Contractors All Risks
Contractors’ insurance is a broad class of insurance covering the risk of damage to property which is in the course of construction or alteration.
It is often known as:
- Contract works insurance
- Construction insurance or
- Contractors all risks insurance.
Primarily, it covers the new materials from delivery, through the construction process to final testing and handover.
A contractors’ insurance policy can be extended to cover not just the materials and partly completed works, but also, under a separate section, the plant that may be used in the process.
Contractors’ insurance does not automatically cover the pre-existing and original fabric that may be being altered. This can be added as a separate item, but it is more often protected under a separate material damage or property insurance.
Generally, the works requiring insurance are being built under a contract. This clarifies:
- Responsibility for how the work will be carried out
- What insurance is required
- Who should arrange the cover.
Policies can also cover works being carried out by the contractor on their own account such as speculative house building.
Whilst contracts will be specific to a particular project and as such, unique, they often follow standardised market forms.
For example those produced by the Joint Contracts Tribunal (JCT) for building projects or the Institute of Civil Engineers (ICE) for civil engineering works.
Standard contract wordings or forms:
- Assist both contractors and insurers to understand their obligations and responsibilities without having to study each individual contract, which may run into hundreds of pages, in detail
- Save thousands of pounds in legal fees that would be payable if contracts had to be negotiated from scratch each time.
Construction contracts, are usually lengthy documents and cover many aspects about the nature of the project including:
Materials to be used
- How much the works will cost
- How the contractor will be paid
- How the job will be carried out
- Specific requirements for the insurance arrangements.
The insurance clauses contained in the contract will not just be about insurance of the property but will also include the liability risks associated with the contract.
For this reason many insurers are prepared to issue a contractors’ indemnity or contractors’ combined policy which can, under separate sections, cover the following risks:
- The contract works
- Contractors’ plant
- Employers liability
- Public liability
It can involve other parties such as the party who is commissioning the job, traditionally known as the principal but now commonly referred to as the employer, and sub-contractors as well as the main contractor.
TYPES OF CONTRACT WORKS
Contractors’ insurance applies in respect of construction projects from start to finish. It covers the new materials from delivery, through the construction process to final testing and handover.
There is no simple subject matter for contractors’ insurance. The types of project covered are very varied in both their nature and risk for insurers.
Traditionally, the subject matter will fall into either the category of construction risks or erection or engineering risks.
Construction risks are buildings (new and alterations) along with civil engineering projects like roads, bridges, tunnels, dams and sea defence work.
The key risks for insurers are generally the same as they will be once the work is completed and insured under a commercial property policy - fire, theft and natural perils such as windstorm and flood but also structural collapse.
Erection or engineering risks
These are contracts for the installation and testing of machinery.
This can range from the simple start up for a single process machine assembled in advance at the manufacturer’s factory right through to, say, the creation of a multi-million pound production line in a car plant.
Whilst erection or engineering contracts may be particularly exposed to fire and explosion risks they are less prone to damage from natural perils, as they are likely in most cases to be carried out inside a completed building.
Often, the key risk may be breakdown during the testing phase. This will depend on the extent of the testing and commissioning of the plant carried out once the works have been completed.
Whilst insurers like to split these two types of project for their own convenience because of the difference in the risks they face, life is often not that simple!
Quite often a single major building contract for say, a new office, can also include a significant degree of engineering work such as installation of heating, ventilation and telephone systems as well as lifts, catering and perhaps printing machinery.
The Insurer Response
In the same way that there is no simple, homogeneous thing as a contract works project, there is no standard way that insurers provide cover - each insurer draws their boundary and provides for risks in a different way.
The structure most widely accepted in today’s market place is that contracts for installation and testing of machinery (erection or engineering contracts) are regarded as engineering risks.
Differences between insurers
These appear when providing cover for contracts for building and civil engineering as there is divergence in what should be handled by the engineering underwriting department and what should be handled by the commercial property underwriting department.
