Construction can be a highly complex and dangerous activity. Each construction project will have its own complex risks inherited from its design and surroundings. These risks may be to persons, being site operatives, visitors to site or members of the public, or risks to the actual construction works themselves occurring as a result of carrying out the works. Insurance should be taken out that covers the works, personal injury or death and property damage. These are generally dealt with under Clause 6 of the JCT Contracts for Design and Build, Intermediate and Standard forms of building contract and clause 5 within the Minor Works Contract. Insurance requirements and cover levels should be stated within the Contract Particulars.
Insurance under the JCT Standard Building Contract and JCT Intermediate Building Contract are dealt with under the same clause, Clause 6, which is split into four sub sections. In this article, we’ll review all four:
- Injury to persons and Property
- Insurance Against Personal Injury and Property
- Insurance of the Works
- Professional Indemnity Insurance (subject to Contractors Design Portion)
Injury to Persons and Property
Under the JCT Standard Building Contract and Intermediate Building Contract, injury to persons or property relates to third party claims that may be brought against the Employer throughout the course of the works. These claims may be personal injury to the public, damage to adjoining buildings caused by the works, or injury or death linked to the works. It is the obligation of the Contractor to indemnify the Employer for any claims. The Contractor will be liable to absorb any losses incurred by the Employer, providing losses are not because of the Employer, Employer’s persons neglect or because of a statutory undertaker.
Clause 6.1 places liability on the Contractor to indemnify the Employer against any expense, loss, claim, proceedings brought or liability in general occurring from personal injury or death of a person as a result of carrying out the works. This is provided personal injury or death is not because of any act of neglect by the Employer, Employer’s persons, or statutory undertaker. Although it might seem reasonable to make the assumption that any claim brought about during the course of the works, say an injury to a member of the public, would be the liability of the Contractor, it’s also the liability of the Employer to ensure they appoint a suitable qualified Contractor with the relevant health and safety qualifications. Likewise, it’s also the responsibility of the architect / principle designer to design out risks.
Should an object fall from height and injure a passerby, the reality is that a claim will be brought against all those who have responsibility, and it will be the courts decision to decide the percentage of liability held by each party. Should the claim made pose a threat to the liquidity of a Contractor, and that Contractor goes bust, the liability will be reapportioned among the remaining parties.
Insurance Against Personal Injury and Property
Clause 6.2 places the same liability and obligations on the Contractor as 6.1. However, in this instance the liability is regarding injury or damage to property and not personal injury or death. In keeping with 6.1, this liability does not extend to where the damage or injury is caused by negligence by the Employer, Employers’ person or statutory undertaker.
Both clauses are to provide the Employer “indemnity” should any proceedings be brought against her. The clauses effectively are saying, “any losses suffered by the Employer will be absorbed by the Contractor.” The Design and Build contract adopt the same clauses and principles regarding this type of insurance. It is important to note here that the liability of the Contractor does not extend to cover Excepted Risks.
The final clause relating to Injury to Persons or Property is clause 6.3, which excludes “the works” and “materials” unless sections of the works have achieved PC, partial possession has been taken by the Employer. In these cases, “the works” become “property” and are to be covered under the relevant insurance policy. In comparison, the JCT Design and Build Contract, under clause 6.3 “Loss or Damage to Existing Structures” – sub clause 4, provides for the same requirements as both the Standard and Intermediate Contract. Sub clauses 1, 2 and 3 of Clause 6.3 make an exception whereby under insurance option C, “insurance by the Employer of existing structure and works in or extensions to them,” the Contractor’s liability and indemnity excludes the loss or damage to existing structures inclusive of contents. So long as these are required to be insured under option C, this exclusion shall apply notwithstanding that any loss may be as a result of negligence or breach of duty by the Contractor or his persons.
It is generally the Contractor’s responsibility to insure himself against his own liability. This is dealt with under clause 6.4 within all three contracts. Both Standard and Intermediate forms of Contract allow for the Employer to request evidence to be issued to the Architect / Contract Administrator that the relevant insurance is indeed in place. This request may be extended to requesting proof that insurance premiums have also been paid. Any default in taking out and maintaining insurance may result In the Employer taking out such insurance and claiming monies back from the Contractor as a debt.
The JCT Design and Build Contract contains the same requirements for the evidence of insurance, under clause 6.12. However, the requirement to provide evidence of insurance applies to both the Employer and the Contractor. The party not responsible for providing insurance may request evidence from the insuring party that the required insurance is in place. Following any request, the party will have seven days to provide such evidence.
Design and Build, Intermediate and Standard Building Contracts all provide for insurance to be taken out by the Contractor to cover the liability of the Employer, or “Non Negligent Insurance.” This is dealt with via clause 6.5.1 and is used by the Contractor to indemnify the Employer for losses which may incur from subsistence, heave, vibration, weakening, removal of support or lower of ground water as a result of carrying out the works.
