Construction insurance

Advice on insurance should be undertaken with caution and deferred to specialists as often as possible.
Surveyors who do provide insurance advice may find it necessary, in the future, to be regulated as
insurance intermediaries.
The insurance needs of a project are detailed in the contract, for example, the JCTs standard forms of
contract gives three options for insuring the works. Insurance provision should be detailed and planned
for as part of the project plan.
As a contractors insurance is not usually project specific, it should be checked as part of this process
with regard to the details of the project.

Advising on insurance
For the construction practitioner, insurance represents one of the most difficult and potentially
dangerous areas on which they may be called to advise a client. Few construction practitioners
understand the subject in sufficient depth and breadth to advise without external specialist assistance.
Many do understand the limits of their own knowledge and will not advise on insurance matters without
first seeking specialist advice themselves or advising their clients to do so. Others jump in, unaware of
the pitfalls, and suffer the consequences.
The case of Pozzolanic Lytag Ltd v Bryan Hobson Associates served to highlight the dangers of
a construction practitioner taking on responsibility for insurance matters, even inadvertently.
To protect against these risks, construction practitioners should:

include a specific exclusion with regard to advising on insurance in their terms of appointment;
never advise on insurance without qualifying that advice to the extent that it should be verified
by an appropriately qualified and regulated specialist;
never advise on how much insurance should be effected or what level of uninsured excess is
appropriate. It is appropriate to advise on the risks and potential financial consequences, but a
construction practitioner is rarely in a position to advise a client on the extent to which that risk
should be insured.

Obligations
Conditions of contract
The majority of projects with which practitioners are involved are likely to be carried out under one of
theJoint Contract Tribunal (JCT) standard forms of building contract. It is recommended that all
practitioners ensure they are reasonably conversant with the impositions of these contracts and what is
required to meet them.
In particular, it should be appreciated that the JCT forms contain options regarding who is responsible
for the insurance of the works (Options A, B or C). It is not appropriate to utilise more than one of these
options even if a contract involves new build works as well as work in or on an existing structure.

Option A should be used for new build projects where the contractor is to be required to effect
the contract works insurance.
Option B is for use on new build projects if the employer is to effect the contract works
insurance.
Option C is for works in or on existing structures and requires the employer to insure the
existing structures and the contract works.

Joint fire code

Following a significant number of major and costly fires on contract sites, the insurance and construction
industries met with other interested parties to establish a code of practice aimed at ensuring a standard
approach to minimising fire exposures. The code draws together many good practice concepts and
standardises procedures. Compliance with the provisions of the code is a requirement of the vast
majority of Contractors All Risk policies and non-compliance can lead to suspension or cancellation of
cover.
Joint Code of Practice: Fire prevention on construction sites (7th edition) is available to purchase from
the Fire Protection Association.

Checking policies
Checking the validity of policies
Unless project specific policies are put in place, most insurance policies are written on an annually
renewable basis. The construction practitioner therefore needs to urge their client to ensure that the
validity and adequacy of the initial policy(ies) is checked carefully and that such checks continue at each
renewal of said policy(ies). This ensures continuity and that any significant changes to the scope of
cover and the conditions applicable are highlighted to the employer. This checking process should
continue for the entire period of the liability up to 12 years for professional indemnity (PI) insurance
policies.

Checking the scope of policies

When checking the adequacy and scope of insurance policies, particular attention should be given to
ensuring that they meet the contractual obligations as well as to the applicable policy exclusions,
conditions and excesses. Some aspects of cover that insurers may consider as being particularly highrisk may be the subject of limits of indemnity that are 'in the aggregate'. This may be true, even on
policies where the main limits are on an 'each and every claim' or an any one occurrence basis.
Examples of this may be claims arising out of environmental damage or contamination, products liability,
etc. under a public liability policy.
Policy extension endorsements or additional, supplementary cover may be necessary for exclusions
that the client does not wish to accept. This will generally involve additional premium(s).