Because of their complexity, many insurers put civil engineering projects under the control of their engineering division.
However, some insurers have specialist contractors departments quite capable of handling building, civil engineering and erection/engineering contracts.
Some insurers split responsibility according to size with small builders insured on an annual basis to be handled by commercial property, but large individual contract covers by engineering or specialist contractors departments.
Others split off the liability from property for handling by their respective commercial liability underwriting departments.
Dividing lines are fine if a project fits nicely into one or other of the construction or erection/engineering risks categories.
If, as is usually the case, the project includes existing fabric as well as new build, or fitting-out as well as building, insurers must be flexible enough to respond to the customer’s needs.
How cover is provided
In addition to deciding who in their organisation is best equipped to assess a particular risk, insurers need to consider whether cover is either:
- For a specific contract
- Arranged on a blanket annual basis for all jobs falling within agreed parameters of contract type, size and duration – often called an open cover.
To conclude, the handling of a particular risk will depend on the insurer’s individual approach.
CONTRACTURAL REQUIREMENTS AND INSURANCE COVER
Contracts are legal agreements between two parties under which each party obtains rights in return for accepting certain obligations.
Whilst contracts do not have to be in writing, they usually are in order to avoid any confusion later as to what was required of each party.
Each party’s rights and obligations are normally set out in the written contract conditions.
Construction contracts are essentially no different to contracts to buy a house or to sell a car.
It sets out:
- What has to be done
- By whom
- By when
- Who is responsible for what risks at all times
- What insurance should be arranged
- Who should arrange it.
On the surface, the requirements of a construction contract might imply a rather onerous workload for the insurers who would have to wade through hundreds of pages of legal clauses before even providing a quote for a risk.
Standard contract wordings
In practice many projects follow standard contract wordings drawn up by trade bodies for firms in their industry. These contracts are published and widely available so insurers can easily assess their implications.
As there is no statutory obligation for the employer and the contractor to use a specific contract form, it is a question of negotiation.
A common problem for underwriters arises when they are asked to quote for a risk where the standard contract has been used by the contracting parties, but with some alterations.
These alterations (and their implications) must be clearly identified and assessed by the underwriter in order for a quote to be provided.
Implications for insurers
However the contract is drawn up, it will usually have several main areas of interest to insurers:
- Who is contractually responsible for which risks?
- What insurance has to be arranged?
- Who is the insurance required to indemnify?
- Who has to arrange it?
Given the number and scope of parties which could be involved in a project, for example:
- Main contractor
- Project manager
- Quantity surveyors
It’s possible to see how important the answers to these questions become.
Extension of cover
In addition to the insurance requirements during the construction period, most standard forms of contract contain the option to require insurance to cover defects, caused during construction but which may come to light when damage occurs following handover during a specified period.
This is known as the ‘maintenance period’.
The cover which insurers are usually required to provide is a wide ‘all risks’ cover to meet the insured’s contractual obligations.
A typical operative clause could be:
‘The insurers will indemnify the insured in respect of damage to the contract works occurring during the period of insurance within the territorial limits from any cause not subsequently excluded.’
The key words will have definitions which are shown below.
The insured is defined in the schedule. This could be the contractor or the employer (or both) and sub-contractors if the contract calls for insurance to be arranged in joint names.
The responsibility for arranging the cover and whom it has to indemnify will be set out in the contract conditions.
Damage includes loss, for example, theft.
This will include:
- The permanent construction works as it develops
- Temporary works that may be required during construction but which will have no final value, for instance, shuttering to protect the sides of trenches.
It will normally specifically exclude the existing structure for alteration contracts.
Many policies will also cover materials stored offsite and in transit (other than by sea or air) to or from the site from the minute they are nominally allocated to an insured contract.
Period of insurance
The period of insurance is defined in the schedule.
This might be for the planned construction period plus the maintenance period for one-off contracts or 12 months for a blanket cover for a contractor.
