking for its name to be shown jointly on their policy alongside that of the employer.1 4. The precise action will depend on the particular circumstances and the attitude of the insurers. In this guidance note the problems that can arise are explained. The remaining subsidence risk may then be insured under a non-negligence policy at terms reflecting the insurers assessment of the revised risk.1 Implications for current cover on existing buildings The insurance of contract works is relatively straightforward compared to the difficulties that can arise when a building is being worked upon. It is far better to avoid them in the first place than to seek a remedy that may be expensive or partial or both. insurers may wish to reconsider the cover and. The problem with this is that the construction insurance market is limited in size and does not always have the capacity to insure a substantial building. 4.1.1. CONSTRUCTION INSURANCE | 45 .2 The problems with joint names insurance on existing buildings A further problem flows from the same factor. they may require an additional premium and/or risk improvements.

It is sometimes used to describe a latent defects policy on a development project.1 A word of warning There is no universally recognised meaning of ‘project insurance’ and different people use it to mean any one of a number of things. The contractor is likely to pass on some of the insurance obligations to subcontractors and suppliers. There are elements of the cover. There are solutions or partial solutions but they may be very expensive and still leave the employer carrying some risk. 4. rather than have each professional effect a separate PI policy to protect them in relation to all the work they do. However. 4. a solution has to be found.1. Directly or indirectly the employer will pay all the insurance costs of the project. 4. perhaps just the exterior walls or the facade. If either of these eventualities arises.5 Key issues The insurers of the existing building must be advised of the nature and extent of the contract works or the policy could be invalidated. it is meant to refer to a project professional indemnity (PI) policy. that may make it beneficial to insure the existing building under such a policy. If the employer is a lessee or has not arranged the policy there could be problems that are both time consuming and expensive to resolve. expediting costs and suppliers extensions. If the employer is undertaking to arrange a joint names cover on the existing building to protect the contractor. Alternatively the employer may not control the buildings insurance and the landlord or freeholder that does may refuse to agree to joint names status for the contractor. This guidance note warns of the need not to make assumptions about the cover under such policies and summarises the perceived advantages for employers of taking more responsibility for arranging insurance. 46 | CONSTRUCTION INSURANCE . it may be better to cover the existing building under a contract works policy. it may be better to cover both the existing building and the contract works under one policy with one sum insured.2. DE3/5.3 One sum insured for both contract works and the existing buildings If the completed works will include very little of the original building. in other words a policy that protects the professionals on a particular project. This is not necessarily in the best interests of employers. Occasionally. It should be cheaper and make settlement of any claims easier.2 Project insurance and property developer all risks policies The basic contract conditions used widely throughout the world usually call for contractors to arrange much of the insurance specified.Problems start if the insurers of the building do not want to carry the additional risk.g. additional cost of working.4 Advantages of insuring existing buildings under a CAR policy A CAR policy is designed for construction works and the cover is drawn up to reflect the risks inherent in construction. as mentioned above. the conditions are being amended so that the employer arranges more of the cover and more is heard of so-called project and property developers’ policies.1. 4. Increasingly. e.1. make sure this is possible. 4.

5. + There is certainty as to the scope of insurance protection (particularly if the public liability insurance extends to all contractors and subcontractors) and less risk of errors. The risks arising from mid-term cancellations and unpaid premiums are also reduced. as there will be less premium cost in the preliminaries. latent defects’ insurance. omissions. Channel Tunnel Rail Link.g. + There will be direct control over settlement of claims and the use of claim monies. if not in sight. etc. A build up of minimum premiums for each participant is avoided. where the difficulties are otherwise compounded. unknown excesses or problems arising from misrepresentation. + The above advantages are even greater for phased developments or major infrastructure projects let in lots or sections. public liability (for the developer only or both developer and contractors. They may be the covers that need to be most considered but there will never be one policy that meets all these needs.) and the JCT clause 6. loss of income (usually rent).The term has also been employed to refer to a ‘property developer’s all risks policy’. nondisclosure or liquidation. 4. Staged premium payments are more achievable. let alone one insurer that offers the best cover at the best price for each. professional indemnity insurance and. + An improved standard of administration is achieved. + Potential disputes between the parties to the contract and between insurers can be avoided. + The need to check the insurances otherwise arranged by contractors and subcontractors is avoided or reduced. One adjuster can be used. unexpected exclusions.2 The advantages of employer controlled insurance + There should be cost savings as duplication and overlap of insurance programmes is eliminated. to dictate the basis of cover and to ensure that it is maintained at an adequate level throughout the period of the contract. if required. There was once a carefully drafted exposition on ‘project insurance’ that explained that it was a policy that covered everything on site. warranties. CONSTRUCTION INSURANCE | 47 . + There is freedom to choose an insurer with good security.2. e. environmental insurances. The management fee of the contractor is reduced. a product issued by some insurers that is effected by a developer and usually offers cover against all risks of material damage to the contract works and any existing building.1 perils. as the insurance will be placed by one broker who will fully understand the activities involved in the project and who will provide proper administration of the insurance programme through a single channel of communication and a uniform system of claims handling. including the four risks mentioned in the previous paragraph.

