Construction Insurances

rics.org

Constructioninsurance

RICS Practice Standards, UK

1st edition, guidance note

Construction insurance1st edition, guidance note

This guidance note is designed to outline best practice for propertyprofessionals dealing with construction insurance. It offers practicalhelp and advice for each stage of a construction project – from theinitial development, through to project completion.

The guidance note covers the following key areas:• Introduction• Rights and obligations of principal parties• Contract conditions• Global implications• When the various insurance covers need to be considered• Surveyor’s guide to professional indemnity (PI) insurance• Director’s and Officers’ (D&O) liability insurance• Consequential loss insurance for construction risks• Contractors all risks or contract works insurance• Employers’ liability insurance• Environmental insurances• JCT non-negligence insurance• Public liability insurance• Surety bonds• Unexpected archaeological discovery insurance• Insurance of existing buildings undergoing refurbishment or

development• Project insurance and property developer all risks policy• Risk management and insurance• Statutory inspection of plant and machinery• Third party interests and ‘joint names’ under construction policies• Latent defects insurance and collateral warranties/third party rights

rics_insurance_cover:Layout 1 10/7/09 19:13 Page 1

Construction insurance

RICS guidance note

1st edition

Published by the Royal Institution of Chartered Surveyors (RICS)

under the RICS Books imprint

Surveyor Court

Westwood Business Park

Coventry CV4 8JE

UK

www.ricsbooks.com

No responsibility for loss or damage caused to any person acting or refraining from action as a result of the materialincluded in this publication can be accepted by the author or RICS.

ISBN 978 1 84219 499 7

Produced by the Project Management, Construction, and Building Surveying Professonal Groups of the RoyalInstitution of Chartered Surveyors.

© Royal Institution of Chartered Surveyors (RICS) July 2009. Copyright in all or part of this publication rests withRICS, and save by prior consent of RICS, no part or parts shall be reproduced by any means electronic, mechanical,photocopying or otherwise, now known or to be devised.

Typeset in Great Britain by Columns Design Ltd, Reading, Berks

Acknowledgments

RICS would like to express its sincere thanks to the following for theircontributions to this guidance note:

Editor and co-author

Ray Robinson, Technical Consultant, Aon Limited.

Ray Robinson, a Fellow of The Chartered Insurance Institute, is a technicalconsultant with Aon Limited, working for the Commercial Property Group,which specialises in the insurance requirements of property owners anddevelopers.

He has spent nearly 50 years in the insurance industry, including over 30 yearswith RSA and has held management positions in underwriting, businessdevelopment and technical development. At various times his career hasfocussed on insurances for property owners, latent defects covers andconsequential loss.

He is a member of the Steering Group of the RICS Insurance Forum.

General Construction

Tom Wylie, Executive Director, Construction, Aon Limited.

Laurence Gilmore, Account Director, Construction, Aon Limited.

Mark Courtneidge, Director, Construction, Aon Limited.

Directors and Officers

John Dexter, Account Executive, Financial Services, Aon Limited.

Employers Liability

Teresa McAuliffe, Director, Aon Limited.

Engineering

Derek Cornwell, Technical Consultant, Risk Management, Aon Limited.

Environmental

Simon Johnson, Director, Environmental Services, Aon Limited.

Professional Indemnity

Christine Paine, Associate Director, Aon Limited.

Peter Sharpe, Director, Aon Limited.

Public Liability

Teresa McAuliffe, Director, Aon Limited.

Surety bonds

Shane Foley, Account Executive, Surety and Guarantee, Aon Limited.

The editor and fellow contributors from Aon can be reached by contacting Aon8 Devonshire Square, London EC2M 4PL, t: +44 (0) 207 623 5500,www.aon.com.

CONSTRUCTION INSURANCE | iii

Other acknowledgments

Latent Defects

Joe Bellhouse, Construction Lawyer and Partner, Wedlake Bell

T +44 (0) 207 395 3073 www.wedlakebell.com

John Parsons, RICS

Project Management, Construction, and Building Surveying ProfessonalGroups.

iv | CONSTRUCTION INSURANCE

Contents

RICS guidance notes 11 Introduction 2

1.1 Introduction 21.2 Rights and obligations of principal parties 31.3 Contract conditions 31.4 Overseas issues 31.5 When the various insurance covers need to be considered and

when each cover starts and finishes4

1.5.1 Contractors’ all risks insurance 41.5.2 Consequential loss 41.5.3 Directors’ and officers’ (D&O) liability insurance 41.5.4 Employers’ Liability (EL) insurance 41.5.5 Environmental insurance 51.5.6 Existing buildings 51.5.7 Latent defects insurance 51.5.8 Non-negligence insurance 51.5.9 Professional indemnity (PI) insurance 61.5.10 Public liability (PL) insurance 61.5.11 Surety bonds 61.5.12 Unexpected archaeology discovery insurance 6

2 Insurances personal to members 72.1 A surveyor’s guide to professional indemnity (PI) insurance 7

2.1.1 Where and how is the cover obtained? 72.1.2 What does PI Insurance do? 82.1.3 What is the right level of cover? 92.1.4 When should I consider cover and what will it cost? 11

2.2 Professional indemnity insurance for project managers 112.3 Directors’ and Officers’ (D&O) liability insurance 14

2.3.1 What is D&O exactly and who is covered? 142.3.2 What type of company should be purchasing D&O

cover?14

2.3.3 What should I be looking out for to ensure I haveadequate cover?

15

2.3.4 Obtaining terms for a D&O policy 152.3.5 Market trends 152.3.6 Key issues 16

3 Construction risk insurances 173.1 Consequential loss insurance for construction risks 17

3.1.1 Three important points 173.1.2 Relevant events 18

3.1.3 Specified perils and force majeure 18

3.1.4 Extensions of time 19

3.1.5 Measurement of liquidated and ascertained damages 19

CONSTRUCTION INSURANCE | v

3.1.6 Loss of rent and loss of use of sale proceeds, includingassessment of indemnity period

20

3.1.7 The developer’s choice as to basis of settlement 213.1.8 Expediting costs (additional cost of working) 213.1.9 Costs incurred in raising or extending loans 223.1.10 Additional overhead costs (sometimes referred to as ‘soft

costs’)22

3.1.11 Higher cost of development finance 223.1.12 Additional increase in cost of working cover 223.1.13 Damage away from the site including prevention of

access23

3.1.14 Damage at suppliers’ premises 233.1.15 Time excess 233.1.16 Unusual consequential risks 243.1.17 Key issues 25

3.2 Contractors’ all risks or contract works insurance 263.2.1 The cover 263.2.2 Joint Code of Practice on Fire Prevention 273.2.3 Additional cost of construction of unbuilt works 273.2.4 Defective design, materials and workmanship 273.2.5 Defective design, materials and workmanship clauses 283.2.6 LEG clauses 293.2.7 Legal challenges 293.2.8 Key issues 29

3.3 Employers’ liability insurance 29

3.3.1 The Employers’ Liability (Compulsory Insurance) Act1969

29

3.3.2 Workplace legislation outside the UK 30

3.3.3 Social security 31

3.3.4 Compensation funded by insurance policies 31

3.3.5 Summary of schemes 31

3.4 Environmental insurances 32

3.4.1 Environmental and underwriting information –understanding the risk

32

3.4.2 Environmental exposure 33

3.4.3 Insurance solutions 34

3.4.4 Historical contamination 35

3.4.5 Operational contamination 35

3.5 JCT non-negligence insurance 36

3.5.1 History 36

3.5.2 Perils insured 36

3.5.3 Activities giving rise to loss 37

3.5.4 Policy exclusions 37

3.5.5 Relationship to material damage and public liabilitypolicies

37

3.5.6 Position under ICE contracts 38

3.5.7 Key issues 38

vi | CONSTRUCTION INSURANCE

3.6 Public liability insurance 38

3.6.1 Extent of cover 38

3.6.2 Restrictions in cover 38

3.6.3 Limits of liability 38

3.6.4 Who should be covered? 39

3.6.5 Premium implications 40

3.6.6 Key issues 40

3.7 Surety bonds 40

3.7.1 Types of bond 40

3.7.2 Performance bonds 40

3.7.3 Retention bonds 40

3.7.4 Advance payment bonds 41

3.7.5 Maintenance bonds 41

3.7.6 Bonds and counter indemnities 41

3.7.7 The benefits 41

3.7.8 International bonds 42

3.7.9 Key issues 41

3.8 Unexpected archaeological discovery insurance 42

3.8.1 The process 42

3.8.2 Risk management 42

3.8.3 Identifying the risk of unexpected discovery 43

3.8.4 Potential cover requirements 43

3.8.5 Key issues 44

4 Further guidance on construction insurance issues 454.1 Insurance of existing buildings undergoing refurbishment or

redevelopment45

4.1.1 Implications for current cover on existing buildings 45

4.1.2 The problems with joint names insurance on existingbuildings

45

4.1.3 One sum insured for both contract works and theexisting buildings

46

4.1.4 Advantages of insuring existing buildings under a CARpolicy

46

4.1.5 Key issues 46

4.2 Project insurance and property developer all risks policies 46

4.2.1 A word of warning 46

4.2.2 The advantages of employer controlled insurance 47

4.3 Risk management and insurance 48

4.3.1 Stage 1 – Risk identification 48

4.3.2 Stage 2 – Risk evaluation 48

4.3.3 Stage 3 – Risk control and elimination 48

4.3.4 Stage 4 – Risk transfer 49

4.3.5 Stage 5 – Risk monitoring 49

4.4 Statutory inspection of plant and machinery 49

4.4.1 In the UK 49

CONSTRUCTION INSURANCE | vii

4.4.2 The Lifting Operations and Lifting EquipmentRegulations 1998 (LOLER)

49

4.4.3 The Pressure Systems Safety Regulations 2000 (PSSR) 504.4.4 The Control of Substances Hazardous to Health

Regulations 2002 (COSHH)50

4.4.5 The Electricity at Work Regulations 1989 (EAW) 504.4.6 The Provision and Use of Work Equipment Regulations

1998 (PUWER)50

4.4.7 Inspection service providers/the competent person 504.4.8 Legal responsibility 514.4.9 Outside the UK 51

4.5 Third party interests and ‘joint names’ under constructionpolicies

51

4.5.1 The means by which other interests are recorded 514.5.2 The degree of protection afforded 524.5.3 Protection of bank interests 524.5.4 Outside the UK 544.5.5 Key issues 54

5 Latent defects insurances 555.1 Introduction 55

5.1.1 The cover in brief 555.1.2 The cover in more detail 56

5.2 Latent defects insurance and collateral warranties/third partyrights

60

5.2.1 The rationale for collateral warranties or third partyrights

60

5.2.2 The drawbacks to reliance on collateral warranties andthird party rights

61

5.2.3 Is latent defects insurance a panacea for developers? 625.2.4 Getting best value from the policy 625.2.5 Some questions answered 625.2.6 Clearing up the misconceptions 635.2.7 Key issues 665.2.8 Further information 66

viii | CONSTRUCTION INSURANCE

RICS guidance notes

This is a guidance note. It provides advice to members of RICS on aspects ofthe profession. Where procedures are recommended for specific professionaltasks, these are intended to embody ‘best practice’, that is, procedures which inthe opinion of RICS meet a high standard of professional competence.

Members are not required to follow the advice and recommendationscontained in the guidance note. They should, however, note the followingpoints.

When an allegation of professional negligence is made against a surveyor, thecourt is likely to take account of the contents of any relevant guidance notespublished by RICS in deciding whether or not the surveyor has acted withreasonable competence.

In the opinion of RICS, a member conforming to the practices recommendedin this guidance note should have at least a partial defence to an allegation ofnegligence by virtue of having followed those practices. However, membershave the responsibility of deciding when it is appropriate to follow theguidance. If it is followed in an inappropriate case, the member will not beexonerated merely because the recommendations were found in an RICSguidance note.

On the other hand, it does not follow that a member will be adjudged negligentif he or she has not followed the practices recommended in this guidance note.It is for each individual chartered surveyor to decide on the appropriateprocedure to follow in any professional task. However, where members departfrom the good practice recommended in this guidance note, they should do soonly for good reason. In the event of litigation, the court may require them toexplain why they decided not to adopt the recommended practice.

In addition, guidance notes are relevant to professional competence in thateach surveyor should be up to date and should have informed him or herself ofguidance notes within a reasonable time of their promulgation. In the opinionof the approving professional bodies this guidance note represents bestpractice.

CONSTRUCTION INSURANCE | 1

1 Introduction

1.1 Introduction

These guidance notes are written for project management surveyors, quantitysurveyors, building surveyors and all other property professionals who need abetter understanding of the many classes of risk that are available under thegeneral heading of ‘construction insurance’.

Insurance is a mystery to many people and construction insurance is probablyone of the most complex classes of business there is. A construction site hasbeen described as a place that often brings together many people, with differentideas, who have never worked together before, to build something that hasnever been built before, and often in adverse conditions.

In many ways those responsible for the insurance requirements of such a siteface a similar range of problems. There will be different interests to beprotected and each party will have its own way of doing things and its owninsurance advisers. Pulling it all together to make sure any particular party hasthe protection it needs, whilst avoiding too much reliance on other parties’insurances, is no easy task. It is rather an obvious statement but it is essentialthat everyone seeking the protection of a policy should have its name shown asan insured in the schedule to the policy. Otherwise they may find they have novalid claim.

The insurance covers for any site will need to protect all parties against a rangeof possibilities that embrace material damage, consequential losses, third partyliabilities stretching far into the future and even non-negligent liability. Tomake matters worse the responsibility for arranging the insurances will usuallyrest with several different parties and, arguably, the insurance requirements ofthe contract conditions are not always helpful, as they do not necessarily dealwith all the covers required or available to transfer risk. Further, just because acontract states that a particular insurance should be arranged by one partydoes not mean that that arrangement is necessarily best for everyone with aninsurable interest in the works. For example, the arrangement of materialdamage cover on the contract works by the contractor is not wise if theemployer requires any form of consequential loss insurance

It is the intention of these guidance notes to help readers find their waythrough the maze. Various types of insurance that may be required areintroduced and some of the problems that can arise are explained, in the hopethat they can be avoided. We recommend that the notes are read in conjunctionwith the relevant contract conditions, be they JCT, NEC or FIDIC.

The only other strong recommendation is that insurance should be takenseriously and consideration should be given to insurance covers early on in theprocurement and construction process. Let the insurance professionals be partof the team, alongside the architects, engineers and the lawyers. Spend timehelping them to understand the precise nature of the works being undertaken,the timescale involved and the financial arrangements. Make sure they areaware of all the parties involved and have an opportunity to comment on all

2 | CONSTRUCTION INSURANCE

relevant documentation before it is signed off. There is then a greaterpossibility of securing adequate protection at the best price and with theminimum of inconvenience.

To assist those readers who are responsible for arranging insurance in goodtime, guidance on when to consider each element of cover starts on page 4.

1.2 Rights and obligations of principal parties

The principal parties to any development will depend on the nature of thedevelopment but, apart from the developer, could include funders, tenants,prospective purchasers, design consultants (architects, structural/civilengineers, mechanical and electrical engineers and often others such asspecialist acoustic consultants), non-design consultants (cost/quantitysurveyors, project managers and/or employers’ agents, planning supervisors,party wall and/or rights of light consultants and sometimes others), a maincontractor and a number of important subcontractors (e.g. for piling/groundworks, main frame, M&E services, cladding, stonework, and so forth).

Contracts and the relevant local laws govern the rights and obligations of theabove participants. The touchstone for these rights and obligations is usuallythe relevant contract, under which risk and responsibilities and rights areallocated between the various parties.

1.3 Contract conditions

Whilst the UK government has its own set of conditions, other governmentsand private developers in Europe tend to use FIDIC. The old colonial countriesoften use a hybrid version of FIDIC and an international version of NEC. Inthe USA they also prefer an international version of NEC. All other contractsused around the world are normally based on either JCT, NEC or FIDIC.Whatever conditions are used it is rare for them to specify all the insurance thatshould really be arranged and it is also unlikely that any policy limits will bespecified. However, any limit specified does not act as a limit of liability.

1.4 Overseas issues

As these guidance notes have been written in the UK it is inevitable that theyhave a UK bias. However, the insurance requirements of contract conditionsused throughout the world have much in common, and construction sites,wherever they are, face the same risks. The main variants will depend on thelegal and commercial frameworks within which each country’s constructionindustry operates.

Whilst the risks faced may be similar, the actual cover arranged will varyconsiderably according to the relative sophistication of local insurance marketsand to the natural hazards in the area, e.g. earthquake in Japan or windstorm inparts of the USA.

Capacity may also be a problem as local insurers may not be able to write largerrisks and additional capacity or reinsurance may have to be sought from globalmarkets, often London.

Insurer security may also be an issue. Undeveloped countries may have aninsurance market made up of insurers that have low security ratings, if any.This may be unacceptable to lenders, overseas employers and others.


With the exception of risks that are outside the scope of standard constructioncovers acceptable to insurers, most of the problems encountered overseas canbe overcome. Specialist advice may be necessary.

1.5 When the various insurance covers need to beconsidered and when each cover starts and finishes

As a general rule the earlier that decisions are made about insurance, the better itis. Expensive mistakes can be avoided; there is more time to find the best marketsand less chance of duplicating covers or paying unnecessary premium. In this notemore specific guidance is given for each class of business.

1.5.1 Contractors’ all risks insurance

This is a physical damage all risks policy on the materials used in theconstruction works. The cover is effective during the period that the works arecarried out until practical completion but is also effective during the agreedmaintenance period. However, a decision on whether it is to be arranged by theemployer or the contractor ideally needs to be made before contracts arefinalised. As the relevant guidance note explains, it may be difficult or evenimpossible for the employer or other parties to buy consequential loss cover ifthe contractor arranges the contract works’ insurance.

1.5.2 Consequential loss

There is a wide range of consequential loss covers to suit differentrequirements. They are available to any party involved in the constructionprocess that could suffer a loss of revenue or profit of any nature if completionof a project is delayed by fire or any other insurable peril.

Cover should commence at the same time as the contract works and willcontinue until practical completion. However, as explained above, werecommend making a decision as to whether cover is required early on as thismay influence whether the employer or the contractor is to place the contractworks’ insurance.

1.5.3 Directors’ and officers’ (D&O) liability insurance

Cover is provided under the D&O policy for awards of damages, costs orsettlements (including defence costs) for which a director or officer is legallyliable resulting from a claim made against them during the policy period forany act, error or omission whilst in their capacity as a director or officer of thecompany (whether committed prior to or during the policy period). Theremay be an extension for retired directors. See section 2.3 for further details.

1.5.4 Employers liability (EL) insurance

An EL policy covers the legal liability of the employer for any illness, injury ordeath suffered by their employees.

EL insurance is always on an annual basis so it is divorced from specificprojects. However, most EL policies are issued on a ’causation’ basis. Thismeans that it is the policy in force at the time any event giving rise to a claim iscaused that will have to meet the claim. Particularly in the case of illness, theclaim may not be made until many years after the illness or disease was causedso the insurance effectively remains live long after the period of insurance hasexpired.


1.5.5 Environmental insurance

Environmental insurance can be used to cover historical conditions thatmanifest themselves during the period of insurance. In the case of a policytaken out by a contractor the cover will also include new conditions created by,or existing conditions exacerbated by, the contractor. The owner of a sitebecomes responsible for the site from the date of purchase whereas acontractor is responsible as soon as they start work on it. Ideally, thecommencement of the policy should coincide with the start of thoseresponsibilities so we recommend early consideration be given to insurancematters. It can take as little two to three days from the date of proposal to theinception of cover, however, this depends on all the information being availableand therefore more usually the process takes place over two or more weeks.

