Reflections on contract works cover post the George collapse tragedy

03 July 2024 Gareth Stokes

Every so often, South Africa is rocked by manmade disasters that take an incredible toll on the affected communities. Two recent examples include the December 2022 fuel tanker explosion in Boksburg that led to 41 deaths, and the May 2024 apartment building collapse in George, Western Cape, which claimed 34 lives. FAnews would like to extend belated condolences to the families and individuals impacted by these tragedies.

In search of answers

It is human nature to respond to manmade catastrophes by apportioning blame or speculating as to the cause of the loss event. In the case of the fuel tanker disaster, the facts were fairly evident from the driver’s account. The truck got stuck under a low-lying bridge and, after a time, caught fire and exploded. Unfortunately, the cause of the George building collapse is less clear. In the days immediately following this tragedy, the writer heard talk of clay soil, design flaws, issues with the concrete used, meddling by the construction mafia, and premature removal of shuttering, to name a few. 

It is pointless getting caught up in this speculation cycle. Given enough time, the authorities will complete an official investigation and identify any errors or omissions, and hopefully implement measures to prevent future disasters. All that construction companies and commercial building project owners can do is take note of the event and ensure that they follow best practice at every stage of their builds, from design and planning approvals to earthworks and eventual construction. 

Insurance for commercial building projects

Insurance is another important consideration. Soon after the George tragedy, FAnews reached out to some construction insurance experts to find out more about what covers a project of this nature should have had in place. 

Chrissie Erasmus, Head of Engineering at Bryte, said that commercial or residential building project owners would typically take out a contract works policy that is designed to cover construction-related activities. This policy offers three key types of cover as part of a packaged policy including a material damage section, third-party liability section, and advance loss of profits section. Most insurers will offer a selection of extensions of cover including during the maintenance and defects liability period. These include professional indemnity insurance and construction guarantee. 

Cas Hansa, Technical Underwriter at Firedart Engineering Underwriting Managers, said the key insurance programme was referred to as a CAR (Contractor’s All Risks) policy. “This is an engineering specialty class of business insurance policy which also has a key sub-section of cover for third party liability,” he said. This allows brokers and contractors to cover the two primary risk exposures on a construction project, namely accidental physical damage to the building works and possible injury and / or physical damage to third parties. He noted it was possible to extend cover to other Principal Owned Properties on or near a construction site. 

Typical sums insured

FAnews asked the experts what the typical sums insured were on a contract works / CAR policy in the South African context. Hansa said they typically dealt with sums of R40-R100 million with an average value around R50 million. Values varied depending on architectural facades, landscaping, number of floors (total floor area), standards of fixtures and fittings, etc. “The cost to build a five-storey apartment block depends on several aspects including location, size, foundation type, number of basements, quality of materials and fittings, labour costs and other construction-related expenses,” noted Erasmus, with an average of R10k to R20k per square metre. 

Do local construction firms put proper insurance in place? And does South Africa have a problem with uninsured formal sector construction work? “Uninsurance is not a huge issue for high-value projects exceeding R5 million, especially if formally contracted and where financing is involved; but insurance considerations for the informal construction sector are most likely quite low,” commented Erasmus. He also cited an international engineering report, published in 2022, that revealed that 48% of construction projects were uninsured against natural disasters. Those who have insurance will be in awe of the mechanisms that spring into action following a disaster. 

Claims notification, loss adjusting etc.

Bryte shared part of the post-event chain which starts with the insurer receiving formal notification of the incident from the broker. The insurer’s first step is to ascertain whether the cover is in force and the premium payment is up to date. If yes, then the insurer will review the policy documentation to identify any relevant conditions and inform its reinsurance partners of the potential loss. A loss adjuster must be appointed to investigate the claim and queries sent to obtain any information needed to assist the claims process. Ongoing communication is important too, with frequent updates from insurer to broker regarding the claim investigation process. The last step is to finalise the claim and inform the broker. 

These steps are simple enough, but determining the cause and which section of a contract works / CAR policy must perform is less so. According to Hansa, here are three possible causes in a collapse like the one seen in George. The first is faulty or negligent professional advice involving defective design or spec, with the party at fault likely being the structural engineer or, to a lesser degree, the architect. The second possible cause is faulty materials such as cement or steel scaffolding supports that are not up to standard. And the third is defective workmanship, for example, workers removing the temporary steel supports holding up a concrete slab too early. For the second and third scenarios, the responsible party is more than likely the contractor. 

“In all three scenarios, the standard and most common insurance practice is for the responsible parties (for the defect) to carry the cost of the actual defective parts, and this cost is excluded in one form or another in market wordings, depending on which defects exclusion clause wording is being used,” Hansa explained. He added that under the first scenario, the CAR insurer would pay for the non-defective resultant damages; but seek recourse from the responsible professional party, hopefully from that party’s PI cover. It is often the case that the insurance limit on the PI policy is inadequate to cover all damages. 

An infrequent, severe loss event

Collapses of this nature are infrequent. Erasmus said that the last notable incidents were the collapses of the Tongaat Mall in November 2013 and the Grayston Bridge in October 2015. He noted that incidents of this nature were reasonably infrequent. “The characteristic of this engineering specialty insurance is low frequency of events but high severity, implying that when such an event or insurance claim does occur it could be quite costly,” Hansa agreed. “Astute, competent technical risk appreciation and underwriting on the side of insurers and reinsurers who all share in spreading the risk, as well as good professional risk management by all the parties involved in the project should continue to ensure fair resilience in our insurance economy”. 

The potential for complex causes in the contract works / CAR claims environment means that full and final settlement of a claim can take from several weeks to over a year. “The response time is impacted by matters such as access to the site, availability of loss adjusters and specialist investigations, finalisation of investigating reports, timely provision of relevant information, ongoing legal matters and negotiations during the settlement agreement,” Erasmus said. FAnews closed the interview by asking each expert for their final thoughts on the role of insurance brokers in ensuring construction covers are appropriate. 

“There is a general lack of awareness of construction insurance and its benefits, especially in the informal sectors,” Erasmus concluded. “The industry can play a more active role in promoting awareness and access to the product [including discussion on the] affordability and customisation of the insurance product”. Hansa responded by saying that the insurance industry had to maintain its high standards of professional development. “Most brokers involved in the specialty engineering classes would be familiar with the detail and the processes involved; but there are times when technical risk management considerations would demand fair assistance and collaboration across the value chain,” he said. 

As always, intermediaries carry the advice risk

And the parting word of advice to brokers who are approached to place cover for a construction project outside their experience. “As intermediaries providing the advice and carrying fair responsibility for it, you have an obligation to familiarise yourself with the broader range of products and suppliers and at times the nuanced clause wording differences,” Hansa concluded. 

Writer’s Thoughts:

The complex nature of contract works / CAR policies will likely deter many smaller brokers from placing cover in that space. Have you tried your hand at this type of cover, and what has your experience been? Please comment below, interact with us on X at @fanews_online or email us your thoughts



Added by Billy, 10 Jul 2024
In South Africa… If the cause for major structural damage on residential house is as result of combination of design flaw, incorrect materials/mixing and improper workmanship… Who’s insurance will pay out to the owner? Engineer or Developer? Assuming the house was bought as plot and plan and developer appointed the engineer. (Contract between owner and developer).
Will the insurance pay out to the liable party or maybe directly to the victim or should the matter go to court to be decided..?
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