particularly delays in completion.4.3 Stage 3 – Risk control and elimination This stage deals with the ways in which the risk can be avoided.3. Some of the potential costs. In the following notes the role of risk management is summarised. Others. such as suppliers and supply chains. 4.1 Stage 1 – Risk identification The risks of physical damage. Design and Management Regulations 2007) and loss prevention practices such as the UK’s Joint Code of Practice on Fire Prevention will feature when the project is large enough or of more than 30 days’ duration in the case of the former. are often difficult to quantify without a full understanding of the financial arrangements. where so many different parties come together. prevented or minimised. such as for consequential loss. 4. virtually unlimited and may be decided by how much insurance cover it is reasonable to purchase. it is particularly important that the risk management process identifies all the potential risks and makes the right choices. will be obvious and easily calculated. Sums insured need to reflect what insurers will pay. often for the first and only time.3. Risk management is really a five-part process. arising from internal water services on site. third party liabilities and defective design. such as third party liability are. On a construction site. Those risks may be carried by the party on whom they fall or insured by that party. reduced. has led to a 48 | CONSTRUCTION INSURANCE . In the coming years expect to see much more emphasis on the avoidance of water damage on construction sites. If insurance is to be arranged this may be impossible without certain measures being required by insurers. This is partly because reference to them is rarely made in the contract conditions and partly because there is a lack of awareness of all the possibilities.3 Risk management and insurance The risks involved in construction are many and varied. Those others then face similar choices. even those for which insurance cover is available.2 Stage 2 – Risk evaluation This covers the likelihood of the risk materialising and an estimation of the potential cost. Clearly CDM 2007 (Construction. such as for material damage. Alternatively. It is important to consider risks arising from external sources. If insurance is being effected it is important to understand how the policy deals with aspects such as inflation and the basis on which claims will be settled. are well known but the consequential risks are often ignored. strictly speaking. and where the risks are so high.3. etc. 4. Otherwise there is scope for underinsurance or the payment of unnecessarily high premiums. Some. The incidence and magnitude of water damage claims. They range from the risk of bodily injury to defective design materials or workmanship and from physical damage to the consequential losses that will follow on from that damage. the responsibility for carrying some risks may be transferred to others.

and which can be transferred to others by contract or by insurance. Why transfer a risk to a third party if that will involve proving negligence.4 Stage 4 – Risk transfer This is an assessment of the risks that are left. worse still.2 The Lifting Operations and Lifting Equipment Regulations 1998 (LOLER) These regulations state that any equipment used for lifting and/or lowering loads must be inspected: 1 Where the safety of the equipment depends on the installation conditions (such as a tower crane.msilm. including the nomination of an experienced individual to accept responsibility for managing/overseeing the exposure. shackles and the like. or CONSTRUCTION INSURANCE 2 | 49 .4. fibre lifting slings. etc. Whilst in service: (c) in the case of equipment used for lifting persons or an accessory for lifting (equipment used to secure a load to the piece of lifting equipment such as chain slings.4. identifying and appointing those people within the organisation who will be given responsibility for implementing all the tasks arising from the risk management exercise and a review of the decisions taken in the light of any material changes. or (b) after assembly and before being put into service at a new site or in a new location. Careful consideration is essential before any risk is transferred.guidance note being jointly published by the UK CAR Underwriters Group and CIREG (Construction Insurance Risk Engineers Group). 4. These are summarised below. The note is intended for projects during their design and construction stage and for ongoing construction projects.4 4. 4. This can be found at: www. when there may be a first party alternative available? Why let a third party arrange cover if that means having no control over the precise scope of cover or. There is the all-important task of ownership.3. the settlement of any claims? Why cover what is essentially the same risk twice or more by having several policies in one name when one policy in joint names or protecting several interests might be better? 4.): (a) after installation and before being put into service for the first time. often referred to as miscellaneous lifting tackle) every six months.5 Stage 5 – Risk monitoring This really embraces two tasks. builders hoist. It calls for a wide range of risk improvement and loss prevention measures.3. 4.com/pdfs/Water_Damage_Guidance_Note_4. or (d) in the case of all other equipment every 12 months.pdf.1 Statutory inspection of plant and machinery In the UK There are various regulations requiring periodic inspection (sometimes referred to as thorough examination) of plant and machinery in the UK that will apply to construction sites.

6 The Provision and Use of Work Equipment Regulations 1998 (PUWER) Although these regulations do not contain any prescriptive inspection regime (other than for power presses) all owners/users of plant and machinery have a duty to ensure they maintain safe systems of work and it is their responsibility to identify items of work equipment which may require particular attention including periodic inspection. and therefore no prescriptive period between inspections. IEE guidance recommends that construction site electrical installations be inspected every three months.7 Inspection service providers/the competent person It is important that a competent person who is independent from manufacture. Alternatively. 4. 50 | CONSTRUCTION INSURANCE .’ The environment in which the systems are operated should determine the period between inspections. 4. such danger … and … regular inspection of equipment is an essential part of any preventative maintenance programme. 4. a duty of care is imposed to ensure that all electrical plant and installations are safe and do not give rise to danger or injury.4. so far as is reasonably practicable.4 The Control of Substances Hazardous to Health Regulations 2002 (COSHH) These regulations require periodic inspection of local exhaust ventilation equipment designed to remove noxious substances at or close to their point of release to prevent or minimise exposure to persons. Pressure systems containing relevant fluids are defined in the regulations and would include items such as air receivers or reservoirs.4. In some cases the inspection may need to be carried out by an independent competent person.4.4. a written scheme of examination can be drawn up which will specify the frequency of inspection but in practice this is unlikely to be feasible for construction site operations. 4.4.3 The Pressure Systems Safety Regulations 2000 (PSSR) These regulations require a written scheme of examination to be drawn up or certified as suitable by a competent person and periodic inspections to be carried out in accordance with the written scheme. installation or maintenance carries out inspections/repair of the plant and is able to operate without fear or favour in completing and reporting on the inspections.5 The Electricity at Work Regulations 1989 (EAW) Although there is no statutory duty to have inspections carried out (other than in specific situations such as quarries).(e) each time that exceptional circumstances which are liable to jeopardise the safety of the equipment have occurred (such as its involvement in an accident or after significant change in conditions or use). steam or other pressure vessels. steam boilers. The regulations state: ‘… as may be necessary to prevent danger all systems shall be maintained so as to prevent. 4. Inspection frequency is normally every 12 months.

