Mind the gaps

Those who sell insurance will tell you that it is there to give peace of mind. When problems arise on construction projects, however, insurance can bring nothing but confusion and tension as the different parties try to work out what policy, if any, will respond to the claim.

Take, for example, a project to build a warehouse. The client appoints a contractor under a design-and-build contract. Halfway through construction, a boiler house chimney collapses, injuring a builder and damaging an adjacent property. Who would cover the losses arising?

In an ideal world, the contractor would have project insurance, so that it could simply submit a claim to the project insurer for all costs and losses. But few contractors are prepared to pay the cost of project insurance, and would therefore usually look to the far more common contractors all risks (CAR) insurance.

Unfortunately, this policy does not do quite what it says on the box. It would cover the cost of repairing damage to the works caused by the chimney collapse and damage to any materials or equipment, but it would not provide cover for claims from the injured builder or the owner of the adjacent property.

The contractor’s employers liability and public liability insurance should cover such claims. But CAR policies generally do not cover economic loss, which means that while the contractor might have cover for the damage caused to the chimney and to the site materials, it would not have cover for losses such as delay, nor for any business interruption claim from the client. The policy also would not cover any claim from the client for liquidated and ascertained damages, payable under the terms of the contract. As a general rule, neither works nor liability insurance would cover claims of a purely contractual nature.

Few contractors are prepared to pay for project insurance. Unfortunately, a contractors all risks policy does not do
quite what it says on the box

Matters would be further complicated if the chimney collapsed because the structural design was inadequate. The CAR policy would not cover damage or defects caused by negligent design. This means that, unless the contractor had separate indemnity insurance to cover its design errors, it would have no insurance for the damage caused to the works or consequential losses. If the contractor had employed a consultant to prepare the structural design, it could make a claim against the consultant for negligence, in the hope that the consultant had professional indemnity insurance. Where a contractor is undertaking design work in-house, it is vital to arrange the appropriate insurance. If the chimney collapsed because of defective workmanship, however, even if the contractor had arranged insurance to cover its own negligence, the policy would not cover negligent workmanship and the contractor would therefore have to cover the cost of repairs and delay.

What would happen if the chimney collapsed after the defects liability period had expired? The CAR policy would only cover claims arising before the expiry. If the contractor had arranged insurance for losses arising from inherent defects with the property, it would be able to seek an indemnity under that policy. Also, the client might be able to seek an indemnity from its buildings insurer or, if the client or the contractor had employed a consultant to prepare the design, they could bring a claim against that consultant, which should have professional indemnity cover.

This is just a flavour of the issues that could arise. The important points to remember are:

• check what policies are in place and what risk and parties they cover;
• notify any events or claims promptly to all policies to avoid inadvertently failing to comply with notification requirements.