Fireworks and Firearms
Nov 20, 2023
I attended a training day on the recently published ICE 6th Edition in the early 1990s. I was a civil engineer relatively new to loss adjusting at the time, hence particularly interested in insurance clauses. However, as it transpired the lecturer fell behind schedule and announced that in an attempt to finish on time he would skip “the boring insurance clauses, as nobody is really interested in them anyway.”
It is of little surprise then, that things can often go wrong following Contractors All Risks (CAR) losses and adjusters have the unenviable task of informing parties that they do not have an appropriate insurance policy in place to cover their contractual liabilities.
It should be a simple matter for contractors to insure works, yet fundamental issues like not checking the maximum contract sum insured on their annual policy, has resulted in claims being declined when contractors win work that is larger than their normal contract size and subsequently a loss occurs.
Similar situations arise when it is the employer’s responsibility to insure. One such case involved a university that was having a major refurbishment and had erroneously considered that it was covered under the works section of their annual buildings policy. However, that section was only designed for minor improvement and maintenance works. When the night watchman, apparently deliberately, lit a fire there was significant damage to the works but the claim was declined because the contract sum was substantially greater than the policy inner limit. Similarly, an employer is responsible for taking out a project policy, failing to do so could result in any claims regarding the project being denied. A prescribed procedure should be followed in order for the contractor’s policy to include the specific project to ensure any losses that occur are duly covered.
Difficulties are often encountered where the appropriate subcontract form from the same suite of documents is not used. A particular problem I have faced is when the employer correctly fulfills their responsibility to take out a project policy which provides cover for themselves, the main contractor and also a certain level of cover for subcontractors yet the main contractor then uses their own restrictive terms and conditions to engage their domestic subcontractors. This results in the subcontractors being responsible for any damage to their subcontract works.
In a recent case, there was to be a basement fitted out with a timber floor, hardwood skirting and doors. The employer had taken out CAR insurance in accordance with the provisions of the contract. The M&E subcontractor was instructed to shut off the water supply as there was a leaking pipe joint in the plant room. The subcontractor completed their work and left site without turning off the water supply over the weekend. This resulted in an inch of water leaking onto the timber floor destroying it, along with the hardwood skirting boards and doors.
An inspection of contract documents revealed that the main contractor had not used the appropriate suited subcontract which would have passed down, amongst other things, cover for this situation. The subcontractors were left responsible for their own subcontract works until handover of the whole project. Accordingly, I adopted the view that the circumstances did not give rise to contractual liability, hence this was not a situation for which the project policy could respond and reported to insurers accordingly.
The situation was particularly regrettable in that the subcontractor was normally a ‘bench joiner’ and had undertaken the fit-out as a special favour to the main contractor. Unaware of the pitfalls of contracting, they had not taken out any CAR insurance.
Given the complexity, or contention of the situation, Insurers referred matters to their ‘term solicitors’ for that year. The solicitor, who was not a construction specialist, took the view that there was a policy and there had been damage, so the policy should pay out, we were instructed to act on that advice and complied accordingly.
Upon discussing this case with a leading CAR lawyer he ascertained that one firstly needs contractual liability; only after this has been established does one have to consider how the liability is to be paid. It is then that one assesses whether there is an appropriate insurance policy that should engage, rather than the individual entity having to pay for the liability themselves.
Suites of contract and subcontract conditions are designed to be used together with risks being shared in a predetermined fashion. Alteration of the insurance provisions can have implications that are unexpected to non-specialists. It is important that construction professionals read, understand and take action with ‘the boring insurance clauses’. In addition, insurances policies should be read and understood by insureds to avoid these kind of situations, before they get filed away.