Claiming against insurance policies

When claiming against insurance policies it is necessary for the insured party to demonstrate both that it
has incurred a loss as a direct result of the insured event and that the loss has been reasonably
incurred. It is particularly important to remember this principle when settling a number of claims, some of
which may relate to insured events and some of which may not.

Construction insurance types

Contractor's all-risks or contract works insurance

Contractor's all-risks or contract works insurance (CAR) is insurance that is usually taken out by a
contractor to cover loss or damage to the works and materials during construction. Such policies usually
contain a list of industry-standard exclusions, which have the effect of excluding cover in the event of
damage caused by certain events, such as war or nuclear contamination, although the extent of these

will vary from one policy to another. The insurance will compensate for claims arising out of loss or
damage from all events otherwise excluded.
CAR insurance is usually taken out in the joint names of the contractor and the employer as is required
by the vast majority of standard forms of contract. Under the standard JCT forms there is a requirement
for certain subcontractors to be included as joint insureds for certain perils or for insurer's rights of
subrogation against such parties to be waived in respect of those perils. Sometimes, subcontractors and
consultants are also included as joint-named parties across the board. This type of insurance may be
obtained by means of an annually renewable policy covering all the contractor's work during the policy
period and cover generally ceases when the works are handed over to the employer.
Annual CAR policies usually contain restrictions relating to the contract value and scope of work
undertaken. Special arrangements will be needed for projects falling outside the scope of those
covered, either by specific agreement (endorsement) under the existing policy or by a contract specific
policy.
Additional insured parties, such as funders, can also be added to CAR policies by endorsement. CAR
policies will also, almost without exception, exclude liability for liquidated damages. This can expose the
contractor to a considerable risk if it is not able to obtain an extension of time from an employer under
the contract. Under the JCT standard forms of contract, the contractor is entitled to an extension of time
for delay caused by any of the specified perils. However, the definition of specified perils consists of a
finite list of events narrower than that covered by the CAR insurance. For example, damage inflicted by
vandals is covered by the CAR insurance, but is not a specified peril. With the contractor unable to
recover liquidated damages through CAR or other insurance, they will have to bear them themselves
a potentially significant exposure.
If works are being undertaken largely within or on an existing structure (for example, if they are
extension, re-fit or refurbishment works), then the JCTs standard forms of building contract require that
the employer takes out both CAR insurance for the works, and insurance for the existing structures and
the contents thereof owned by the employer or for which it is responsible. Such an arrangement makes
sense as it may help to avoid arguments regarding the apportionment of the costs of the remedial works
following insured loss or damage between the new works and the existing structure.
However, there are several potential complications in relation to this. The JCTs standard forms of
building contract require that the cover for the existing structures, taken out by the employer, are in the
joint names of the employer and the contractor.
This means that the insurers of the existing structure are being asked to provide cover not only to their
insured, probably the building owner, but also to the contractor and subcontractors about whom they
know nothing. Increasingly, there are cases of insurers declining to provide cover on this basis or, if they
do, seeking significantly increased premiums to provide cover that meets the contractual requirement.
A further complication may arise where the employer is not the owner of the building or is not the party
responsible for insuring the building. For example, a multi-tenanted office block where one tenant is
having works carried out. All too often a standard JCT form is signed and just as work is about to
commence they discover that the employer cannot provide the cover that is required to meet its
contractual obligations. Even if it is possible to obtain such cover, the cost thereof may be greater than
the value of the works being carried out.
Many landlords, and/or their insurers, are unwilling to add parties such as contractors working for
tenants to their policies. It is not infrequent that the employer is left in a situation where it has signed a
contract that contains insurance obligations with which it simply cannot comply.
It is vital, therefore, that insurance is not left until the last minute and that all appropriate steps are taken
to ensure that the insurances the various parties are required to effect can and have been put in place.
In the event that they cannot, there must be time for relevant changes to be made to the contract to
reflect what can be reasonably be achieved so that the employer is not put in a position where either
party can hold the other to ransom.