The insurance cover is site-specific for policy periods up to ten years on a‘claims made’ basis, with an automatic extended reporting period of threemonths to enable late claims to be notified.

1.5.6 Existing buildings

If there are any existing buildings on site that are not being demolished, theymay remain insured under an existing policy for the duration of the works,although the policy wording may automatically restrict or exclude elements ofthe normal cover depending on the nature and extent of the works. However, itmay be beneficial to insure both an existing building and the contract worksunder one material damage policy with one sum insured. In this case an earlydecision is required as this may influence contract conditions.

1.5.7 Latent defects insurance

The basic policy covers actual physical damage to a building (including theinternal and external services) caused by inherent defects that originate in the‘structural parts’ of the building. The defect may be caused by a failure ofdesign workmanship or materials. Although this class of business is dealt withat the end of this publication, we recommend that a decision on whether or notit is to be taken out, and which parties are to be protected, is made at theconception stage, even before the professionals are appointed. This is becausethe existence of the cover may impact on the fees being charged and the termsof appointment of those parties responsible for seeing any developmentthrough.

The actual cover does not commence before practical completion andcontinues for the agreed period thereafter, usually 10 or 12 years.

1.5.8 Non-negligence insurance

This cover is designed to cover existing buildings or neighbouring buildings(and consequential losses) that could be damaged by some of the hazardousactivities that are inevitable in construction no matter how much care is taken.It is worth considering the need for such cover as soon as the nature of thework being done is known. The architect usually makes the decision. Cover willneed to commence when work starts and continue until practical completion.By then the activities likely to lead to a claim will have ceased.


1.5.9 Professional indemnity (PI) insurance

Cover is provided under PI policies for awards of damages, costs or settlements(including defence costs) for which the practice is legally liable resulting from aclaim made against them during the policy period for any act, error oromission arising out of the conduct of the business. Cover is for mattersnotified to the insurers in the policy period. The event giving rise to the claimmay have occurred during the same period of insurance but is more likely tohave occurred before (perhaps many years before).

It is because of this that PI insurance is described as being on a ‘claims made’basis.

1.5.10 Public liability (PL) insurance

The standard cover will provide indemnity in respect of liability at law fordamages or compensation arising from accidental injury to third parties (notemployees) or accidental damage to their property arising in connection withthe project.

We recommend this element of cover be considered very early on in theprocurement process, as decisions made about who is to purchase what coverand in whose names should be reflected in the contract conditions. The policymay be annually renewable or project-specific.

The period of insurance should commence when cover is first required andwill need to continue until practical completion and then beyond to cover anyrelevant maintenance period. Standard PL policies are issued on an‘occurrence’ basis which means that the policy in force at the time of the injuryor damage will respond.

1.5.11 Surety bonds

A surety bond is a financial guarantee that the contractual obligation of aprincipal will be fulfilled. Issued by insurers, they are an alternative to bankers’guarantees. It can prove valuable to consider performance bonds at an earlystage in proceedings as they feature in the tendering process. However, theactual cover does not commence until work starts on site and it will continueuntil practical completion and then beyond to the end of the defects ormaintenance period.

It is worth considering other bonds as and when required and the period ofcover will last as long as the beneficiary is at risk of any default.

1.5.12 Unexpected archaeology discovery insurance

No matter how much is known about the archaeological history of a site andhow much investigation is done there is always the risk that unexpectedremains will be found once works starts. This can have all sorts of financialconsequences that can be insured. Refer to ‘Key issues’ at the end of section 3.8.


2 Insurances personal to members

2.1 A surveyor’s guide to professional indemnity (PI)insuranceAny member of RICS will be aware of the need for PI insurance, both as arequirement of membership and to protect themselves in the event of allegations ofwrongdoing being made against them. The need is clear-cut. In this guidance notethe cover itself is examined and advice is given on arranging a policy.

2.1.1 Where and how is the cover obtained?

This is, on the face of it, the simplest of the queries to answer. You canapproach any insurance broker and ask them to arrange PI cover for you. RICSdoes not recommend any particular broker, although it can supply a list ofbrokers in your area, or you can pick one from the phone book. Alternativelyyou can approach an insurance company yourself and ask them for aquotation. However, before you embark on any of these actions it would bewise to consider the following.

Is the insurance broker I am talking to experienced in arranging PI insurance?

PI insurance is a specialised area of expertise, and many high street brokerseither do not deal with this type of cover, or deal with it so rarely that they arenot experienced in the various nuances of the cover. Quite often the brokerswho are the most experienced in this area are not found on the local highstreet.

Is the broker I have chosen arranging the cover direct with insurers, or is hegoing through another intermediary?

Many brokers will tell you that they can obtain a quotation from a Lloyd’ssyndicate, but only certain authorised brokers can obtain figures directly fromLloyd’s. Many brokers pass the enquiry onto one of these authorised brokers toobtain terms for them, this may lead to misunderstandings and/or incorrect orinadequate passing on of information on both sides, especially if the brokeryou are dealing with is inexperienced in PI insurance.

Does RICS approve the insurance company?

RICS has compiled a list of approved insurers, who are a mix of Lloyd’ssyndicates and insurance companies, all of whom have agreed to provide aminimum level of cover to RICS members. As part of your duty to comply withRICS requirements, we recommend that you place your insurance with one ofthese approved insurers. A full list of these can be found on the RICS website.

Before making any decisions regarding brokers or insurers it is a good idea totalk to other members to see if they can recommend a particular organisation,or to contact RICS who will supply a list of experienced brokers in your area.Whilst RICS do not recommend any particular company all the names theysupply will be experienced in arranging PI insurance for surveyors. It isimportant to check that the Financial Services Authority regulates the brokerselected.


Once a choice has been made it will be necessary to complete a proposal form.These forms follow a fairly standard format, and can, at first sight, seemdaunting as they do run to several pages. If it is any consolation, insurancebrokers find them just as daunting if they are unfamiliar with them. The task ismade easier if worked through systematically. Not all questions will be relevantto everyone as certain sections of the form apply only to people carrying outcertain disciplines. It is extremely important that forms are completed fullyand legibly, as this is the information on which the underwriter will set thepremium.

Forms that are badly completed or illegible, and some of them are, give a badimpression; a well-completed, neat and tidy form makes a favourable firstimpression and may save you some money. If it is considered necessary toelaborate on certain aspects of the work then it is advisable to put extrainformation on separate sheets of paper. It is important not to be tempted toconceal any matters that might be felt detrimental to the proposal. Insurance isa contract of utmost good faith, and any omitted information that would haveinfluenced a decision made by insurers and that later comes to light, as it oftendoes, could mean that the policy does not respond to an otherwise legitimateclaim.

Some companies will offer a quotation over the phone. We recommend thatyou answer all their questions fully and completely as otherwise any quotationmay not subsequently be valid. Any company operating in this manner willusually send a written quotation and a full copy of the information given in thetelephone call, which you are advised to check, amend if necessary, sign andsend back to them. Legally this is exactly the same as completing a proposalform.

2.1.2 What does PI insurance do?

The policy wording should be on a civil liability basis, which means that itcovers claims from third parties for matters arising out of the conduct of theinsured’s professional business. The insured does not have to have beennegligent to have a successful claim made against them.

There will be a limit of indemnity shown in the policy and this should be on aneach and every claim basis, in other words the amount of cover selected is themaximum amount that insurers will pay for any one single claim. There is nolimit to the number of claims that can be made in any one year of insurance.Costs and expenses incurred by insurers in dealing with the claim, for exampleexpert witness fees, solicitors fees, are in addition to the amount of coverpurchased. For example, if there is protection for £1m for any one claim andthe claimant successfully claims £900,000 and the costs to insurers in variousfees, etc. are another £300,000 then they will pay £1,200,000 in total. If theinsured is VAT registered they may be asked to pay the VAT applicable to theircosts and expenses and claim this back on their VAT return.

There will be a claims excess on the policy. This is the amount that the insuredhas to pay in the event of a claim. This will vary from insurer to insurer, andwill almost always be a higher amount for higher risk work, so there could be apolicy where the excess is the first £1,500 of each and every claim but rising to£5,000 for each and every claim arising out of mortgage valuation work. Thisexcess normally applies only to the actual claims payment, so if insurers incurfees in defending a claim and no payment is made to a claimant the insured isnot asked to pay the excess.


The insured’s professional business will be defined in the policy as ‘worknormally carried out by a member of RICS, or as declared to insurers on theproposal form dated . . .’. It is very important that the full extent of activities isdeclared on the proposal form to ensure that everything done is fully covered.

Cover automatically extends to all partners/directors/LLP members andemployees. It also includes personal appointments such as, but not limited to,quinquennial inspections (which are always an individual appointment),adjudication and arbitration. Pro-bono work carried out on an individualbasis, such as for the local church or school, is also covered, provided insurershave been told about it.

The watchword for any insured is: ‘If in doubt always tell your insurers whatyou are doing’ – you cannot be wrong for giving as much information aspossible.

One thing to be aware of is that PI policies are almost invariably written on a‘claims made’ basis. This means that it is the policy in force at the time theclaim is made or notified that deals with it, not the one that was in force whenthe work was done. This is in direct contrast to virtually all other UKinsurances, which are on an ‘occurrence basis’, where the insurer at the time ofthe incident pays no matter when the claim is made or notified. This claimsmade basis means that it is imperative that continuous cover is maintained,even into retirement. Indeed, RICS require members to maintain cover for aminimum of six years from the date of cessation of any practice.

As mentioned previously, RICS and its approved insurers have agreed a policywording that will be offered as a minimum by all approved insurers. Someinsurers do give wider cover than the minimum in certain areas, and werecommend that proposers always ask if the cover is the approved minimum orif it is wider and, if so, in which areas.

2.1.3 What is the right level of cover?

RICS has laid down minimum levels of cover for members to carry in order tobe compliant with its requirements. However, these are minimum levels onlyand may not be appropriate for particular member’s circumstances.

The minimum levels are based on fee income bands and are as follows:

Fees up to £100,000 Cover required £250,000 each andevery claim

Fees between £100,000and £200,000

Cover required £500,000 each andevery claim

Fees over £200,000 Cover required £1m each and everyclaim

The definition of fees excludes VAT and disbursements.

A sole practitioner earning around £20,000 per annum dealing with low riskwork, such as expert witness, planning and development (where there are nodetailed plans) or land agriculture management would be happy at theminimum limit of £250,000 each and every claim. On the other hand a largecompany doing mortgage valuation work on properties with a value of severalmillion pounds would need to carry a much higher limit than the £1mminimum laid down by RICS.


Some clients may insist on higher levels of cover. Most local authorities, forexample, require anyone contracted to them to carry at least £5m any oneclaim.

No insurer or broker can advise on the level of cover required as only theinsured can assess their potential exposure.

The cost of insurance is directly related to fee income, the type of work done,the level of cover and past claims experience. Surveying encompasses a range ofdisciplines, and insurers rank these from low risk through to high risk.

The very highest risk work, which will attract the highest premiums and claimsexcesses, is survey and valuation work, whether commercial or residential, andin particular valuations for lending purposes. Experience has shown that this isthe area that produces most claims, be it a negligent survey (i.e. a missed defectin the property), or negligent valuation (under or over valuation). Commercialvaluation work is a higher risk than residential as this leads to higher valueclaims, and has also produced more fraud claims.

Valuations for matters such as probate, divorce, asset register, compulsorypurchase, or the more specialist areas such as milk and sheep quota valuationsare not regarded as such high risk and do not attract such high premiums.

Medium risk work encompasses such things as estate agency (commercial andresidential), property management, CDM work (Construction, Design andManagement (Health and Safety) Regulations), project management andproject supervision and land surveying.

Low risk work is quantity surveying, expert witness work, auctioneering, lossassessing/adjusting, agricultural disciplines and architectural work.

One type of work that must be mentioned separately is anything connectedwith asbestos. The wording agreed between insurers and RICS limits cover forclaims arising out of asbestos to £250,000 in the aggregate (meaning that allclaims in a year cannot come to more than £250,000 in total) and it specificallyexcludes claims arising out of asbestos surveys. This cover is designed to giveindemnity purely for incidental asbestos exposure (i.e. missing some asbestoslagging in a loft or similar).

Working with asbestos is a very specialist area and is regarded as such high-riskwork that only a very few insurers offer the specialist cover needed, and theirrequirements are extremely stringent. As may be expected the premiums arealso very expensive, reflecting the risk involved in working with this material,and the potential cost of claims. RICS has arranged such a policy for itsmembers, and details can be found on the RICS website: www.rics.org.

From time to time a contract will come along where a higher limit ofindemnity is required. Unfortunately, most underwriters are not prepared toincrease the cover just for one contract, it has to be done for all work. If acollateral warranty is required then this will mean that the higher cover has tobe kept in place for a minimum period of time from practical completion,usually 12 years. This extra cost needs to be factored in when deciding the feefor such a contract.

The exception to this is if the contract is of such a size that single project coveris attractive to underwriters. Given that there are very high minimumpremiums for this cover, normally £25,000 upwards, the contract needs to be ofa size, and attracting a fee of the size, that justifies this level of premium, again


bearing in mind the potential 12-year cover period. Very few insurers offer thiscover, it is a specialist area written by some Lloyd’s underwriters.

Once cover has been arranged and paid for a policy document should bereceived within 30 days of inception of the cover. The documents receivedshould comprise a full policy wording, a schedule and any applicableendorsements. The schedule will show the amount of cover (limit ofindemnity), the policy excess, the insured’s name and address, the effectivedates of the insurance and who to contact in the event that a potential claimneeds to be reported.

Endorsements can be either general updates to the policy wording that apply toeveryone taking out such a policy, or specific to an insured. For example, if theproposal form revealed a potential claim on a previous insurer then the newpolicy will exclude anything related to this as the previous insurers are alreadydealing with it. If subcontractors are to be covered under the policy then therewill be an endorsement noting them by name. Other typical endorsements willconfirm that previous trading names used by the insured are still covered, orwill include work done overseas (the standard policy wording covers work inthe UK only).

It is important that all the documents sent to you are read throughimmediately and if anything is incorrect or not understood it is worthquerying straightaway. An error in the policy that is not noticed or that is notqueried and corrected may affect cover in the event of a claim.

Finally, mention must be made of surveyors working in the public sector.Traditionally, local authorities and similar bodies have not purchased PI coveron the grounds that all work is internal (i.e. you cannot claim against yourself).However, if work is done for any outside agency then cover for this is needed,and it is worth remembering that even if the work is internal an independentthird party could make a claim. For example, if a surveyor carries outcondition surveys on council houses, which are later sold to the occupiers (orothers), and a defect, for example asbestos lagging or unmentioned subsidenceor dry rot, comes to light the council could be sued by the purchaser for thecost of rectification, as well as being asked for financial restitution for loss ofrental income, alternative accommodation, etc.

2.1.4 When should I consider cover and what will it cost?

We recommend that you ensure adequate cover that conforms to RICS’sminimum requirements is in force before you carry out any work. The cost willvary according to your fee income and type of work carried out but starts fromas little as £495 per annum for a limit of £250,000 any one claim for a solepractitioner with fees of around £50,000 per annum doing low-risk work.

2.2 Professional indemnity insurance for project managers

The remaining paragraphs are devoted to construction project managers, asthe nature of their work requires special consideration. Such managers areresponsible for co-ordinating the construction of building projects of varioussizes, but usually they are appointed to larger contracts such as, but not limitedto, hotels, factories, office blocks, housing developments, schools and hospitals.They are appointed by the client, who is often, but not always, the developer,and their duties may include:


+ the appointment of the contractor, architect, structural engineer and othersub-contractors needed to complete the contract;

+ interpretation of plans;

+ estimation of costs and quantities of material needed;

+ planning constructions methods and procedures;

+ co-ordination of the supply of labour and materials;

+ supervision of the construction site itself and the direct site managers andsub-contractors;

+ negotiation with building owners and sub-contractors where necessary;

+ controlling the preparation of costs estimates and other documentation forcontract bids;

+ controlling payment to sub-contractors by way of valuation of completedworks;

+ ensuring that building regulations, standards and by-laws are enforced inbuilding operations;

+ consultation with architects, engineers and other technical workers toensure that design intentions are met;

+ ensuring that the contract is completed on time and within budget;

+ keeping the client advised at all times so that if there are delays, budgetdiscrepancies, etc. these are dealt with swiftly and efficiently.

Many construction project managers work in private organisations such aslarge construction and development companies, but equally a good numberare employed by government/local authority departments/housingassociations, or are self-employed.

Where the project manager is a direct employee of a private sectorconstruction or development company then the professional indemnityinsurance taken out by that firm should automatically cover these activities.However, if the firm for which he is working is a non-regulated company heshould ensure that:

(a) the company has professional indemnity insurance; and

(b) the project management activities have been fully declared to insurers andare indemnified.

The pitfalls come for project managers who are employed by public sectoremployers. As mentioned earlier, many local authorities, housing associations,governmental departments and the like do not carry professional indemnityinsurance on the grounds that their work is internal and you cannot claimagainst yourself. The project manager, however, comes into contact with a vastnumber of external organisations and people, any and all of whom could makea claim against him if things go wrong.

For example, a contract on a new office block being built to let by the localcouncil over-runs by six months due to the contractor failing to put sufficientlabour resources on site. The council for whom the project manager workshave already signed a lease on the building, and the head lessee has sub-letseveral units. The delay means that the head lessee is failing to receive rent forthe period of the over-run, and he comes to the project manager forrecompense, as he should have ensured that the contractor supplied sufficientlabour to complete the contract on time.


Or, the project manager is in charge of a refurbishment project involving socialhousing. Everything is completed on time, the local authority hand theproperties over to a housing association and the tenants move in. Six monthslater it is discovered that there is harmful asbestos in the properties andeveryone has to move into alternative accommodation while the asbestos issafely removed and replaced with a suitable material. The housing associationcome to the local authority for reimbursement of their outlay on safe removaland alternative accommodation costs, stating that the project manager shouldhave ensured that any asbestos was identified and removed during therefurbishment process and he has therefore been negligent.

Or, the project manager is in charge of the building of a major new housingdevelopment. The local authority will retain some of this for social housing;some will be sold to private purchasers. Everything is successfully completed,the housing development is finished on time, but a few months later theoccupants of the houses find that their properties are subsiding badly.Investigation reveals that there are disused mine workings under thedevelopment site which are collapsing. The houses become uninhabitable andunsellable and will eventually have to be demolished. The private purchasers allsue the local authority for their losses citing the failure of the project managerto identify the mine workings in the preliminary investigations of the site as themain cause of their loss.

These are, of necessity, only brief scenarios of the pitfalls for project managers.Because of the interaction of project manager and organisations/personsoutside of the organisation for which he works it is essential that professionalindemnity insurance is arranged, even where he is a public sector employeewhere such cover is not normal. It is perfectly possible to arrange cover thatlimits claims to those emanating from an independent third party, i.e. anyoneoutside the public sector employer.

The final scenario is where the project manager is a public sector employee butis appointed by a private sector company. This can happen where a localauthority or similar invite tenders from the private sector to carry out aproject, such as new school, new hospital etc. and the contractor/developerappointed has the services of the local authority project manager, and a fee ischarged for this. Under these circumstances the contractor/developer can makea claim against the project manager, as he is giving advice or design for a feeand again professional indemnity insurance should be purchased to cover suchclaims.


