Insurance issues in construction and engineering contracts are often left to the last minute, but they can be a minefield. What insurances are relevant to construction and engineering projects, and what issues do you need to consider when negotiating insurance provisions.
Back to basics
Some insurance basics:
- Liability v indemnity: Insurances can be split into two broad categories. Liability-based insurance protects the insured against liability it may incur to a third party, whereas indemnity insurance entitles the insured to compensation for loss that the insured itself has suffered.
- Events occurring v claims made: 'Events occurring' insurance responds to claims which arise out of events which took place during the period of insurance, regardless of when they are made. 'Claims made' policies only cover claims that are made during the period of cover. Insurances maintained on an 'events occurring' basis need not be maintained after the project has been completed. However, 'claims made' insurances should, where possible, be maintained for the duration of the insured's liability.
- Each and every claim v aggregate: Policies maintained on an 'each and every claim basis' will generally have a separate pot of money available for each claim that is made under the policy, whereas aggregate insurance provides a single pool of money for each period of insurance.
Professional indemnity insurance
Professional indemnity insurance insures against liability arising from professional negligence. In construction projects professional negligence can arise from both negligent design and negligent performance of non-design professional services, such as employer's agent services.
It is becoming more common for professional indemnity insurance maintained by design and build contractors to be held on an 'aggregate' basis rather than on an 'each and every claim' basis. The problem with aggregate policies is that the one pot of cash might be used up at the start of a policy year, leaving nothing for the remainder of the policy year. As this insurance is maintained on a 'claims made' basis the employer runs the risk for each policy year that the contractor remains liable that the aggregate pot of cash will already be exhausted. This is an even bigger risk for employers if the policy covers a number of group companies.
An option for employers is to ask for the aggregate policy to include one or more reinstatements which can mean that the policy, if exhausted by one claim, is 'reinstated' to the original level of cover, despite that earlier claim.
Employer's liability insurance
This covers the liability of an employer for injury or disease to its employees arising out of their employment. As this insurance is required by law, many construction and engineering contracts do not contain express provisions relating to employer's liability. However, an express provision may be necessary if the employer considers that the appropriate level of insurance is greater than the statutory minimum, or where an international project may be subject to foreign laws.
Contractors should beware of employers who seek to make all insurances under a contract to be maintained in the joint names of the employer and the contractor. As employer's liability insurance only covers the liability of the employer, it is not appropriate for such insurance to be in joint names and such a requirement should be resisted.
Public liability insurance
Public liability insurance covers liability arising from death or personal injury to third parties, and for damage to property belonging to third parties.
This insurance is particularly important where a contractor is undertaking works to an existing structure. Most standard form contracts will require that in such circumstances, the employer insures the existing structure in respect of certain key events (e.g. fire and flood) and the works for all risks, in the joint names of the contractor and the employer.
But what happens if the employer under the construction contract is not the owner of the existing structure? If the employer cannot procure that the owner adds the contractor onto the existing policy then the contractor is reliant on its own public liability policy. There is potential for the damage caused to a 'state of the art' building by minor works to far outweigh the value of the works, especially given that the public liability policy would need to cover the full reinstatement value of the existing structure.
For employers, the point to note is that a contractor's indemnity in respect of damage to property will normally exclude damage to the existing structure caused by risks that are required to be maintained in the joint names of the contractor and the employer. If the employer is not able to procure that the building owner adds the contractor on to the building policy then the employer should ensure that the carve out from the indemnity is removed.
'All risks' insurance covers physical damage to the works and site materials, and can be maintained by the contractor or the employer. Most construction contracts will require that such insurance is in the joint names of the contractor and the employer, and will often be amended to allow for any third party funder or purchaser to also be added as a joint named insured. For a contractor who is insuring, it is important to confirm the identities of any such third party funders or purchasers at the outset of the project.
Noting the interest of a party on a policy does not amount to joint insurance. Usually it means that the insurer will notify the party whose interest is noted if there is any claim made on the policy or if the premium has not been paid, or the policy has lapsed. But is a joint names policy of insurance any better?
In the event of a claim, under a joint insurance policy the insurer may succeed in avoiding the whole policy if there has been fraud or non-disclosure on the part of any one of the joint insureds. However, with a composite policy, in the event of fraud or non-disclosure on the part of one of the co-insureds, the insurer cannot avoid the whole insurance policy. The policy will survive for the benefit of those co-insured who are not guilty of the fraud or non-disclosure. It is therefore in the interests of contractors and employers for the policy to be a composite policy.
It used to be safe to assume that if you are named as a joint insured then you could not be pursued by the other insured. However, the existence of this 'rule of law' has been questioned by the Court of Appeal and contractors should ensure that the contract expressly provides that there is to be no right of recourse against another joint insured.
Some practical tips
For contractors and consultants:
- ensure that certain insurances are only required to be maintained which are available at commercially reasonable rates, and on commercially reasonable terms
- beware obligations to insure with a 'reputable insurer' as this is a very subjective term
- if evidence of insurance is required, this should be limited to providing a broker's certificate
- ensure that there are no gaps between the various project insurances, but also beware double insurance (this may lead to one or more policies being invalidated or a restriction being imposed on what can be claimed under any of the policies)
- ensure that contractors and consultants cannot rely on their own claims record when deciding if insurance is available at commercially reasonable rates
- ensure that renewal certificates are always obtained from contractors and consultants.
And finally... always take advice from your insurance brokers before finalising insurance provisions in construction contracts.