Professional indemnity (PI) insurance

Professional indemnity (PI) insurance is available to protect consultants in respect of claims made
against them for negligence or breach of contract for their professional services provided. This
insurance is usually available on a claims-made basis. That is, the consultant takes out insurance on an
annual basis for any claims that it may receive during that year, irrespective of when a negligent act was
alleged to have been made. This makes it imperative that consultants maintain their policy on an annual
basis even after they cease trading. Special run-off cover is available for a single premium for such
liabilities.
Most professional institutions have made arrangements with the insurance market for a specific
insurance product to be made available to their members. Institutions often make it mandatory on their
members to take out these policies. RICS has a compulsory requirement for principals of firms that
provide surveying services (partners, directors, sole principals/sole practitioners, members (of limited
liability partnerships) or consultants) of firms that provide surveying services to carry PI insurance. The
level of cover is determined by the gross income of the firm and the type and scope of cover is prenegotiated with the insurance market by RICS.
Important issues with regard to PI insurance policies include the following.

The insurance should be on an each and every claim or any one claim basis as these provide
cover to the full limit of indemnity for each claim that is made against you during the insurance
period. The alternative is an in the aggregate policy, which provides a fixed limit of indemnity for
all claims made during the insurance period.
The insurance limit should exclude defence costs or state that defence costs are in addition,
so that insurers will pay up to the full limit of indemnity to settle the claim and in addition pay the
defence costs incurred such as legal fees. The alternative is a policy that includes defence costs,
which means that the limit of indemnity could be eroded by the legal costs involved in defending
the claim. These can accumulate quickly in the event of court proceedings.
Check the limits of cover for asbestos, toxic mould and pollution. The insurance provided varies
significantly both in terms of whether any cover is provided and if it is the exact levels and basis of
the cover.
Check the notification provisions. They are generally a condition precedent of the policy, which
means that insurers can refuse to pay a claim if the claim provisions are not adhered to. Brief all
staff carefully about the need to notify the insurers about possible claims and what to do in the
event that they have a claim made against them. Failure to notify can allow insurers to refuse to
pay a claim or even void your policy totally. This is particularly important with the time periods
imposed on adjudication, but some policies are now starting to include strict and very short
periods for notification for all claims.
Check for an innocent non-disclosure clause. If you have made a mistake in the information
submitted to insurers or are late in notifying a possible claim, this clause will provide a certain
amount of protection. The wording of such clauses varies and not all allow for late notification
issues. The inclusion of such a clause is not a substitute for good claims notification procedures.
Check what rights the insurer has to terminate the policy during the insurance period.
Bankruptcy and non-payment are fairly standard; some policies give insurers the unilateral right to
cancel the policy at any stage by giving a certain period of notice, generally 30 days.
Ensure that you are happy with the security of the insurer you are going to use. If the insurer
cannot pay their liabilities then the policy has no value. With a claims-made policy the main risk is
that an insurer becomes insolvent during the claims resolution period, which can be several years
after the initial notification, with the result that there may be a short fall in the claim payment.

Employer's liability insurance

Employer's liability insurance (EL) is one of the few insurances required by UK statute. It provides an
indemnity to an employer for its legal liability to its employees for death and disease or personal injury
arising out of their employment.

If, for example, an employee falls off a ladder on a building site while in the course of their employment
and it is shown that the employer is legally liable, the EL insurance will compensate the employee for
the personal injury suffered.
It is mandatory for all employers employing staff within the UK to effect and maintain EL insurance. The
limit of indemnity provided must be for a minimum amount of 5,000,000 in respect of any one claim.
The relevant regulations also require that a valid certificate of employers liability insurance is displayed
at all locations where an employer has employees working. Where a contract lasts for more than one
year it is important to ensure that satisfactory EL cover continues and that the policy(ies) are renewed
with current certificates provided and displayed.
Most standard forms of contract in use currently require that the contractor (and perhaps all
subcontractors) has EL insurance in place that at the very least meets the statutory requirements.
Occasionally the contract conditions may stipulate a requirement for cover to be for an amount greater
than the statutory minimum.

