Insurance provisions are an important part of a construction contract that provide protection against different types of risk. Each project will present different risks based on the design, surroundings, and nature of the project. However, regardless of the size and scope of the project, it is essential insurance is taken out to protect each party from liabilities.
In most of the JCT suite of contracts, Section 6 deals with the different types of insurance. The section is split into four parts: injury to persons and property; insurance against personal injury and property; insurance of the works; and professional indemnity insurance. This article focuses on insurance of the works, which is a type of insurance designed to protect building works in progress, covering for any loss or damage that happens during construction.
There are three different options for insurance of the works in JCT standard forms:
- Option A, in which a joint-names all risks insurance of the works is taken out by the contractor;
- Option B, in which a joint-names all risks insurance of the works is taken out by the employer; and
- Option C, in which the employer takes out a joint names all risks insurance of the works and the policy also insures the existing structure and contents against ‘specified perils’.
Options A and B
Options A and B are relatively straightforward. ‘All risks’ policies do exactly what they say on the tin: cover against all risks that might affect a construction project. They are specialist insurance policies that are joint insured, composite insurance policies designed for building works. They cover sub-contractors, remove any rights for the insurer to recover from the party at fault and have no rights of vitiation – this being that even if the premium is not paid the policy subsists.
Most main contractors will have a company-wide ‘all risks’ policy that new projects can be notified under to receive cover. Provided notified properly so that the employer’s interest is as a joint-named holder (not just with their interest noted – a different and insufficient concept), Option A therefore makes the most sense for most projects.
In contrast, this type of insurance is very difficult for employers to obtain as they obviously typically have no record of building. So Option B is rarely a sensible choice.
Option C insurance is the only option that involves existing structures and refers to refurbishment and extensions. In fact, under Option C the employer will be required to take out and maintain two joint-names policies: a policy covering the costs of repair arising from damage to the existing structure and contents caused by ‘Specified Perils’ (such as fire and flood), and an ‘all risks’ policy covering the works themselves (as described above).
The former type of insurance covers Specified Perils rather than All Risks, but in practice covers fire, flood, storm etc, which are the normal risks. What this policy is intended to do is cover damage to the existing structure caused by, for example, a flood in the works.
The existing structures policy is required under the unamended JCT form to be on a joint names basis. Although the market does typically offer cover for damage to the existing structure, it will not usually offer it on a joint-names basis. The employer, therefore, will not be able to comply with the strict terms of the contract. If there is a claim and the employer does not have the right insurance, it will be in breach of the contract. The contractor would therefore have a defence to any claim on the basis had the employer complied with the terms of the contract, there would be no claim against the contractor, due to the policy having no rights of subrogation.
One way around this would be amending the standard form JCT to reflect, in particular, the scope of cover that the employer is able to procure. Most typically this will remove the contractor as the joint insured in relation to the existing structures and will be relying instead on the scope of its public liability cover. Additionally, the employer should take out whichever policy it is able to and ensure the amendments to the contract effectively cover this.
In the JCT 2016 suit of contracts, the parties can replace paragraph C.1 with a “C.1 Replacement Schedule”. This essentially allows the parties to agree an alternative arrangement for the insurance of the existing structures where a joint names policy cannot be obtained by the employer. This is a sensible way forward for parties that properly engage with the insurance provisions at the outset.
Regardless of the project, all parties need to ensure they have robust insurance provisions in their contracts, and conversations about these provisions should be started early to avoid delays to the works. Once it has been agreed which insurance options will be used, parties should be careful to ensure they procure the right policy – otherwise they will be in breach of contract and will face problems should a potential insurance claim ever arise.
And always remember – whatever issue you are facing with your Option C insurance, the answer probably lies in amending the contract!
This article originally featured in July 2022’s edition of our Aggregate newsletter: to read the complete edition, click here.