Contract Works insurance can be procured in two different ways:

1. Project Specific: It can be procured as a single project. This is when you are insuring the contract from its commencement through to practical completion or handover. There is then usually a defects liability period that runs after this. During this period the policy will cover both damage caused by the contactor fixing defects as well as damage that manifests as a result of a cause during construction.

2. Annual Floater: The second option is through an annual floater policy. This can be taken out by principals or contactors. It covers all construction contracts that fit within a certain criteria, for example length, type and size of contract.

What is an annual floater policy?

An annual floater policy typically comes in two forms.

One is by insuring construction projects on a “contracts commencing” basis. This type of policy covers construction projects that commence during the policy period and continue to cover the works under construction until the end of the contract period; which can be for a number of years after the policy has ended.

The other way is by way of what’s called a “turnover basis”. Annual floater policies on a turnover basis are generally simpler in that the policy will cover all construction contracts that are underway as well as any projects that commence during the policy period. Under this policy, cover ceases at the end of that policy period with the intent that a new or renewed policy will continue to cover those contracts.

There are three main types of policies when referring to construction risks:

Policy one: Material damage, also known as a Contract Works policies.

This policy covers all physical loss or damage to the works not specifically excluded.

It includes all property to be used in part of or incidental to the project. This includes temporary works, structures or materials and temporary buildings.

The insured parties include the principal, contractors/sub-contractors as well as designers, engineers, consultants, suppliers or manufacturers (for their on-site manual activities). There are a number of people involved and insured through a single contract works policy.

“With Contract Works insurance, you are covering a risk that doesn’t yet exist. Telling insurers what they’re actually covering is a challenge.”

There are usually two different types of cover for defects liability period:

1. Extended Maintenance: Extended maintenance covers any damage that manifests during the defects liability period as a result of something that happened during the construction period and at the construction site. For example, contractor didn’t pour the concrete slab properly during construction resulting in significant cracking appearing during the defects liability period.

2. Guaranteed Maintenance: The second one is guaranteed maintenance – cover under this option is far broader as it covers damage during the defects liability period from anything that happened prior to the work being handed over. This includes causes that happen both prior to construction commencing and/or anywhere in the world. Insurers rarely offer this cover as they view this risk as a warranty risk.

Policy two: Third Party Liability.

This is intended to cover the legal liabilities for parties in relation to the project’s activities. The policy is not intended to cover damage to the works itself but is designed to cover liabilities resulting from damage to third party property and personal injury / death to third parties. Like the contract works insurance, these policies are commonly designed to insure the principal, contractors/sub-contractors as well as designers, engineers, consultants, suppliers or manufacturers (for their on-site manual activities).

Policy three: Delay in Start Up, also known as Advanced Business Interruption.

This policy covers financial loss (revenue, profit, rent, etc.) suffered by the principal due to a delay in the commencement of the business operation as a result of insured loss(es) covered under the Contract Works policy. Unlike traditional Business Interruption insurance, the delay under this policy can be due to a number of insured events that happen during construction, however there is only one delay: the project’s end date.

How this policy operates is generally more complicated than other Business Interruption policies. There are usually other causes or reasons for delays to a project (sometimes running concurrently) that have nothing to do with damage to the works. Working out how or to what extent the insured damage has caused the delay is often a challenge and one that takes a lot of work with insurers, loss adjusters and principals alike to work through.

Contract Works policies need to address a diverse range of different risks and contractual obligations.

The policy wording is key. There are different clauses that should be included under these policies in order to ensure that you fully meet your obligations and that the policy responds as expected.

Example one: A cross-liability clause allows insured parties to make claim against each other and the policy to respond as if a single policy was in place.

Example two: A waiver of subrogation clause prevents the insurer from seeking recovering from any party that the principal/contractor has agreed under contract to include as an insured.

Example three: A non-imputation clause ensures that one insured party is not prejudiced under the policy due to a breach or non-disclosure by another party under the policy. This provision is often a requirement of lenders/financier who want to ensure that their interests under the policy remained covered.

Defects exclusions

Contract Works policies have different types of defects exclusion; these are referred to as DE or LEG (London Engineering Group) exclusions. These exclusions range from DE1 to DE5 and LEG1 to LEG3 and each can dramatically change the extent to which the policy will respond to damage caused by defects. Depending on the specific circumstances of the loss, coverage under these exclusions can vary from broad coverage to no cover at all. It is important that clients understand the coverage available under these different exclusions and where available, be provided with options and alternatives.

Whilst these exclusions can provide coverage for defects, it is important to remember that there needs to be damage for the policy to respond in the first instance. A defect itself does not necessarily constitute damage under the wording.

“Until it has broken or failed, there is no defect cover.”

Case study: Walk-bridge

· There was a walk-bridge being built for a roadway. This was a bridge with significant weight attached to it.

· They were prefabricating the walk-bridge off to the side and attempted to place the walk-bridge as a whole piece over the road.

· When putting it into place, there was pressure applied to the bridge. The bridge was designed to support the full weight of the bridge across the roadway.

· The steel trust members of the bridge were ultimately inadequate for the pressures being applied.

· The truss members started to fail over time and ultimately the bridged collapsed, causing damage to the whole bridge and vehicles travelling under the bridge as well as injuring and killing workers and commuters.

· Under the different defects exclusions available, a certain LEG exclusion would’ve excluded the entire replacement cost of the bridge. Under another LEG exclusion, the entire bridge replacement would be covered.

The bottom-line

Insurance claims involving defects are often difficult and complicated. Every scenario needs to be considered based on its own merits and the specific wording and clauses of the policy; including the defects exclusion.