Employers Liability Tracing Office

The Employers Liability Tracing Office (ELTO) is an independent industry body comprising members
who are employers liability insurers.
ELTO is a proactive move by the insurance industry to meet its obligations to help those who have
suffered injury or disease in the workplace identify the relevant insurer quickly and efficiently. At the
heart of this process is a centralised database the Employers Liability Database (ELD) which
contains all new and renewed employers liability insurance policies, old employers liability policies that
have new claims made against them and all successful traces from the current tracing service.
Therefore at the next renewal insurers will require the Employer Reference Number (ERN) for the
company insured and if applicable, each subsidiary of the company.

Public liability insurance

Public liability insurance (PL) is also often referred to as third-party liability insurance. This insurance
responds to claims by third parties such as members of the public or employees of another company
working on site for injury to persons or damage to property caused by the activities of a company. For
example, if scaffolding falls from a crane while being unloaded and damages a passing car, injuring the
driver, the public liability insurance will respond to both the property damage (the car) and the personal
injury.
All standard forms of contract will contain requirements relating to the provision of PL insurance and
generally there will be provisions requiring that the contractor must effect and maintain cover for a
minimum amount of indemnity and that cover must be maintained, as a bare minimum, for the duration
of the contract.
It should be noted that the minimum limit of indemnity for which the contractor is required to effect
insurance is not in any way a limitation of its liability. Under current UK law, a party is legally liable for an
unlimited amount as regards injury or death of third party persons or damage to third party property.
However, unlimited cover is not currently available in the insurance market and thus, companies tend to
purchase widely differing limits.
Major contractors may purchase protection to limits of several hundreds of millions of pounds while
smaller concerns may have a limit of only 2 million. It is inevitable that practitioners may become
involved in such discussions with the client and other members of the professional team and therefore
care should be taken. There is no rule of thumb or magic formula for quantifying what is the correct limit
of indemnity required and often it is the case that the final decision is taken based upon the cost of such
cover; this is probably not the right way of making such an important decision but in practice it is often
the deciding factor.

If a practitioner becomes involved in such discussions it may be worth bearing in mind what the potential
exposures are:

Injury to or death of persons What risks could the company be exposed to if, for example, an
incident on site caused death or injury to a passing bus full of tourists? Not only would there be
claims for those killed but there could be substantial damages sought for those injured, including
special care over many years, loss of earnings, etc.
Damage to property A tower crane falling onto an adjoining building or a fire spreading from
the site to surrounding property could cause serious damage running into many millions of
pounds. Similarly, an escape of water within the contract site in a multi-tenanted building could
cause serious damage elsewhere in that building.
Consequential losses While there may be little damage to a building, suppose the incident
shut down a key location for a large bank and they lost their dealing rooms for a period. The
potential consequential losses could be massive.

To seek to effect truly adequate cover would probably not be economically viable and so, in the majority
of cases a compromise is found.