It is important to avoid the use of the term ‘joint insured’.4. the employers of those who have control of the equipment or those using or supervising or managing the use of the equipment. Their names can be added by means of memorandum to the policy. but in others government bodies carry them out.1 The means by which other interests are recorded There are two ways in which third party interests are specifically added to policies. However. the plant owner normally arranges inspections and evidence of inspection should be supplied with the plant. as in the UK.It is strongly recommended that any service provider selected to carry out inspections is accredited as a type A inspection body by the United Kingdom Accreditation Service (UKAS) to BS EN ISO/IEC 17020:2004. which notes that they have an interest in the insurance. A joint interest is actually an indivisible interest. It has been the subject of case law and is generally understood. but can vary widely in other parts of the world. In that sense it is the equivalent of co-insured. (b) the owner of a mobile pressure system or user of an installed pressure system in the case of PSSR. 4. The first part deals with some general principles. 4.4. COSHH and PUWER. Whilst the term is sometimes given the same meaning as ‘co-insured’ it is incorrect to do so. 4. both the party taking out the policy and the insurers must agree. If they are so named then in insurance speak they become a co-insured and a composite policy has been created. The user should ensure that this evidence is available. In the context of these contracts the term does lead to the creation of two divisible interests.5 Third party interests and ‘joint names’ under construction policies In theory it is possible to add the names of third parties to any insurance policy provided that they have an insurable interest. (c) additionally in the case of PUWER.8 Legal responsibility Legal responsibility to ensure that inspections are carried out on time (and that any defects revealed by the inspection are rectified within any stipulated timescale) rests with: (a) the employer (or. In JCT and FIDIC construction contracts there is often a requirement for ‘joint names’ insurance. This provides assurance that the service provider is competent to carry out the inspections. In some countries inspections are carried out by commercial organisations. they can be added as another insured by being named as such in the schedule to the policy. (d) where plant is hired in. The joint interests share only CONSTRUCTION INSURANCE | 51 . as applicable.5.9 Outside the UK Regulations requiring inspections are broadly similar in European Union countries. In this guidance note the issues arising are explained. the self-employed) in the case of LOLER. as this is where many of the problems arise. 4. Alternatively. The second part deals specifically with the protection of bank interests.

5. Generally speaking insurers do not charge for this additional risk but reserve the right to do so in the future. 52 | CONSTRUCTION INSURANCE . In effect. There are two different circumstances to examine. Direct risk This is best illustrated by an example. the fourth co-insured still has a valid claim. It is doubtful if naming any lender as a co-insured actually increases the risk of damage by an insured peril.3 Protection of bank interests The following paragraphs are for the benefit of those readers who need a greater understanding of the issues around the protection of bank interests and the rationale behind lenders’ demands to be named under the borrower’s policies. Their requirements generally fall under the headings below. On the other hand co-insureds are in the same position as if they had taken out a separate policy in their own name. 4.one contract with the insurer and any action by just one of them that contravenes the policy conditions will void the cover for all.5. This can be dealt with by higher premiums.2 The degree of protection afforded There is a fundamental difference between the above two methods. The risk to insurers is that they might have to indemnify the bank to the extent of the outstanding loan in circumstances where they would not have to indemnify the developer because there has been a breach of policy conditions. there are four separate policies. Indirect risk This is best illustrated by considering what happens when a bank is lending money on a new development and wants to protect its investment. the third party noted by memorandum do not have a claim either. 4. they have to live with the reality of the markets and their main concerns are to what extent the possibility of a claim is increased and whether any extra premium is warranted. provide protection for the developer should they be vicariously liable for the actions of his contractor or subcontractors. even though these parties are not co-insured. An interest noted by memorandum gives that party no separate contract with the insurers. However. if there are four co-insureds. If three of the co-insureds all invalidate the policy for whatever reason. However. however. When a developer borrows money on the security of a development it is natural enough that the lenders want to make certain the insurance is in order. In other words if the insured under the policy do not have a valid claim because they have contravened the terms of the policy. if it is decided that the policy should also protect the main contractor as a co-insured. This means that they have no right to make a claim in their own name and they have no greater rights of recovery under the policy than the actual insured. A developer may take out a public liability policy in its own name and the premium will be assessed accordingly. the risk is obviously greater and it becomes greater still if subcontractors are also named. From an insurer’s point of view the creation of four contracts for only one premium is contrary to their best interests. The public liability policy will.

but not all. it does not need the protection of a non-invalidation clause.2. The usual risks would be those covered by a contractors’ all risks policy as explained in para. Loan agreements will usually seek such status on both material damage and public liability policies. mortgagees’ or multiple insured clauses. and care needs to be taken. This would only be of consequence if the bank had been unable to secure co-insured status and had to rely on its interest being noted by way of memorandum. Insurers cannot exercise subrogation rights against a co-insured. In theory any one of the perils insured could be unavailable for a particular building but in practice it is rare to find restrictions in the UK. Increasingly banks will find that flood cover may not be available in areas where the risk is high. non-vitiation. but such clauses do give added peace of mind. Even if negligence against the lender may be difficult to prove. especially where more than one insurer is involved. Non-invalidation clauses Banks’ insurance undertakings usually demand a clause protecting the bank against the possibility that the insurance will be invalidated by acts of the insured. The main threat to the availability of all risks cover in the UK is flooding. However. including the lenders. Status The status that lenders seek is that of co-insured. strictly speaking.Breadth of cover The demand for the borrower to take out adequate cover is perfectly reasonable. not all the insurers you would expect actually meet these ratings. Care is needed because there are no standard wordings and some would only protect the lender against certain breaches of policy conditions. CONSTRUCTION INSURANCE | 53 . which is achieved once the lender’s name appears in the schedule to the policy. However. Whilst the need to be a co-insured on a contract works policy is obvious. Security of insurer Again it is reasonable for the banks to demand the insurances be placed with a reputable insurer with an agreed security rating. the lenders will benefit from being able to claim defence costs from the insurers. Lenders have to decide if they want to carry that additional risk. Such clauses are variously known as non-invalidation. In some territories outside the UK it is quite possible that all risks protection will be unavailable or that some perils will carry high deductibles or loss limits. third parties suffering injury or damage may take action against everyone connected with the development. If any party is named as a co-insured then. 3. particularly if there are no plans for flood improvement. Subrogation waivers Whilst subrogation waivers are often requested these are unnecessary if the lender is a co-insured. it is less so for the third party cover. Other names can be used but they all fall into the same ‘family’ of wordings that seek to protect a certain party or parties against the possibility that the policy is invalidated by the insured or another of the co-insured.1.

