INTRODUCTION TO CONSTRUCTION INSURANCE February 2017

1. INTRODUCTION TO CONSTRUCTION INSURANCE February 2017

2. Agenda (1) Identifying risks and parties involved (2) The contract (3) Classes of insurance (4) Contract works policy cover (5) Underwriting and pricing considerations (6) Risk management

3. Identifying risks and parties involved

4. Identifying risks and parties involved Identifying risks There are many formal ways to identify risks An informal and easy way is to BRAINSTORM!

5. Identifying risks and parties involved • Parties involved • Principal/Employer Party commissioning the work • Funders Loan money • Architects/ Professional advisers • Consulting engineers/ • Design consultants/ • Surveyors/other • Managing contractor/ Overall control and supervision • Contracts manager/ • Project manager

6. Identifying risks and parties involved • Parties involved (cont.) • Main contractor Control quality/timing/costs • Subcontractors Specialist work • (Nominated or domestic) • Principal designer/ Match requirements with actual • Principal contractor • Suppliers Supply materials/supply and fix

7. (2) The contract

8. The contract The actual contract document is the key to the provision of Contract Works insurance

9. The contract EXAMPLES OF CONTRACT • Traditional procurement • Design is separate from construction • Design and Build procurement • The contractor is responsible for undertaking both the design and the construction of the work in return for a lump sum price

10. The contract • Management procurement • The overall design is the responsibility of the client’s consultants • The contractor is responsible for defining packages of work and then for managing the carrying out of this work

11. The contract The terms of the standard contract will state: • Who is contractually responsible for which risks? • What insurance has to be arranged? • Who the insurance policy is required to indemnify? • Who has to arrange and pay for the cover?

12. The contract Example: Liability clauses • For injury or death the contractor is liable, whether negligent or not, unless he can prove the negligence of the employer • For property damage the contractor is only liable for his own negligence, omission, default or breach of statutory duty • Obliges the contractor to take out, and maintain in force, insurance covering the liabilities

13. The contract JCT STANDARD CONTRACT Section 2 Sets out contractor’s responsibility for works For example: • contractor’s designed portion (when applicable) • unfixed materials and goods on and offsite • contractor’s design liability • practical completion and early possession of site

14. The contract JCT STANDARD CONTRACT Section 6 Indemnity and insurance provisions Section 7 Rights of third parties/collateral warranties

15. The contract Contract works insurance clauses • OPTION A, relates to new building work and requires the CONTRACTOR to effectContractors’ All Risks insurance in the joint names of the Contractor and the Employer • OPTION B, relates to new building work and requires the EMPLOYER to effect a Contractors’ All Risks policy in the joint names of the Employer and the Contractor

16. The contract • OPTION C, relates to alterations and extensions and requires the EMPLOYER to • effect a Contractors’ All Risks policy • The Employer must also insure the existing structures & contents in the joint names of the Employer and the Contractor

17. The contract Option C – Existing structures and contents The specified perils to be insured are: fire, lightning, explosion, storm, flood, escape of water from any water tank, apparatus or pipes, earthquake, aircraft and other aerial devices or articles dropped therefrom, riot and civil commotion

18. The contract Non-negligent Damage; Clause 6.5.1 • Requires the Contractor to arrange insurance to protect the Employer against claims for damage to property adjacent to the works. • The insurance is restricted to the following specified perils: • Collapse • Subsidence • Heave • Vibration • Weakening or removal of support • Lowering of ground water

19. The contract JCT MINOR WORKS BUILDING CONTRACT • Provides three options A, B or C in respect of the insurance of the works and/or existing property. • Not the same options as the JCT Standard Building Contract.

20. The contract JCT MINOR WORKS BUILDING WORKS Existing Structure & Contents Option B: Employer and Contractor; Fire + Specified Perils Option C: EMPLOYER ONLY; Fire + Specified Perils Contract Works Option A: Contractor arranges Option B: Employer arranges

21. The contract Liability indemnity v. insurance limits Note: The contractor: • should appreciate that whilst there is a limit to the level of insurance required by a contract there is no limit to the indemnity they provide to the employer • is still required to indemnify the employer even if there is a shortfall in the insurance

22. (3) Classes of insurance

23. Classes of insurance • Contract Works • Site Materials • Temporary Works • Existing Structures • Plant and Machinery • Own Plant • Hired-in Plant • Temporary Buildings • Contents of Temporary Buildings • Advance Loss of Profits (DSU) • Liabilities • Public • Employers • Environmental • Legal Indemnities e.g. inherent defects

24. Classes of insurance Fire and special perils insurance Cover against loss of/damage to own property Standard cover Fire Lightning Limited Explosion Subject to exclusions

25. Classes of insurance Fire and special perils insurance (cont.) Extensions Explosion Aircraft Riot and civil commotion Malicious damage Earthquake Storm and flood Burst pipes Impact Subsidence, ground heave, landslip + others Subject to exclusions

26. Classes of insurance • A misnomer • All Risks does not equal all risks, but more risks in more places! • Includes accidental damage All Risks

27. Classes of insurance Other property insurances Theft (N.B. definition of theft) Glass Money (N.B. limits) Goods in transit <IF3>

28. Classes of insurance Business interruption insurance Advance loss of profits (Delay in start-up) Cover against the actual or potential loss of earnings and additional expenses incurred as a result of a material loss covered under property insurance

29. Classes of insurance Turnover Net Trading Profit Gross Profit Insured Fixed Charges (or Standing charges) This is Sum Insured Uninsured Working Expenses (or Variable charges)

30. Classes of insurance Type of cover, will depend on the nature of the business and the way in which the income earned is described in the accounts Gross Profit? or Gross Revenue? or Gross Fees?

