An introduction to insurance in construction and engineering contracts
A review of the insurances and principles of insurance law relevant to those working in the construction and engineering sectors.
At its most basic, insurance is a contract in which the insured pays a premium to the insurer who agrees to provide financial compensation to the insured if a specified event occurs. This event must involve some uncertainty as to its occurrence.
Insurance contracts are usually subject to detailed exclusions and cover limitations.
Similarly, they tend to include special rules, such as duties of disclosure, which the insured must comply with to avoid the risk of invalidating their policy.
“All risks” insurance covers physical damage to works and site materials and can be maintained by either the contractor or the employer in the joint names of the employer (and any other person with an interest in the project) until practical completion. Where works are in existing buildings, the employer is usually best placed to effect it but for “new builds”, it should be taken out by the party who can obtain the insurance most cost-effectively. International projects and some private/public partnership (or “PPP”) projects may also require delayed start-up and business interruption insurances as part of the All Risks policy.
Professional indemnity insurance (PII) insures against liability arising from professional negligence in the design or the carrying out of the services, such as surveying, project management or contract administration. It is usually required from a professional consultant, a contractor with design responsibility and sub-contractor whose duties include a significant design element. Importantly, as it usually operates on a “claims made” basis, it must be maintained throughout the insured’s period of liability, not just until the end of the project.
Project liability insurance is often required to be maintained by suppliers in respect of proprietary materials, goods or technology to protect against liability for injury to third parties or damage to their property.
Public liability insurance covers liability arising from death or personal injury to third parties other than the insured’s own employees and for damage to property belonging to third parties. As it is usually maintained on an “events occurring” basis it need not be maintained after completion. Employer’s liability insurance protects a party against liability for injury or disease to its employees arising out of their employment. As UK law requires this to be at least £5 million per occurrence, it tends only to be seen in contracts for projects with an international element or where a higher level is needed.
Single project insurance covers everyone under one policy, with the insurer waiving its right of subrogation against the insured parties. The same policy may cover PII, latent defects insurance, land and buildings insurance and “all risks” insurance. It avoids the “gaps” that can arise with multiple policies and reduces costs by avoiding duplicate insurance. It also reduces disputes by removing the subrogation rights but is still relatively rare in the UK for cost reasons.
Latent defects insurance typically lasts for ten years from the original construction of the building and protects the owner against material damage to the building. It is generally taken out when a building is first built. The owner does not have to prove fault by any party. All parties must understand the purposes and limitations of these insurances and how they interact with their contractual obligations and seek legal advice where necessary.
When negotiating insurance requirements parties should ensure these are “back to back” with the actual cover maintained by the insured and provide a mechanism to check the insurance is being maintained. On large or complex projects it should be required that the insurance is maintained with a reputable insurer, preferably in the UK or EU.
For further information about insurance law for construction projects, please contact Michael Janney on 01622 776422 or email email@example.com.