Post By: Insurance Top Stories
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- Employer’s Liability Insurance;
- Public Liability Insurance;
- Contractor’s All Risk (CAR) Insurance;
- Combined Policies;
- PI Insurance;
- Design and Build PI insurance;
- Motor Vehicles and Movable Plant Insurance;
- Latent Defects Insurance;
- Insurance Against Loss of Delay Damages; and
- Terrorism Cover.
Similar types of cover are in common use in the USA and many other countries but are often given different labels (Cunningham and Fischer, 1998; Lew and Overholt, 1999). Other insurance products that may be bought by project participants but are not referred to in the standard forms of contracts of the construction industry include cover for: director & officer liability (Hogarth, 2008); political risk (Hayes and Cummings, 2001); unforeseen conditions and force majeure risks (Smith et al., 2001); revenue shortfall risk (Smith et al., 2001); and environmental and pollution damage risks (Smith et al., 2001; Hogarth, 2008).
Brief descriptions of the main traditional insurance products synthesised from the sources already referred to are next provided. They are to be read with the caution that the contents of each type of policy varies from insurer to insurer and that the language used in construction contracts to describe the protection required is not always replicated in the standard insurance products. There is therefore a need, before selecting the product of any insurer, to analyse it to ensure an exact match between the protection offered and the requirements of the particular contract. If there is a mismatch, there are two main courses of action: either an extension to the basic policy is negotiated with the insurer in question or the project owner is persuaded to amend the contract terms to reflect the policy available. This task is so technical that, unless there is specialist in-house expertise, the services of a construction broker must be obtained.
Employer’s Liability Insurance
Under the Employer’s Liability (Compulsory Insurance) Act 1969, with a few exceptions, it is compulsory for any person or organisation employing people to take out and maintain insurance against its legal liability for accidents to, or diseases sustained by, its employees in the course of their employment. The reason for it being compulsory is to ensure that an injured employee or his dependants obtain compensation regardless of whether or not the employer has the financial resources to meet the employee’s claim. Each project participant employing people and falling with the legislation must therefore comply with the statute.
Public Liability Insurance
Public Liability Insurance, also called “Third Party Policy”, is usually taken out by contractors and sub-contractors. It covers the insured’s liability for: injury to or death of people other than its own employees; and damage to property other than the construction works. Sometimes this cover is extended by contractors to cover loss or damage for which the contractor is not liable to the project owner, e.g. subsidence to neighbouring property and other types of damage that are the unavoidable consequences of carrying out the works in accordance with the contract documents for which the project owner, rather than the contractor, is responsible.
CAR Insurance
This policy covers loss/damage to the contractor’s construction works, site materials and constructional plant. The name is a misnomer because no policy available in the insurance market covers every form and cause of loss/damage to contract works.
Combined Policies
Although the common practice is to have cover against employer’s liability, public liability and loss or damage to the contract works as separate policies, it is possible to have a composite policy covering all these tree risk categories. This has the advantage of administrative convenience, e.g. completing one proposal form, paying one premium and having one document to deal with.
PI Insurance
The purpose of this type of policy is to indemnify professional persons (e.g. engineers, architects and surveyors) against liability arising from any breach of their professional duty. It is normally taken on an annual basis. The availability of such insurance cover has often made the construction professions, particularly designers, attractive targets for legal suits.
A major difference between this type of policy and the others is that it is on a “claims made” basis, i.e. the insured is entitled to indemnity only if the policy was effective when the claim was made. Whether the policy was in place when the professional acted in breach of his duty or when the damage occurred is irrelevant. The other types of policies are on an “occurrence” basis, i.e. the insured is covered only if the insurance was in place when the damage or loss occurred. For this reason, underwriters of PI policies will normally pay more attention to the previous activities of the insured than with other types of policies.
Design and Build Professional Liability Insurance
Under the contract for the procurement of a facility by the design and build procurement method, the contractors carries the design risk even if it sub-contracts the design element to a professional architect or engineer. The contractor under a traditional contract would also be taking on responsibility for design if part of the design is to left to the contractor to provide. Under English common law the contractor in each of these situations is under a duty to ensure that that the design it provides is fit for purpose (see Viking Grain Storage Ltd. v. T. H. White Installation Ltd. (1985) 33 BLR 103). Under the terms of some standard forms of contract this duty is often limited to one of exercising reasonable skill and care, the standard required of professional architects and engineers. An option open to the contractor is to rely on the cover of external consultants to which it sub-contracts the design element of the project. However, such an approach carries the danger that the consultant’s cover might not be in alignment with the contractor’s design risk. Furthermore, the contractor would be exposed should the consultant, for whatever reason, fail to take out the cover or renew it. Prudence therefore demands that the contractor takes out its own independent design and build PI insurance to cover its design risk. Some standard forms of contracts expressly require the contractor to maintain such cover.