2.3 Directors’ and officers’ liability (D&O) insurance

Company directors on the boards of both publicly listed and private companies arebecoming more wary than ever of their potential exposures to litigation. TheCompany Reform Bill and well-documented increases in DTI investigations, stockoptions backdating allegations and extradition proceedings have all highlightedthe risks that directors face. The dramatic downturn in the economy starting in2008 magnified these risks even further.

Unsurprisingly, this has led to greater scrutiny of the cover provided by acompanies’ D&O liability insurance to ensure that directors that are makingdecisions on behalf of the company are sufficiently protected should they be namedin litigation arising from these roles. It is also more common for prospective newboard members to instruct their lawyers to undertake a thorough examination ofa company’s D&O policy prior to accepting a role on a new board to ensure thecover provided is satisfactory. In the notes below the cover is explained.

2.3.1 What is D&O exactly and who is covered?

In essence, the cover provided by the D&O policy is for awards of damages,costs or settlements (including defence costs) for which a director or officer islegally liable resulting from a claim made against them during the policyperiod for any act, error or omission in their capacity as a director or officer ofthe company. Fines and penalties are typically excluded.

D&O cover is taken out in the company name, but the main beneficiaries ofthe policy are the individual directors and officers (as well as the companyshould they indemnify a director for such loss). It also provides protection foremployees who are acting in a managerial capacity or who are named as a jointdefendant in an action against a director or officer. Further, although the policyis usually taken out in the name of the holding company, it then automaticallyprovides protection for all directors and officers of any subsidiary companieson a global basis.

Cover is provided for past, present and future directors and officers. Retireddirectors are commonly also provided with an automatic six-year period tocover claims made against them for acts committed whilst they were a directoror officer of the company in the event the policy is non-renewed (for whateverreason). Such period should be provided for no additional cost and wouldapply from the date of such non-renewal.

D&O is also a ‘claims made’ cover (i.e. only claims notified during the policyperiod are covered) as opposed to the large majority of insurances, which arearranged on an occurrence basis.

2.3.2 What type of company should be purchasing D&O cover?

When D&O cover was first made available it was only the largest publicly listedcompanies who sought to purchase it. This purchasing philosophy has changedradically over the years and now it would be extremely unusual for any UKlisted company not to buy D&O.

Although it is common for a high percentage of claims to be brought byshareholders, there are many other third parties that can look to bring actions.This has resulted in many private companies also purchasing this cover as


standard. An example of these third parties would be regulators/governmentbodies, employees, customers, competitors, co-venture partner companies andliquidators.

2.3.3 What should I be looking out for to ensure I have adequate cover?

Care is needed because the breadth of coverage provided by D&O policies canvary enormously between insurance carriers. There are many differentiatorsthat can have a substantial impact on the extent of cover provided. Thefollowing are just a few of the coverage areas that can vary substantiallybetween insurance policies:

+ definition of insured person;

+ cover for pollution-related claims;

+ insured v. insured (claims by one insured person against another);

+ automatic cover for new acquisitions (often restrictions for size/domicilityof acquired company);

+ public/private offerings of securities (these will often be excluded);

+ transactions (cover will often cease if the company is sold or the majorityof its shares sold);

+ non-rescindable contract language.

Specific to the property/construction sector, in the first quarter of 2009 severalhigh-profile companies in this sector sought to shore up their respectivebalance sheets through significant rights issues. We recommend that youensure cover is provided under a company’s D&O policy for any wrongful actscommitted by the directors and officers associated with such capital raisingsthat occur during the policy period. Such additional exposures are often notautomatically covered as standard.

2.3.4 Obtaining terms for a D&O policy

In order to procure terms for a D&O policy for companies with less than£750m total assets it is possible to obtain terms with just the companyregistration number. For companies larger than this a copy of the company’slatest report and accounts as well as a completed proposal form would berequired.

2.3.5 Market trends

The five years prior to 2009 saw a dramatic softening in premium rates in theLondon market for D&O insurance combined with a dramatic influx ofinsurers offering capacity to this product in light of the relatively benign claimsenvironment in the UK during this period.

At the beginning of 2009 there were in the region of 35–40 insurers that couldoffer D&O cover in the London market and this has been a considerable factorin driving premiums for this product down.

However, this time also saw early signs that the majority of these insurers werelooking to reverse this softening in light of some significant losses sustained fortheir financial institutions clients.

Insurers started being far more selective about the companies that they wouldbe prepared to insure and companies in certain sectors have been affected more


than others. The construction/property sector was targeted by many insurersfor premium increases in light of the particularly tough trading conditions thatcompanies in this sector experienced.

Certain insurers also sought to use this opportunity to attempt to impose morerestrictive policy conditions following several years of their policies offeringcontinually greater breadth of cover. For example, the imposition of ‘insolvencyexclusions’ on their renewal terms, if accepted by the broker/company, have thepotential to expose directors and officers to a significant un-insured risk. Thisonerous limitation seeks to exclude any cover for the directors and officers forany wrongful acts arising out of or based upon the insured company becominginsolvent. Given that this is when the directors would most likely seek to callupon the D&O policy (due to indemnification from the company unlikely tobe available) this provision should be vehemently resisted at all times.

It is important therefore in challenging market conditions that companies seekto partner with a broker that has both the depth of experience and resource tocombat such pressures being imposed by the market.

2.3.6 Key issues

Whenever market conditions are challenging it is far better to prepare arenewal strategy with a broker earlier than usual to ensure insurers arefurnished with all information necessary to provide competitive renewal terms.

We recommend that care is taken over ‘new’ wordings offered by insurers asthese may contain onerous limitations in cover which if accepted could haveserious implications for covered persons.

It is worth ensuring that your broker provides latest information relating to thesecurity credit ratings of each insurer quoting renewal terms. Ensure also thatsuitable provisions are contained within the policy to make certain that in theevent of a subscribing insurer becoming insolvent during the policy period thebroker has arranged solutions to enable swift replacement of said insurershould this be required.


3 Construction risk insurances

3.1 Consequential loss insurance for construction risks

Developers are used to carrying risk. It is part and parcel of their business. Theconsequential loss risk on a construction site is a high one as there are so manyfactors that could delay completion and then so many headings under whichadditional expense or actual loss of anticipated income could arise. Themeasurement of each potential loss can be a problem. If it is not correctly assessedthere may be underinsurance or an unnecessarily high sum insured that results infar too much premium being paid. In this guidance note the potential losses andthe measurement of them are considered. The focus is on the development ofbuildings that are to be let or sold but potential occupiers and others may also needto consider the implications of any delay and at the end some interestingvariations on the usual theme are included.

3.1.1 Three important points

There are three important points to be made at the outset.

If any party involved with the construction will require consequential losscover of any kind it is very unlikely that any insurer will be willing to assistunless it also holds the material damage insurances on the contract works. Thisis reasonable because it is only by the insurer controlling the settlement of thematerial damage claim that the size of the consequential loss can be minimised.

Therefore, if the contract conditions call for the contractor to arrangeinsurance on the works, it may be impossible for the employer to arrange anyconsequential loss cover. The employer will then have to arrange its own coveron the contract works in order to secure that consequential loss protection.

To avoid the possibility of the employer effectively paying enhanced premiumsfor such contract works cover it is worthwhile making clear to the contractorfrom the outset that the employer is paying for its own cover, if this is theintention. The contract price quoted by the contractor should then reflect this.It is usually very difficult, if not impossible, to persuade the contractor toreduce its price at a later date. In any case the contractor may prefer to arrangeits own cover on the works so that it has control over any claims that arise. Thisis understandable and the contractor may also argue, possibly with somejustification, that it can buy the contract works insurance more cheaply thanthe employer.

Faced with the problems of changing contract conditions, arranging cover onthe works and, possibly, paying more premium for the privilege, any employercould be forgiven for giving up the idea of arranging consequential loss cover.However, this brings us to the second point, which is that it is not good practiceto rely on liquidated damages instead. Apart from the fact that the contractormay find it impossible to purchase insurance against liquidated damages,making recovery of a genuine loss uncertain, there is the possibility that thecontractor will be entitled to an extension of time and will not be liable to payany damages anyway.


The final point is that a properly arranged insurance on consequential loss willmore accurately reflect the employer’s loss than liquidated damages can and byarranging both contract works and consequential loss insurance with the sameinsurers there is the added advantage that the insurers will be looking for aquick resolution to the works claim in order to reduce the size of theconsequential loss.

3.1.2 Relevant events

Before considering policy covers and providing some advice to avoid commonpitfalls, it is prudent to consider the nature of the risk exposure that developerscan face. The range and variety of building contracts is immense, although, byand large, when considering property development work, one of the standardJCT forms will be utilised as a basis. Section 6 of the Standard Form ofBuilding Contract 2005 Edition deals with damages if the contractor fails tocomplete the works by the completion date. Subject to certain conditions thecontractor is obliged to compensate the employer to the extent of liquidatedand ascertained damages at the rate specified in the contract. However, if thedelay is due to certain ‘relevant events’ an extension of time for completion ofthe building will be given. In that event the damages do not have to be paid.These ‘relevant events’ typically include the following:

1 force majeure;

2 exceptionally adverse weather conditions;

3 loss or damage occasioned by any one or more of the ‘specified perils’ (seebelow);

4 civil commotion, local combination of workmen, strike or lock-outaffecting any of the trades employed upon the works or any of the tradesengaged in the preparation, manufacture or transportation of any of thegoods or materials required for the works;

5 terrorism.

Contract conditions do vary and therefore the proposal that an extension oftime may be available is not necessarily correct in every instance. Where it isknown that an employer is effecting a delay in start-up insurance thecontractor may be able to agree a waiver of liquidated damages incircumstances where the insurance coverage is available. This may havepremium implications but may be the best value for money.

3.1.3 Specified perils and force majeure

The ‘specified perils’ are usually defined as: fire, lightning, explosion, storm,tempest, flood, bursting or overflowing of water tanks, apparatus or pipes,earthquake, aircraft and other aerial devices or articles dropped therefrom, riotand civil commotion, but excluding excepted risks. The excepted risks include,amongst other things, radioactivity and pressure waves. There is no definitionof ‘force majeure’ perils in JCT contracts although they are usually specified inPFI contracts. For insurance purposes the principal force majeure perilsinclude: fire and allied perils, strikes, lockouts, labour disputes, change of law,order of any court enforcing a change of law and any other cause beyond thecontrol of the contractor.

At one time it was possible to buy cover for the consequential losses flowingfrom late completion or permanent abandonment of a project following theoccurrence of force majeure perils or restricted to ‘specified perils’ (howsoever


specified in the policy document) but following some huge claims it appearsthat cover of such breadth is no longer available. In addition clause 22D hasbeen deleted from the 2005 JCT form.

It is worth mentioning at this point that care is needed with the term ‘specifiedperils’. The specified perils in a lease may be defined differently to above.Reference to ‘all risks of specified perils’ will almost certainly include not justthose mentioned above but, in addition, malicious damage, impact,subsidence, landslip, heave and, possibly, other accidental damage.

3.1.4 Extensions of time

Clause 2.25 of the JCT form is also relevant as it deals with applications forextensions of time. The contractor is obliged to give notice as soon as itbecomes reasonably apparent that the progress of the works is being, or is likelyto be, delayed. The notice must give details of all material circumstances andstate whether or not, in the contractor’s opinion; the event is a ‘relevant event’.Leaving aside those clauses that deal with loss and expense caused by mattersmaterially affecting regular progress of the works that may leave resultant lossand expense claims sitting firmly with the contractor, the possibility for thedeveloper sustaining the loss is clear to be seen. Whilst it is not the subject ofthese notes, developers should be aware of some differences with the StandardJCT Form of Management Contract (2005 Edition). Under this, the certifyingofficer will not consider such an extension to the extent that the delay arisesfrom any omission on the part of either the management or works contractors,even if the delay has been caused by an otherwise permitted event of delay. Forexample, a situation could easily arise where a pipework joint was improperlymade, leading to ‘bursting or overflowing of water apparatus’, so that whilst aperil operated, workmanship error could deny the management or tradecontractors being absolved from liquidated and ascertained damages.

3.1.5 Measurement of liquidated and ascertained damages

Equally, even if liquidated and ascertained damages can be applied to any delayscenario, the reality of the impact upon the developer’s financial position canoften be beyond the level of liquidated and ascertained damages set duringtender negotiations. Whilst every effort is made to set the level of damages atan appropriate level, the full consequences are not often appreciated until a lossis sustained. Equally, it can be the case that on smaller projects it is difficult toreach agreement with the contractor involved for an appropriate level ofdamages. This is because, if set accurately, they may preclude the contractorfrom undertaking the development or, alternatively, the imposition of suchdamages would adversely affect any tender submitted. One example of such ascenario would be the fit out of an existing office building to accommodate, forexample, a traders’ dealing room where actual losses for delays may be trulysignificant.

Consequently, another avenue for shortfall and irrecoverable losses for thedeveloper arises. The case for the developer undertaking a careful risk analysisand then securing appropriate insurances for potential exposure is clear. Theeffect of the relevant events is that the contractor is not responsible to thedeveloper for the consequences of delays in completion that are outside itscontrol. Not all of the remaining exposures can be insured so the developer hasa significant amount of risk itself. Unfortunately, developers often carry more


risk than is necessary by failing to insure at all or failing to insure adequately,even though insurance cover can be purchased.

An examination of the potential losses that may be insured begins below.

3.1.6 Loss of rent and loss of use of sale proceeds, including assessment ofindemnity period

Loss of rent is considered first. If insured damage occurs, completion of thedevelopment may be delayed, the lessee cannot move in on the date expectedand the developer suffers a loss of rental income for the period of the delay.The basis of settlement is the loss of that income and the sum insured shouldbe calculated on the basis of the anticipated annual rent multiplied by theindemnity period in years.

Assessment of indemnity period

The indemnity period is defined in the policy and, broadly speaking, it shouldrepresent the maximum period after a loss that the insured’s business will beaffected in consequence of insured damage. For a developer intending to let,the first consideration is how long would it take to repair damage to thedevelopment occurring at the worst possible time? This will usually meancontemplating a total loss just before completion. Suppose that a completerebuild would take three years taking into account all factors. In other words,rent will begin to be paid three years later than originally planned. Theminimum indemnity period is therefore three years and that is the number ofyears’ rent the developer could expect to recover from insurers if the worsthappened. However, there may be other factors to consider. For example if aprospective and definite tenant is lost as a result of the delay it may be thatanother tenant cannot be found when the building is finally ready.Alternatively, another tenant may be found in time but at a lower rent than theoriginal would have paid. The developers’ real loss may continue for more thanthree years so a longer indemnity period may be chosen. Of course, insurersmay not be willing to grant cover for the longer period. If they do the premiumwill be higher and the developers would still have to prove any loss is entirelydue to the original damage.

Loss of use of sale proceeds

If the developers intend to sell the development on completion and the sale isdelayed in consequence of damage, the developers no longer receive the saleprice on the date expected. They lose the use of those funds that they couldhave put to good purpose, i.e. to pay back a loan, to invest in another project,or merely to put in a deposit account in the bank to earn interest. The highestloss would arise if the whole of the sale proceeds were due to be investedimmediately in the purchase of another site and the completion of the first sitewas delayed for the maximum indemnity period. For example, if the saleproceeds would have been £10m and that sum of money has to be borrowed at9% interest for three years whilst the insured development is rebuilt, a loss of£2.7m is suffered. This figure would be the sum insured. In practice such a lossis unlikely. Settlement of any claim for loss of use of sale proceeds would bebased on a combination of the continuing cost of financing existing loans, thecost of new projects and the interest lost on investing the balance. If adeveloper is unaware whether the completed building is to be sold or let it isusual to calculate a sum insured for both possibilities and insure for the higher


amount. An example of a ‘loss of use of sales proceeds’ claim follows, based onthe figures of £10m and 9% just mentioned. Assume that the developersexpected to receive £10m on the sale of a completed development on 1 January2010. They were going to use £5m of this money to pay back an existing loan of£5m on that development; £3m would have been used to purchase another sitefor future development and the balance of £2m would have been banked intheir deposit account. Instead they have to continue to borrow the £5m at 9%and they borrow another £3m also at 9% interest per annum. The interest of,say, 3.5%, that they would have earned on the £2m on deposit is lost. Assumethat the sale of the damaged building is delayed two years until 1 January 2012whilst the damage is reinstated. The developers then sell the building at lastand receive their £10m. In simple terms the measure of this loss is:

£8m at 9% interest for 2 years = £1.44m

£2m at 3.5% interest for 2 years = £0.14m

Total claim = £1.58m

There is also the possibility that any delay in completion may result in a lowersale price because of an economic downturn during the period of delay.

3.1.7 The developers’ choice as to basis of settlement

The best market wordings for developers’ consequential loss assume that at thetime the insurance is taken out the insured does not know for certain if thedevelopment will be sold or leased. These wordings allow the insured to selectthe basis of settlement at the time of the damage in the light of circumstancesat that time. The sum insured has to be based on the higher of the two figuresmentioned earlier, i.e. the annual rent or the annual cost of borrowing the saleproceeds, in both cases multiplied by the indemnity period. The otheradvantage of the flexibility of such wordings is that the claim may be based onloss of rent for the initial period and loss of use of sale proceeds if the buildingwas due to be sold when, say, it was 50% occupied. The losses detailed aboveclearly fall on the developer. Rather than rely upon liquidated damages fromthe contractor, which it is difficult, if not impossible, to obtain insurance for, itwould seem sensible for the developers to buy protection themselves on an allrisks basis. Such protection will include the specified perils but will not, ofcourse, cover all the circumstances in which those provisions would requirepayment by the contractor. Provided the developers’ insurance advisers aregiven sufficient information to measure the potential loss properly andprovided they understand the workings of the policy being purchased, theinsurance should provide an adequate indemnity.

3.1.8 Expediting costs (additional cost of working)

Cover under the above item should also include provision for expediting costs(over and above any amount recoverable under the construction insurancecovering the contract works). However, the amount recoverable is limited towhat is reasonable compared to the saving produced on the claim for loss ofrent or loss of use of sale proceeds. In practice this means that insurers will bereluctant to pay for expenditure that did not produce at least a correspondingsaving on another part of the claim. This is similar to the so-called ‘economiclimit’ under other business interruption policies. No separate sum insured forthis element of the risk is usually necessary because it is included within thecover under the loss of rent item. The proposed wording should be examined.


3.1.9 Costs incurred in raising or extending loans

The legal and other costs incurred in continuing existing loans or raising newones as a result of delay by insured damage should also be covered. These maybe included within the basic cover outlined above without the need for aseparate sum insured. We recommend that the proposed policy wording isexamined to make sure. However, unless there is a separate sum insured,insurers’ overall liability will be limited to the sum insured on the basic coverfor loss of rent or loss of use of sale proceeds.

3.1.10 Additional overhead costs (sometimes referred to as ‘soft costs’)

Any delay in completion of a letting or sale may involve an increase inmarketing, leasing, selling and legal costs. To the extent that these will beincurred in order to diminish a loss of rent claim they may be recoverableunder expediting costs. They are sometimes insured by a separate item.Underwriters are entitled to extra premium for this. There may becircumstances in which an insured wishes to spend money or may incur costsover and above those they feel could be justified under expediting costs. Eachcase has to be examined separately and a post-loss situation considered.