Project insurance
Project insurance means many different things to many people and so the use of such a definition can
cause confusion.
For many employers, obtaining a project specific policy that brings together various key covers under
one insurance has a number of advantages. Perhaps the most significant advantage being that the
employer controls the scope, terms, conditions, sums insured/limits of indemnity and levels of excesses
applicable and also has control of the claims under the policy. Such policies usually provide cover under
three main headings contract works (CAR), public liability (PL) and consequential loss. Consequential
loss cover will usually only apply to those losses incurred by the employer resulting from the occurrence
of insured loss or damage that leads to a delay in completion of the project.
The losses the employer may potentially incur are many. If the premises being constructed comprise of
a new manufacturing or operating base, then there could be a loss of income, loss of profit, increased
cost of working, etc. If the project is of a speculative nature, the employer may incur additional financing
costs or a loss of rental income in respect of premises that are destined to be let.
Some of the major projects undertaken recently in the UK and across the world, are covered by another
form of project insurance a relatively new product that has sought to respond to the increasing
demand for project partnering as a procurement route. Such project insurance is essentially an
insurance package that may include professional indemnity (PI) insurance, contractor's all-risks
insurance, public liability insurance, loss of anticipated income insurance and latent defects insurance.
The philosophy is that if an insured event occurs on a project, it is the insurance policy that will respond.
The insurer waives its rights of subrogation so there is no need for the parties to the project to worry
about who is to blame for causing the event or allowing it to happen. This approach to risk management
enables project teams to be designed via an integrated team approach, rather than through the
traditional approach.
The traditional approach is to clearly and precisely allocate risk and responsibility to the various team
players and this has been blamed for creating a divisive team. The parties become more concerned with
demonstrating that their own package of responsibilities has been adequately satisfied, than focusing on
the needs and objectives of the client.
Currently, project insurance is a specialist product and is only available on very large projects. It is also
common for such insurance policies to be written with high levels of uninsured excess. In order to
achieve the anticipated productivity gains from an integrated team approach, this uninsured element
needs to be addressed. Some large client bodies are prepared to self-insure this element; others spread
the cost around the project team according to a pre-determined formula.

Litigation insurance
Litigation insurance comes in two forms: before the event (BTE) litigation insurance and after the event
(ATE) litigation insurance.
BTE litigation insurance is an annual policy taken out to pay for any potential legal action that may arise
during the period of cover. It is available for both claimants and respondents and will pay for the legal
costs of the insured and any costs order that may be made against the insured. Once the policy is in
place, the insured has to demonstrate that they have a greater than 51% chance of success in any
litigation, in order to activate the policy. It is available to both claimants and respondents.
These policies are themselves a powerful means of assisting settlement. A party that is paying its own
legal costs, faced by another that is covered by BTE litigation insurance, will be well advised to actively
seek an early resolution to the matter.
ATE litigation insurance is a policy taken out in respect of a known issue. Such policies are usually taken
out by claimants, but are available to respondents too. ATE litigation insurance does not fund an action,
but protects the insured from a costs order (requiring it to pay the legal costs of the other party) in the
event that it loses the action. It is therefore most common to find such policies in use alongside
conditional fee arrangements (CFAs) with lawyers. ATE litigation insurance premiums are recoverable
as a legal expense, as is the CFA uplift charged by the lawyers. Therefore, if a party covered by such an
arrangement wins their case, they will be able to recover their additional expense as part of the recovery
of legal costs from the losing party. If, on the other hand, the insured party loses the case, the insurance
premium will be far less than her liability for legal costs would have been.

Joint names insurance/subrogation

Subrogation is the right that all insurers have to step into the shoes of the insured and seek
compensation from other defaulting parties. For example, if a sub-contractor negligently causes a fire
damaging the contractor's works, the contractor can claim against their all-risks insurance policy for the
cost of rectifying the damage, but the insurer can, in the name of the contractor, sue the subcontractor
for their outlay.
Joint names insurance is the term used for insurance policies that are effected in the names of two or
more parties. Most common among such policies is the contractor's all-risks insurance which is, almost
without exception, effected in the joint names of the contractor and the employer and sometimes
includes subcontractors and consultants too.
The big advantage of a joint names policy is that the insurer waives its rights of subrogation against the
parties named in the policy. There is, therefore, no post-event litigation between two or more insurance
companies and the parties named in the policy can focus on rectifying the damage and completing the
project, rather than looking to find a party who was to blame.

Latent defects insurance

While this type of insurance has been available for many years, only a relatively small number of
projects are covered by latent defect insurance policies. This class of insurance traces its roots to the
French market where decennale insurance is a legal requirement on all new buildings and works.
However, the UK legal system does not contain appropriate provisions for such cover to be a statutory
requirement although the Latham Report urged that steps should be taken to change this.

