Recently, the Supreme Court has found in favour of small firms to receive payments from their insurers regarding claims for the effect of COVID-19, specifically business interruption insurance after contesting entitlement for some time. Notwithstanding this, Lloyds of London estimated that as a global industry the impact of COVID-19 on insurance companies is expected to see them suffer losses of over £166billion, a value only exceeded by the devastation left when major hurricanes have hit America.
Insurance, therefore, is critical in any industry and despite the instruction for construction companies to continue works through the pandemic, they are by no means insulated from its effects. Companies need to review their current cover levels, understand gaps in cover, reflect on their current working practices, and if they have made amendments consider how this could affect their coverage.
Reflecting on the above, let’s look at the different types of insurance, what they cover, and if you should need to claim what should you do and what the consequences are if you fail to act.
Construction All Risk (CAR)
The emphasis behind CAR is that it seeks to ensure the parties are insured for damage to the existing property, including third-party damage when undertaking works. If you think of a renovation project, once the client has handed over the site to the contractor, they become responsible for any damage past this point. For example, if the contractor fails to provide adequate security and vandalism occurs, they can fall back on their insurance to recover the repair costs.
Equally, during the renovation, if the site is flooded through a contractor’s fault, CAR should cover this again. The all-risk description in the policy is because it covers any loss or damage to the property or materials unless the insurance underwriter and the parties have agreed on specific exclusions. Typical examples include defects in the existing property, i.e., the damage caused the property was exacerbated due to the current asset’s underlying condition etc.
CAR can also include cover for machinery movement, business interruption, and construction plant during construction works. This type of insurance is essential for contractors exposed to existing infrastructure such as airports, highways, specialist restoration and buildings that adjoin others.
For cover levels regarding CAR, it depends on the business’s turnover and therefore, the risk they present. It’s not uncommon for the excess on these insurance policies to be around £25,000 with overall cover between £2m to £5m.
Employers liability insurance is a legal requirement for companies that have direct employees or use labour-only subcontractors. It covers for bodily injuries to people that have been affected because of your work. Examples include the lack of safe work systems, e.g., incorrectly scaffolding installed, lack of sufficient personal protective equipment or exposure to dangerous substances without adequate protection. These examples could lead to an injury that causes the claimant to claim against the employer’s liability insurance.
In terms of what constitutes a labour-only subcontractor, they do not provide materials and are wholly directed by the main contractor’s management team. Employers liability insurance is required for labour-only subcontractors as they are managed by others. From an insurance perspective, you are accountable for their actions and the level of risk to which you expose them.
For cover levels, most policies will be a minimum of £10m but dependent on the operation’s level. The volume of direct labour or labour-only subcontractors could be higher based on a relative risk profile.
Professional Indemnity (PI) Insurance
This type of insurance is there to cover you if negligence can be proven where you have provided a service. This might be in the advice you gave in making a payment to a third party that proved incorrect, causing the client to overpay. Equally, suppose you are a designer. You provide a fundamentally unbuildable design, causing project delays and reputational damage, and therefore you could face a claim against your PI insurance.
Preferable contractual terms and conditions for designers include an obligation to limit their works to reasonable skill and care in the delivery of their services instead of a fit for purpose obligation. If the defendant to a claim can demonstrate that they have used the same level of reasonable skill and care in performing their duties that another similarly competent person would have. In that case, they can seek to prove they have not been negligent.
In the case of fitness for purpose, this is a more onerous requirement, meaning that the product or output must be as per the requirements irrespective of the actions taken. In a construction sense, for example, the contractor must ensure the building is fit for purpose. Until it is deemed such, they are continually liable to provide services until this is achieved.
Public Liability Insurance
Suppose your works involve interfacing with the public and other third parties. In that case, you will need to insure against personal injury, death, or loss and damage to other third parties such as the public or subcontractors. It’s not compulsory in law like employer’s liability insurance. Still, it is vital to be covered due to the potentially high costs involved in dealing with a claim plus the ensuing fines and compensatory costs which could also be significant.