Non-cancellation Once the banks achieve co-insured status insurers usually undertake not to cancel or lapse the cover without giving notice to the bank. lenders. they will be paid direct to the lenders. Professional advice is essential.5. lenders are protected against the possibility of any claims monies being used in a way that is contrary to their interests.5 Key issues Where another party is to be added to a policy and will bring additional risk the original insured should consider who will pay the extra premium and the consequences for their claims experience as this could impact on future premiums. 54 | CONSTRUCTION INSURANCE . Summary The protection of lenders can become time consuming and frustrating for borrowers. 4. In other words. To avoid unnecessary expense and potential delays it is best to take advice on the requirements of lenders’ insurance requirements and seek to amend any that are inconsistent with insurance practice. Sometimes projects are delayed as a result.4 Outside the UK The concept of granting co-insured status to lenders is virtually unknown outside the UK and. The intention of these is that. The insurance claim is based on damage reinstatement and therefore the recovery in the event of non-reinstatement may be less. Caution should be taken if a lender requires an economic reinstatement test whereby insurance monies are diverted to the lender for debt repayment rather than damage repair. 4. The lender can then ensure that the money is spent on repairing the damage. lawyers. generally speaking. probably only for 30 days maximum. insurers and brokers. Some banks seek loss payee provisions. insurers do not like giving greater protection in this respect to the banks than they would give to the insured that actually took out the cover so they will not hold cover indefinitely. This also applies should annual policies with premiums based on loss experience be exposed to these additional risks. The problems are often exacerbated because documents and demands are inconsistent with insurance principles and practice. However.Payment of claims monies Claim monies are usually properly distributed because they are spent on repair of the damage. Insurers do not want to pay any claim more than once so where they have to satisfy more than one insured or ‘interest noted’ they make sure everyone is happy before paying the claim. to the extent that insurance proceeds would otherwise be paid to the borrower.5. lenders are only given assurances over the destination of claims payments.

has been readily available from a limited number of major UK and other insurers since 1989. Two years down the line some sections of the cladding parted from the framework and a few fell into the car park. the owner of the building phoned its insurers and made a claim under their latent defects policy. These existed at practical completion but were undiscovered at that time. Special considerations apply when a development is wholly or partially residential. After each incident. many project sponsors rely only on contract claims and the use of collateral warrenties or the Contracts (Rights of Third Parties) Act 1999 for security and redress in respect of the consequences of defective design and construction. During the foundation stage the excavations are inadequate and there is also soil contamination. after tenants had loaded up the building. In spite of some increase in its use.1 Latent defects insurances Introduction Latent defects insurance. which will carry far lower excesses. 5. Insurers agreed to pay the cost of installing new ones. Whilst the cladding is being installed a workman is supplied with fixings.1 The cover in brief Imagine that you are building a four-storey office block. In other words there were respective failures in design. a special section has been included to deal with these. The insured did not have to prove negligence against anyone and as subrogation rights had been waived CONSTRUCTION INSURANCE | 55 . During the design stage the wrong information is fed into a computer and as a result understrength beams are used in the roof. It was also established that there would be further and imminent damage as a result of poor quality fixings if they were not replaced. workmanship and materials. The claim was handled in much the same way as if the building was damaged by fire. The differences should be explained by the broker arranging the cover. In each case the insurer paid for repairs minus the deductible. the foundations started to subside and crack. The insurer appointed adjusters.5 5. further investigations into the exact cause and the possibility of more damage from the same cause were carried out and estimates for repairs were obtained. Potential mortgagees belonging to the Council of Mortgage Lenders (CML) will almost certainly expect that a particular form of latent defects insurance is in place and is compliant with their requirements.000 per unit. The roof started to sag one year after that. sometimes referred to as building defects or inherent defects insurance.1. It may even be necessary to issue two policies on the same building. As the subject is one that gives rise to more questions and misunderstandings than most other classes of business. A few months later. and may be for a maximum of 10 years. Instead. one for the residential parts and one for the commercial parts. some of which are of poor quality and not strong enough. there are still many who are not aware of it or do not fully appreciate the benefits it can offer when used early in the procurement of a wide range of projects. A limited number of insurers provide suitable cover. usually a maximum of £1. The cover for the residential parts will be different in other respects to that summarised below. which is for commercially occupied properties only.

