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Back to basics law: how to make sure you have full construction contract insurance

Antony Edwards-Stuart QC looks at the different forms of construction contract insurances

There are four main types of insurance policy that may cover the activities of the contractors and professionals involved in a construction contract: all risks, specified perils, public liability and professional indemnity insurance. Sometimes one or more of these can be included in a single policy.

ALL RISKS
This is a form of property insurance that covers loss of or damage to the property insured, whether existing buildings, the works or materials. Although known as all risks cover, it does not cover every loss - some may be excluded, such as damage from ionising radiation. Most importantly, the loss must be fortuitous from the insured’s point of view, even though it may be the result of someone else’s deliberate conduct (eg. theft). But a loss is not fortuitous if it is caused by the insured - for example, if the employer does not pay the contractor who as a result removes materials delivered to site, that is not a fortuitous loss and there will be no claim. The contract may provide for either the contractor or the employer to take out this insurance in the joint names of both (and subcontractors).

SPECIFIED PERILS
This is also a form of property insurance, but it only covers loss of or damage to the property insured from certain named perils. These are usually losses caused by events such as fire, explosion, storm, flood and bursting or overflowing of water tanks, pipes and other apparatus, earthquake, lightning, riot and civil commotion. Such a policy would not cover, for example, damage caused by a falling tower crane or the collapse of an under-designed beam. Many of the standard forms of building contract require the existing structures to be insured against specified perils and not against all risks, whereas the works are often required to be insured against all risks. Again, the contract may provide for either the contractor or the employer to take out the insurance in joint names.

PIBLIC LIABILITY INSURANCE
This is a form of insurance, usually taken out by the contractor, which covers the liability of the contractor and subcontractors, and sometimes of the employer also, against claims by third parties for injury or damage arising out of the carrying out of the works. The liability has to be established before the insurer has to pay, usually by a judgment of the court (but it can be by a bona fide settlement). However, most public liability policies provide that the insurer has the right to take over the conduct of the defence to the claim and the policy will cover the costs of doing so. Generally, the insurers will settle the claim if they can, unless it is clearly unfounded. The policy almost invariably covers the claimant’s legal costs.

PROFESSIONAL INDEMNITY INSURANCE
This is a form of insurance which typically covers professionals, such as architects, engineers and surveyors, against liability for professional negligence. However, large contractors also carry professional indemnity insurance to cover those of their activities which are of a professional nature. The policy will usually contain a comprehensive definition of what constitutes professional activities. Professional indemnity insurance and public liability insurance are written by different markets in the insurance industry, and so historically the two types of insurance have always been quite distinct (a public liability policy will nearly always exclude liability for professional negligence). Professional indemnity policies contain different levels of exclusion in respect of the cost of rectifying items of work that are defective in design or specification - for example, the policy will often exclude the costs of repairing the defective item itself and, sometimes, the additional cost of damage to other property that is unavoidably caused in order to rectify the defective item.

CLAIMS MADE, OCCURRENCE BASIS, NOTIFICATION OF CLAIMS LIMITS
Property insurance is always covered by reference to the date of the loss, which must be within the period of insurance. Liability policies, by contrast, are generally written on a ‘claims made’ basis, so that the policy will respond to a claim that is first made against the insured during the period of insurance. Liability policies invariably contain a provision by which circumstances likely to give rise to a claim must be reported and, if reported within the period of insurance, will be covered by that policy irrespective of when the claim is finally made.

All policies of insurance require prompt notice to be given of a loss, claim or circumstance likely to give rise to a claim. Notice clauses come in a wide variety of forms and many are expressed to be a condition of liability, so that if notice is not given in accordance with the policy terms there is no cover. Although the courts tend to be as generous as they can in interpreting such clauses, very often their wording leaves the court with very little room for manoeuvre. If you take away nothing else from this article, please note the crucial importance of always ensuring that losses or claims are promptly reported.

Almost all property and liability policies have a self-insured retention (or deductible) and limits (which, in a property policy, may be different for each type of property covered). The policy limit is the amount that the policy will pay, but it may be a limit that is applied to each and every claim or it may be an aggregate limit - so that once the total of all claims under the policy in a given year reaches the limit the policy is effectively exhausted, even if the period of insurance has not expired.

THE EFFECT OF JOINT NAMES INSURANCE ON LIABILITY
Where parties to a construction contract are jointly insured against the same risk, claims between them in respect of a loss caused by that risk are usually excluded. However, whether or not this is the case will depend on whether the terms of the contract demonstrate an intention that in respect of certain events the parties are to look only to the insurance to recoup their losses. This is where the lawyers come in.

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