Terrorism Cover
Traditionally, the CAR Insurance, the insurance required against loss or damage to executed work and site materials, was defined in contracts so widely that the obligation to take out and maintain it covered damage or loss from terrorism. In contracts for the modernisation or modification of existing facilities the requirement to insure the existing facility and its contents against loss or damage did not exclude damage by terrorism. Insurer’s response to increased terrorist activity in recent times has been to withdraw full cover in respect of terrorism from their standard commercial policies on account of astronomical rises in levels of claims. The UK Government stepped in to make full cover available by establishing Pool Reinsurance Company Ltd (Pool Re), the function of which is to take the risk away from insurers. This enables terrorism cover withdrawn from the standard policies to be bought back with premiums graded by the risk associated with the zone of the location of the works. It is these premiums that go to fund the government’s scheme. Lloyds now provides alternative cover which can be wider than that available through Pool Re (Hogarth, 2008).
Motor Vehicle and Movable Plant Insurance
Execution of construction projects requires the use of motor vehicles to transport men, materials and machines between their places of origin and their points of use. Insurance has to be taken against certain risks associated with the use of such vehicles. Under the Road Traffic Act 1972 a driver of motor vehicle on a road must have, as a minimum, insurance against personal injury and death caused by the vehicle. Extended cover, referred to as “Third Party, Fire and Theft” cover, is available. This covers not only personal injury and death but also damage to property and loss of or damage to the vehicle from fire or theft. An even more extensive cover, referred to as “comprehensive insurance”, includes accidental damage to the vehicle itself.
Insurance Against Loss of Delay Damages
Liquidated damages (delay damages specified in the contract) are normally based on estimates of the loss likely to be incurred by the project owner if it is not completed by the contractual completion date. Where the contractor is awarded extension of time under the terms of the contract, liquidated damages for the period of extension are no longer payable even though the project owner may still suffer loss the from delayed completion. For example, a developer would still loose rental income from which to repay the cost of his development. On some projects a prudent owner may wish to insure against the loss of the liquidated damages.
For two reasons, the project owner’s actual loss may be far in excess of the liquidated damages in the contract. First, as liquidated damages are assessed at the time of contract execution, actual events may turn out different from those assumed in their calculation, e.g. higher inflation than anticipated. Second, it covers the project owner for only the period of delayed completion whilst losses could be incurred beyond that period. For example, the effect of the delay may that prospective tenants pull out together.
Latent Defects Insurance
The terms of some construction contracts may be such that the contractor’s liability for defects comes to an end on the issue of a final certificate. Even where liability is for the appropriate limitation period, the project owner may be unable to assign its rights under the contract to third parties, e.g. tenants and purchasers, because of a common practice of expressly prohibiting assignment in the relevant contracts. Latent defects insurance is designed to protect the project owner against defects that it might have to make good itself. The problem of defects was investigated by the National Economic Development Office (1988), which produced a report recommending a type of latent defects insurance referred to as “Building Users Insurance against Latent Defects” (BUILD). Modelled on a type of insurance, referred to as “Decennial Insurance”, that is mandatory in France and other parts of the continent, its main attributes recommended are:
- it is taken out by the owner;
- as a minimum, it should cover material damage to the structure, foundations and weather-shield envelope occurring within ten years of practical completion;
- it should be non-cancellable;
- to avoid the costs of litigation to establish who is responsible for the loss, the insurer should waive its rights of subrogation against the contractor, subcontractor and designers; and
- it is assignable.
Insurers providing this type of cover usually appoint independent consultants to vet the design of the building and to check quality and the contractor’s methods and procedures during its construction. The cost of verification is normally charged to the insured in addition to the normal premium. Because of the value of such verification in limiting claims, this type of policy is commonly taken out before actual construction on site. However, it is possible, for extra premium, to obtain such cover after project completion.
To cite this document:
Issaka Ndekugri, Hannah Daeche, Diwei Zhou, (2013) "The project insurance option in infrastructure procurement", Engineering, Construction and Architectural Management, Vol. 20 Issue: 3, pp.267-289, doi: 10.1108/09699981311324005
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