The insurance cover will not extend in the following:
- Should the Contractor be liable for the works
- Where errors occur in the design
- Should the event have reasonably been foreseen to be inevitable in the nature and execution of the work
- To cover for site materials or any damage that arises out of war or uprising
- If the damage is caused by an excepted risk or as a result of pollution or contamination
- Any damage that results in costs or expenses being paid to the Employer in respect of breach of contract.
All three contracts already discussed provide for three options within the Contract Particulars to Insure the Works. These are options A, B and C, defined as follows:
- Option A – New Buildings – All Risk Insurance of the Works by the Contractor
- Option B – New Buildings – all Risk Insurance of the Works by the Employers
- Option C – Insurance by the Employer of Existing Structures and Works in or Extensions to them.
All Risk Insurance is defined as “insurance which provides cover against any physical loss or damage to works executed and site materials against the reasonable cost of the removal and disposal of debris and of any shoring and propping of the works which results from such physical loss or damage”. The JCT excludes the obligation to cover the following items within the all risk policy:
- Defective property due to wear and tear, obsolescence or rust, deuteriation or mildew
- Works or materials that are defective as a result of a defect in design, extending to any other work which is damaged or lost as a result of this
- Loss or damage caused by war, invasion, act of enemy hostilities, civil war, rebellion etc. – an Excepted Risk.
Excepted risks generally are not covered under the standard insurance protocols within the JCT. These comprise pressure waves caused by aircrafts or aerial devices travelling at sonic or supersonic speeds, act of terrorism not included within the terrorism Pool Re cover and radiation from contamination by nuclear fuel or waste.
In the event of an insurance claim and pay out, the high-level procedure is outlined below under each option:
- Option A: Contractor Administers policy, Employer pays all insurance monies to Contractor, less amount for professional fees, this cant be more than the percentage stated within the contract, Contractor is not entitled to any more monies other than that paid by insurance. If the Contractor goes into administration, the administrator will administer any monies paid out. The Employer therefore might receive less than the entire insurance pay out or no monies at all depending on the administrator’s views of the Contractor’s debts.
- Options B and C: Insurance company pays out direct to Employer, restoration and repair of any damage is dealt with as a change. This may be plus or minus in relation to the money paid out by the insurance firm. The risk is therefore owned by the Employer under these options. If the payout doesn’t cover the cost to reinstate the works, the Employer will need to foot the bill by other means.
The JCT Minor Works Contract (MWC), is similar in manner ways to the JCT Design and Build Contract, Intermediate Building Contract and Standard Building Contract; however, the MWC deals with insurance under clause 5 as opposed to clause 6.
Clause 5 is set out much in the same way as Clause 6 within (D&B, IBC and SBC) in that:
- Clause 5.1 requires insurance that indemnifies the employer against personal injury or death
- 2 provides indemnity for injury or damage to property
- 3 requires the Contractor to insure against his liability of personal injury and property damage, whereas this is 6.4 in DB IBC and SBC.
In addition, within the Minor Works contract, either party may request the insuring party for proof of insurance. This extends to the Main Contractor providing proof of Subcontractor insurances too. The Contractor doesn’t place a time limit on the party to provide proof once requested. Nor does the contractor allow a party to provide the opportunity for any party to insure the works should proof of insurance not be given and by default this doesn’t provide any opportunity to recover the costs of procuring insurance as a debt.
Professional Indemnity Insurance
Professional Indemnity insurance provides cover for consultants and designers in the event of a claim of negligence being made against them. Claims for negligence aren’t limited to consultants, where under a JCT with Contractors Design Portion, or the Design and Build Contract, the Main Contractor will also be required to carry Professional Indemnity for the relevant parts of the design work.
The RICS require £250,000 as a minimum level of cover. This also depends on fee values. When Professional Indemnity is required under a building contract, there are provisions set-out within the contract to inspect such insurance. However, in contrast to works insurance, should Professional Indemnity not be taken out, the Employer may not take out the insurance and recover the cost as a debt. Professional Indemnity cover and limits are provided for the period of which it was taken out, irrespective of when work was carried out. Some insurers may refuse retrospective cover on new clients. It’s important to be aware that any Professional Indemnity cover should have the relevant run off period, this is 6 years from the date of a simple contract breach, 12 years for contracts under deed, or 15 years as a long stop date.
Brief Conclusion and Takeaway Thoughts
The JCT Suite of Contracts provides insurance mechanisms and requirements to provide indemnity to the Employer and for the Contractor to indemnify themselves against personal injury or death and property damage, and for the insurance of the works under either option A (Contractor new builds) B (Employer new builds) or C (Employer existing structures / alterations).
Insurance should be taken out in joint names and the Contractor should ensure that Sub-Contractors, where relevant, are named on the policy to avoid any subrogation. JCT contracts generally provide a mechanism for the Employer to review the adequacy of the insurance, and if needed take out the required cover and recover the costs as a debt from the Contractor.
Employers need to consider carefully how they deal with insurance procurement. If Option A is selected and the Contractor goes into administration, any monies paid by insurance will be distributed at the discretion of the administrator. This can be avoided by selecting option B or C. That said, when selecting option B or C, any reinstatement works are treated as a variation to the Contractor and the total value of that variation may not be covered by the insurance payout.