Insurance is an often overlooked aspect of construction contracts warns Brendan Cash (Partner) and David Newport (Special Counsel) in the Dentons’ Major Projects and Construction team.
Insurance can be viewed as a ‘run of the mill’ matter where everyone confirms the cover they have in place and no more thought is needed.
However, it is an area that deserves close attention when contracting, to make sure that risks that should be insured are in fact insured for an appropriate sum, and by the right party, and that parties are not exposed to unexpected uninsured risks and loss.
In particular, the way in which existing structures affected by contract works are covered is an issue that we are seeing arise increasingly often in construction contracts. This appears to arise in part from the fact that the Crown and councils (and related Crown or council-controlled entities) are more often self-insuring all or some of the assets in their portfolio. That may reflect the difficulty in obtaining cover for such assets or pragmatic decisions around the risk of loss versus the cost of having such cover in place across a portfolio of assets. In any event, it means there may be no existing insurance in place for the assets affected by contract works that can be extended to cover damage during the contract works.
The issue then arises as to how the risk of damage to the existing structure is managed during the contract works.
We are now frequently seeing terms that seek to manage the risk of damage to an existing structure affected by the contract works by way of the contractor’s public liability policy. For example, the provisions in clause 8 of 3910/3916 are amended to provide that, unless the contract (Schedule 1) specifically identifies any existing structures as being insured by the principal, the existing structure and its contents must be treated as third party property by the contractor’s public liability insurance.
Alternatively, the contract may not show the principal as taking out any insurance in relation to the existing structures.
Regardless of whether the contract amendments make this clear, the effect of such clauses or the omission or any insurance cover for an existing structure is to try to impose on the contractor’s public liability insurers the risk of loss to the existing structure from the contract works. That sounds fine in principle but there are limitations to contractors’ public liability insurance.
First, and most importantly, most contractor public liability policies exclude cover for damage to the property the contractor is working on. The dividing line between what is and is not covered given this exclusion is not always clear.
As a result, contractors will need advice as to whether their public liability policy as it stands (in terms of annual policies) or any project-specific policy put in place will cover any existing structure that the principal is not insuring. Contractors can look to have the exclusion of cover for damage to the property the contractor is working on removed but, if that can be achieved, that will be at a cost and subject to a financial limit.
Financial limits to a contractor’s public liability cover is the second issue. The value of the existing structure and its contents may substantially exceed the public liability policy indemnity limit. Who bears the risk of a catastrophic loss over and above the value of the policy?
The short answer is the contractor bears the risk. The clauses in 3910/3916 dealing with care of the works and the site make the contractor responsible for care of the contract works, the materials in its care and the site. If the contract works, materials or the site are damaged while the contractor is responsible for them the contractor must repair the loss or damage to the extent needed to complete the contract works without additional payment.
There are some limited exceptions to this (e.g. if the damage is caused by an excepted risk, then work is treated as a variation), but in general terms the contractor bears the risk of loss to the works and wider site.
The imposition of this risk on the contractor takes place in a contractual regime that envisions contract works insurance being in place to cover the risk and cost associated with repair to damage to the contract works and materials (and potentially to some extent the site) and a requirement that the principal insures the existing structure (and any adjacent structure) for the replacement values nominated
in Schedule 1.
If that regime is being amended, with the principal not insuring the existing structure or not insuring it for its full replacement value, then the contractor needs to carefully consider what risk it is exposed to in relation to damage to the existing structure, whether that risk can be covered by its insurances and to the extent any loss is not insured to tag out any responsibility for that uninsured loss.
While a catastrophic loss on a construction project is rare, the fire on the Convention Centre project shows it is possible. The fight over who bears the very substantial cost and losses arising from that fire is still being sorted out, some years later. There was recently a lengthy (months-long) trial in the High Court dealing with this.
While that loss arose in the context of a new vertical build, the same risk of catastrophic loss arises when the contract works involve work on any existing structure. As a result, it is important to carefully review the insurance provisions in Schedule 1 and any amendment to the general terms in relation to insurance and understand what impact they have.
Another form of insurance arrangement in respect of existing structures that we sometimes see creating unintended risk on the contractor side is where a principal elects to insure existing structures under a pre-existing Material Damage (MD) policy. In such an arrangement, contractors need to be added as named insureds to the Principal’s pre-existing MD policy, or there needs to be an agreement with the insurer preventing subrogated recovery claims.
Otherwise, while at a superficial level the existing structures may appear insured, in reality it is only the principal (as a named insured under the MD policy) that is insured, while the contractors/subcontractors remain exposed to subrogated recovery claims by the principal’s insurer for the value of the repair work.
Contractors should get advice from their brokers and, if need be, legal advice, to make sure they protect their position.
• This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Dentons does not accept any liability other than to its clients, and then only in relation to specific requests for advice. For specific advice, contact your legal advisor or the Major Projects and Construction team at Dentons on
(09) 379 4196.
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