In its simplest form, a latent defects policy provides cover in respect of actual material damage to a
building in so far as this is caused by inherent or latent defects that originate within the structural
elements thereof. The structural elements are usually defined as being:

the foundations, columns, beams;

the external walls and cladding, doors and windows;
the stairs and floors;
the roof structures; and
any other external and internal load-bearing elements essential to the stability of the property.

Most insurers also include weatherproofing and waterproofing cover within the basic cover.
The policy is usually made in the name of the building owner/developer but is freely assignable to new
owners, lessees or financiers. It can prove to be a useful sales or letting aid as well as an additional
reassuring measure for a party sourcing a new building for its own operations.
Perhaps the single most important advantage of maintaining such cover becomes apparent when a
latent defect manifests itself. Instead of having to commit considerable time and resource to establishing
the party(ies) responsible, the insured has only to turn to the insurer to seek indemnity for rectification.
The insurer will be the party who establishes responsibility and pursues recovery from those responsible
by exercising its rights of subrogation.
Insurers are sometimes prepared to waive subrogation rights against architects, engineers, contractors
and others (but not suppliers), on payment of an additional premium. It is difficult to see the justification
for doing this.
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. Policies are generally for
10 years from practical completion although some insurers will provide cover for 12 years or possibly
15. The inherent defect may be in the design, materials or workmanship.
Some insurers will agree to extend their policies to include such elements as the mechanical and
electrical services within the building and also to include cover in respect of consequential losses
incurred by the insured. These can involve loss of rental income resulting from the building being untenable, additional costs of working due to the need for the buildings occupants to move out while
remedial works are carried out, etc.
Premium costs obviously vary dependent upon the scope of cover sought and the sum insured, etc.
Although the premiums are often seen as being high, when looked at over a ten year period they
represent good value.
Part of the underwriting process for latent defects insurance is the carrying out of a technical audit by an
appropriately qualified party appointed by insurers. The technical auditor will visit the site regularly
during construction, monitoring both the design and the construction work, to identify irregularities or
potential problems and ensure their rectification and to issue a certificate at practical completion
confirming to insurers the insurability of the risk.
It is essential therefore, that any decision to consider latent defects insurance is taken before works
commence. The technical audit fee is payable by the developer but there is no commitment to take out
or pay for the cover until after practical completion. Indeed, some developers choose to purchase the
technical audit service as an independent watchdog during the construction period and do not continue
with the latent defects insurance upon completion.
It is worth repeating that latent defects insurance should be considered at a very early stage of the
development so that decisions can be made before any on site work is commenced. Advice and
clarification should be sought from an appropriately experienced and knowledgeable insurance
professional to ensure that a suitable bespoke package is put together. There should also be a full
understanding of the cover available and the cover being purchased.

Non-negligent insurance
Usually seen as a particularly esoteric form of insurance, this cover is rarely understood fully although
often used. It dates from a 1958 judgment Gold v Patman & Fotheringham and is a provision
predominantly only to be found within the JCTs standard forms of building contract (in various clause
numbers depending upon the contract in use 21.2.1, 6.2.4, 6.5.1. etc). It requires that the contractor
effects non-negligent insurance on behalf of the employer.
The clause refers to a limited perils liability cover that indemnifies the employer alone in respect of
damage to property other than the contract works arising out of a limited list of perils and caused by or
arising out of the execution of these works. The insurance does not offer any protection to the
contractor even though the contractor is shown as a jointly insured party.
The contractor must be specifically instructed to effect this insurance by the architect/contract
administrator and must be advised what limit of indemnity is required. The cost of the insurance is the
subject of a provisional sum and this cost is fully reimbursed to the contractor under the contract.
Where a contractors designed portion is included in a JCT contract and an amount is inserted against
this clause in the employer's requirements, the contractor must effect this insurance and include for the
cost for it within its tender. No additional reimbursement is allowed by the contract.