3.1.11 Higher cost of development finance

Many covers that are arranged ignore the fact that development finance cancost more than completed building finance and the fact that it is usuallypossible to borrow more against a completed building than it is against aplanned development. The consequences of this are twofold. In the first place ifa developer borrows to finance a new development then, when it is completedand let, the rate of interest on that loan may go down to reflect the lower riskthat the financier is running. If completion and letting is delayed the developernot only loses the rent but also loses the benefit of the lower rate of interest.Secondly, the developer may be able to borrow, say, 70% of the cost of adevelopment and then use its own funds to finance the other 30%. When thedevelopment is finished it may be the developer’s intention to borrow moremoney against the completed development thus releasing some of its ownfunds towards a further new development. If the original project is delayed, thedeveloper cannot do this. Even if more money can be borrowed against thenew development the cost of finalising the project will be higher. These twoconsequential losses should be insured against. The policy wording shouldprovide for this under the basic loss of rent/loss of use of sale proceeds cover.No separate sum insured should need to be calculated and there is not usuallyanything in the policy that would restrict the amount recoverable. No specificpremium should be charged. The problem is that many policies do not providethe cover at all. The developer should consider the possibility of a loss underthis heading and ensure cover is in force if necessary.

3.1.12 Additional increase in cost of working cover

Under the heading of ‘expediting costs’ it was explained that the reasonablecost of expediting completion of the works is covered under the basic policybut the amount that may be recovered is limited by the so-called economiclimit. It is possible to obtain cover over and above this to further expedite theworks by means of an additional item although sometimes the matter is dealtwith by means of an extension with an inner limit. There may be a requirementfor the insured to contribute a percentage to each claim. The expenditure


under this cover is limited to what is necessary and reasonable withoutreference to any corresponding saving in the indemnity that would otherwisebe payable for loss of rent or loss of use of sale proceeds. We recommend thatdevelopers consider this cover. The ability to make a claim under expeditingcosts might give them useful options in the event of a loss. For example, theability to make extra payments to speed up completion may enable them toavoid losses in the future that would fall outside the indemnity period andwould therefore not be recoverable from insurers. If underwriters require aseparate sum insured, an additional premium will be charged.

3.1.13 Damage away from the site including prevention of access

Most insurers’ policies include free extensions of cover under the advanceprofits covers to pick up losses that result from damage off site. This could bedamage to contractors’ offices, materials or equipment stored off site, vehiclesor plant in transit or whilst stored and damage to other phases of development.However, the range of free covers can vary. Some policies may include cover fordenial of access and/or failure of utilities although care is needed to ensurewhether losses are subject to only a 24-hour excess or the much higher timeexcess imposed by underwriters referred to below. Clearly the maximum timeexcess should be 24 hours if the cover is to be worthwhile.

3.1.14 Damage at suppliers’ premises

The basic cover will sometimes include cover for delays incurred followingdamage at the premises of suppliers of materials to be used in the contractworks. The most serious losses are likely to occur if there is a delay in thearrival of crucial or bespoke supplies such as lifts, boilers, windows andcladding. However, an inner limit, usually a low one, will apply. Some largelosses have been incurred following damage at suppliers’ premises where thefree cover given has not been enough. Cover can be purchased for delays as aresult of damage to all suppliers to the development not named on the policy.This can be very expensive and where the anticipated loss from particularsuppliers could exceed, say, £1m it is better to name the supplier or suppliers inthe policy with a specific limit or limits. This may be cheaper.

3.1.15 Time excess

Almost invariably cover will be subject to a time excess that varies according tothe length of the contract. This is the period immediately after a loss duringwhich insurers will not pay for the consequential losses described above.Generally speaking, the longer the period of the contract, the longer the timeexcess will be. The minimum time excess is usually 14 days but expect to see 28days or more. The excess should apply to the total of all delays caused byinsured perils and not individually to each loss. When there are severalbuildings the time excess may be applied separately to each one.

The reason for the time excess illustrates why construction consequential losscovers are difficult to write and why some insurers do not willingly write thecover at all. Construction projects are subject to delays for all sorts of reasons,bad weather, labour shortages, accidents on site, difficulties in obtainingsupplies, etc. Further, not all damage by an insured peril will necessarily delaycompletion. It may be possible for the developer to change the sequence ofworking so that any potential delay is negated or to catch up with theprogramme of work anyway. Whatever the circumstances, if there is damage by


an insured peril and the final completion date is subsequently delayed thedeveloper will, understandably, want to allocate a fair portion of the delay, orall of it, to the insured damage. It may be difficult to prove the loss at the bestof times if there have been other delays before or after the damage. Attempts totrack the progress of a development against the programme of works are not asstraightforward or successful as everyone would like, although insurers mayrequire this monitoring to be done. Often the poor quality of, or even theabsence of, adequate site records and data works against the developers insubstantiating a claim. Early advice of a claim is essential, backed up by realsubstantiated records where possible.

The time excess serves two purposes. It eliminates small claims and assists theinsurer’s hand in negotiations.

3.1.16 Unusual consequential risks

The above paragraphs have covered pretty thoroughly the consequential risksfaced by a developer when damage occurs on site. But they are not the onlyparty on site that may benefit from such insurance. Project managers,investors, prospective tenants and others may stand to make money from adevelopment if it is completed on time or to suffer a financial loss if it is not.Sometimes they are quite surprised that there is an insurance solution. Inprinciple, any kind of consequential loss can be covered by anyone who standsto suffer a loss as a result of damage by an insurable peril. Generally speakingthere has to be physical damage as delays by strikes or other non-damage perilsare difficult to insure against, if not impossible at times. Further, thecompensation sought has to be based on indemnity rather than some arbitraryamount plucked from the air and the precise measurement of that loss can bedifficult to calculate let alone define in a policy wording. Below are someexamples of what has been requested in the past.

1 Two developments with the same project managers, but different funders,were being built on adjoining sites. The first development had already beenlet but there was concern that the lessee might exercise a right not to takeup the lease if the completion of the site next door was delayed beyond acertain date. The reason was that the lessee did not want to move in ifconstruction work, with the attendant noise, dust and inconvenience, wasstill going on next door. Cover was agreed for loss of rent at the firstdevelopment following damage by an insured peril next door if suchdamage led directly to a delay in completion and a decision by the lessees toinvoke their right not to take up the lease. The basis of settlement was lossof rent, but the trigger was damage at the site next door rather than theinsured’s own premises. It was pointed out to the insured that proof ofcause of loss might be difficult. However, a letter from the lessee explainingthat the lease was not going to be taken up because of the delay incompletion of the site next door would have been hard for insurers tocounter.

2 A bank planned to move from two existing leased properties into newpremises being built. If the new building was ready on schedule the bankwould be able to terminate the two existing leases at no cost to them. Ifcompletion of the new premises was delayed the bank might have beenobliged to renew the two leases and then incur penalties when they finallymoved out. In the worst scenario they might have been left paying the renton the two properties until the leases finally expired many years later. They


were able to buy insurance that would cover their additional costs if such adelay occurred. The concept was simple but in practice an accurateassessment of the bank’s potential loss had to take into account a lot offactors. The challenge was to calculate the sum insured correctly andpresent insurers with an accurate assessment of the risk so that they couldarrive at an equitable premium. It needed the full cooperation of the client,their lawyers and the managing agents in order to do this.

3 A project manager was responsible for the construction and letting of adevelopment and when 50% of the premises were let the developer wasselling the building to an insurance company for their property investmentportfolio. The project manager’s ‘profit’ from the deal was to be calculatedaccording to a formula that meant that the sooner the 50% letting wasachieved the more money he made. Delay by fire, etc. would therefore haveaffected that ‘profit’ adversely. Appropriate insurance was purchased.

4 A developer was building a shopping arcade most of which was pre-let totop quality tenants whose covenant strength was reflected in the purchaseprice agreed by a pension fund. There was concern that severe damage andfailure to finish the development by an agreed date would cause the lesseesto trigger an opt-out provision. Their replacement by other tenants withlesser covenant strength, albeit at an equal rent, would have adverselyaffected the purchase price. This had been agreed in advance based on anagreed formula. In the worst instance the formula would have reduced theagreed purchase price by several hundred thousand pounds. Cover forpayment of this loss as a capital sum was agreed and the formula used inthe policy wording as the basis of settlement.

3.1.17 Key issues

1 Any employer seeking consequential loss insurance will be better offarranging its own contract works cover.

2 Consequential loss insurance is a more certain route to recovery thanreliance on liquidated damages.

3 Consequential loss insurance will be a more accurate reflection of theemployer’s loss than liquidated damages.

In order to secure adequate insurance cover at a competitive price werecommend that those arranging the policy have a full understanding of howthe development is to be financed, the programming of the works and thefinancial implications of any delay. An accurate assessment of the sum insuredis essential to avoid under- or over-insurance.


3.2 Contractors’ all risks or contract works insurance

There are several terms used in the insurance world that mean different things todifferent people and one of these is contractors’ all risks (CAR) insurance. Theterm is sometimes used to refer to both the material damage and liability coversrequired by a contractor. Most insurance practitioners would regard CAR asreferring only to the material damage cover on the contract works unless the realintention was obvious from the rest of the text. Anyone using the term, whetherverbally or in writing, should make their intention clear, so as to avoid anyambiguity in interpretation.

In this guidance note only the material damage cover is examined.

3.2.1 The cover

A CAR policy responds when the works being constructed, as defined in thecontract, are damaged by an insured peril and require replacing and/orrepairing. It is normal for the project contract to stipulate who will provide thiscover. If it were the contractor then it would be normal for them to have anannual policy covering all their contracts up to a specific limit. However,should responsibility fall upon the employer then cover would normally beunder a policy arranged specifically for that project.

When arranging the cover, we recommend that care be taken in identifying thecorrect contract value, construction period, defect period and description ofthe works.

The policy will normally respond to any physical loss or damage unless thecause is specifically excluded so the term ‘all risks’ whilst commonly used, is tosome extent, misleading. Nevertheless the cover is very wide and embracesprotection against fire, aircraft, explosion, earthquake, riot, malicious damage,storm, flood, burst pipes, impact and other accidental damage. However,policies can be issued covering loss or damage by particular and specifiedperils, e.g. fire, flood, storm. In both cases the policy will need to be extended toprovide protection in respect of damage by terrorists.

In either case it is imperative to fully understand what exclusions apply orwhich perils are listed to ensure that the cover gives sufficient protection to theemployer and the contractor. The policy should always be in the joint names ofthe employer and contractor although the contract may stipulate that otherparties, e.g. financiers, are also named in the policy.

All policies will have an excess that will be deducted from any claim settlement.On occasions insurers will apply more than one excess under a policy forspecific losses, e.g. flood claims may have a higher excess than any other claimwhere the risk of flooding warrants this.

The following extensions of cover should be included in the policy but may besubject to inner limits that may be amended by negotiation with insurers priorto the project starting:

+ professional fees;

+ automatic reinstatement of the policy limit following a loss;

+ debris removal;

+ free issue materials;

+ discovery of munitions of war;


+ inflation clause;

+ plans and documents;

+ public authority clause.

Insurance brokers specialising in this class will also have their own list ofextensions that they will negotiate with insurers.

3.2.2 Joint Code of Practice on Fire Prevention

Insurers themselves may impose certain conditions on the employer/contractor in respect of specific requirements, e.g. compliance with the JointCode of Practice on the Prevention from Fire on Construction Sites andBuildings Undergoing Renovation. This was introduced by the Fire ProtectionAssociation after full consultation with interested parties and has provedsuccessful in combating the huge losses being suffered by insurers. Expectinsurers to apply the Code and seek compliance with its terms.

The basic cover of loss or damage to the works can also be extended to includethe following additional costs.

3.2.3 Additional cost of construction of unbuilt works

There are two elements to this cover as explained below.

1. Inflation only

The need for this cover is best illustrated by an example. Suppose that aneight-storey office block is being constructed but it is badly damaged by fireafter only four storeys have been completed. The contract works materialdamage cover will pay for the cost of reinstating the damage (including anyinflationary aspects). However, by the time that work is completed the cost ofbuilding the upper four floors may have increased as a result of inflation.Underwriters normally require the insured to bear a proportion of each claim.Care is needed in assessing the sum insured, which must reflect the worstpossible scenario and the insured’s estimate of future inflation on buildingcosts.

2. Out of sequence working

Successful delivery on time of a development depends on all site activitiesrunning to time in the right sequence. If this sequence is thrown out bydamage the cost of development can increase substantially. It is possible toinsure this risk but, again, the insured will almost certainly have to bear aproportion of each loss subject to a minimum contribution. Care is needed asthe breadth of cover offered by insurers is restricted by standard exclusions.

3.2.4 Defective design, materials and workmanship

It will often be the case that the ‘material damage’ covers available under eitheran annual or project-specific contract works policy will be subject to a standarddefects exclusion. The effect of this will depend upon the precise exclusionused but a typical ‘DE3’ wording (see below) will exclude the cost of replacing,repairing or rectifying any part of the works that are in themselves defective ineither design, plan, specification, materials or workmanship. This exclusion canonly be properly understood if we consider the wordings of the exclusions usedin the contract works policy and the practical effect of the exclusions in use.


The actual wordings are set out below and the practical effects are below that. Itis DE3 that is standard to most policies. Any variation on this will savepremium in the case of DE1 or DE2 or cost more for DE4 or DE5 (see below).

3.2.5 Defective design, materials and workmanship clauses

1. Outright defect exclusion (DE1)

‘This policy excludes all loss of or damage to the property insured dueto defective design, plan, specification, materials or workmanship.’

2. Extended defective condition exclusion (DE2)

‘This policy excludes the costs necessary to replace, repair or rectify anyof the property insured which is in a defective condition due to a defectin design, plan, specification, materials or workmanship, or which reliesfor its support or stability on any of the remainder of the propertyinsured which is in itself in a defective condition. This exclusion shallnot apply to the remainder of the property insured which is free of suchdefective condition but is damaged as a consequence of such defect.’

3. Limited defective condition exclusion (DE3)

‘This policy excludes the costs necessary to replace, repair or rectify anyof the property insured which is in a defective condition due to a defectin design, plan, specification, materials or workmanship, but thisexclusion shall not apply to the remainder of the property insuredwhich is free of such defective condition but is damaged as aconsequence of such defect.’

4. Defective part exclusion (DE4)

‘This policy excludes the costs necessary to replace, repair or rectify anycomponent part or individual item of the property insured which isdefective in design, plan, specification, materials or workmanship, butthis exclusion shall not apply to other parts or items of the propertyinsured unintentionally damaged as a consequence of such defect.’

5. Design improvement exclusion (DE5)

‘This policy excludes the costs necessary to replace, repair or rectify anydefect in design, plan, specification, materials or workmanship, butshould unintended damage result from such a defect, this exclusionshall be limited to the additional costs of improvements to the originaldesign, plan or specification.’

Example of the application of the aforementioned exclusions

Imagine a site with a steel-framed building. The perimeter boundary wallaround the site and the roof has been completed. The cladding has beenpartially completed. The bolts used in the construction of the steel frameworkprove to be inadequate and the whole structure collapses, damagingeverything.

The various defect exclusions would pay as follows:

+ DE1 – all the damage would be excluded;

+ DE2 – all damaged items would be excluded except the perimeter wall;

+ DE3 – the steel framework would be excluded. The roof, cladding andperimeter wall would be paid for;


+ DE4 – only the nuts and bolts would be excluded;

+ DE5 – all damage would be paid for. The improvement costs would beexcluded.

3.2.6 LEG clauses

The London Engineering Group (LEG) has developed their own version ofthese clauses known as LEG 1⁄2/3 which effectively mirror DE1, DE3 and DE5above.

3.2.7 Legal challenges

Various legal challenges are ongoing as to the effectiveness of these clauses andtherefore whilst the description of coverage above may not reflect the currentor future legal interpretation. As with all contractual documentation, werecommend you seek professional advice.

3.2.8 Key issues

If the contractor arranges this cover it restricts or even removes the ability ofthe employer to purchase any consequential loss covers required.

3.3 Employers’ liability insurance

Throughout most of the developed world, employers are legally responsible forproviding safe working conditions for their employees and they also need to ensurecompensation will be available if the employee suffers death, injury or disease. Inthis guidance note the implications for employers are explained.

In the UK all employers, other than a few specified public bodies and, since2004, sole traders, are required by the law to take out an employers’ liability(EL), insurance policy. An EL policy covers the legal liability of the employerfor any illness, injury or death suffered by their employees.

3.3.1 The Employers’ Liability (Compulsory Insurance) Act 1969

EL insurance was made compulsory under the Employers’ Liability(Compulsory Insurance) Act 1969. In this way, the government ensured thatcompensation would be available to employees who suffer illness or anaccident in the workplace.

+ It’s not just accidents. Employees can contract work-related diseases –from dermatitis through contact with certain chemicals to mesotheliomathrough inhaling asbestos fibres.

+ It’s not just current employees. Employees who moved on many years agomay have contracted a work-related disease that has only just come to lightand been diagnosed.

+ It’s not just employees under a contract of service or apprenticeship. Thecourts will define an ‘Employee’ to be someone working under theemployer’s control so it is worthwhile making sure that the definition of an‘Employee’ is as wide as possible – and that the same definition is used onthe employer’s public liability policy. In that way, injury or damage causedby ‘an employee’, for which the employer is vicariously liable, will beinsured.

+ It’s not just head office. It doesn’t matter where the accident happened orthe illness was caused – whether it was on site or off site: if the employer is


legally liable, the EL policy should apply. The only exception is driverssuffering a motor accident whilst at work. EU harmonisation means thatcompensation for work-related motor accidents is now covered under amotor policy – another class of insurance made compulsory by law toensure compensation is available.

+ It’s not just UK companies. Foreign companies sending their employeeshere need to purchase the cover if they have a ‘place of business’ in the UK.Such a place could be a building site or just a nameplate.

Indeed, EL policies are unique in that insurers are severely restricted by law inthe exclusions and conditions they can apply. Trade exclusions can be applied,e.g. work above a certain height or below a certain depth, work with explosivesor asbestos, demolition activities or work offshore. However, these exclusionsare designed to make sure the employer has shared all the information aboutthe risk with his insurer and the correct premium is charged for hazardousactivities. And, if the employer is working offshore, for example, he must takeout EL cover for such work, otherwise he is breaking the law.

The Employers’ Liability (Compulsory Insurance) Act 1969 ensures that theemployer has at least a minimum level of insurance cover against any suchclaims. The statutory minimum amount is currently £5m any one occurrencealthough, in practice, most insurers offer cover of at least £10m. However, withcourt awards for serious injury to just one person exceeding £10m in the UK,employers should look carefully at their risk exposures and consider whetherhigher limits are needed. Particular attention should be given to the maximumnumber of employees on site at any one time.

Further information regarding cover in the UK may be obtained from theHealth and Safety Executive website (www.hse.gov.uk/pubns/hse40.pdf).

This includes advice on what is required for employees working abroad and thecategories of employers that need covering. Similar government websites maybe found in other countries and we recommend that these are consulted for thelatest requirements.

But, just because an employee is injured at work, it doesn’t necessarily followthat the employer will have to pay compensation. The employer has to belegally liable for the illness or injury: in essence this will usually involve someform of negligence on the part of the employer. This type of legal system is‘fault-based’.

3.3.2 Workplace legislation outside the UK

The UK and the Republic of Ireland are unusual in having a fault-based systemof unlimited damages in tort and/or breach of statutory duty as the remedy forclaimants suing for injuries sustained in the course of their employment. Mostother industrialised nations, where compensation is available to those injuredor contracting disease as a result of their employment, have ‘no-fault’ systems,usually with pre-determined (liquidated) damages according to the nature andextent of such injury or disease. Most of these allow for regular amounts to bepaid during the period of disability rather than a lump sum. Some of theseschemes are funded by the state, others are financed by private insurancepurchased by the employer.

