Construction and all things insurance

In any construction project there are an infinite number of risks. Construction risks will typically be determined by a project’s nature, size and complexity.

While it is sometimes difficult to discern all the risks associated with a project particularly at its outset, brokers are well-advised to not only engage with the various parties that may be involved in a project, but also to consider the construction contract documents.

Importance of contract documents

Construction contract documents typically identify the risks associated with the project, the responsibility to insure and the rights and obligations of the parties.

It is important that brokers have regard to contract documents before selling cover, as failure to do so may result in a broker selling cover for a risk that the insured is not likely to face or it may happen that, real risks may be uninsured.

Suite of contracts

Most construction projects are developed using one or another suite of construction contracts.

Typical examples are the New Engineering Contract (NEC), Federation International des Ingenieurs-Conseils (FIDIC) and Joint Building Contracts Committee (JBCC) suite of contracts.

From an insurance perspective these contracts seek to identify matters which are usually “contractor risk” events and those that are likely to be “employer risk” events and the contract will traditionally ascribe responsibility to insure accordingly and separately.

Taking a closer look

Let us take a look at each of the above mentioned contracts; the NEC, FIDIC and the JBCC in more detail.

The NEC3 (June 2005)

Clause 84 regulates contractual insurance requirements in an “Insurance Table”, which identifies contractor risk events and stipulates the amount of cover and limits of indemnity acceptable to the employer. A departure from the Insurance Table whether in respect of insurance that the employer is required to secure or additional insurance required of the contractor is generally set out in the Contract Data. The Insurance Table and the Contract Data therefore cumulatively comprise the insurance package under the NEC suite of contracts.
The NEC3 suite requires contractor’s insurance to be effective from the start date to the issue of the Defects Certificate, which is typically after hand-over of the works to the employer.

The JBCC

The JBCC suite also delineates the responsibility to insure. Clauses 10 and 11 regulate property and liability insurance respectively. Typically the responsibility to insure again falls to the contractor and changes to the standard terms are dealt with in the schedule to the contract. Insurance effectiveness under JBCC is regulated by clause 12 and is slightly different from the provisions of NEC3.

Under the JBCC contract, risk in the works passes at practical completion or deemed practical completion, which is before defects are rectified and final completion.

The FIDIC

Insurance under the FIDIC (red book) contract has similar insurance provisions as those contained in the NEC and JBCC suites. Clause 18 of the red book, which deals with insurance, provides more flexibility as to which party provides insurance cover.

The clause merely refers to the “Insuring Party” but the default position (unless there is a deviation in the particular conditions of contract) is that risks are insured by the party that is required to bear them. Employer’s risks are set out in clause 17 of the contract and all other risks are treated as contractor risks. Risk under the red book generally passes on the issue of a performance certificate, which signifies acceptance of the works by the employer.

Unlike the JBCC suite of contract, acceptance of the works cannot be deemed under FIDIC and a delay in the issue of a performance certificate may cause an insured’s obligations to insure to become protracted.

Under a banner of a single policy

While construction contracts tend to “pigeon-hole” insurance obligations amongst role-players, given the growing sophistication with which projects are developed nowadays and the possibility of some risks going unnoticed in this milieu, construction project policies have become a popular choice of policy for insurers and insured’s alike.

This type of policy is a combination of various construction policies under the banner of a single policy in order to facilitate a smooth interface among the insureds under the policy and for better control over project insurance, amongst other things.

These policies are typically project-specific and will require specialised brokers and underwriting.

A well designed project policy is one that balances the interests of a project as a whole together with the individual interests of the multiple insureds. This is often no easy task when one considers that multiple insureds under a single policy may have competing interests.