Construction Insurance and UK Construction Contracts

Marshall Levine and Roger ter Haar KC

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CHAPTER 5 Classes of insurance contract

5.1 It is not a particularly profound observation that construction and engineering projects involve a wide range of risks for all those involved and for third parties not directly or voluntarily involved. Those risks include the risks of physical injury, loss and damage and their financial consequences and economic losses unassociated with physical injury, loss and damage, such as loss of profits by reasons of delay in completion of a project, or simple miscalculation as to the likely costs of a project or the availability of the market for the completed project. 5.2 It is the intent of this chapter to set out a summary of the main classes of available insurance policies.

The main classes of construction insurance policies

5.3 A construction insurance policy will be either a single project policy or a floater policy. A single project policy provides cover for the whole or part of a specific construction project. There are various classes of policy that construction contracts normally require, principally liability policies (employers’ liability and public liability), and material damage policies. Insurance may be effected through composite or combined policies. 5.4 Although it might be thought ideal to obtain one insurance policy covering a single construction project, this is not generally possible because of the vast range of risks associated with construction projects and because different insurers and underwriters specialise in underwriting different risks. This frequently requires several insurance policies to be in place to cover the risks arising out of a single project, but this inconvenience is mitigated to the extent that it is usual practice to cover third party liability and material damage under one policy.

Liability policies

5.5 The principal types of liability policy cover employers’ liability, road traffic cover, public liability and professional liability. These policies are designed to cover an insured’s legal liability to third parties (i.e. liability to persons who are not a party to the insurance contract) subject to certain exceptions. An employer’s liability policy covers the liability of an employer to his employees (i.e. those persons under a contract of service or apprenticeship to the employer) for personal injury or disease arising out of or in the course of their employment

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on the project. Employers are required by law to have such liability insurance in effect.1 5.6 All users of motor vehicles upon roads or other public places are required to have liability insurance providing indemnity against liability for injury to parties other than the driver and for damage to the property of parties other than the driver.2 In respect of construction projects this will involve consideration of whether vehicles are being used on a “road or other public place”.3 There can be issues of overlap between road traffic policies and general liability policies where “site” vehicles are used on the road. 5.7 Public liability insurance provides an indemnity against personal injury claims by the public (other than employees) and property damage claims by any third party, including employees. 5.8 Professional liability or professional indemnity insurance (PI) covers those professionals such as architects, surveyors, engineers, project managers and others involved with the construction project against claims of professional negligence. It is very often the case that contractors have their own design departments or carry out works on a basis whereby the contractor takes contractual responsibility for design even if carried out by a subcontractor or independent professional engaged by the contractor. Accordingly, well-advised contractors who also take on design responsibilities will also procure professional indemnity cover. See below in respect of professional indemnity insurance generally.

Material damage policies

5.9 This type of policy covers loss or damage to property in which the insured has an insurable interest, through ownership, possession or a contract to acquire ownership of that property. A typical material damage policy only covers loss of or damage to specified property. Not infrequently, a material damage policy may be combined with other policies. Thus commonly material damage cover will be granted in one section of the policy and public liability cover in another section; or material damage cover may be granted in one section and business interruption cover in another. Usually each section falls to be construed independently of any other section. A particular problem that arises in respect of the insurance of construction projects is the application of the Contractors Plant Association conditions, which can lead to gaps between physical damage and liability insurance arranged by plant owners and contractors for construction plant and drivers. 5.10 Material damage policies are often described as contractors all risks (CAR) or erectors all risks (EAR) policies. Typical property covered under CAR/EAR policies includes:

contract works (temporary and permanent);
construction plant (e.g. cranes or scaffolding) while in use in the course of construction or whilst in storage on site;
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plant erection, i.e. loss of or damage to construction plant while being erected or dismantled on site;
goods in transit, i.e. loss of or damage to contract works materials while transported to site, although marine and aviation risks will usually be excluded;
damage to employees’ property (other than contract works).

5.11 There are many commonly found exclusions and exceptions to cover. Risks commonly excluded are marine and aviation risks, professional indemnity risks, consequential loss and contract performance guarantees. Material damage (property) policies are discussed further in below. 5.12 Many projects involve the incorporation of proprietary materials or products that are assumed by the participants in the construction process to be fit for a particular purpose. On occasions that assumption may prove to be ill-founded.4 Well-advised suppliers of goods and manufacturers of equipment and fittings will have the benefit of product liability insurance. Such insurance covers liability for loss or damage caused by defects in products but not for liability for products that are merely defective.5 There is also a very restricted market for product guarantee insurance.

Consequential loss policies

5.13 Loss of or damage to property involved in a construction project or intended to be involved in a construction project is liable to cause delay to completion of the project. Delay to completion of a project usually causes loss to the contractor who is on site longer and is often working in disruptive and uneconomic conditions as a result, and will usually cause loss to the employer of the contractor, who will incur financing costs for longer and who may miss an opportunity to sell or let the project property or to use the property for his own purposes, suffering loss in consequence. Insurance against such economic losses occasioned by physical damage is relatively easily available in the marketplace. Delay is also likely to be caused by other factors such as late issue of instructions by or on behalf of the employer, or incompetence on the part of the contractor. Losses caused by delays arising out of such matters are not commonly covered by insurance. 5.14 These forms of insurance may be together described as consequential loss policies: particular types include business interruption policies, advance loss of profits policies, delayed start up policies and liquidated damages and force majeure policies. (See paragraph , supra.)

Composite and combined policies

5.15 As set out above, different forms of cover are often included in the same policy. It is perhaps more common for smaller construction companies to take out such combined covers.

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5.16 Composite or combined policies may in some cases have advantages over separate policies:

they may be significantly less expensive in terms of premiums and discounts;
only one proposal form is required;
as only one policy is issued, a single renewal notice and renewal premium is required; and
only one declaration of turnover for the purposes of adjusting the premium is required.

5.17 A policy may also be composite in that it covers the differing interests of more than one insured. Particularly in such cases it can be crucial legally to distinguish between joint and composite policies, as upon that distinction may turn the question of whether one insured’s rights are affected by fraud, non-disclosure or breach of condition by another insured.6 If the policy is a joint policy covering what is truly a joint interest on the part of a number of persons in the subject matter of a policy, all insureds are liable (subject to the policy terms) to be affected by defences available to an insurer in respect of any one insured. However, if the policy is a composite policy, then the position of each insured is looked at separately, so that, for example, non-disclosure or fraud by one insured will not necessarily affect the ability of an innocent co-insured to obtain indemnity (subject as always to the specific terms of the policy). The distinction between joint and composite policies was summarised by Sir Wilfrid Greene MR in General Accident Fire & Life Assurance Corp Ltd v Midland Bank Ltd:7

That there can be a joint insurance by persons having a joint interest is, of course, manifest. If A and B are joint owners of property - and I use that phrase in the strict sense - an undertaking to indemnify them jointly is a true contract of indemnity in respect of a joint loss which they have jointly suffered. Again, there can be no objection to combining in one insurance a number of persons having different interests in the subject-matter of the insurance, but I find myself unable to see how an insurance of that character can be called a joint insurance. In such a case the interest of each of the insured is different. The amount of his loss, if the subject-matter of the insurance is destroyed or damaged, depends on the nature of his interest, and the covenant of indemnity which the policy gives must, in such a case, necessarily operate as a covenant to indemnify in respect of each individual different loss which the various persons named may suffer. In such a case there is no joint element at all.

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