In the following paragraphs a few of the schemes are explained and thedifferences between these systems and the system used in the UK and Republicof Ireland are examined.


3.3.3 Social security

The most common system is government-funded social security. For example:

+ New Zealand operates a scheme that provides benefits for all injury/diseaseregardless of cause and precludes the injured/affected from suing in NewZealand courts; and

+ many European countries – such as France, Italy, Spain and Germany –operate similar systems with a scale of benefits according to the severity ofthe disability.

These systems do not proscribe civil action by the injured party, but suits donot arise because there is no point. Some of these schemes allow recovery, inwhole or in part, of amounts paid by the government from negligent or grosslynegligent employers. Italy and Spain are two examples of this. These schemesare commonly known as workers’ compensation, workers’ comp or WCA.

3.3.4 Compensation funded by insurance policies

Belgium, Denmark, each of the states of the USA, and Australia are examples ofterritories that have workers’ compensation statutes that provide scale benefitsas outlined above, but where the insurance is provided by policies purchased bythe employer from a commercial insurer.

3.3.5 Summary of schemes

To conclude this brief outline, the differences between these systems are asfollows:

+ The fault-based system requires the claimant to be able to prove their caseand afford to mount the action, and provides uncertain results in the formof a single monetary payment. It costs the government nothing toadminister, and, in the case of Great Britain, provides the government witha prospect of recovery of social security payments and hospitalisation costsfrom the compensator. It is relatively cheap for the employer.

+ The no-fault-based system with private insurance provides certainty to theinjured party, can be tailored to social needs and is a lot more expensive forthe employer to buy than cover under a fault-based system.

+ The social security schemes share the same benefits for the employee as theno-fault scheme. It is a choice of government policy whether the scheme isfunded out of general taxation or from specific employment taxes. The costis similar to no fault; it is mainly a question of who pays.


3.4 Environmental insurances

Government policy in the UK over the last decade or so has been to promote theeconomic reuse of previously developed land, commonly referred to as brownfieldsites, with well-documented and specific targets set for the number of residentialdevelopments to be built on such sites. These brownfield sites, many formerlyoccupied for a range of industrial uses, become available for redevelopment as thenature and needs of industry, particularly heavy industry, change and willcontinue to change. A good example is the coalfields legacy, where significant areasof brownfield land have been redeveloped over the last 10 to 15 years.

A consequence of our industrial heritage is that many brownfield sites have, andwill continue to be found to have, some degree of contamination of the ground andunderlying groundwater. This guidance note examines environmental insuranceand the role it can play in protecting and facilitating the reuse and redevelopmentof such sites.

For the purposes of the following paragraphs environmental insurance isdefined as protection against an insured’s exposure to the legal liabilitiesarising from the ownership and/or development of brownfield land and anyconsequential loss and damages. In simple terms this means:

(a) exposure to third party claims for property damage, bodily injury or evenloss of business; and

(b) exposure to regulatory action by an authority that requires investigation,clean-up of contaminated ground/water or the restoration ofenvironmental damage.

A third category of loss protected by environmental insurance is the legal andother costs associated with defending an alleged claim by a third party or arequirement to take action by a regulator. The types of insurance policyavailable are addressed in later paragraphs.

3.4.1 Environmental and underwriting information – understanding the risk

Before quoting for any environmental insurance the insurers will requireunderwriting information specific to the risk that is being proposed. Theinformation required has to be sufficient for the underwriter to understandboth the nature of the risk(s) and the context of that risk, which will depend onwhether the proposer is a buyer, seller, owner or developer. Environmentalreporting is typically split into three phases, each of which can be iterative. Ageneral description of each phase is set out below.

Phase I: ‘Desk-top’ reporting

In this phase historical data is collected and interrogated. Such data willinclude maps showing previous uses, geological and hydro-geological maps,information from local authorities such as the proximity of landfill sites to thesite in question, previous environmental incident and planning history.Environmental sensitivity, i.e. proximity to sites of special scientific interest,will also be of interest. Following this interrogation a site-specific report will beproduced. There are a number of providers of these types of report, which, ifnecessary, can be supplemented by a site visit in order to gather more directinformation.

At this first stage potential risks are identified, for example the possibilities forsite contamination as a result of its previous use. A qualitative assessment of


the risk, as low, medium or high, may also be made. Depending on theoutcome this may be all the technical data an underwriter will require to makea decision and offer terms. However, it is common for questions to be raised,which require a further level or phase of investigation.

Phase II: Site investigation

In this phase, a more detailed assessment of the site is made. This will oftennecessitate some level of intrusive investigation, i.e. taking soil and watersamples, digging trial pits or boreholes. The outcome will be a report, which isboth factual, in terms of what was done and the data obtained, andinterpretative, in terms of what are the implications of the data. Theinterpretative report may also contain some form of qualitative andquantitative risk assessment. Indeed, the authorities may require the latter.Where a site is particularly contaminated the level of risk will need to beformally demonstrated and argued through the planning process together withany remediation (clean-up) proposals.

Phase III: Remediation and validation

At this stage any problems identified through phases I and II are remediatedappropriate to the proposed use and the surrounding environment. Anyremediation will be required to be documented as a full remediation planbefore execution and then end-result validated. There may be a requirementimposed by the authorities for post-completion monitoring, particularly wherethere is ground gas or contaminated ground water, so that the authorities canbe confident about the long-term situation.

3.4.2 Environmental exposure

A range of possible exposures, for owners of brownfield and contaminated sitesand land, to environmental risk and liability, is listed below.

+ Historical pre-existing gradual pollution

– Third party off-site property damage and loss of use of property

– Third party off-site bodily injury

– Third party on-site property damage and loss of use of property

– Third party on-site bodily injury

– Regulatory/legal liability for off-site clean-up costs

– Regulatory/legal liability for on-site clean-up costs

– Legal defence and expenses

– Change of law

– Migration from off-site third party property leading to on-site thirdparty damage and/or regulatory or other legal action

– Contractual liabilities, e.g. warranty or indemnity exposure

– Cost certainty, cost cap on planned remediation – cost overruns inremediation and clean-up can result, for example, from finding morecontamination than the investigations suggested or higherconcentrations and either may change the nature of the treatment orthe cost of disposal


– Construction risk of the contractor creating new contamination on siteor exacerbating an existing situation. This could arise, for example, ifthe contractor inadvertently provides a new pathway for pre-existingcontamination to migrate and cause a loss or damage

+ New gradual pollution

– Third party off-site property damage and loss of use of property

– Third party off-site bodily injury

– Third party on-site property damage and loss of use of property

– Third party on-site bodily injury

– Regulatory/legal action off-site clean-up costs

– Regulatory/legal action on-site clean-up costs

– Environmental and biodiversity damage and losses under the EUEnvironmental Liability Directive (ELD)

– Legal defence and expenses

In addition, all these exposures can create significant and consequentialbusiness interruption.

When assessing the liabilities and risk of exposure, it is important todistinguish between known issues which have been clearly identified, qualifiedand quantified and unknown issues, which can range from the suspected butunproven to the totally unexpected. Known issues are those which insurance isunlikely to be able to cover because they are (i) known to the insured and (ii)will have to be addressed, even if not immediately. There is no fortuity to anyloss, just a question of when and how much.

The nature of environmental insurance is that there will always be someintrinsic level of residual uncertainty by the very nature of the problem it istrying to address.

3.4.3 Insurance solutions

There is a range of insurance policies to cover the environmental exposures ofdevelopers, property owners and contractors as described above. Whilstseparate policies can be purchased to cover pre-existing pollution conditions(historical contamination) and new pollution conditions (futurecontamination) it is possible to purchase both policies to provide seamlesscover for a site.

Environmental insurance has proven a valuable tool for the transfer of the riskof environmental legal liability. It has proven particularly applicable in thecontext of the sale and purchase of land and property.

When considering the types of risk that are insurable, it is important that anyclaims, losses or damages are both unexpected and fortuitous. Where this is notthe case then the insurer is underwriting the cost of known conditions andexpected or anticipated works. Where the risk is unexpected and fortuitous,known pollution conditions or contamination can be covered as long as:

+ the known conditions are defined and understood by the underwriters(this requires information);

+ the site remains in a suitable for use condition even with these knownconditions; and


+ the known conditions are not causing harm or have a significantprobability of causing harm to the environment, human heath orcontrolled water.

As an example, where there is a known condition that is assessed to beadequately controlled and contained by an engineered cap and cover, then theinsurance can be provided for the unexpected and fortuitous event that thecontrol mechanisms fail to adequately contain or prevent damage, whichbecomes apparent only after the insurance is incepted and in place.

3.4.4 Historical contamination

Pollution legal liability insurance can be purchased to cover environmentalliabilities associated with the ownership or transfer of ownership ofcontaminated land. These policies are often called ‘contaminated sites/propertytransfer policies for pre-existing pollution conditions’. They cover on-site andoff-site bodily injury, property damage and clean-up costs, future legislationand legal and professional fees as a result of pre-existing conditions. Businessinterruption for loss of rental income can also be covered. Policies can bepurchased for periods of up to ten years, £20m cover and with deductibles(excesses) of between £25,000 and £100,000.

Portfolio cover: As for property transfer above but the policy will cover aportfolio of sites and is annually renewable. Such a policy will, generallyspeaking, also cover new pollution conditions as well as pre-existing pollutionconditions. New sites can be added to the portfolio as they are acquired.

Contractors pollution liability: This provides cover for exacerbation of pollutionconditions during development including on-site and off-site bodily injury,property damage and clean-up costs, future legislation, legal and professionalfees. Generally cover is for the period of the development and the limits willmatch those on the pre-existing conditions cover. Contingent cover can beprovided for developers.

Remediation cost cap: This is cover for remediation costs that exceed a levelagreed by the insurer up to the limit of indemnity provided in the policy. Theagreed level is the estimated cost of remediating the contamination plus abuffer, or deductible.

Warranty and indemnity wraps: These provide cover for indemnities not beingfulfilled.

3.4.5 Operational contamination

Often insureds believe that their public liability (PL) insurance providessufficient cover for ‘sudden and accidental’ events but understand and take therisk that it excludes any cover for gradual pollution. However, it is not thatsimple and this is illustrated by two recent examples. First, the Bartoline case(Bartoline v. Royal Sun Alliance) which went to the High Court, demonstratedthat costs for action by the regulators, where this is no property damage and noclaim, might not be covered under a PL policy.

In a second case, in France, a sudden and accidental pollution incident causedenvironmental damage under the EU Environmental Liability Directive, whichwas not covered by the general liability insurance programme but, fortunately,was picked up by their additional EIL programme. This case is currently beinginvestigated and final losses determined.


The range of products available for operating new conditions is similar tothose for historical pollution providing similar coverage, but limited to ‘new’conditions.

Combined solutions can be constructed to cover both pre-existing and newconditions.

Contracting risks, particularly for contractors actually causing gradualpollution or exacerbating an existing problem, can be covered using acontractors pollution liability form (CPL), which can also be adopted withinan owner-controlled insurance programme if required.

3.5 JCT non-negligence insurance

Construction is an inherently dangerous process, particularly when it involvesworking on or near to existing or neighbouring buildings or other structures. Nomatter how much care is exercised there is always the possibility that such propertywill suffer damage. Nobody has been negligent but nevertheless the owner hassuffered a loss for which there is almost certainly no cover under their materialdamage insurance. It was this set of circumstances that led to the legal case of Goldv Patman & Fotheringham in 1958. This landmark case and the cover it gave riseto are summarised below.

3.5.1 History

Gold was the owner of a property that was to be modified. The defendantsentered into a contract with Gold to carry out the work and it included piling.Although the contractors were not negligent in any way, the adjoining thirdparty property suffered damage as a result of their piling activities due to theweakening of support. The owners of the property had no right of actionagainst the contractors, as they had not been negligent. However, theysucceeded in a claim against Gold on the grounds that the damaged propertyhad acquired a right of support from Gold’s land and that Gold removed thatsupport at his peril, however this was done. Gold tried to recover from thecontractors who had, in fact, arranged such cover in their own names but notin the name of Gold as well. The wording of the contract had not requiredthem to procure a joint names’ policy.

3.5.2 Perils insured

This case led naturally to the inclusion of a clause in some contracts thatrequires the contractor to take out a policy that protects the developer in thesecircumstances, although there is nothing to stop the developers arrangingcover for themselves. The insurance provides an indemnity to developers inrespect of any expense, liability, loss, claim or proceedings incurred as a resultof damage to property (other than the constructional works) arising from theworks being done and due to collapse, subsidence, heave, vibration, weakeningor removal of support and lowering of ground water. Cover from the perils ofexplosion, flood, backing up of drains and bodily injury to third parties causedby an insured peril, can also be requested. The cover may be in respect ofexisting buildings being worked upon and/or property on adjoining land.Cover is not always taken out as the kind of activities which give rise to suchlosses may not be present. It is usually left to the architect to recommendwhether or not the cover is required but sometimes no consideration at all isgiven to the matter. Although the policy is issued in joint names it is thedeveloper who is indemnified.


3.5.3 Activities giving rise to loss

The insured perils can arise in a number of ways, but it is work involving any ofthe following that is more likely to cause such damage:

+ demolition close to neighbouring property;

+ excavation works near to existing foundations;

+ piling;

+ underpinning;

+ de-watering;

+ shoring;

+ work affecting the load-bearing capacity of an existing structure;

+ work on listed buildings and buildings in poor condition.

3.5.4 Policy exclusions

This is a ‘non-negligent’ cover and the exclusions are, therefore, important tohelp understand the intention of the wording. The main ones are damage:

+ caused by the negligence, omission or default of the contractor or anysubcontractor;

+ attributable to error or omissions in the designing of the works;

+ which can reasonably be foreseen to be inevitable having regard to thenature of the work or the manner of its execution.

There is also an exclusion in respect of penalties incurred under contract anddamages for breach of contract. These can arise where a developer enters intocontracts affecting the developer’s liability to the owners or tenants ofneighbouring property. However, this cover may be purchased if required bypayment of an additional premium. The limit of indemnity selected shouldtake account of the value of the surrounding property at risk. The cover is notthat expensive bearing in mind the nature of the business but insurers willnormally require a survey before they agree to anything.

This type of insurance is exclusive to JCT contract forms and in the 2005Edition is contained within clause 6.5.1. However, other contract forms couldhave a similar requirement brought in as an amendment.

3.5.5 Relationship to material damage and public liability policies

Some of the perils referred to in the ‘perils insured’ at section 3.1 above mayappear to be covered by any material damage all risks policy on existingbuildings. However, such policies will include a ‘change of risk’ or similarcondition requiring the insurers to be advised of any works that increase therisk of damage. The insurers will then have the opportunity to exclude thecover from the said material damage policy on existing buildings until the riskreturns to normal on completion of the work. Alternatively, there may be anoutright policy exclusion. For example, the perils of subsidence and accidentaldamage will always exclude such cover when any property is undergoingconstruction or structural alteration or repair.

Similarly, there will be an exclusion of these perils under any public liabilitypolicy.


3.5.6 Position under ICE contracts

An ICE form of contract passes the non-negligent risk to the contractor.Therefore provided that he has a contractual liability extension on his publicliability policy the non-negligent public liability risk stays with the contractorand is insured accordingly.

3.5.7 Key issues

It is important when arranging this cover that the policy is issued in the jointnames of the employer and contractor. Circumstances have arisen where apolicy was issued in the name of the contractor only. A claim occurred bywhich time the contractor had gone out of business. The employer submittedthe claim to the insurers who refused to deal with it as the employer was not anamed insured and therefore had no rights under the policy.

3.6 Public liability insurance

Contract conditions invariably make reference to public liability insurance in boththe indemnity and insurance clauses. They also state who is responsible for makingsure such cover is in force and in whose names. In this guidance note the extent ofcover available and who should be protected is examined.

3.6.1 Extent of cover

A typical policy will provide indemnity in respect of liability at law fordamages arising from accidental injury to third parties (not employees) oraccidental damage to third party property arising in connection with theproject.

It may also cover liability for damages arising out of any nuisance or trespasscommitted by the insured and any rights (such as a right of way) with whichthe insured may accidentally interfere in the course of the development.

Other elements of cover usually provided include:

+ claims defence costs;

+ the use of plant on the site;

+ legal defence costs in respect of prosecutions brought under the Health andSafety at Work etc Act 1984 and other specified legislation such asConsumer Protection legislation.

3.6.2 Restrictions in cover

For some time, many insurers have excluded claims arising from sources theyregard as particularly hazardous, such as terrorism, asbestos, gradual pollution,mould, e-commerce transactions and, potentially, financial loss where therehas been no ‘injury or damage’ as defined in the policy. Insurers may restricttheir liability for particular risks by imposing inner limits much smaller thanthe overall policy limit. It is important to be aware of these and of whether theycan be removed by payment of additional premium.

3.6.3 Limits of liability

The policy may be arranged on an annual basis with a specific limit being themaximum amount payable in the event of any one claim or series of claimsarising from one occurrence. It is normal for this limit to apply in respect ofany one claim but some limits do apply to all claims in the period of insurance.


There may be a limit on any one claim and then a separate aggregate limit.Sometimes there are elements of cover that insurers may be particularlyconcerned about, e.g. sudden and accidental pollution may be subject to lowerlimits of liability and/or separate aggregates.

For larger projects the policy will often be project specific with primary coverwritten as part of a construction insurance package. Separate excess of losspolicies would then be issued for the balance of cover required. For example, ifa £50m limit of indemnity is required, the project policy may pay claims up to£2.5m with two other policies paying claims above £2.5m up to £25m andfrom £25m up to £50m, all for the same period of insurance.

Whatever type of policy is issued, it is the insured party or parties that decideson the level of cover to be purchased dependent upon the risk exposure arisingfrom the work being undertaken. When deciding upon the limits to bepurchased it is best not to rely on any figure requested within a contractdocument, as this is normally the minimum amount required.

A construction site is potentially an inherently dangerous place for:

+ visiting third parties;

+ surrounding roads and railways;

+ surrounding buildings;

+ the general public, particularly children.

The limit of liability purchased is often determined by:

+ the cost of the cover;

+ the potential for third party injury or damage;

+ the nature of the works being undertaken;

+ the proximity of third party persons and property;

+ the values of surrounding properties; and

+ the probability of loss.

The policy will be subject to an excess that will be deducted from the totalamount claimed and may apply only in respect of claims for property damageor in respect of all claims.

3.6.4 Who should be covered?

Every party on site with a potential liability to the public will require aninsurance policy. Additional responsibilities for each party will also be set outin the contract. It is traditional and still common for the contractor to arrangea cover on behalf of the employer. However, it has to be asked if this is in thebest interests of everyone, whether the employer who may find he has onlynominal cover or a claimant who may find they are passed from one insurer toanother if there are different policies in different names. One option is to effecta project policy arranged by the employer/owner or developer, as morespecifically described elsewhere in these guidance notes.

The parties protected by the policy will vary according to the developer’srequirements and the nature of the contract forms being adopted. Theindemnity can apply to:

+ the developer, owner, employer only; or

+ as above and the main or management contractor;

+ as above and all trade/subcontractors.


Apart from the above there may be freeholders, superior landlords, financiersplus professional consultants and suppliers (on site exposures only) to beadded to the list of insured. The policy will set out the names of all insured andspecify in which policy covers they have an insurable interest.