31. Classes of insurance Can also insure against: Additional costs/extra expenses incurred following damage to prevent a loss of turnover/production Referred to as ICOW (increased costs of working) but subject to the “economic limit” Note: Stand alone ICOW policy can cover uneconomic losses

32. Classes of insurance Indemnity period The period beginning with theoccurrence of the damage and ending not later than the Maximum Indemnity period during which the results of the Business have been affected in consequence of the damage

33. Classes of insurance Indemnity Period What turnover Would have been if no loss Turnover Damage Sustained Property Repaired, rebuilt, replaced Business Ceases To Be Affected

34. Classes of insurance Employers’ liability insurance Legal liability for damages (including claimants’ costs and expenses) in respect of bodily injury to, or death, disease or illness, sustained by any person under a contract of service or apprenticeship with the insured; and caused during the period of insurance; arising out of and in the course of their employment by the insured; in connection with the trade or business; and occurring within certain territorial limits

35. Classes of insurance Public liability insurance Legal liability to third parties for damages (including claimants’ costs and expenses) in respect of bodily injury, death, disease or illness, and for any loss of or damage to property which happens in connection with the business insured under the policy and occurring during the period of insurance

36. Classes of insurance Products liability insurance Legal liability for bodily injury or property damage, happening during the period of insurance, which arises out of goods or products manufactured, constructed, altered, repaired, serviced, treated, sold, supplied or distributed by the insured

37. Classes of insurance Pollution liability Cover provided in respect of pollution or contamination caused by a sudden identifiable, unintended and unexpected incident

38. Classes of insurance Professional indemnity insurance Indemnifies Insured against their legal liability for damages and legal costs and expenses arising out of their professional activities Negligent Design Badadvice Incorrect specification

39. Classes of insurance Directors’ and officers’ liability insurance Accounting Irregularities Indemnifies directors and officers against their personal liability for damages and legal costs and expenses arising out of a wrongful act committed in their capacity as directors and officers Bad Acquisitions Breach securities law Wrongful Trading Health & Safety Offences Investigation Costs Sexual Harassment By Director

40. Classes of insurance • Motor insurance • Cover to meet requirements of Road Traffic Act 1988 (and beyond, if required): • Road Traffic Act (RTA) only • Third Party only • Third Party, Fire and Theft • Comprehensive <IF3>

41. (4) Contract works policy cover

42. Contract works policy cover Structure, form and content Heading – insurer information Preamble – reference to parties/contract/proposal form Signature – of insurer Operative clause – what is covered Exceptions – what is not covered Conditions – insured needs to comply with these Policy schedule – insured’s specific details Information and facilities – general

43. Contract works policy cover Construction Insurance - no single name all insurers use: • Contract Works • Contractors All Risks ( CAR ) • Construction Insurance

44. Contract works policy cover Contract Works Subject Matter Property in the course of construction • materials on- and off-site • partly completed works • finished job for maintenance defects Materials used during construction • plant - both own and hired • temporary works “used” during construction All before, during and after construction but NOT pre-existing property

45. Contract works policy cover Insurance Coverage The policy, in order to comply with JCT contract conditions, must cover: All risks of physical loss or damage to • the works and materials • for the full reinstatement value of the property • including the cost of debris removal and shoring up after damage to the works

46. Contract works policy cover The policy also covers site materials • that will be incorporated into the construction project It is customary to insure materials • in transit (not by sea or air) to the site and • whilst in off site storage • consider off-site fabrication risk

47. Contract works policy cover • The definition of the contract works should include temporary works as well as the permanent works • The territorial limits under Contractors’ All Risks policies are typically Great Britain, Northern Ireland, the Channel Islands and the Isle of Man excluding offshore works

48. Contract works policy cover Excluded Property • deeds, bonds, money etc. • vehicles, boats & planes • pre-existing property • property handed over • Nuclear Material contracts

49. Contract works policy cover Joint Names Insurance Other Interests Clause • The interest in any portion of the Property Insured of any party entering into an agreement with the Insured (or any principal of the Insured) is noted in this insurance to the extent that the agreement requires such interest to be noted • Provided that such other party shall observe fulfil and be subject to the terms conditions exclusions and limits of the Policy in so far as they can apply

50. Contract works policy cover Indemnity to Principal Clause • The Insurer will at the request of the Insured indemnify any principal to the extent required by the contract in respect of liability arising from the performance of work by the Insured for the principal • Provided that: • the Company shall retain sole conduct and control of any claim • the Principal shall observe fulfil and be subject to the terms conditions exclusions and limits of the insurance