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Last edited 09 Dec 2021
Insurance for building design and construction
[NB: It is not intended to be all-encompassing as it is too large a topic to be covered in a single article.]
Insurance provides third-party protection against risks. Risks on construction projects can be significant, and so insurance is very common, providing protection both for the insured, and for the party to whom the insured has a liability.
It is for each individual or party to decide upon insurance policies that are appropriate for their circumstances. It is very expensive to over-insure and it could be very expensive to under-insure in the event that a claim is made. For this reason, expert guidance is advisable.
A collateral warranty is a legally binding agreement which is ancillary to a separate contractual agreement between two parties and which imposes an extended duty of care and a broader liability on those parties. Such a warranty effectively provides for a duty of care to be extended by a contracting party to a third party that is not party to the original contract.
Privity of Contract rules would prevent any liability arising between architect and occupier without the existence of a collateral warranty enabling the developer to create a contractual obligation between architect and occupier.
 Contractors all-risks insurance/contract works insurance
This is a policy that covers all risks associated with a construction project, commonly issued under the joint names of a contractor and a principal client. It is sometimes referred to as 'Contract Works Insurance'.
Cover usually protects against the cost of unforeseen loss or damage to building works, machinery movement, advanced business interruption and public liability, installation and constructional plant during the construction period but can be extended to included the maintenance period too. In addition, cover can be included for tools, plant owned by the policy holder or plant hired in.
This type of insurance protects Company Directors and Officers from a claim by shareholders or creditors of a company in the event that a claim is made in respect of their alleged wrongdoing. All Company Officers owe a fiduciary duty to their company and, in addition the concept of 'Wrongful Trading' is particularly hazardous if a company goes into administration or is liquidated.
Directorships are often held on a 'non-executive' basis and such positions can be particularly dangerous in the sense that a non-exec will not be involved in the day to day running of a business but will have exactly the same legal burdens as those directors who are running the business on a full-time basis.
All firms who employ staff are legally required to hold Employers' Liability Insurance (EL). EL insurance will help pay compensation if an employee is injured or becomes ill because of the work they do for the employer.
The twin effects of climate change and development on flood plains have become increasingly problematical for home owners and property insurers. Greater amounts of rainfall generally and more and more exceptional weather incidents have resulted in the insurance industry facing ever-rising flood-related insurance claims.
In particular, it replaces liability-driven professional indemnity insurance (which requires proof of fault before responding) with financial loss cover where the outturn cost above the target cost plus pain-share is insured.
Latent defects insurance is seen to provide more complete cover for defects than other methods, (such as collateral warranties) which may require proof of breach of contract. This can take considerable time, and can be subject to complications such as net contribution clauses and insolvencies.
This is a relatively inexpensive form of insurance which can either be insured via a specific policy or as a section of a combined policy. In an increasingly litigious world it is becoming common to insure against the cost of defending legal action.
This type of insurance exists to provide recompense in the event that the policy holder incurs capital loss or expense in dealing with a range of possible legal issues which are inadvertently encountered.
Business owners will usually want to ensure that their assets are insured against damage or theft. In addition, these policies may have sections offering cover against Business Interruption or Consequential Loss as well as fraud.
Business Interruption Insurance is particularly important as it covers the loss of profit which may be caused by an interruption to commercial activity occasioned by flood or fire. Loss of rent receivable from a tenant can also be insured in this way.
So, in addition to the usual insurance of assets, these policies also insure, in certain circumstances, the loss of income and this is particularly important in a commercial context. Salaries and other overheads remain, regardless of events, and so it is sensible to ensure that they can continue to be paid.
A performance bond is commonly used in the construction industry as a means of insuring a client against the risk of a contractor failing to fulfil contractual obligations. The most common concern is that the contractor will become insolvent before completing the contract.
Where this occurs, the bond provides guaranteed compensation up to the amount of the performance bond. Bonds can be issued either by an insurance company or bank. The cost of such a bond is usually borne by the contractor.
For all providers of professional services, professional indemnity insurance (PI insurance) is considered an 'essential'. Indeed many clients will not enter into a contractual relationship with a supplier unless they can demonstrate that they hold professional indemnity insurance to a minimum level.
Professional indemnity insurance is there to cover proven negligence on the part of the service provider. The consequences of such negligence on substantial construction projects can be enormously expensive to correct and this type of insurance should, if arranged at the commensurate level, provide:
- Certainty that the service provider will not be bankrupted by a successful claim.
- Recompense to the client for the cost of remediating the consequences of the negligence in question.
Most professional indemnity policies will offer additional sections of cover (such as financial fraud) but their principal purpose is to cover the risk of negligence in providing professional services.
These policies are relatively expensive although the nature of services being offered will be the main factor in determining the level of premium. For example, surveyors offering commercial property valuation services or architects offering design services to commercial developers will pay premiums that are high when compared to providers of, for example, rating services.
A further point to consider here is the level of excess that the policy holder is prepared to bear themselves. This is particularly important as most sums paid out by insurers under professional indemnity claims are to meet legal expenses incurred without a case actually coming to Court.
So, in practice this form of insurance pays legal costs, not damages, and for this reason a willingness by a policyholder to meet, say, the first £10,000 of a potential claim should result in a lower overall premium as the insurer will have more confidence that they will not be called upon to pay out themselves.
Public liability insurance is generally required of contractors to provide cover against personal injury or death, or loss or damage to property of third parties such as members of the public or independent sub-contractors.
Beneficiaries of such policies are predominantly providers of asset finance or manufacturers, but business owners and shareholders can also be beneficiaries as shareholder value can be protected or enhanced if balance sheet asset values are protected in this way.
This type of insurance can be obtained on a 'stand-alone' basis or as an addition to a conventional buildings or commercial combined policy. Simply stated, it covers material damage caused by an act of terrorism.
- Building Users' Insurance Against Latent Defects.
- Business interruption cover under COVID-19.
- Collateral warranties.
- Contractors' all-risk insurance.
- Contract works insurance.
- Counter Terrorism Security Advisor.
- Decennial liability.
- Design liability.
- Directors and officers insurance.
- Employer's liability insurance.
- Excepted risk.
- Fire safety exclusions - the insurance position.
- Flood insurance.
- Future of construction insurance.
- Indemnity to principals.
- Insurer of last resort.
- Integrated project insurance.
- JCT Clause 6.5.1 Insurance.
- Joint names policy.
- Latent defects insurance.
- Legal indemnities.
- Legal indemnity insurance.
- Non-negligent liability insurance.
- Performance bond.
- Professional consultant's certificate.
- Professional Indemnity Insurance.
- Professional indemnity insurance in construction.
- Public liability insurance.
- Residual value insurance.
- Reverse premium.
- Self build insurance.
- Self insurance.
- Specified perils.
- Subcontractor default insurance (SDI).
--Cantor Atkin 17:15, 28 Apr 2021 (BST)
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