N.B. Any party listed as an “insured” under a policy has duties under thatpolicy, specifically to provide the insurer with all material facts.

3.6.5 Premium implications

Public liability insurance is not cheap and if one party does arrange cover intwo or more names the cost of this and the potential savings to the othernames needs to be reflected in tender prices.

3.6.6 Key issues

It is important to decide responsibilities for placing public liability insurancebefore contracts are signed, rather than just follow the provisions of the basiccontract conditions. Whoever is making the decision as to who must arrangethe cover must consider all those who may need to be protected. The list maywell include freeholders and head lessees, apart from financiers and they mayhave concerns about the insurers. There may even be lease requirements callingfor particular insurers to be used.

3.7 Surety bonds

A surety bond is a guarantee from the surety in favour of the employer/beneficiarythat the contractual obligation of the principal will be fulfilled. Effectively, bondsare agreements between three parties for the benefit of one of them: the employer.

There are numerous bond wordings to meet the needs of specific industries and theconstruction industry is one of the main purchasers of them. In this guidance notethe purpose and benefits of bonds are explained.

3.7.1 Types of bond

In the construction industry the following are the bonds most commonlyfound.

3.7.2 Performance bonds

These guarantee that a project will be performed according to the terms andconditions of the contract and provide a cash indemnity to the employer in theevent of a default by the contractor that leads to the employer suffering a loss.Bonds are usually effected for 10% of the contract price but could be more orless. The default is usually caused by the insolvency of the contractor.

3.7.3 Retention bonds

These are issued in favour of an employer that has agreed to waive its right todeduction of retention monies from sums owed to the contractor for workcarried out. The bond will be for the retention percentage, which usuallyranges from 3% to 5% of the contract price.


3.7.4 Advance payment bonds

These are appropriate where an employer makes a payment to a contractor orsubcontractor in advance of construction. This advance might be made topurchase an expensive piece of machinery essential to the work being done.The bond amount would be the sum advanced.

3.7.5 Maintenance bonds

These are a form of performance bond relating solely to the maintenanceperiod. They provide a remedy for defective workmanship or faulty materialsdiscovered after practical completion during the maintenance period. Thebond amount would be assessed according to the risk.

3.7.6 Bonds and counter indemnities

A bond is not the same as an insurance policy as risk is not transferred fromthe principal to the surety. The latter has a legal right to seek reimbursementfrom the former, usually via a counter indemnity. However, like an insurancepolicy the bond does protect someone (the beneficiary) against an unwantedevent, e.g. non-completion of a contract by guaranteeing that money will beavailable, thereby giving the same peace of mind.

A counter indemnity is a written agreement signed by the principal entitling asurety to reimbursement if it has to pay claims under any bonds it has issued.Such agreements are complex and can vary with each surety. They range fromstandard documents to indemnities incorporating undertakings and financialcovenants.

3.7.7 The benefits

Bonds offer an alternative to bank guarantees so the benefits are bestunderstood by a comparison of the two.

Surety bonds do not reduce the working capital of the principal or restrict itsborrowing capability.

They are ‘conditionally worded’, which gives the principal the protection of theunderlying contract conditions.

Surety companies rely on a counter indemnity, whereas banks often andadditionally require a charge over the principal’s assets.

Banks usually issue ‘on demand’ bonds, which are payable on first demand andindependent of contract conditions (which means the beneficiary does nothave to establish any breach of contract).

The surety bond can be a higher percentage of the amount at risk than a bankwill offer.

Further the employer is effectively being given an underwritten andindependent opinion that the principal has the financial and operationalability to complete the contract satisfactorily. If it did not the surety companywould not be prepared to issue the bond.


3.7.8 International bonds

International bonds vary enormously depending on the legal framework in thecountry concerned and the nature of the guarantee.

3.7.9 Key issues

The requirement for bonds needs to be considered early as the benefits of thesemay need to be compared to those issued by banks before irreversible decisionsare made.

3.8 Unexpected archaeological discovery insurance

In order to appreciate the need for the above insurance it is necessary tounderstand the role played by archaeology in the planning process, the potentiallosses that may be insured and the point at which insurance cover should besought. All these issues are dealt with below. To a large extent the risks that thedeveloper runs can be identified, assessed and mitigated but, as explained, adegree of risk is still left and it is this residue that may be insured.

3.8.1 The process

The UK is very rich in archaeological remains and much of it still liesundiscovered. This evidence of our past is an irreplaceable national asset. It isprotected by a host of legislation that is designed to trace and preserve it.Archaeology is an essential part of the planning process, a materialconsideration that cannot be ignored. Whereas some archaeological sites arescheduled ancient monuments or otherwise protected under specificlegislation, most sites come under the government Planning Policy Guidance,Note 16 (PPG16), on Archaeology and Planning. This is arguably the mostimportant publication relevant to archaeology and development in England.PPG16 establishes procedures to ascertain the archaeological impact of adevelopment so that the planning authority can make an informed decisionabout how best to safeguard archaeological interests. It rests on the principlethat archaeological remains are a valuable and finite part of our heritage thatshould ideally be preserved in situ even if they are not scheduled. Basically, itrequires the developer to discuss the proposed development with the planningauthority and, if requested, to include relevant information with the planningapplication. This often means that an archaeological study of the site has to becommissioned and is where specialist commercial archaeologists such asMoLAS (the Museum of London Archaeology Service) come in.

3.8.2 Risk management

PPG16 sets out a number of stages in ‘archaeological risk management’.

Stage one – a desk-based study will assess the likelihood and extent of anyremains on the site based on the archaeological and historical background ofthe site, the extent of disturbance caused by any earlier construction work andthe impact of the proposed scheme. This study should be designed to providethe local authority with all the information it needs to decide on theappropriate archaeological treatment of the site. The study may suggestoptions in accordance with the client’s wishes but it is the local authority thatwill have the last word. There are three likely outcomes of this study:

+ the local authority may approve the application with no furtherinvestigation;


+ if the site is felt to have archaeological potential, the authority may requirethe applicant to submit a field evaluation report, which could involvedigging test pits and trenches and other physical work on the site. Thiscould be difficult or even impossible prior to planning permission if accessto the land is restricted and it will certainly add to costs, with no guaranteethat planning permission will be granted;

+ permission may be granted subject to a planning condition or agreement todeal with the archaeological requirements.

Stage two – a field evaluation may be required. This will usually be carried outin accordance with a brief set by the local authority, along with the proposedresearch objectives and method statements set out in the project designproduced by the archaeological contractor. The evaluation – whether requiredpre-or post-determination – will then be submitted to the authority and theywill either require further work or the archaeological planning condition willhave been discharged subject to archiving of appropriate material andpublishing results as specified.

Stage three – if further work is required, the developer and the archaeologistshould now get together to identify measures to mitigate the impact of theproposed development on the archaeology. This third stage can go two ways:either the local authority will specify that archaeological deposits must bepreserved in situ, without being disturbed, or they will specify that they shouldbe excavated and recorded by professional archaeologists, normally under aplanning condition. This can involve a lot of expense in changing workingmethods on site in order to preserve remains or in redesigning the foundationsand other parts of the works. Their proposals, once agreed with the authorityand the curator, have to be set out in detail in an archaeological project designthat may then be appended to the ensuing legal agreement between thearchaeological contractor and the developer.

3.8.3 Identifying the risk of unexpected discovery

It is worth pointing out that early consultation between developers andarchaeologists is beneficial. It may then be possible to anticipate events. Moneycould be saved by combining the desk assessment with the field study or bycombining archaeological evaluation with geotechnical investigation work.Money can also be saved by having professionals with experience in smoothlyintegrating archaeological fieldwork into complex construction programmes.Sometimes, for example, archaeological excavation takes place within standingbuildings before demolition.

Once the archaeological work has been agreed, the use of a legal agreement hasthe effect of placing most of the risk with the archaeologists carrying out thework within the agreed programme and budget. However, the developerremains at risk if there is an unexpected archaeological discovery on site thatcauses further delay or additional cost or even a permanent loss of site value. Itis against these possibilities that insurance can be taken out. The insurancerequirements may be considered under the following headings. The mostcommonly purchased ones are delay and redesign, followed by additionalarchaeological costs and cancellation.


3.8.4 Potential cover requirements

1 Delay costs – additional costs incurred in relation to the delayed completionof the development, which the insured is legally liable to pay. This is likelyto be the most significant unexpected cost to the developer and wouldinclude additional interest payments.

2 Additional archaeological costs – incurred in undertaking a scheme ofarchaeological work, including fieldwork, post-excavation work andpreparation of results to an agreed standard for publication, as required bythe planning authority or other statutory or curatorial organisation.

3 Cancellation costs – can be incurred as a result of the necessary cancellationof all or part of a project because of revocation of planning consent or thespot designation of unexpectedly discovered remains as a scheduledancient monument.

4 Redesign costs – the developer can incur this cost as a result of arequirement to revise the layout or constructional details of a project inorder to ensure the preservation of unexpectedly discovered archaeologicalremains.

5 Loss of profit – the nature of the ‘profit’ would vary according to theinsured’s business but would include loss of rent.

6 Loss of value – in extreme circumstances an unexpected discovery mightmean a loss of space or even a whole storey with the result that the marketvalue of the development is reduced. Before any quotation for insurancecan be given, an independent risk survey by the underwriter’sarchaeological consultant is required. The consultant’s fee, which is usuallybetween £500 and £2,000, has to be paid in advance and is non-refundable.Underwriters’ minimum premium for this class of business is £5,000.

References and contacts

Planning Policy Guidance, Note 16, Archaeology and Planning, Departmentfor Communities and Local Government, 1990 (www.communities.gov.uk/documents/planningandbuilding/pdf/156777.pdf).

3.8.5 Key issues

Insurers do only cover the unexpected so it is important to get cover in placeafter the basic work described above but before someone starts diggingfoundation trenches. In the sequence of stages set out above it makes mostsense to deal with insurance requirements as soon as possible in stage three.There can often be delays while the local archaeological or planning authoritiesdecide exactly what their requirements are, but as soon as these are sorted outinsurers should be in a position to get things done quite quickly.


4 Further guidance on constructioninsurance issues

4.1 Insurance of existing buildings undergoingrefurbishment or redevelopment

Where an existing building is to be the subject of contract works care is needed bythose drawing up the contract conditions and those responsible for insuring thebuilding. In this guidance note the problems that can arise are explained. It is farbetter to avoid them in the first place than to seek a remedy that may be expensiveor partial or both.

4.1.1 Implications for current cover on existing buildings

The insurance of contract works is relatively straightforward compared to thedifficulties that can arise when a building is being worked upon. Such abuilding will probably be insured under a commercial all risks propertyowners’ policy whilst occupied or temporarily unoccupied pending the works.There will be a number of conditions in that policy that will apply when worksare being carried out and these should be examined. If the contract does notinvolve much of an increase in risk the current insurers may be happy tocontinue the cover without additional charge but it will require reasonableprecautions to be taken. On the other hand if there is hot work, e.g. workinvolving welding equipment or blowtorches, they may require an additionalpremium and/or risk improvements. If there are to be structural alterations,particularly if they involve foundations, insurers may wish to reconsider thecover and, say, exclude subsidence occurring as a result of the works. Theremaining subsidence risk may then be insured under a non-negligence policyat terms reflecting the insurers assessment of the revised risk. The preciseaction will depend on the particular circumstances and the attitude of theinsurers.

However, it is also possible that the current insurer will wish to exclude thecover altogether on the grounds that the building is now a construction riskand best insured under a construction policy. The problem with this is that theconstruction insurance market is limited in size and does not always have thecapacity to insure a substantial building.

4.1.2 The problems with joint names insurance on existing buildings

A further problem flows from the same factor. A contractor working in a largebuilding will worry about being sued if its negligence causes serious damage.Even if it could secure adequate public liability insurance, the premium may beprohibitive. To get round this the contractor will seek to pass the risk to thebuilding insurers by asking for its name to be shown jointly on their policyalongside that of the employer. This is so-called joint names insurance. This isall very well if the employer is also the insured under the policy and is preparedto pay any additional premium and/or to accept restrictions in cover and/or topay for additional risk precautions during the contract period. Either way itshould be made clear that this is at the employer’s risk/cost.


Problems start if the insurers of the building do not want to carry theadditional risk. Alternatively the employer may not control the buildingsinsurance and the landlord or freeholder that does may refuse to agree to jointnames status for the contractor. If either of these eventualities arises, a solutionhas to be found. There are solutions or partial solutions but they may be veryexpensive and still leave the employer carrying some risk.

4.1.3 One sum insured for both contract works and the existing buildings

If the completed works will include very little of the original building, perhapsjust the exterior walls or the facade, it may be better to cover both the existingbuilding and the contract works under one policy with one sum insured. Itshould be cheaper and make settlement of any claims easier.

4.1.4 Advantages of insuring existing buildings under a CAR policy

A CAR policy is designed for construction works and the cover is drawn up toreflect the risks inherent in construction. There are elements of the cover, e.g.DE3/5, additional cost of working, expediting costs and suppliers extensions,that may make it beneficial to insure the existing building under such a policy,

4.1.5 Key issues

The insurers of the existing building must be advised of the nature and extentof the contract works or the policy could be invalidated. However, it may bebetter to cover the existing building under a contract works policy, asmentioned above.

If the employer is undertaking to arrange a joint names cover on the existingbuilding to protect the contractor, make sure this is possible. If the employer isa lessee or has not arranged the policy there could be problems that are bothtime consuming and expensive to resolve.

4.2 Project insurance and property developer all riskspolicies

The basic contract conditions used widely throughout the world usually call forcontractors to arrange much of the insurance specified. The contractor is likely topass on some of the insurance obligations to subcontractors and suppliers. Directlyor indirectly the employer will pay all the insurance costs of the project. This is notnecessarily in the best interests of employers. Increasingly, the conditions are beingamended so that the employer arranges more of the cover and more is heard ofso-called project and property developers’ policies. This guidance note warns of theneed not to make assumptions about the cover under such policies andsummarises the perceived advantages for employers of taking more responsibilityfor arranging insurance.

4.2.1 A word of warning

There is no universally recognised meaning of ‘project insurance’ and differentpeople use it to mean any one of a number of things. It is sometimes used todescribe a latent defects policy on a development project. Occasionally, it ismeant to refer to a project professional indemnity (PI) policy, in other words apolicy that protects the professionals on a particular project, rather than haveeach professional effect a separate PI policy to protect them in relation to allthe work they do.


The term has also been employed to refer to a ‘property developer’s all riskspolicy’, a product issued by some insurers that is effected by a developer andusually offers cover against all risks of material damage to the contract worksand any existing building, loss of income (usually rent), public liability (for thedeveloper only or both developer and contractors, etc.) and the JCT clause6.5.1 perils.

There was once a carefully drafted exposition on ‘project insurance’ thatexplained that it was a policy that covered everything on site, if not in sight,including the four risks mentioned in the previous paragraph, latent defects’insurance, professional indemnity insurance and, if required, environmentalinsurances. They may be the covers that need to be most considered but therewill never be one policy that meets all these needs, let alone one insurer thatoffers the best cover at the best price for each.

4.2.2 The advantages of employer controlled insurance

+ There should be cost savings as duplication and overlap of insuranceprogrammes is eliminated. A build up of minimum premiums for eachparticipant is avoided. Staged premium payments are more achievable.

+ An improved standard of administration is achieved, as the insurance willbe placed by one broker who will fully understand the activities involved inthe project and who will provide proper administration of the insuranceprogramme through a single channel of communication and a uniformsystem of claims handling.

+ The need to check the insurances otherwise arranged by contractors andsubcontractors is avoided or reduced. The management fee of thecontractor is reduced, as there will be less premium cost in thepreliminaries.

+ There is certainty as to the scope of insurance protection (particularly if thepublic liability insurance extends to all contractors and subcontractors)and less risk of errors, omissions, unexpected exclusions, warranties,unknown excesses or problems arising from misrepresentation, non-disclosure or liquidation. The risks arising from mid-term cancellationsand unpaid premiums are also reduced.

+ There is freedom to choose an insurer with good security, to dictate thebasis of cover and to ensure that it is maintained at an adequate levelthroughout the period of the contract.

+ There will be direct control over settlement of claims and the use of claimmonies. One adjuster can be used.

+ Potential disputes between the parties to the contract and between insurerscan be avoided.

+ The above advantages are even greater for phased developments or majorinfrastructure projects let in lots or sections, e.g. Channel Tunnel Rail Link,where the difficulties are otherwise compounded.


4.3 Risk management and insurance

The risks involved in construction are many and varied. They range from the riskof bodily injury to defective design materials or workmanship and from physicaldamage to the consequential losses that will follow on from that damage,particularly delays in completion. Those risks may be carried by the party onwhom they fall or insured by that party. Alternatively, the responsibility forcarrying some risks may be transferred to others. Those others then face similarchoices.

On a construction site, where so many different parties come together, often for thefirst and only time, and where the risks are so high, it is particularly importantthat the risk management process identifies all the potential risks and makes theright choices.

In the following notes the role of risk management is summarised.

Risk management is really a five-part process.

4.3.1 Stage 1 – Risk identification

The risks of physical damage, third party liabilities and defective design, etc. arewell known but the consequential risks are often ignored. This is partly becausereference to them is rarely made in the contract conditions and partly becausethere is a lack of awareness of all the possibilities, even those for whichinsurance cover is available.

It is important to consider risks arising from external sources, such as suppliersand supply chains.

4.3.2 Stage 2 – Risk evaluation

This covers the likelihood of the risk materialising and an estimation of thepotential cost. Some of the potential costs, such as for material damage, will beobvious and easily calculated. Some, such as third party liability are, strictlyspeaking, virtually unlimited and may be decided by how much insurancecover it is reasonable to purchase. Others, such as for consequential loss, areoften difficult to quantify without a full understanding of the financialarrangements.

If insurance is being effected it is important to understand how the policy dealswith aspects such as inflation and the basis on which claims will be settled.Sums insured need to reflect what insurers will pay. Otherwise there is scopefor underinsurance or the payment of unnecessarily high premiums.

4.3.3 Stage 3 – Risk control and elimination

This stage deals with the ways in which the risk can be avoided, reduced,prevented or minimised. Clearly CDM 2007 (Construction, Design andManagement Regulations 2007) and loss prevention practices such as the UK’sJoint Code of Practice on Fire Prevention will feature when the project is largeenough or of more than 30 days’ duration in the case of the former. Ifinsurance is to be arranged this may be impossible without certain measuresbeing required by insurers.

In the coming years expect to see much more emphasis on the avoidance ofwater damage on construction sites. The incidence and magnitude of waterdamage claims, arising from internal water services on site, has led to a


guidance note being jointly published by the UK CAR Underwriters Groupand CIREG (Construction Insurance Risk Engineers Group). The note isintended for projects during their design and construction stage and forongoing construction projects. It calls for a wide range of risk improvementand loss prevention measures, including the nomination of an experiencedindividual to accept responsibility for managing/overseeing the exposure. Thiscan be found at: www.msilm.com/pdfs/Water_Damage_Guidance_Note_4.pdf.

4.3.4 Stage 4 – Risk transfer

This is an assessment of the risks that are left, and which can be transferred toothers by contract or by insurance. Careful consideration is essential before anyrisk is transferred. Why transfer a risk to a third party if that will involveproving negligence, when there may be a first party alternative available? Whylet a third party arrange cover if that means having no control over the precisescope of cover or, worse still, the settlement of any claims? Why cover what isessentially the same risk twice or more by having several policies in one namewhen one policy in joint names or protecting several interests might be better?

