Reinstatement: Another risk

An insurer who elects to reinstate a damaged building which it insures may inadvertently become the 'client' of the builder, under construction regulations which create occupational health and safety responsibilities for the insurer in relation to building works.

Speaking at a recent seminar held on the construction regulations promulgated under the Occupational Health and Safety Act, Rob Otty, Director at Deneys Reitz Attorneys, pointed out that the regulations impose health and safety obligations on a 'client' which is defined to mean 'any person for whom construction work is performed'.

He explained that when an insurer elects to deal with an insurance claim for a damaged building by reinstating the property it may become the 'client' for the purposes of the construction contract that comes into being as a result. The obligation to reinstate entails that the work must be done properly and within a reasonable time, even if the reinstatement costs exceed original expectations.

Insurer becomes the client

The question arises therefore whether the insurer, which has elected to indemnify its insured by reinstatement of the building, is a "client" as defined by the regulations, said Otty, "and in my view it is." He elaborated, "The insurer ordinarily and for obvious reasons, appoints the contractor or arranges for the contractor's appointment by the insured; the insurer makes payments to the construction team; and the insurer receives the benefit from the construction works which enables it to fulfill its obligations under the policy. Also, if the construction is not completed appropriately or within time, the insurer may be obliged to perform properly or to pay damages for not having done so."

Obligations imposed

Construction Regulation 4 places obligations on the 'client' in relation to building works. These include:
* The preparation of health and safety specifications.
* Providing the principal contractor with information which might affect health and safety of any person.
* The obligation to stop any contractor from executing work which is not in accordance with the health and safety plan.

Criminal prosecution and liability

An insurer is not normally equipped to perform these obligations, said Otty, which means that the insurer should appoint an agent to act as its representative. Provision is made in Regulation 4(5) for appointing an agent.

"The insurer's responsibilities as client are then transferred to the agent, assuming, of course that the insurer has reasonably satisfied itself that the agent not only has the required competency but also has the resources necessary to ensure compliance with the health and safety obligations. The risk of criminal prosecution and liability then shifts to the agent," Otty added. "The insurer, however, has an ongoing obligation to satisfy itself that its agent remains competent throughout the contract."

Taking all this into account, said Otty, the debate continues regarding the description and identity of the client in the actual construction contract entered into when the contractor is appointed to do reinstatement work. "Most often the client will be described as the insured. But in my view this does not change the insurer's obligations."

When a court decides who is the client in the sense of the "person for whom construction work is performed", the court will consider the substance of the arrangement rather than only its form. Thus even where the insured may be described in the contract as the client, this is only one factor that will be taken into account. "To the court, the relevant question is 'who is the person for whom the construction work is performed'. I believe that in most instances, the court is likely to conclude that it is the insurer," said Otty.

The problem is not easily overcome. On the one hand insurers will want to see to it that the reinstatement work does not get out of hand financially or with regard to completion date, and will want to keep control of the building work. On the other hand, the insurer will want to avoid responsibilities that it is not equipped to handle. Insurers should be careful in making the election to reinstate if they cannot, by agreement with the insured, ensure that the insured or an agent is responsible for the health and safety obligations.