The cover on the contract works will cease when:
- A certificate of completion is issued or
- The works are taken over by the employer.
Some standard contract forms require the works to be insured for a specified time after completion/handover (say, fourteen days) and if so, the policy should cater for this additional period.
The territorial limits are usually Great Britain, Northern Ireland, the Channel Islands and the Isle of Man, but the definition may also be broadened to include Eire and even particular contracts abroad.
Offshore contracts, even within the territorial limits, will be excluded unless specifically agreed otherwise.
Some insurers provide automatic cover for relatively small contracts within the European Union.
POLICY TYPES, PREMIUMS AND LIMITS
Cover can either be arranged on:
- A specific contract basis for a particular project or
- An ‘open cover’ basis for a contractor covering all jobs carried out in a year within the work parameters agreed with insurers. These provide automatic insurance for all contracts of agreed types below a stipulated limit, although insurers may want referral of individual jobs above a lower threshold purely ‘for information’.
Some larger contractors may have both covers in place at the same time:
- Open cover for the run-of-the-mill work
- Individual project insurance for work that fall outside of the agreed parameters of the annual policy due to:
- A higher contract value
- A longer contract period
- Construction projects which are more hazardous than normally undertaken
- The location of the works being outside the territorial limits.
Occasionally insurers may want the large contract separately insured, perhaps if they are arranging reinsurance just on that particular contract.
Alternatively, the contractor may want the insurance arranged this way to protect their long term claims experience from heavy or unusual work.
Most often it is because other parties that make up the ‘insured’ for a particular project require separate insurance with their own name featured.
Calculation of premiums – specific contracts
The premium for specific contract covers will be based on planned costings and timings and is then adjusted once the work is completed.
Calculation of planned project costs is not an exact science and it is not uncommon for contracts to ultimately cost significantly more than was planned, or advised to insurers.
Calculations of premiums - open covers
The premium for open covers will be based on the turnover derived from the insured jobs the contractor expects to do in the coming year and a rate reflecting the types of work they will undertake allied to their claims experience.
The premium will be adjusted at the year-end according to the turnover actually achieved.
With either basis of cover the sum insured is based on the estimated contract value of the insured contract.
However, to allow for unplanned increased costs, insurers usually include an element of escalation cover for contract price overshoot.
Typically insurers’ escalator clauses automatically allow for small increases, usually up to 25% in the aggregate of the original contract value.
Larger increases will need to be advised to the insurer for acceptance and rating.
Although cover is for contractors insurance policies is for ‘all risks’, there will be damage to the contract works which is not covered.
The usual exclusions found in all commercial property policies will apply:
- War risks
- Radioactive contamination
- Sonic bangs.
Other risks usually excluded include:
Wear and tear
This is not an ‘actual event’ of damage, more a gradually operating cause. It excludes from the insurance damage caused by deterioration due to atmospheric conditions, rust, corrosion or oxidisation.
Losses discovered only when a stock-take is carried out. Insurers are covering the results of specific loss or damage events. If the loss cannot be attributed to a specific event, insurers would not accept that the cause of loss was theft.
The degree of cover which insurers will give for the cost of rectifying damage caused by defective materials or workmanship which come to light either during construction or after handover in the maintenance period differs significantly between insurers.
At one extreme is the school of thought that says that any defect caused by the contractor is due to their incompetence and the results are a trade risk, which they should be responsible for themselves.
At the other extreme is recognition that the cost could be well beyond many contractors’ ability to pay and so insurers should help out.
The solution in practice, is usually somewhere in the middle - insurers usually excluding the cost of rectifying the defective property but picking up the bill for resultant damage to other parts of the works.
Insurers now tend to exclude damage caused by acts of terrorism entirely but quote separately for it as a ‘buy-back’ on request.
Terrorism is not an exclusion that is permitted under the standard JCT contract forms and cover should therefore not be affected unless the contract conditions are amended.
