Construction: Property Insurance can raise many questions

Construction site workers looking at plans

Project insurance in a construction context can mean many things to the different stakeholders involved in the project. It can also raise many questions.

  • Who shall arrange the insurances and has the inclination to do so?
  • What types of insurances should be purchased on a project specific basis?
  • Who should be named as Insureds?
  • What is the most cost effective option?
  • Which option provides the broadest coverage?

There is one certainty however - that insurance is crucial on construction projects.

In broad terms it provides coverage to:

  1. All stakeholders, with respect to the costs of reinstating lost or damaged property;
  2. Employers and financiers, with respect to lost revenues and debt service obligations, arising out of loss or damage to insured property;
  3. All stakeholders, for liabilities for third party bodily injury and property damage;
  4. All stakeholders, for environmental liabilities;
  5. Contractors and consultants, for professional liability claims made against:
    1. Contractors by employers or third parties;
    2. Consultants by contractors, employers and third parties.
  6. Contractors and consultants for employers’ liabilities arising out of death and injury to construction employees.

Insurances on construction projects can generally be arranged in three ways:

1.  Contractors’ and consultants’ annual policies (annual floaters);
2.  Project specific insurance  - Contractor controlled/arranged;
3.  Project specific insurance – Owner controlled/arranged.

So which of the above classes of insurance are perfectly suited to project insurance?

The simple place to start is to list the insurances that are not suited to project insurance, such as employers’ liability.

Next for consideration are insurances that are limited to a particular project and therefore by definition cannot be insured on any other basis than a project specific basis. These policies include environmental insurance, latent defects, marine cargo (typically), and delay in start-up (DSU) for project delays caused by material loss and damage.

The final two categories are those which require true consideration, as these can be insured on a project or annualised basis.

The first to take into account are annual policies that have limitations and therefore cannot cover all project types. These typically encapsulate the material loss or damage policy, construction/erection all risk (CAR/EAR - depending on territorial nomenclature), as a contractor’s annual CAR policy will have limitations on the:

  1. maximum insurable contract value. For example projects up to GBP 50m in value, therefore excluding major projects, where project insurance is the only option;
  2. type of projects that can be covered, typically excluding projects deemed too risky for automatic coverage under an annual floater CAR policy. For example offshore construction.

It should be noted that CAR policies will typically incorporate primary third party liability coverage and therefore these coverages are not mutually exclusive when considering project versus annual insurance.

Last to be taken into consideration are those classes of insurance that are capable of being provided on a project specific basis. These are the insurances that cause the most debate, so we have summarised the key issues below.

Class
Considerations
Comment
Conclusion

CAR – smaller projects

DSU not required

Coverage can be provided on either a project specific basis or through a contractor’s annual policy. Project insurance could be preferred where parties have the desire to arrange such insurance and require the certainty in terms of cost and coverage provided by a ring fenced project policy

Annual or Project CAR

CAR – smaller projects

DSU required

DSU can only be provided on a project specific basis with project CAR

Project insurance

CAR – large projects

None

No options

Project insurance

CAR – high risk projects

None

No options

Project insurance

Professional Indemnity

What if the contractor does not have annual PI, for example where they are from territories that don’t purchase PI

No options

Project insurance

Professional Indemnity

Where a joint venture exists, especially if it is integrated or liabilities are shared on a joint and several basis. Or a JV where a JV partner has no or inadequate PI

A SPPI policy can be taken out for JVs or alternatively annual PI can be utilised if it has a suitable JV clause.

Annual or Project PI

Professional Indemnity

Contractor’s PI limit inadequate

Purchase increased limits through either project PI or owner’s protective PI

Project insurance

Excess Third Party Liability

Where a joint venture exists, especially if it is integrated or liabilities are shared on a joint and several basis.

A project policy can be taken out for JVs or alternatively annual TPL can be utilised if it has a suitable JV clause.

Annual or Project TPL

Excess Third Party Liability

Contractor’s TPL limit inadequate

Purchase increased limits through project TPL

Project insurance

As to whether it’s the contractor or the owner that should arrange the project policies we have studied above, I am afraid that is another topic entirely, for discussion at a later date.


Andrew Harrison-Sleap

Andrew Harrison-Sleap

Executive Director and Global Deputy Head of Construction, Howden Speciality

[email protected]