For the purposes of insuring construction and engineering projects, there is a critical and sometimes overlooked distinction between insuring the works carried out under the contract, and insuring the underlying property of the employer. A recent Privy Council case considers this distinction.
Contractor’s All Risks (CAR) Insurance
CAR insurance is intended to cover accidental physical damage to the contractor’s works being built and any associated temporary structures. Accidental damage typically covered under a CAR policy includes, amongst other things, damage caused by fire, flooding, storms, burst pipes, vandalism and theft. A CAR policy usually covers several parties as identified in the policy, and ends at the practical completion of the works.
The property covered by a CAR policy will be the works under construction, which ultimately will be taken over by the owner on practical completion. So if the works are damaged by fire, the CAR policy should cover the cost of reinstating the works. But what happens where the contractor’s works become integrated in the owner’s pre-existing property, as may be the case in a fit-out or a renovation project. Will the owner’s property also be covered by the CAR insurance? This was the issue considered by the Privy Council in an appeal from the Bahamas.
Sun Alliance Ltd v Scandi Enterprises Ltd  UKPC 10
The relevant facts were as follows:
- The project in question concerned the renovation of an existing building of 12 units. As the building was unoccupied, the employer took the decision not to insure it, but instead took out a CAR insurance policy, presumably in the expectation that it would cover the whole building.
- The property insured under the policy was described as the “Contract Works”, insured in the sum of BSD$700,000.
- The CAR policy were largely in standard terms, with one exception, namely that the owner of the building was the sole party insured. The owner intended to carry out the work by directly employing small firms and workmen.
- A fire occurred during the course of construction, causing extensive damage to the building. At the time of the fire the only works carried out were renovations to 2 of the 12 units and minor plumbing and electrical work in the building. The value of these works was less than BSD$5,000 in total. By contrast, the damage to the pre-existing building was of a greater magnitude.
The key question before the Privy Council was whether damage caused by the fire to the pre-existing building was covered under the CAR policy.
Privy Council Decision
The Privy Council stressed that express terms of an insurance contract, where clear, must be applied. In this case, it was clear from the policy that the “Contract Works” were insured, but not the pre-existing building itself. The result, therefore, was the owner was entitled only to recover under the CAR policy for the value of the fire-damaged works (the value of which was modest), and not for the more extensive damage to the building itself.
The case provides a salutary reminder of the role and limits of CAR insurance. A CAR policy covers physical damage to the contractor’s works, but does not cover damage to the underlying property. A separate property insurance policy should be taken out to cover damage to any pre-existing property of the employer.
The distinctions between these forms of insurance are, helpfully, reflected in standard forms of construction and engineering contracts. For example, under the FIDIC Red Book (1999):
- The requirement to insure “the Works” is set out in Sub-Clause 18.2; and
- The requirement to insure against any loss of or damage to “physical property” (with the exception of the property covered under Sub-Clause 18.2) is addressed under Sub-Clause 18.3. Such “physical property” would include the property of the Employer, such as a pre-existing building.
Insuring a construction or engineering project does not usually involve taking out a single policy to cover against all risks and eventualities. Perhaps an “all risks” policy may, by its name, create the initial impression that it operates in such a way. But as this Privy Council case illustrates, it is the detail of the policy which matters.