materials or workmanship. The following summary of cover and cost plus details of the technical auditor’s role is broadly correct for the class but there are slight variations between insurers and these may change further from time to time. + roof structures. Therefore the details below are for general guidance only and should not be relied upon for all insurance covers. + other external and internal load bearing elements essential to the stability of the property. + external doors and windows. Further the cover does not vary much from one insurer to another. It is important to complete a proposal form. in which case a degree of inconvenience and the cost of the deductibles would have been avoided. + An inherent defect is one that exists prior to the date of practical completion but that remains undiscovered at that date and manifests itself during the period of the policy – 10 to 12 years. + stairs and floors including screeds designed to the strength of the floor of which they form part. That is what latent defects insurance can do for a new development. Of course there is a good chance that the faults would have been uncovered by the technical auditors and remedied before completion. beams. columns.1. The basic protection + The basic policy covers actual physical damage to the whole of the building (including the internal and external services) but only when such physical damage is caused by inherent defects that originate in the ‘structural parts’ of the building. The definitions used by some insurers are wider than that shown above and include features that other insurers would regard as non-structural. + The inherent defect may be in the design. 56 | CONSTRUCTION INSURANCE .2 The cover in more detail Those who have purchased latent defects insurance will know that the policy document is relatively short and quite easy to understand once the fundamental concept of the cover is appreciated. 5. The structural parts are usually regarded as: + foundations. A precise definition will appear in the policy for each insurer. + There is no need to prove negligence against a third party. + external walls and cladding including glazed curtain walling and non-load bearing facings and their fixings. In addition the insurers paid the loss of rent as a result of the operation of the rent cesser clause. Whoever is named as the insured in the policy makes a claim against the insurers in the same way as they would claim for fire or storm damage under a property damage policy. A typical definition of structural parts is shown below but it does vary from one insurer to another.by insurers there was no recovery from the contractors or professionals. obtain firm quotations and compare policy wordings before making any decision as to how to proceed. 1.

(In practice such defects are likely to damage only other parts of the services themselves unless they lead to the operation of a peril such as fire that would.) + Damage to the whole building caused by a defect in the mechanical and electrical services. There is an exclusion of cover for the first 12 months after practical completion. Clearly.(a) Weatherproofing and waterproofing cover Damage resulting from ingress of water caused by a defect in the weatherproofing and waterproofing is usually. Optional covers Some insurers offer the following in addition to the basic cover: + Damage to the whole building (including the internal and external services) caused by a defect in the non-structural parts of the building. Insurers take the view that the developer must take care to appoint a contractor that will be around long enough to rectify defects during this initial period. However. in any case. (In practice such defects are unlikely to have catastrophic consequences. anything is possible. (ii) Waterproofing + These are the waterproofing elements that are designed to prevent water from entering the building below ground level. This is seen by some as an important exclusion that detracts from the value of the policy. Cover operates in the event that physical damage is caused by water entering the building due to a defect in the weatherproofing envelope of the building at or above ground level or the waterproofing seal below the ground floor. + skylights. However. It is unlikely cover will be available for damage to protective coatings. decorative finishes and floor coverings apart from permanent floor finishes. (i) Weatherproofing The weatherproofing envelope will normally include: + roof coverings. included as standard within the basic cover. As inherent defects in wall cladding and roofing are a major source of damage it is always best to include it. + external windows and doors excluding moveable elements. some definitions of structural parts include items that other insurers may define under non-structural parts. it is not possible to remove the restriction. CONSTRUCTION INSURANCE | 57 . this is an important differentiator and may influence the choice of insurer. 2. As mentioned above. + the ground floor slab. + external walls and cladding. be covered under an annual all risks material damage policy. weatherproofing and waterproofing. but not always.) (a) Non-structural parts These are generally regarded as being all other parts of the building not included under the heading of structural parts.

The fourth exclusion. apparatus or pipe. insurers pay for: + + + + cost of repairing damage. + war and allied risks. explosion. professional fees. Insurers take a similar view on why it is justified. + window cleaning equipment. + electrical distribution systems (including fixed lighting). earthquake. + cost of removing contents whilst work is carried out (there is a limit on this. + lifts and escalators. which may need to be raised). 3. cost of remedial action to prevent imminent damage. + extra cost of reinstatement to comply with public authority requirements. The above are the main elements of protection but individual insurers’ wordings should be examined for the full cover. although. escape of water or oil from any tank. Main exclusions applying to all covers The main exclusions applying to all covers are as follows: + works which are outstanding at practical completion. + load or application of pressure in excess of the design load or pressure. + fire. storm. lightning. in practice. like the exclusion of weatherproofing and waterproofing cover referred to in 1(a) is perceived by some as too harsh. cost of debris removal and site clearance. (a) Exclusion applicable to the mechanical and electrical services cover only + Testing and intentional overloading of the mechanical and electrical services unless in accordance with manufacturers’ or suppliers’ instructions 4. 58 | CONSTRUCTION INSURANCE . + building management systems and building security equipment (including car park ticket machines and barriers and all types of electrical security doors) but excluding external services. + use of the property other than that for which it is designed. + pollution and contamination. flood. What insurers pay for in the event of a claim In the event of a claim.(b) Mechanical and electrical services An extension of some insurers’ policies cover can be provided for damage caused by inherent defects in: + heating. + inherent defects discovered during the defects liability (or maintenance) period and the remedying of which is the contractor’s responsibility under the terms of the building contract. they may be prepared to limit its effect. + wear and tear and gradual deterioration. ventilating and air conditioning systems and fresh and waste water systems.

The technical auditors’ fees are usually paid in stages as they carry out their tasks during the design and construction period. usually range from GBP 0. The benefits to the insured of buying the cover + It provides immediate funds for repairs and minimises disruption. nonstructural and M&E services cover usually costs from 1% to 2% of total contract value inclusive of fees. weatherproofing. + There is more peace of mind for all the project team. The risk of a defect arising is reduced and this is particularly important because if it is a defect that could give rise to damage the insured may be saved from having to pay for losses falling below the deductible as well as the deductible itself if larger claims are avoided. + It means a phone call to a builder rather than a lawyer when damage is discovered. + Innovation is encouraged. + It can be a major advantage when negotiating a sale or letting. Some insurers now offer instalment facilities for the premium over the period of the policy and some may not require the 10% deposit. + Less time and money is spent on arguing about contract conditions and warranties. + The potential for confrontation is reduced. some major tenants are now insisting on the cover being in place. engineers.5. 8. CONSTRUCTION INSURANCE | 59 . Total cover including structural. the imposition of a higher deductible. Others do not charge the fees separately but pay the auditors out of the deposit premium they receive. usually. 10% of the premium is usually paid when the insurance is taken out and the other 90% is paid soon after practical completion. In fact. Some insurers charge the auditors’ fees separately from the premium. lessees or financiers. 6. + It meets the insurance requirements being imposed by many financiers. + Insurers are usually (but not always) prepared to waive subrogation rights against architects. waterproofing. The perceived benefits for the construction project if the cover is purchased + Developers do not need to rely to the same extent on the project team’s professional indemnity insurance. including the fees. + Everyone can concentrate on getting the actual design and construction right. The premium and technical auditors’ fees for basic structural cover plus weatherproofing and waterproofing for 12 years Typical rates for the basic cover. contractors and others (but not suppliers) on payment of an additional premium and. Who is protected by the insurance policy? + The policy will usually be in the name of the developer but is freely assignable to new and subsequent owners. + The employment of the technical auditors required by insurers to protect their own interests has benefits for the insured as well. 7.65% to GBP 1% on the total contract value rising to GBP 2% for completed buildings.