4.3.5 Stage 5 – Risk monitoring

This really embraces two tasks. There is the all-important task of ownership,identifying and appointing those people within the organisation who will begiven responsibility for implementing all the tasks arising from the riskmanagement exercise and a review of the decisions taken in the light of anymaterial changes.

4.4 Statutory inspection of plant and machinery

4.4.1 In the UK

There are various regulations requiring periodic inspection (sometimesreferred to as thorough examination) of plant and machinery in the UK thatwill apply to construction sites. These are summarised below.

4.4.2 The Lifting Operations and Lifting Equipment Regulations 1998 (LOLER)

These regulations state that any equipment used for lifting and/or loweringloads must be inspected:

1 Where the safety of the equipment depends on the installation conditions(such as a tower crane, builders hoist, etc.):

(a) after installation and before being put into service for the first time; or

(b) after assembly and before being put into service at a new site or in anew location.

2 Whilst in service:

(c) in the case of equipment used for lifting persons or an accessory forlifting (equipment used to secure a load to the piece of liftingequipment such as chain slings, fibre lifting slings, shackles and thelike, often referred to as miscellaneous lifting tackle) every six months;or

(d) in the case of all other equipment every 12 months; or


(e) each time that exceptional circumstances which are liable tojeopardise the safety of the equipment have occurred (such as itsinvolvement in an accident or after significant change in conditions oruse).

Alternatively, a written scheme of examination can be drawn up which willspecify the frequency of inspection but in practice this is unlikely to be feasiblefor construction site operations.

4.4.3 The Pressure Systems Safety Regulations 2000 (PSSR)

These regulations require a written scheme of examination to be drawn up orcertified as suitable by a competent person and periodic inspections to becarried out in accordance with the written scheme. Pressure systems containingrelevant fluids are defined in the regulations and would include items such asair receivers or reservoirs, steam boilers, steam or other pressure vessels.

4.4.4 The Control of Substances Hazardous to Health Regulations 2002(COSHH)

These regulations require periodic inspection of local exhaust ventilationequipment designed to remove noxious substances at or close to their point ofrelease to prevent or minimise exposure to persons. Inspection frequency isnormally every 12 months.

4.4.5 The Electricity at Work Regulations 1989 (EAW)

Although there is no statutory duty to have inspections carried out (other thanin specific situations such as quarries), and therefore no prescriptive periodbetween inspections, a duty of care is imposed to ensure that all electrical plantand installations are safe and do not give rise to danger or injury. Theregulations state:

‘… as may be necessary to prevent danger all systems shall bemaintained so as to prevent, so far as is reasonably practicable, suchdanger … and … regular inspection of equipment is an essential part ofany preventative maintenance programme.’

The environment in which the systems are operated should determine theperiod between inspections. IEE guidance recommends that construction siteelectrical installations be inspected every three months.

4.4.6 The Provision and Use of Work Equipment Regulations 1998 (PUWER)

Although these regulations do not contain any prescriptive inspection regime(other than for power presses) all owners/users of plant and machinery have aduty to ensure they maintain safe systems of work and it is their responsibilityto identify items of work equipment which may require particular attentionincluding periodic inspection. In some cases the inspection may need to becarried out by an independent competent person.

4.4.7 Inspection service providers/the competent person

It is important that a competent person who is independent frommanufacture, installation or maintenance carries out inspections/repair of theplant and is able to operate without fear or favour in completing and reportingon the inspections.


It is strongly recommended that any service provider selected to carry outinspections is accredited as a type A inspection body by the United KingdomAccreditation Service (UKAS) to BS EN ISO/IEC 17020:2004. This providesassurance that the service provider is competent to carry out the inspections.

4.4.8 Legal responsibility

Legal responsibility to ensure that inspections are carried out on time (and thatany defects revealed by the inspection are rectified within any stipulatedtimescale) rests with:

(a) the employer (or, as applicable, the self-employed) in the case of LOLER,COSHH and PUWER;

(b) the owner of a mobile pressure system or user of an installed pressuresystem in the case of PSSR;

(c) additionally in the case of PUWER, the employers of those who havecontrol of the equipment or those using or supervising or managing theuse of the equipment;

(d) where plant is hired in, the plant owner normally arranges inspectionsand evidence of inspection should be supplied with the plant. The usershould ensure that this evidence is available.

4.4.9 Outside the UK

Regulations requiring inspections are broadly similar in European Unioncountries, but can vary widely in other parts of the world.

In some countries inspections are carried out by commercial organisations, asin the UK, but in others government bodies carry them out.

4.5 Third party interests and ‘joint names’ underconstruction policies

In theory it is possible to add the names of third parties to any insurance policyprovided that they have an insurable interest. However, both the party taking outthe policy and the insurers must agree. In this guidance note the issues arising areexplained. The first part deals with some general principles. The second part dealsspecifically with the protection of bank interests, as this is where many of theproblems arise.

4.5.1 The means by which other interests are recorded

There are two ways in which third party interests are specifically added topolicies. Their names can be added by means of memorandum to the policy,which notes that they have an interest in the insurance. Alternatively, they canbe added as another insured by being named as such in the schedule to thepolicy. If they are so named then in insurance speak they become a co-insuredand a composite policy has been created. In JCT and FIDIC constructioncontracts there is often a requirement for ‘joint names’ insurance. It has beenthe subject of case law and is generally understood. In the context of thesecontracts the term does lead to the creation of two divisible interests. In thatsense it is the equivalent of co-insured.

It is important to avoid the use of the term ‘joint insured’. Whilst the term issometimes given the same meaning as ‘co-insured’ it is incorrect to do so. Ajoint interest is actually an indivisible interest. The joint interests share only


one contract with the insurer and any action by just one of them thatcontravenes the policy conditions will void the cover for all.

4.5.2 The degree of protection afforded

There is a fundamental difference between the above two methods. An interestnoted by memorandum gives that party no separate contract with the insurers.This means that they have no right to make a claim in their own name and theyhave no greater rights of recovery under the policy than the actual insured. Inother words if the insured under the policy do not have a valid claim becausethey have contravened the terms of the policy, the third party noted bymemorandum do not have a claim either. On the other hand co-insureds are inthe same position as if they had taken out a separate policy in their own name.In effect, if there are four co-insureds, there are four separate policies. If threeof the co-insureds all invalidate the policy for whatever reason, the fourthco-insured still has a valid claim.

From an insurer’s point of view the creation of four contracts for only onepremium is contrary to their best interests. However, they have to live with thereality of the markets and their main concerns are to what extent the possibilityof a claim is increased and whether any extra premium is warranted. There aretwo different circumstances to examine.

Direct risk

This is best illustrated by an example. A developer may take out a publicliability policy in its own name and the premium will be assessed accordingly.However, if it is decided that the policy should also protect the main contractoras a co-insured, the risk is obviously greater and it becomes greater still ifsubcontractors are also named.

This can be dealt with by higher premiums.

The public liability policy will, however, provide protection for the developershould they be vicariously liable for the actions of his contractor orsubcontractors, even though these parties are not co-insured.

Indirect risk

This is best illustrated by considering what happens when a bank is lendingmoney on a new development and wants to protect its investment. It isdoubtful if naming any lender as a co-insured actually increases the risk ofdamage by an insured peril. The risk to insurers is that they might have toindemnify the bank to the extent of the outstanding loan in circumstanceswhere they would not have to indemnify the developer because there has beena breach of policy conditions. Generally speaking insurers do not charge forthis additional risk but reserve the right to do so in the future.

4.5.3 Protection of bank interests

The following paragraphs are for the benefit of those readers who need agreater understanding of the issues around the protection of bank interests andthe rationale behind lenders’ demands to be named under the borrower’spolicies.

When a developer borrows money on the security of a development it isnatural enough that the lenders want to make certain the insurance is in order.Their requirements generally fall under the headings below.


Breadth of cover

The demand for the borrower to take out adequate cover is perfectlyreasonable. The usual risks would be those covered by a contractors’ all riskspolicy as explained in para. 3.2.1. In theory any one of the perils insured couldbe unavailable for a particular building but in practice it is rare to findrestrictions in the UK. The main threat to the availability of all risks cover inthe UK is flooding. Increasingly banks will find that flood cover may not beavailable in areas where the risk is high, particularly if there are no plans forflood improvement.

In some territories outside the UK it is quite possible that all risks protectionwill be unavailable or that some perils will carry high deductibles or loss limits.Lenders have to decide if they want to carry that additional risk.

Security of insurer

Again it is reasonable for the banks to demand the insurances be placed with areputable insurer with an agreed security rating. However, not all the insurersyou would expect actually meet these ratings, and care needs to be taken,especially where more than one insurer is involved.

Status

The status that lenders seek is that of co-insured, which is achieved once thelender’s name appears in the schedule to the policy.

Loan agreements will usually seek such status on both material damage andpublic liability policies. Whilst the need to be a co-insured on a contract workspolicy is obvious, it is less so for the third party cover. However, third partiessuffering injury or damage may take action against everyone connected withthe development, including the lenders. Even if negligence against the lendermay be difficult to prove, the lenders will benefit from being able to claimdefence costs from the insurers.

Subrogation waivers

Whilst subrogation waivers are often requested these are unnecessary if thelender is a co-insured. Insurers cannot exercise subrogation rights against aco-insured.

Non-invalidation clauses

Banks’ insurance undertakings usually demand a clause protecting the bankagainst the possibility that the insurance will be invalidated by acts of theinsured. Such clauses are variously known as non-invalidation, non-vitiation,mortgagees’ or multiple insured clauses. Other names can be used but they allfall into the same ‘family’ of wordings that seek to protect a certain party orparties against the possibility that the policy is invalidated by the insured oranother of the co-insured. Care is needed because there are no standardwordings and some would only protect the lender against certain breaches ofpolicy conditions, but not all. This would only be of consequence if the bankhad been unable to secure co-insured status and had to rely on its interestbeing noted by way of memorandum. If any party is named as a co-insuredthen, strictly speaking, it does not need the protection of a non-invalidationclause, but such clauses do give added peace of mind.


Payment of claims monies

Claim monies are usually properly distributed because they are spent on repairof the damage.

Insurers do not want to pay any claim more than once so where they have tosatisfy more than one insured or ‘interest noted’ they make sure everyone ishappy before paying the claim.

Some banks seek loss payee provisions. The intention of these is that, to theextent that insurance proceeds would otherwise be paid to the borrower, theywill be paid direct to the lenders. The lender can then ensure that the money isspent on repairing the damage. Caution should be taken if a lender requires aneconomic reinstatement test whereby insurance monies are diverted to thelender for debt repayment rather than damage repair. The insurance claim isbased on damage reinstatement and therefore the recovery in the event ofnon-reinstatement may be less.

Non-cancellation

Once the banks achieve co-insured status insurers usually undertake not tocancel or lapse the cover without giving notice to the bank. However, insurersdo not like giving greater protection in this respect to the banks than theywould give to the insured that actually took out the cover so they will not holdcover indefinitely, probably only for 30 days maximum.

Summary

The protection of lenders can become time consuming and frustrating forborrowers, lenders, lawyers, insurers and brokers. Sometimes projects aredelayed as a result. The problems are often exacerbated because documents anddemands are inconsistent with insurance principles and practice.

4.5.4 Outside the UK

The concept of granting co-insured status to lenders is virtually unknownoutside the UK and, generally speaking, lenders are only given assurances overthe destination of claims payments. In other words, lenders are protectedagainst the possibility of any claims monies being used in a way that is contraryto their interests. Professional advice is essential.

4.5.5 Key issues

Where another party is to be added to a policy and will bring additional riskthe original insured should consider who will pay the extra premium and theconsequences for their claims experience as this could impact on futurepremiums. This also applies should annual policies with premiums based onloss experience be exposed to these additional risks.

To avoid unnecessary expense and potential delays it is best to take advice onthe requirements of lenders’ insurance requirements and seek to amend anythat are inconsistent with insurance practice.


5 Latent defects insurances

5.1 Introduction

Latent defects insurance, sometimes referred to as building defects or inherentdefects insurance, has been readily available from a limited number of major UKand other insurers since 1989. In spite of some increase in its use, there are stillmany who are not aware of it or do not fully appreciate the benefits it can offerwhen used early in the procurement of a wide range of projects. Instead, manyproject sponsors rely only on contract claims and the use of collateral warrenties orthe Contracts (Rights of Third Parties) Act 1999 for security and redress in respectof the consequences of defective design and construction.

As the subject is one that gives rise to more questions and misunderstandings thanmost other classes of business, a special section has been included to deal withthese.

Special considerations apply when a development is wholly or partially residential.Potential mortgagees belonging to the Council of Mortgage Lenders (CML) willalmost certainly expect that a particular form of latent defects insurance is in placeand is compliant with their requirements. A limited number of insurers providesuitable cover, which will carry far lower excesses, usually a maximum of £1,000per unit, and may be for a maximum of 10 years. It may even be necessary to issuetwo policies on the same building, one for the residential parts and one for thecommercial parts. The cover for the residential parts will be different in otherrespects to that summarised below, which is for commercially occupied propertiesonly. The differences should be explained by the broker arranging the cover.

5.1.1 The cover in brief

Imagine that you are building a four-storey office block. During the designstage the wrong information is fed into a computer and as a result under-strength beams are used in the roof. During the foundation stage theexcavations are inadequate and there is also soil contamination. Whilst thecladding is being installed a workman is supplied with fixings, some of whichare of poor quality and not strong enough. In other words there wererespective failures in design, workmanship and materials. These existed atpractical completion but were undiscovered at that time.

A few months later, after tenants had loaded up the building, the foundationsstarted to subside and crack. The roof started to sag one year after that. Twoyears down the line some sections of the cladding parted from the frameworkand a few fell into the car park. After each incident, the owner of the buildingphoned its insurers and made a claim under their latent defects policy. Theclaim was handled in much the same way as if the building was damaged byfire. The insurer appointed adjusters, further investigations into the exact causeand the possibility of more damage from the same cause were carried out andestimates for repairs were obtained. In each case the insurer paid for repairsminus the deductible. It was also established that there would be further andimminent damage as a result of poor quality fixings if they were not replaced.Insurers agreed to pay the cost of installing new ones. The insured did not haveto prove negligence against anyone and as subrogation rights had been waived


by insurers there was no recovery from the contractors or professionals. Inaddition the insurers paid the loss of rent as a result of the operation of therent cesser clause. That is what latent defects insurance can do for a newdevelopment. Of course there is a good chance that the faults would have beenuncovered by the technical auditors and remedied before completion, in whichcase a degree of inconvenience and the cost of the deductibles would have beenavoided.

5.1.2 The cover in more detail

Those who have purchased latent defects insurance will know that the policydocument is relatively short and quite easy to understand once thefundamental concept of the cover is appreciated. Further the cover does notvary much from one insurer to another. The following summary of cover andcost plus details of the technical auditor’s role is broadly correct for the classbut there are slight variations between insurers and these may change furtherfrom time to time.

Therefore the details below are for general guidance only and should not berelied upon for all insurance covers. It is important to complete a proposalform, obtain firm quotations and compare policy wordings before making anydecision as to how to proceed.

1. The basic protection

+ The basic policy covers actual physical damage to the whole of the building(including the internal and external services) but only when such physicaldamage is caused by inherent defects that originate in the ‘structural parts’of the building. A typical definition of structural parts is shown below butit does vary from one insurer to another.

+ An inherent defect is one that exists prior to the date of practicalcompletion but that remains undiscovered at that date and manifests itselfduring the period of the policy – 10 to 12 years.

+ The inherent defect may be in the design, materials or workmanship.

+ There is no need to prove negligence against a third party. Whoever isnamed as the insured in the policy makes a claim against the insurers in thesame way as they would claim for fire or storm damage under a propertydamage policy.

The structural parts are usually regarded as:

+ foundations, columns, beams;

+ external walls and cladding including glazed curtain walling and non-loadbearing facings and their fixings;

+ external doors and windows;

+ stairs and floors including screeds designed to the strength of the floor ofwhich they form part;

+ roof structures;

+ other external and internal load bearing elements essential to the stabilityof the property.

A precise definition will appear in the policy for each insurer. The definitionsused by some insurers are wider than that shown above and include featuresthat other insurers would regard as non-structural.


(a) Weatherproofing and waterproofing cover

Damage resulting from ingress of water caused by a defect in theweatherproofing and waterproofing is usually, but not always, included asstandard within the basic cover. As inherent defects in wall cladding androofing are a major source of damage it is always best to include it. There is anexclusion of cover for the first 12 months after practical completion. This isseen by some as an important exclusion that detracts from the value of thepolicy. However, it is not possible to remove the restriction. Insurers take theview that the developer must take care to appoint a contractor that will bearound long enough to rectify defects during this initial period.

Cover operates in the event that physical damage is caused by water enteringthe building due to a defect in the weatherproofing envelope of the building ator above ground level or the waterproofing seal below the ground floor.

(i) Weatherproofing

The weatherproofing envelope will normally include:

+ roof coverings;

+ skylights;

+ external walls and cladding;

+ external windows and doors excluding moveable elements;

+ the ground floor slab.

(ii) Waterproofing

+ These are the waterproofing elements that are designed to prevent waterfrom entering the building below ground level.

2. Optional covers

Some insurers offer the following in addition to the basic cover:

+ Damage to the whole building (including the internal and externalservices) caused by a defect in the non-structural parts of the building. (Inpractice such defects are unlikely to have catastrophic consequences.)

+ Damage to the whole building caused by a defect in the mechanical andelectrical services. (In practice such defects are likely to damage only otherparts of the services themselves unless they lead to the operation of a perilsuch as fire that would, in any case, be covered under an annual all risksmaterial damage policy. However, anything is possible.)

(a) Non-structural parts

These are generally regarded as being all other parts of the building notincluded under the heading of structural parts, weatherproofing andwaterproofing. It is unlikely cover will be available for damage to protectivecoatings, decorative finishes and floor coverings apart from permanent floorfinishes.

As mentioned above, some definitions of structural parts include items thatother insurers may define under non-structural parts. Clearly, this is animportant differentiator and may influence the choice of insurer.


(b) Mechanical and electrical services

An extension of some insurers’ policies cover can be provided for damagecaused by inherent defects in:

+ heating, ventilating and air conditioning systems and fresh and waste watersystems;

+ lifts and escalators;

+ window cleaning equipment;

+ electrical distribution systems (including fixed lighting);

+ building management systems and building security equipment (includingcar park ticket machines and barriers and all types of electrical securitydoors) but excluding external services.

3. Main exclusions applying to all covers

The main exclusions applying to all covers are as follows:

+ works which are outstanding at practical completion;

+ use of the property other than that for which it is designed;

+ load or application of pressure in excess of the design load or pressure;

+ inherent defects discovered during the defects liability (or maintenance)period and the remedying of which is the contractor’s responsibility underthe terms of the building contract;

+ wear and tear and gradual deterioration;

+ fire, lightning, explosion, earthquake, storm, flood, escape of water or oilfrom any tank, apparatus or pipe;

+ pollution and contamination;

+ war and allied risks.

The fourth exclusion, like the exclusion of weatherproofing and waterproofingcover referred to in 1(a) is perceived by some as too harsh. Insurers take asimilar view on why it is justified, although, in practice, they may be preparedto limit its effect.