Policies will be subject to an excess for each and every claim. Typically, a number of differing levels of excess apply depending on the cause of loss.
Theft and malicious damage losses, for example, will often be subject to a higher excess.
Some policies provide for losses caused by earthquake, storm or flood that occur within a specified time period (for example, 72 hours) to be deemed a single claim and therefore subject to a single excess.
The policy may also specifically exclude losses arising out of certain specified activities. For example:
- Multiple lifts - the raising or lowering operations in which a single load is shared between items of lifting / handling plant
- Overload testing - where plant undergoes any form of testing involving abnormal stresses or intentional overloading.
Policy exclusions will vary from insurer to insurer and from policy wording to policy wording and should be considered carefully in each individual policyholder’s case.
EXTRA BENEFITS AND MAINTENANCE PERIODS
Extra benefits include the following:
Insurers will pay for the cost of removing debris from the site after a loss, along with any necessary demolition, dismantling, or shoring up that is required as a result of the insured damage.
If a building is significantly damaged, work has to be done by professionals such as architects, surveyors and engineers in drawing up plans to arrange how the re-building can be done.
Such costs can be substantial and would not be covered, but for this clause.
It is important to note that professional fees incurred in preparing the insured’s claim are not covered.
EU and public authority requests
Building regulation requirements are constantly changing, and even a new building in the course of construction could be open to enforced changes if damage occurred before it was completed.
With this clause such extra costs would be covered.
The need for this extra cover is clearly less likely for a new building than for the average building insured under a commercial property policy.
This extra cover only relates to costs created as a result of re-building or repair work following insured damage - if changes would have to have been made to meet new legislation, perhaps to install better ramps to improve access for the disabled, cover would not apply.
Historically, insurers applied a percentage limit, often 10% for each of the 3 items above, payable in addition to the policy limit for these covers but increasingly it is now covered provided the limit of liability (the estimated contract price) is adequate.
Traditionally commercial insurers took the view that if they paid a loss, the insured had ‘used up’ the insurance bought for that element of property.
If the property was then replaced, the insured was expected to request additional cover.
Now most policies automatically reinstate the sum insured after the loss but reserving the right to charge an additional premium.
Cover is only available for a maintenance or defects liability period if this is stipulated in the contract.
The maintenance period commences from the date the finished project is handed over and the contractor’s insurance policy would otherwise end.
For buildings, a period of 12 months is normal although on occasions this may be increased to 24 months.
For engineering/erection contracts, whilst 12 months is also the norm, the actual period can be more variable within a usual range of 3 to 24 months.
The key point to remember is that cover relates to damage to the contract works:
- Caused by an insured peril prior to the commencement of the maintenance period which comes to light during the maintenance period
- Caused by the contractor in the course of any work carried out during the maintenance period in compliance with their obligations under the contract.
The policy does not cover damage from say, natural perils (for example, storm or flood) occurring during the maintenance period but would cover fire damage caused by the contractor whilst on site carrying out the maintenance work.
TOOLS AND CONSTRUCTION PLANT
Tools and constructional plant, be it owned or hired, are generally excluded from the definition of the contract works but cover is available as an additional item or section.
The number of items/sections differs greatly between insurers.
Employees’ tools and effects
These can be covered but are usually kept separate from the insured’s own plant because of the different insurable interest and lower indemnity limits and excesses applicable.
The main reason is because cover is more limited - it is typically restricted to contract sites only although some policies cover employees’ tools and effects whilst adjacent to the site as well as on it.
This can be anything from a pick and shovel to a crane. It can be owned or hired, mobile or static, large or small.
Temporary buildings such as site huts are included within the definition of plant but they may be split from other owned plant by having two schedule items.
Owned and hired plant
These are usually kept separate and there may be further sub-divisions into separate items, according to the insurer.
In theory at least, cover is available on either a reinstatement or indemnity basis although insurers are usually reluctant to give reinstatement on other than new or small plant.