+ to issue a certificate of approval to insurers at practical completion. to issue a further certificate relating to weatherproofing/ waterproofing cover for 12 months after practical completion. the rights and obligations of the participants in a project are governed by the contracts into which the parties enter and the prevailing law. It is possible for occupiers to purchase any kind of business interruption cover just as they can for damage by fire or other perils. whether loss of rent or otherwise.9. Consequential loss covers When buildings cover is purchased. In addition. It is important that brokers are advised of any likely requirements for consequential loss covers. + to clear up problems arising with the contractors or professional team. preferably without the need to involve the insurers or the developers. This type of contract is dependent upon (collateral to) the underlying principal contract such as a consultant’s appointment or a construction contract. + to check that communication within the project team is effective and that responsibilities are clear.2.1 The rationale for collateral warranties or third party rights As mentioned in the opening pages to these guidance notes. The precise role will depend on the demands of individual insurers. the basic policy will usually include minimal cover (say £250. explore or appreciate its benefits and simply rely only on contract claims and the use of collateral warranties or the Contracts (Rights of Third Parties) Act 1999 for security and redress in respect of the consequences of defective design and construction and the assumption of continued availability of professional indemnity insurance for key parties in the project. it is usual for loss of rent to be insured as well. which creates a direct contractual link to enable the party granted the warranty to enforce certain rights against the grantor under certain circumstances. 5. The role of the technical auditors The role of the technical auditors is: + to monitor the design and construction. 10.2 Latent defects insurance and collateral warranties/third party rights Whilst latent defects insurance has been increasingly used in the UK. + to visit the site at regular intervals. Where project parties want specific rights relating to a contract to which they are not a party. a certified true copy of which must be provided to the beneficiary with the collateral warranty (otherwise the rights under the warranty cannot 60 | CONSTRUCTION INSURANCE . there are still many who do not know about.000 or 10% of the sum insured) for the cost of removing contents from the building whilst repairs are completed. + if applicable. at the outset. 5. this is often dealt with by means of a collateral warranty. Such requirements may substantially increase the exposure and influence the markets to be used.

A claim has to be made and liability established before the injured party will receive any compensation. Often it is difficult to know whether a problem is a design or workmanship issue and this adds to the cost. Third party rights need negotiating in the same way as the rights under the collateral warranty. reliance on warranties/rights is not a satisfactory solution for parties trying to secure against the risk of something wrong with the design and specification of a completed development over a period of up to 12 years from completion.g. the use of which is growing.2. Significant effort (and cost) is put into obtaining these. there is still one major obstacle that has to be overcome before their value is realised. time and difficulty in seeking and obtaining redress and monetary compensation from the parties who are liable and their insurers. Some of these can prove troublesome (and hence extra costly) to obtain together with the appropriate certified copies of the principal underlying contract. The given rights will then automatically be conferred on the specified third party (which may be identified as a class) when the principal contract is executed and dated without the need for a separate contract document to be engrossed and executed by the relevant parties to make those rights enforceable. Typically. 5. an option to ‘step-in’ and take over the underlying principal contract. This is particularly the case with subcontractors. If this statute is used. design standards and specifications and. Negligence or fault still has to be proved and that may be both expensive and timeconsuming. therefore. It is common to have to procure at least 30 and often 100 or more collateral warranty documents over various stages of a project. An alternative to the use of collateral warranties is available through the Contracts (Rights of Third Parties) Act 1999. If the third party is specified as a class (e. Workmanship issues will not generally be covered by insurance unless they happen to fall under the all risks policy before completion or the buildings/ property insurance following completion and action would need to be taken against the appropriate party (ultimately the contractor). This can be time consuming and creates further paperwork. The grantee then has to check every year that the warranties/rights are still so supported.2 The drawbacks to reliance on collateral warranties and third party rights Once the project has been completed these warranties/rights will often only be of value if the party granting them is still supported by the requisite professional indemnity insurance and even this assumes that the warrantor is still in existence and not insolvent and that the cover is available on reasonable terms. Even if the collateral warranties/rights are well drafted and professional indemnity cover remains in force for up to 12 years. third party rights may be enshrined in the principal contract (usually in a schedule).be clearly interpreted). In many ways professional indemnity cover and. but the real long term value of many collateral warranties is questionable. It is now an option in some standard form construction contracts. in respect of parties with a close interest in ensuring the project is completed. the rights dealt with under a collateral warranty relate to workmanship. with no certainty of a positive result and an uncertain timescale. One of the big advantages of latent defects insurance is that it is not necessary to prove fault or negligence and compensation is available relatively quickly CONSTRUCTION INSURANCE | 61 . tenants) a further specific short notice should be given to notify the giver of the rights of the specific third party.

