A quick guide to construction insurance

A quick guide summarising the different types of insurance that may be required or maintained in connection with a construction and engineering project, focusing on types of insurance rather than the law affecting insurance

What is insurance?

Insurance is a contract in which:

• The insured pays a premium to the insurer.
• The insurer agrees to give the insured some benefit (usually financial compensation) if a specified event occurs. The event must involve some uncertainty about whether or when it will happen.

Why use insurance on a construction project?

A liability allocated to a party under a construction contract may be substantial and the party accepting a risk often chooses to cover its liability with insurance. Insurance also protects the party to whom liability is owed as the party accepting the risk may be unable to discharge its liability unless it has insured against the risk.

For example, if an architect’s practice designed a building with a defect in it, which would cost £1m to remedy, the architect may not have £1m. Often, only an insurance claim would allow the architect to pay the remedial cost.

Types of insurance on construction projects

This note focuses on five common types of insurance, often considered when parties carry out a construction or engineering project:

• All risks insurance.
• Professional indemnity insurance.
• Product liability insurance.
• Public liability insurance.
• Latent defects insurance.

All risks insurance

All risks insurance covers physical damage to the works and site materials. It may be taken out by the contractor or the employer, and the parties should specify who is responsible in the construction or engineering contract. The contract usually details the specific insurance requirements, for example, which risks must be insured against and the amount of insurance. Whichever party obtains the insurance, the contract often requires it to be maintained in the joint names of the employer and the contractor.

Professional indemnity insurance

Professional indemnity insurance insures against liability arising from professional negligence. This usually includes a contractual liability that is equivalent to professional negligence, such as a breach of a contractual obligation to exercise reasonable skill, care and diligence when carrying out design. Architects, engineers, other professional consultants and a building contractor that owes a design responsibility to its employer are usually required to maintain such insurance.

Product liability insurance

Product liability insurance protects against liability for injury to people or damage to property, arising out of products supplied by a business. Suppliers of equipment to a construction or engineering project, such as lifts or escalators, may be required to maintain such insurance, sometimes in place of professional indemnity insurance.

Public liability insurance

Public liability insurance covers liability arising from death or personal injury to third parties other than the insured’s own employees and for damage to property belonging to third parties.

Latent defects insurance

Latent defects insurance (also known as decennial insurance) typically lasts for ten years from the original construction of a building. A building owner must usually arrange the cover in advance and it typically protects the owner against the cost of remedying the structure of a building, due to a defect.

Does a contract’s level of insurance cap liability?

Simply referring to a required level of insurance in a contract does not cap liability at that level. This is a common misconception in the construction and engineering industry.

For example, if an architect is contractually required to maintain professional indemnity insurance of £5 million on an “each and every claim” basis, this does not automatically limit its liability to £5 million for each and every claim. If the architect’s client has a claim for £10 million, the architect’s own assets may be at risk. The architect and its client may agree a separate cap on liability (at the same level as the insurance requirement), but the insurance requirement alone does not create a cap.