Cover is available on either a blanket basis for all plant or all plant of a specific type, or for specific items only.
It is charged according to the types of plant and values.
The cover provided is much the same as for the contract works - ‘all risks’ excluding breakdown (which should be arranged in the engineering market.)
Cover usually applies on site but also in transit to or from site.
Cover off site
There is less consistency in approach between insurers about constructional plant in other locations. Some insurers provide cover anywhere within the territorial limits whilst some restrict cover to losses on or in the vicinity of contract sites.
Most exclude plant hired out.
The biggest area of divergence relates to owned plant not currently in use and back at base - some insurers include this automatically. Some will include at a price and others will not include in any circumstances.
Requirements for hired in plant
Cover can be extended to apply to hired plant in the insured’s ‘custody or control’, in exactly the same way as the insured’s own plant but may not provide a full indemnity in the event of a claim - the insured may have a greater responsibility under the terms of their hiring contract.
For example, the hire contract may require them to:
- Reimburse the owner on a reinstatement basis
- Pay for continued hiring charges until the item is either repaired and returned or replaced.
Therefore insurers generally offer cover for hired plant under a legal liability wording - they protect the insured for their legal obligations under the hire contract wording.
Insurers are generally happy with the terms of the most common form of contract for plant hiring in the UK, that issued by the Construction Plant–Hire Association (CPA). There are many others that are far more onerous and these are generally unacceptable to insurers.
To overcome this, insurers in the main will limit any indemnity under the policy to that which would have applied if the hiring had been made under CPA conditions.
Others, however, will only indemnify on a liability basis for contracts actually made using CPA conditions.
Contract documents cover all aspects of the project. In carrying out the work, the contractor can cause injury or damage to persons legitimately on the site, such as a council building surveyor, or possibly, to passers by.
If this is as a result of their negligence or of their staff, a claim for compensation is likely to be brought against the contractor.
The injury could be caused by the actions of a sub-contractor, which the main contractor has appointed. Often it’s the main contractor that the injured party chooses to sue.
Conversely, the negligent party could be another contractor appointed directly by the employer and the injured claimant may choose to play safe and sue all parties involved in the contract including our poor contractor.
It is for these reasons that it is important that the contract sets out clearly who is responsible, under which circumstances and above all, who is responsible for arranging the insurance.
Format of contracts
Contracts usually follow similar formats which include these stages:
- Create or allocate liabilities - they say who is the responsible party should something go wrong
- Require the responsible party to indemnify the other party
- Ensure that the responsible party has adequate funds by requiring insurance to be effected - usually detailing the extent and level of insurance to be purchased.
It is important to appreciate that whilst the level of insurance required is specified, the indemnity that could be required at law of the responsible party is theoretically unlimited.
The responsible party is usually the contractor and they must indemnify their employer. The extent of the indemnity required can vary from contract to contract.
Indemnity to principal
The standard contractors’ liability policy incorporates an ‘indemnity to principal’ clause which allows the unnamed employer to submit a claim under the contractor’s liability policy for losses arising out of the contract works.
The employer is indemnified provided they comply with all the standard policy terms and conditions such as notifying the claim promptly and allowing insurers to be responsible for the conduct of the claim.
It should be noted that due to the nature of the contracts which contractors are required to sign, contractors’ liability policies provide cover beyond the limited contractual liability cover generally offered to other trades and professions.
Cover for other trades and professions
Other trades’ and professions’ public liability policies typically limit the contractual liability cover provided to liability that would have applied in the absence of the contract being signed.
In other words, if the insured was not legally responsible for the loss before they signed the contract then the policy will not cover the additional liability accepted by signing the contract.
Whilst contractors’ liability policies can cover these additional liabilities they will exclude liability for:
- Liquidated damages (payments required under the terms of the contract for late completion of the works).
Policy conditions set out the rules and guidelines that form the basis of the insurance policy - the agreement between insurer and insured and usually include the items shown below:
Compliance with policy terms
As the insurance policy is a legal contract it is automatic that in order to obtain the benefit of their rights under the contract the insured has to comply with its terms.