+ Investigate and understand the role and responsibilities of the technical auditor and share this knowledge with everyone associated with the project and make use of the technical auditor’s role as widely as possible.5 below) and cannot replace or cover all categories of liabilities that may otherwise be available via a claim under a collateral warranty/third party rights schedule.2. Make the approval of the technical auditors a condition of achievement of practical completion and reflect this in the building contract and the contract administrator’s appointment. But. + Use the Contracts (Rights of Third Parties) Act 1999 to avoid the need for collateral warranties and thereby save the cost involved in obtaining the completed warranties from consultants and contractors.2.(and usually without great expense) to the insured provided. 5. + If a waiver of subrogation against the design team and contractors can be purchased from the latent defects insurer. Latent defects insurance (LDI) is primarily for new build (see ‘some questions answered’ para. consider and explore a discount on consultant fees and contractor pricing. of course. Some questions answered How much does latent defects insurance cost? The cost will depend on a number of factors but 1% of the cost of construction will usually be enough to buy most of the cover normally purchased as well as paying for the auditors’ fees.3 Is latent defects insurance a panacea for developers? It should not be viewed as a panacea. It needs a little forethought and planning and it will bring real benefits to. at the moment.2. management companies and purchasers. 5. The existence of this type of policy should be a significant attraction to a purchaser of the development or tenant of the whole or a substantial part of the development with a full repairing covenant. if approached in an enlightened manner with a progressive project team there will be ways of getting real value out of a atent defects policy and seeking cost saving elsewhere.4 Getting best value from the policy + Research and put into effect a latent defects policy at the outset of the planning and procurement process.2. an investor. for example. When banks start lending again they may be even keener than before on seeing the cover in place.5 . This will provide a benefit not only in terms of obtaining the best possible premium for the policy. tenants (with full repairing covenants). Depending on market conditions it may be a factor influencing ease of rental or ease of sale. it is unlikely to respond to a defect during the rectification or latent defects period. + Consider and explore whether the party providing finance might use the technical auditors as their technical monitors and so seek to save costs. The premium is initially calculated using a breakdown of figures from the contract price but is adjusted on completion to 62 | CONSTRUCTION INSURANCE 5. but also optimising the design and procurement process so costs can be saved. There must be physical damage for an LDI policy to respond and. + Purchase the broadest cover available that is appropriate for the particular project and the needs of the key third parties (this might include mechanical and electrical). 5. the damage suffered is covered under the policy.

if any.reflect the cost of rebuilding the completed construction. How long does the policy run? The period of insurance is usually for 12 years from practical completion. When should I buy it? Although the cover does not take effect until practical completion or shortly afterwards. should a failure of the new structures lead to damage elsewhere. You will then be asked to complete a proposal form. method statements and bar charts. the number of insurers willing to quote may be diminished. the cost will be more. the deductible for each and every loss may be doubled as well and some of the benefits of using a technical auditor may be lost. There will then be plenty of time for the technical auditors to carry out their duties. CONSTRUCTION INSURANCE | 63 . After that it becomes progressively harder. this is the best means by which insurers can gather the information they need to assess the risk. which may have a bearing on their costs. Success in buying the cover is more likely if only a facade is being retained with a new building behind it. The cost can be far cheaper for larger developments. Is it possible to buy the cover for buildings where construction has already started or on completed buildings? The short answer is ‘yes’. Do refurbishments and redevelopments qualify for cover? The cover is designed for new buildings. this rather defeats the objective of the policy and the premium saved may not make it worthwhile. Ideally the insurance should be considered at the outset of the planning and procurement process. Loss experience shows that insurers suffer more losses on buildings where the technical auditors had less opportunity to have input into the project and check the design and quality of the workmanship. including premium cost. How do I go about buying the cover and what will happen then? The first step is to approach an insurance intermediary – preferably one with a good understanding of the subject. extent of cover on offer. including plans. Furthermore. A number of documents will also be required. it is cheaper than buying the cover once building work has started. insurers should really be approached long before construction commences. However. levels of deductible. If cover is not purchased until after completion it will still have to expire on the same date as if it had been purchased from completion. Insurers and auditors will make clear their precise requirements. deposit premium. ground conditions report. drawings. Sometimes the latter is included within the deposit. mainly because the auditors’ fees are proportionately less. In fact the later the cover is purchased the more it costs and the less the benefits. Finally. Whilst it is possible to buy cover for shorter periods. possibly twice as high. the sooner the auditors start work the greater the potential benefits of their involvement. but if there are new structures among the works it may be possible to buy protection for the new parts with consequential cover on the rest. Insurers will then advise provisional terms. and the technical auditors’ fee.

and insurers may not even be advised. you will need to supply any further documentation required and the technical auditors will commence work. they are bound to issue a policy in accordance with that offer subject to the audit being satisfactory. even at 1% or less.6 Clearing up the misconceptions One of the most frustrating things about handling latent defects enquiries is the number of misconceptions that have grown up around it. a policy will be issued. They will submit regular reports to the insurers but their intention is that at practical completion you will secure the cover you were seeking from the outset. there could be savings in other areas. Why is the whole building not covered against damage? The whole building is covered against damage caused by inherent defects as defined. Nobody will pretend that. Any problems they identify will usually be resolved immediately. An important point is that once you have accepted the insurers’ offer of cover. To a certain extent this is because insurers have not really promoted the cover. Their task will be easier if the necessary introductions are made to those working on site. However. It is sometimes possible to pay by instalments and if the cost could be recovered from tenants it could add less than 1% to a tenant’s annual outgoings. the cost of the cover is a welcome addition to the budget. although others feel that their policy definition of structural parts is so wide that the risk of a major problem arising from the remaining parts is negligible. 64 | CONSTRUCTION INSURANCE . those relating to defects arising in the first 12 months after completion. some insurers offer non-structural defects as an add-on.Once you have accepted the terms and paid any debits. if the insurance was regarded as an integral part of the package and not just as an add-on. Once the premium is paid. However. with as little fuss as possible. Confusion sometimes arises because under the basic policy cover the inherent defect has to be in the structural parts of the building as defined. which rarely differ from those quoted.2. Does it really cost between 3% and 7% of construction costs? Cost has been dealt with elsewhere. In the following paragraphs some of the misunderstandings are stated and the true facts explained. It is usually 1% or less for a 12-year policy. In practice the exclusions refer to defects that should be put right by contractors. If there is a disagreement there will be negotiations and in the unlikely event of a compromise not being reached the implications for cover and terms will be explained. The auditors will carry out their duties both in their office and on site. 5. In other words there is no cover if the inherent defect is in the non-structural parts. There should be no nasty surprises at the end! At practical completion the auditors should be able to sign off the risk as suitable for the policy. their role is explained and effective lines of communication are drawn up. The cover is not wide enough and does not give developers the certainty they require There is an argument that two of the policy exclusions. Insurers will then advise final terms. remove cover that developers really need in order to remove uncertainty about their potential liability for defects after completion.