(a) Exclusion applicable to the mechanical and electrical services cover only

+ Testing and intentional overloading of the mechanical and electricalservices unless in accordance with manufacturers’ or suppliers’ instructions

4. What insurers pay for in the event of a claim

In the event of a claim, insurers pay for:

+ cost of repairing damage;

+ cost of remedial action to prevent imminent damage;

+ professional fees;

+ cost of debris removal and site clearance;

+ extra cost of reinstatement to comply with public authority requirements;

+ cost of removing contents whilst work is carried out (there is a limit onthis, which may need to be raised).

The above are the main elements of protection but individual insurers’wordings should be examined for the full cover.


5. Who is protected by the insurance policy?

+ The policy will usually be in the name of the developer but is freelyassignable to new and subsequent owners, lessees or financiers.

+ Insurers are usually (but not always) prepared to waive subrogation rightsagainst architects, engineers, contractors and others (but not suppliers) onpayment of an additional premium and, usually, the imposition of a higherdeductible.

6. The benefits to the insured of buying the cover

+ It provides immediate funds for repairs and minimises disruption.

+ It means a phone call to a builder rather than a lawyer when damage isdiscovered.

+ It meets the insurance requirements being imposed by many financiers.

+ It can be a major advantage when negotiating a sale or letting. In fact, somemajor tenants are now insisting on the cover being in place.

+ The employment of the technical auditors required by insurers to protecttheir own interests has benefits for the insured as well. The risk of a defectarising is reduced and this is particularly important because if it is a defectthat could give rise to damage the insured may be saved from having to payfor losses falling below the deductible as well as the deductible itself iflarger claims are avoided.

7. The perceived benefits for the construction project if the cover is purchased

+ Developers do not need to rely to the same extent on the project team’sprofessional indemnity insurance.

+ The potential for confrontation is reduced.

+ There is more peace of mind for all the project team.

+ Less time and money is spent on arguing about contract conditions andwarranties.

+ Innovation is encouraged.

+ Everyone can concentrate on getting the actual design and constructionright.

8. The premium and technical auditors’ fees for basic structural cover plusweatherproofing and waterproofing for 12 years

Typical rates for the basic cover, including the fees, usually range from GBP0.65% to GBP 1% on the total contract value rising to GBP 2% for completedbuildings.

Total cover including structural, weatherproofing, waterproofing, non-structural and M&E services cover usually costs from 1% to 2% of totalcontract value inclusive of fees; 10% of the premium is usually paid when theinsurance is taken out and the other 90% is paid soon after practicalcompletion. The technical auditors’ fees are usually paid in stages as they carryout their tasks during the design and construction period.

Some insurers now offer instalment facilities for the premium over the periodof the policy and some may not require the 10% deposit.

Some insurers charge the auditors’ fees separately from the premium. Othersdo not charge the fees separately but pay the auditors out of the depositpremium they receive.


9. The role of the technical auditors

The role of the technical auditors is:

+ to monitor the design and construction;

+ to check that communication within the project team is effective and thatresponsibilities are clear;

+ to visit the site at regular intervals;

+ to clear up problems arising with the contractors or professional team,preferably without the need to involve the insurers or the developers;

+ to issue a certificate of approval to insurers at practical completion;

+ if applicable, to issue a further certificate relating to weatherproofing/waterproofing cover for 12 months after practical completion.

The precise role will depend on the demands of individual insurers.

10. Consequential loss covers

When buildings cover is purchased, it is usual for loss of rent to be insured aswell. In addition, the basic policy will usually include minimal cover (say£250,000 or 10% of the sum insured) for the cost of removing contents fromthe building whilst repairs are completed.

It is possible for occupiers to purchase any kind of business interruption coverjust as they can for damage by fire or other perils.

It is important that brokers are advised of any likely requirements forconsequential loss covers, whether loss of rent or otherwise, at the outset. Suchrequirements may substantially increase the exposure and influence themarkets to be used.

5.2 Latent defects insurance and collateral warranties/thirdparty rights

Whilst latent defects insurance has been increasingly used in the UK, there are stillmany who do not know about, explore or appreciate its benefits and simply relyonly on contract claims and the use of collateral warranties or the Contracts(Rights of Third Parties) Act 1999 for security and redress in respect of theconsequences of defective design and construction and the assumption ofcontinued availability of professional indemnity insurance for key parties in theproject.

5.2.1 The rationale for collateral warranties or third party rights

As mentioned in the opening pages to these guidance notes, the rights andobligations of the participants in a project are governed by the contracts intowhich the parties enter and the prevailing law.

Where project parties want specific rights relating to a contract to which theyare not a party, this is often dealt with by means of a collateral warranty, whichcreates a direct contractual link to enable the party granted the warranty toenforce certain rights against the grantor under certain circumstances.

This type of contract is dependent upon (collateral to) the underlyingprincipal contract such as a consultant’s appointment or a constructioncontract, a certified true copy of which must be provided to the beneficiarywith the collateral warranty (otherwise the rights under the warranty cannot


be clearly interpreted). Typically, the rights dealt with under a collateralwarranty relate to workmanship, design standards and specifications and, inrespect of parties with a close interest in ensuring the project is completed, anoption to ‘step-in’ and take over the underlying principal contract. Analternative to the use of collateral warranties is available through the Contracts(Rights of Third Parties) Act 1999, the use of which is growing. It is now anoption in some standard form construction contracts. If this statute is used,third party rights may be enshrined in the principal contract (usually in aschedule). The given rights will then automatically be conferred on thespecified third party (which may be identified as a class) when the principalcontract is executed and dated without the need for a separate contractdocument to be engrossed and executed by the relevant parties to make thoserights enforceable. If the third party is specified as a class (e.g. tenants) afurther specific short notice should be given to notify the giver of the rights ofthe specific third party. Third party rights need negotiating in the same way asthe rights under the collateral warranty.

It is common to have to procure at least 30 and often 100 or more collateralwarranty documents over various stages of a project. Some of these can provetroublesome (and hence extra costly) to obtain together with the appropriatecertified copies of the principal underlying contract. This is particularly thecase with subcontractors. Significant effort (and cost) is put into obtainingthese, but the real long term value of many collateral warranties isquestionable.

5.2.2 The drawbacks to reliance on collateral warranties and third party rights

Once the project has been completed these warranties/rights will often only beof value if the party granting them is still supported by the requisiteprofessional indemnity insurance and even this assumes that the warrantor isstill in existence and not insolvent and that the cover is available on reasonableterms. The grantee then has to check every year that the warranties/rights arestill so supported. This can be time consuming and creates further paperwork.A claim has to be made and liability established before the injured party willreceive any compensation.

In many ways professional indemnity cover and, therefore, reliance onwarranties/rights is not a satisfactory solution for parties trying to secureagainst the risk of something wrong with the design and specification of acompleted development over a period of up to 12 years from completion.Workmanship issues will not generally be covered by insurance unless theyhappen to fall under the all risks policy before completion or the buildings/property insurance following completion and action would need to be takenagainst the appropriate party (ultimately the contractor). Often it is difficult toknow whether a problem is a design or workmanship issue and this adds to thecost, time and difficulty in seeking and obtaining redress and monetarycompensation from the parties who are liable and their insurers.

Even if the collateral warranties/rights are well drafted and professionalindemnity cover remains in force for up to 12 years, there is still one majorobstacle that has to be overcome before their value is realised. Negligence orfault still has to be proved and that may be both expensive and time-consuming, with no certainty of a positive result and an uncertain timescale.

One of the big advantages of latent defects insurance is that it is not necessaryto prove fault or negligence and compensation is available relatively quickly


(and usually without great expense) to the insured provided, of course, thedamage suffered is covered under the policy. The existence of this type ofpolicy should be a significant attraction to a purchaser of the development ortenant of the whole or a substantial part of the development with a fullrepairing covenant. When banks start lending again they may be even keenerthan before on seeing the cover in place.

5.2.3 Is latent defects insurance a panacea for developers?

It should not be viewed as a panacea. Latent defects insurance (LDI) isprimarily for new build (see ‘some questions answered’ para. 5.2.5 below) andcannot replace or cover all categories of liabilities that may otherwise beavailable via a claim under a collateral warranty/third party rights schedule.There must be physical damage for an LDI policy to respond and, at themoment, it is unlikely to respond to a defect during the rectification or latentdefects period. But, if approached in an enlightened manner with a progressiveproject team there will be ways of getting real value out of a atent defects policyand seeking cost saving elsewhere. It needs a little forethought and planningand it will bring real benefits to, for example, an investor, tenants (with fullrepairing covenants), management companies and purchasers. Depending onmarket conditions it may be a factor influencing ease of rental or ease of sale.

5.2.4 Getting best value from the policy

+ Research and put into effect a latent defects policy at the outset of theplanning and procurement process. This will provide a benefit not only interms of obtaining the best possible premium for the policy, but alsooptimising the design and procurement process so costs can be saved.

+ Purchase the broadest cover available that is appropriate for the particularproject and the needs of the key third parties (this might includemechanical and electrical).

+ Investigate and understand the role and responsibilities of the technicalauditor and share this knowledge with everyone associated with the projectand make use of the technical auditor’s role as widely as possible.

+ Consider and explore whether the party providing finance might use thetechnical auditors as their technical monitors and so seek to save costs.Make the approval of the technical auditors a condition of achievement ofpractical completion and reflect this in the building contract and thecontract administrator’s appointment.

+ Use the Contracts (Rights of Third Parties) Act 1999 to avoid the need forcollateral warranties and thereby save the cost involved in obtaining thecompleted warranties from consultants and contractors.

+ If a waiver of subrogation against the design team and contractors can bepurchased from the latent defects insurer, consider and explore a discounton consultant fees and contractor pricing.

5.2.5 Some questions answered

How much does latent defects insurance cost?

The cost will depend on a number of factors but 1% of the cost of constructionwill usually be enough to buy most of the cover normally purchased as well aspaying for the auditors’ fees. The premium is initially calculated using abreakdown of figures from the contract price but is adjusted on completion to


reflect the cost of rebuilding the completed construction. The cost can be farcheaper for larger developments, mainly because the auditors’ fees areproportionately less.

When should I buy it?

Although the cover does not take effect until practical completion or shortlyafterwards, insurers should really be approached long before constructioncommences. Ideally the insurance should be considered at the outset of theplanning and procurement process. There will then be plenty of time for thetechnical auditors to carry out their duties, which may have a bearing on theircosts. Furthermore, the sooner the auditors start work the greater the potentialbenefits of their involvement. Finally, it is cheaper than buying the cover oncebuilding work has started.

Is it possible to buy the cover for buildings where construction has alreadystarted or on completed buildings?

The short answer is ‘yes’. However, the number of insurers willing to quote maybe diminished, the cost will be more, possibly twice as high, the deductible foreach and every loss may be doubled as well and some of the benefits of using atechnical auditor may be lost. In fact the later the cover is purchased the moreit costs and the less the benefits. Loss experience shows that insurers suffermore losses on buildings where the technical auditors had less opportunity tohave input into the project and check the design and quality of theworkmanship.

Do refurbishments and redevelopments qualify for cover?

The cover is designed for new buildings, but if there are new structures amongthe works it may be possible to buy protection for the new parts withconsequential cover on the rest, should a failure of the new structures lead todamage elsewhere. Success in buying the cover is more likely if only a facade isbeing retained with a new building behind it. After that it becomesprogressively harder.

How long does the policy run?

The period of insurance is usually for 12 years from practical completion. Ifcover is not purchased until after completion it will still have to expire on thesame date as if it had been purchased from completion. Whilst it is possible tobuy cover for shorter periods, this rather defeats the objective of the policy andthe premium saved may not make it worthwhile.

How do I go about buying the cover and what will happen then?

The first step is to approach an insurance intermediary – preferably one with agood understanding of the subject. You will then be asked to complete aproposal form; this is the best means by which insurers can gather theinformation they need to assess the risk. A number of documents will also berequired, including plans, drawings, ground conditions report, methodstatements and bar charts. Insurers and auditors will make clear their preciserequirements. Insurers will then advise provisional terms, including premiumcost, extent of cover on offer, levels of deductible, deposit premium, if any, andthe technical auditors’ fee. Sometimes the latter is included within the deposit.


Once you have accepted the terms and paid any debits, you will need to supplyany further documentation required and the technical auditors will commencework. Their task will be easier if the necessary introductions are made to thoseworking on site, their role is explained and effective lines of communicationare drawn up. The auditors will carry out their duties both in their office andon site. They will submit regular reports to the insurers but their intention isthat at practical completion you will secure the cover you were seeking fromthe outset. Any problems they identify will usually be resolved immediately,with as little fuss as possible, and insurers may not even be advised. If there is adisagreement there will be negotiations and in the unlikely event of acompromise not being reached the implications for cover and terms will beexplained. An important point is that once you have accepted the insurers’offer of cover, they are bound to issue a policy in accordance with that offersubject to the audit being satisfactory. There should be no nasty surprises at theend!

At practical completion the auditors should be able to sign off the risk assuitable for the policy. Insurers will then advise final terms, which rarely differfrom those quoted. Once the premium is paid, a policy will be issued.

Why is the whole building not covered against damage?

The whole building is covered against damage caused by inherent defects asdefined. Confusion sometimes arises because under the basic policy cover theinherent defect has to be in the structural parts of the building as defined. Inother words there is no cover if the inherent defect is in the non-structuralparts. However, some insurers offer non-structural defects as an add-on,although others feel that their policy definition of structural parts is so widethat the risk of a major problem arising from the remaining parts is negligible.

5.2.6 Clearing up the misconceptions

One of the most frustrating things about handling latent defects enquiries isthe number of misconceptions that have grown up around it. To a certainextent this is because insurers have not really promoted the cover. In thefollowing paragraphs some of the misunderstandings are stated and the truefacts explained.

Does it really cost between 3% and 7% of construction costs?

Cost has been dealt with elsewhere. It is usually 1% or less for a 12-year policy.Nobody will pretend that, even at 1% or less, the cost of the cover is a welcomeaddition to the budget. It is sometimes possible to pay by instalments and if thecost could be recovered from tenants it could add less than 1% to a tenant’sannual outgoings. However, if the insurance was regarded as an integral part ofthe package and not just as an add-on, there could be savings in other areas.

The cover is not wide enough and does not give developers the certainty theyrequire

There is an argument that two of the policy exclusions, those relating to defectsarising in the first 12 months after completion, remove cover that developersreally need in order to remove uncertainty about their potential liability fordefects after completion. In practice the exclusions refer to defects that shouldbe put right by contractors.


The technical auditors duplicate works unnecessarily (they also add to the cost ofconstruction, interfere with the project and can be the cause of delays. Evenwithout the auditors’ involvement, the insurers’ requirements for a risk-freebuilding will add to costs)

If all of the above were true the cover would have been dead in the groundyears ago. No doubt some of these things are true some of the time, but theyare unintentional. The auditors do duplicate some work because they are achecking agency, but the real concern is usually based on the belief that they areduplicating the work of other auditors who may be acting for a tenant orfunder. In practice the other auditors are probably working to a different briefand their audits are unlikely to be nearly as thorough. If there is potential andunnecessary duplication this could be tackled and removed by negotiation withinterested parties, including the insurers and their auditors. The audit shouldnot increase building costs or cause delay, as the brief is only to make sure thebuilding is erected in accordance with good practice and the buildingregulations.

The deductible is applied to every claim and this, to a large extent, defeats theobjective of the cover

It depends on the wording of the policy but the usual position is that if thereare a series of claims arising from the same cause, the deductible will onlyapply once.

We already have collateral warranties and always follow up to make sure thatprofessional indemnity covers remain in force for years after the contract iscompleted

Fine, but that does not guarantee that if damage occurs the cost of repairs canbe recovered quickly (or at all if the liable party becomes insolvent) even ifnegligence can be proved. A claim must be made and proved against the partieswith potential liability, who may not be in existence years hance. The damagemay still not be repaired in the meantime. A latent defects policy does notrequire proof of negligence and funds can be available relatively quickly forremedial works.

The Contracts (Rights of Third Parties) Act 1999 gives all the protection needed

Whilst it is true that this Act may help, there is still a reliance on negligencebeing proved and the guilty party having sufficient funds available byinsurance cover or otherwise. The same drawbacks apply as with collateralwarranties (see above).

My professional team sees no advantage for them in the cover being in place andhave a fear of being sued by insurers if they get things wrong

There are several points to make here. First, there is no evidence that insurersdo sue as a matter of course. In, fact experience seems to indicate they only doso in rare circumstances. Secondly, it may be possible to purchase a waiver ofsubrogation in favour of some parties involved in the project. Thirdly, theactivities of the technical auditors should actually reduce the risk for everyone.Fourthly, as latent defects insurance becomes more common then in the longerterm this may lead to a transfer of some risks away from PI policies and asubsequent reduction in PI premiums. In the meantime, of course, the


professionals will no longer be first in the firing line when insured defects arediscovered. Finally, if latent defects cover assumes the right place in the wholeinsurance umbrella, the professionals might be able to rid themselves of someof the worry and paperwork and devote more time to what they like doing anddo best.

5.2.7 Key issues

Do:

+ think about latent defects insurance at an early stage in order to minimisethe cost and maximise the benefits. The cost can almost double if theinsurance is purchased after the foundations have been started;

+ think of the cover as an integral part of the procurement and constructionprocess. It should not be an afterthought purchased only to satisfy fundersor tenants;

+ make sure that all those working on the project know from the outset thatcover is being purchased and they understand the advantages andimplications for them;

+ appoint someone to work with the technical auditors to ensure that thedocuments and information they require are made available in good time.Ideally, the same person should also liaise with the auditors on site visits;

+ make it clear from the outset if any consequential loss cover is required asthis will have a bearing on the market placement.

Do not:

+ buy it too late and pay higher premiums as well as losing some of thebenefits of the auditors’ involvement;

+ dismiss the insurance out of hand. Experience suggests that once a clientpurchases the cover, they go on doing so;

+ advise insurers of the final sum insured on buildings, on which thepremium will be assessed, until you are satisfied that it is calculated inaccordance with the requirements of the particular insurer’s policywording. It is important to appreciate how the basic policy cover providesinbuilt protection against inflation in construction costs during both theperiod that would be required for repair or reinstatement followingdamage and the period of insurance. Getting it wrong can be expensive interms of unnecessarily high premiums or inadequate protection.

5.2.8 Further information

For further information see Property Eye, issue 21 (autumn 2006) (AonLimited) – available at www.rics.org. Hard copies can be obtained from AonLimited.


rics.org

Constructioninsurance

RICS Practice Standards, UK

1st edition, guidance note

Construction insurance1st edition, guidance note

This guidance note is designed to outline best practice for propertyprofessionals dealing with construction insurance. It offers practicalhelp and advice for each stage of a construction project – from theinitial development, through to project completion.

The guidance note covers the following key areas:• Introduction• Rights and obligations of principal parties• Contract conditions• Global implications• When the various insurance covers need to be considered• Surveyor’s guide to professional indemnity (PI) insurance• Director’s and Officers’ (D&O) liability insurance• Consequential loss insurance for construction risks• Contractors all risks or contract works insurance• Employers’ liability insurance• Environmental insurances• JCT non-negligence insurance• Public liability insurance• Surety bonds• Unexpected archaeological discovery insurance• Insurance of existing buildings undergoing refurbishment or

development• Project insurance and property developer all risks policy• Risk management and insurance• Statutory inspection of plant and machinery• Third party interests and ‘joint names’ under construction policies• Latent defects insurance and collateral warranties/third party rights

rics_insurance_cover:Layout 1 10/7/09 19:13 Page 1

Date post:	19-Nov-2014
Category:	Documents
Upload:	kmid2003
View:	983 times
Download:	4 times

Construction Insurances

Documents