Everyone involved in development/construction projects recognises the importance of adequate insurance being in place to cover the multitude of risks that can arise. Although there is a general awareness of the type of cover available, there is less awareness of the wide variations in, for example, professional indemnity and contractor’s all risk policies. This may mean that those taking comfort from the existence of such policies have an unpleasant surprise when they come to make a claim.
Added to that is the fact that as a way of mitigating the high cost of premiums, those insuring often agree to take on a substantial excess/deductible or agree to the exclusion of claims of higher risk. A developer or funder is therefore well advised to look behind the standard insurance certificate now routinely produced as evidence of insurance cover. Such certificates commonly do not state the total cover in place (instead they are geared to the level of cover the consultant or contractor has agreed to maintain – which may be different); whether such cover is inclusive or exclusive of costs of defending the claim; and do not usually specify what exclusions there are from the policy.
Other practical points to consider are:
- Is there a “non vitiation” clause which means that on a joint policy if one party breaches the policy, the insurer will still maintain cover for the other parties. If not the insurer may avoid the whole policy;
- Standard contractor’s all risk policies do not cover delays in completion of the project. Whilst a developer may take comfort from the provision for liquidated damages in the building contract, such damages may be mitigated by extensions of time granted under the building contract leaving him with no recourse for lost rent or costs of delays in sales. It may therefore be worth considering specific delay insurance cover;
- Professional indemnity policies cover negligence but some exclude breach of contract claims. Some also exclude cover for adjudication claims and awards. Negligence on the part of the insured must be proven (sometimes a long, laborious and expensive process) before the insurers meet any claim. The fact that a consultant or a contractor has made an error does not of itself mean that he is negligent and a non-negligent error or default may be very costly to the Employer. If “no fault” cover is required the developer/funder should consider latent defects insurance which may have the added bonus of dispensing with the need for collateral warranties;
- Some policies provide that insurers will not pay out until the insured’s excess is paid, this is a major consideration if the insured cannot pay or has become insolvent;
- Public liability policies often have a limitation for recovery of statutory contamination clean up costs, potentially a major expense;
- On any development there may be a number of policies covering the same risk because each of the participants has its own insurance. Savings may be made and gaps in cover avoided by the employer taking out a project policy at the outset.
In short, insurance is an important area which deserves more attention and planning than it is often given, if it is truly to cover for the risks which may arise from modern construction and engineering projects. Accordingly it pays for insurance to be thought about and addressed early in the procurement planning.