The technical auditors duplicate works unnecessarily (they also add to the cost of construction. the deductible will only apply once. of course. Even without the auditors’ involvement. the CONSTRUCTION INSURANCE | 65 . The Contracts (Rights of Third Parties) Act 1999 gives all the protection needed Whilst it is true that this Act may help. the activities of the technical auditors should actually reduce the risk for everyone. Thirdly. including the insurers and their auditors. as the brief is only to make sure the building is erected in accordance with good practice and the building regulations. but the real concern is usually based on the belief that they are duplicating the work of other auditors who may be acting for a tenant or funder. as latent defects insurance becomes more common then in the longer term this may lead to a transfer of some risks away from PI policies and a subsequent reduction in PI premiums. The audit should not increase building costs or cause delay. fact experience seems to indicate they only do so in rare circumstances. to a large extent. The auditors do duplicate some work because they are a checking agency. but that does not guarantee that if damage occurs the cost of repairs can be recovered quickly (or at all if the liable party becomes insolvent) even if negligence can be proved. My professional team sees no advantage for them in the cover being in place and have a fear of being sued by insurers if they get things wrong There are several points to make here. A latent defects policy does not require proof of negligence and funds can be available relatively quickly for remedial works. interfere with the project and can be the cause of delays. In the meantime. defeats the objective of the cover It depends on the wording of the policy but the usual position is that if there are a series of claims arising from the same cause. In practice the other auditors are probably working to a different brief and their audits are unlikely to be nearly as thorough. First. there is still a reliance on negligence being proved and the guilty party having sufficient funds available by insurance cover or otherwise. The damage may still not be repaired in the meantime. the insurers’ requirements for a risk-free building will add to costs) If all of the above were true the cover would have been dead in the ground years ago. Fourthly. it may be possible to purchase a waiver of subrogation in favour of some parties involved in the project. Secondly. In. We already have collateral warranties and always follow up to make sure that professional indemnity covers remain in force for years after the contract is completed Fine. The same drawbacks apply as with collateral warranties (see above). A claim must be made and proved against the parties with potential liability. If there is potential and unnecessary duplication this could be tackled and removed by negotiation with interested parties. No doubt some of these things are true some of the time. The deductible is applied to every claim and this. who may not be in existence years hance. but they are unintentional. there is no evidence that insurers do sue as a matter of course.

+ make sure that all those working on the project know from the outset that cover is being purchased and they understand the advantages and implications for them. Hard copies can be obtained from Aon Limited. 66 | CONSTRUCTION INSURANCE . + advise insurers of the final sum insured on buildings. + appoint someone to work with the technical auditors to ensure that the documents and information they require are made available in good time.7 Key issues Do: + think about latent defects insurance at an early stage in order to minimise the cost and maximise the benefits.rics. It should not be an afterthought purchased only to satisfy funders or tenants. 5. + dismiss the insurance out of hand. Ideally. if latent defects cover assumes the right place in the whole insurance umbrella. Do not: + buy it too late and pay higher premiums as well as losing some of the benefits of the auditors’ involvement. the same person should also liaise with the auditors on site visits. issue 21 (autumn 2006) (Aon Limited) – available at www. It is important to appreciate how the basic policy cover provides inbuilt protection against inflation in construction costs during both the period that would be required for repair or reinstatement following damage and the period of insurance. + make it clear from the outset if any consequential loss cover is required as this will have a bearing on the market placement. on which the premium will be assessed. until you are satisfied that it is calculated in accordance with the requirements of the particular insurer’s policy wording. The cost can almost double if the insurance is purchased after the foundations have been started. Experience suggests that once a client purchases the cover. they go on doing so. + think of the cover as an integral part of the procurement and construction process. 5. Getting it wrong can be expensive in terms of unnecessarily high premiums or inadequate protection.2.8 Further information For further information see Property Eye.professionals will no longer be first in the firing line when insured defects are discovered.org.2. the professionals might be able to rid themselves of some of the worry and paperwork and devote more time to what they like doing and do best. Finally.

Construction insurance 1st edition. The guidance note covers the following key areas: • Introduction • Rights and obligations of principal parties • Contract conditions • Global implications • When the various insurance covers need to be considered • Surveyor’s guide to professional indemnity (PI) insurance • Director’s and Officers’ (D&O) liability insurance • Consequential loss insurance for construction risks • Contractors all risks or contract works insurance • Employers’ liability insurance • Environmental insurances • JCT non-negligence insurance • Public liability insurance • Surety bonds • Unexpected archaeological discovery insurance • Insurance of existing buildings undergoing refurbishment or development • Project insurance and property developer all risks policy • Risk management and insurance • Statutory inspection of plant and machinery • Third party interests and ‘joint names’ under construction policies • Latent defects insurance and collateral warranties/third party rights rics.org . guidance note This guidance note is designed to outline best practice for property professionals dealing with construction insurance. It offers practical help and advice for each stage of a construction project – from the initial development. through to project completion.

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