Last month’s fire at Notre-Dame Cathedral prompted many to look at their construction insurance policies. Barry Hembling assesses the available options.
The world watched in horror at the recent fire in Notre-Dame Cathedral, which destroyed the building’s spire and roof and severely damaged its upper walls. Thankfully, many works of art and religious relics were moved to safety, and although three people were injured, there were no fatalities.
While the cause of the fire remains unconfirmed, it occurred while refurbishment works were taking place to the cathedral’s roof. The fire has led many to wonder what insurance policies are available to cover fire, and other risks, during construction works.
Works/CAR insurance
Works, or contractor’s all risks insurance, is maintained during the build period and covers physical loss or damage to executed construction works and site materials. It covers specified perils such as fire, lightning, flood or earthquake. Personal injury, death and third party damage are covered by public liability insurance.
The building contract will apportion the insurance risks, clarify which parties are taking out the relevant insurances and confirm the levels of cover.
The JCT standard form contracts have three works insurance options, depending on whether the project is a) a new build where the contractor insures, b) a new build where the employer insures, or c)where the employer insures works to an existing structure.
The applicable insurance option must be specified in the contract. The works insurance will usually be a joint names policy covering the employer and contractor. The contract will clarify the required levels of insurance. The works insurance must be sufficient to cover the full costs of replacement and repair, taking account of future price rises, as reinstatement may not take place until the end of the construction programme.
Which party takes out the works insurance is not just a question of cost, but deciding who is best placed to manage the insurance risks.
Many employers decide to take out the works insurance themselves, even where the contractor has pre-existing cover. This enables the employer to ensure that insurance remains in place at the required level.
This also gives the employer greater control over applying settlement monies towards the replacement or repair of the damaged works. Where the contractor takes out the works insurance, monies are paid directly to the contractor, with the employer relying on the contractor’s obligations to apply the funds for purposes of repair. Regardless as to which party insures, funders may require that monies paid out for reinstatement be retained separately.
Composite insurance
Works insurance and third party liability risks have commonly been covered by separate policies, but combining these risks in a single project insurance policy is increasing. Many standard form contracts assume the use of separate policies, and so where a composite policy is used the contract will require careful review and amending.
The importance of aligning the contract with the insurance policy was evident from a recent case – Haberdashers’ Aske’s Federation Trust Ltd v Lakehouse Contracts Ltd and others [2018] EWHC 558 (TCC) – where the court held a party could not rely on the project-wide policy where they had agreed in the underlying construction contract to obtain their own insurance.
Works and buildings insurance
Where construction works are taking place in multi-tenanted buildings, it is necessary to consider how the works insurance fits with the existing structure and contents insurance. The works insurance usually covers only the floors or parts of the building where works are taking place.
The position can be complicated where the works include improvements to the existing building envelope. In this scenario, in the event of a claim there could be two policies in existence – one covering the external envelope and the other covering the construction works.
Both insurers might argue they are not required to pay out the full insurance proceeds, meaning insufficient monies to fully reinstate. This is why tenants’ fitting out works are sometimes required to be covered by the landlord’s policy. As the insurance arrangements for works in multi-tenanted buildings vary, the last updates to the JCT standard form contracts introduced more flexible arrangements allowing the drafting to be tailored for project requirements.
Insurance for non-negligent damage
Most works insurance policies have standard exceptions for wear and tear, design defects and workmanship. They also do not usually extend to non‑negligent losses.
An employer may be strictly liable for damage to other properties due to subsidence, weakening or removal of support or vibration from the carrying out of the works, irrespective of whether or not there has been negligence or breach of duty.
Cover for non-negligent losses can easily be overlooked and so the necessary insurance should be taken out, and the construction contract must make clear who will do so.
Terrorism cover
Terrorism is another risk which is either completely excluded from the works insurance or excluded above a basic level of cover. Separate terrorism insurance is available, with a choice between government-backed insurance (known as Pool Re cover) based on a narrower definition of terrorism or wider cover that is not government backed.
Many standard form construction contracts assume that if terrorism insurance is to be taken out, then Pool Re cover will apply. The contract must make clear if more extensive cover is required.
Final word
It is important that the correct types and levels of insurance are in place to cover the construction works and that the contract is tailored to reflect that cover.
The insurance scheme should be agreed between the parties and their advisers at an early stage and the appropriate contract amendments made. Insurance policies generally only respond to contracts where there is an insurable interest. Failing to align the underlying contract to the policy to which it relates risks creating a gap that insurance will not cover.
Main image © Yoan Valat/EPA-EFE/Shutterstock
Barry Hembling is a construction partner at Watson Farley & Williams LLP