As employer’s liability insurance and public liability are similar in their nature of the cover, you can generally get a policy with insurers that covers for both. The minimum level of cover will range from £1m to £2m, but in extreme cases, the cover level can run much higher and therefore clients will take out and provide cover for their supply chain.
An example of this is the sort of cover you might see for public liability in the rail industry where indemnity up to £155m is required. It would not make sense to pay for each contractor to provide such a policy coupled with the fact they may not even attain such a level of cover; therefore, it makes sense for the client to provide it.
Latent Defects Insurance
This type of policy is typically taken out for new-build developments. It covers inherent defects in workmanship or design that become apparent after completion and outside the defects period. There are alternate choices for this type of cover, such as collateral warranties. Still, latent defect insurance does not require the claimant to prove the evidence of a contractual breach as you would for a collateral warranty, which is administratively easier.
However, the limit of indemnity is usually capped at a maximum sum insured, which can be perceived as a negative against a collateral warranty. This type of insurance policy will be limited to the recovery of individual costs, whereas a collateral warranty would cover all losses.
Directors and Officers Insurance
Suppose you are a Company Director or Officer registered at Companies House. In that case, you could potentially face a claim from shareholders or your creditors if they can make a case for any wrongdoing, e.g. illegal trading. If a case is proven, any personal assets may be up for grabs. The policy can payout for legal costs in defending a claim plus the costs involved in dealing with regulatory action.
In terms of the typical cover levels, they can range from £10,000 up to £10m dependent on the scale of operations and the number of Directors you are seeking to cover with policies tailored to suit.
How should you assess the level of insurance you need?
An insurance provider will take an objective look at the type of operations you carry out, and therefore you should do the same. Consider what current market forces are in your industry and the likelihood of a claim being made against you or the risk profiles of the projects you deliver and the possibility of a problem arising in these operations.
As you develop your business plan and consider broadening your operations if you are moving into new markets, consider how these affect your risk profile and play this back to your current insurance
Regulatory bodies may also specify the level of cover required for you to be awarded contracts to undertake work in specific sectors. Again, when considering your moves into differing sectors, you should consider the level of cover you require and if this insurance level is attainable.
How to make a claim
Timing is critical when either making a claim or defending one. Once you become aware of a potential claim, you need to notify your insurer immediately, including the details and facts you are aware of. Many policies require you to inform your insurers as soon as you become aware of an event and if you fail to do so, you may forego your entitlement to cover.
You might think it prudent that you should wait until you have all of the facts and substantiation before taking this to your insurance company as this will bolster your chances of success. Still, any delay in notifying them is often prejudicial to your entitlement. Hence, it is undoubtedly better to provide notice as soon as possible and then notify any affected parties they should also notify their insurers.
Things to watch out for
If you have changed insurers, do not automatically assume they will cover the recently uncovered event. If an insurer can prove that the root cause occurred some years ago, you should notify whoever was your insurer at the time as well as your current insurers.
Upon receiving your notification, your insurer will need to acknowledge your submission. Still, it is unlikely they will provide you with a statement in agreement that will cover your claim, it’s more likely that will reject it, but if this happens, you should not accept this as you should seek to defend your position with legal support if necessary. As highlighted at the top of this article, the recent ruling in the Supreme Court regarding business interruption claims due to COVID has shown that, with momentum and the courts’ support on interpretation, the policies can be enforced.
In further analysis, Mactavish, an independent expert working on risk analysis, believe that current working practices adopted by contractors in response to the current pandemic have altered their risk profile to the point they may have invalidated their insurance cover.
Equally, they also advise that new insurance policies are seeking to increase the restrictions in the cover. Hence, a gap analysis between the insurance you need as a business or what your header contract requires versus the level of cover you have in place via the insurers is a must. It would also help if you undertook regular periodic reviews to ensure that the cover level remains appropriate.