This clause ties any other party (such as the contractor’s employer or a sub contractor) seeking indemnity under the insurance policy to the same obligations.
The insured has a duty to take all reasonable precautions to prevent injury or damage occurring and, if it has, to keep the loss to a minimum, (mitigate).
Alteration in risk/working conditions
This usually requires the insured to:
- Notify the insurer if any feature of the risk changes in a way that increases the risk or if any defects or conditions of working are discovered which render the risk more than usually hazardous
- Take such actions as insurers believe the circumstances require in order to reduce the increased hazard.
If an insured fails to do this, the insurer may be able to invalidate the insurance immediately.
Adjustment of premium
Contractors’ insurance premiums are based on estimates:
- Anticipated contract value for specific covers
- Projected annual turnover for open covers.
Both need to be adjusted at the end of the period to ensure the insurer gets an equitable premium for the risk they have been exposed to.
Annual policies often incorporate a minimum deposit premium so that if the estimated annual turnover is not achieved by the insured then insurers do not have to refund any of the deposit premium.
This clause sets out when declarations are required and usually gives the insurer the right to charge an additional premium if the insured fails to make a declaration.
This outlines the terms under which the insurer may cancel the policy - that is, the period of notice the insurer is required to provide and that notice must be in writing by registered post to the last known address of the insured.
The period of notice varies but 21 to 30 days is typical.
It is only in serious circumstances that an insurer chooses to cancel the policy before renewal date.
The cancellation condition may also allow the insured to cancel the policy in certain circumstances, for example, within fourteen days of inception.
The clause will usually explain how any premium refund due to the insured will be calculated.
If, however, the insured cancels the policy outside of any initial period of grace (such as the fourteen days) the minimum deposit premium requirement is likely to come into operation.
The cancellation condition, or a separate condition, will also normally cover a situation in which premium payment is monthly. In such circumstances cover usually expires at the instant the insured defaults on a payment although insurers normally commit to giving 7 days written warning.
These usually include the items shown below:
This condition usually guides the insured through the claims process including:
- Notification of any event likely to result in a claim
- Responsibilities for providing supporting material/documentation
- Helping the insurer to investigate the circumstances of the loss.
- In the hope that early police action will increase the chance of getting any stolen property back insurers usually require notification of a theft or malicious damage loss to be reported to the:
- Police, immediately
- Insurer, as soon as possible.
It is usual for losses arising as a result of riot to have to be reported within seven days so that insurers might use their subrogation rights (see below) to recover their outlay from the police authority concerned.
Other events that might lead to a claim usually only need referral to the insurer as soon as possible or as soon as reasonably practicable.
The claims conditions will require the insured to preserve any damaged or defective property which might prove necessary as evidence for examination by insurers.
Procedures will also include arrangements for referring the issue to arbitration if there is a dispute between the insured and insurer on the size of any settlement.
Sometimes policies include procedures for the insured to refer the case to an independent adjudicator if they have a complaint about the way the insurer has treated them.
These cover the rights that the insurer can assume so that they are able to sensibly look after the various interests of the insured, their other policyholders and their shareholders. These usually include:
This allows the insurer to take over the rights of the insured and enable them to pursue recovery of their outlay from any other party who could be totally or partially responsible for the loss.
This means the insured cannot profit from the loss by claiming from their insurer and also another party.
Under common law subrogation rights arise only after indemnity has been given - after paying a claim. The subrogation condition amends this so insurers can begin to pursue their outlay on notification of a claim.
This is a standard condition in most types of insurance. It states what will happen if there is more than one policy covering a loss, often involving insurers sharing the costs proportionately.
The condition protects the principle of indemnity by ensuring that the insured does not gain from a loss by claiming more than once.
Insurers withdraw any rights under the policy in the event of fraud or attempted fraud by the insured.
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