Types of Insurance
The RIAI contract deals with three insurance issues relevant to the works. The first is the obligation to insure against loss of property. The second obligation is to insure against injury to employees and members of the public and third party. The third relates to defects in the actual works themselves and the buildings of which they form part.
The first two types of risk are broadly those arising from the contractor’s own negligence and breach of duty. Where damage is caused to third parties by its fault, by the building itself, or the manner of the execution of work or management control of the building works and site, it may be liable to third parties in a claim for negligence or breach of duty by them.
Many such claims involve potential liability, at least in part, arising from the state and condition of the property on the part of the employer. The contract usually passes these liabilities to the contractor during the course of the work so that the contractor insures against liability for the benefit of the contractor and employee. The insurance required covers liability arising from negligence and other breaches of duty.
All Risks Insurance
There are alternative options / versions in relation to so-called all-risks insurance. All-risks insurance is designed to cover the works themselves. This will include damage to the works by flood, fire, subsidence, defective workmanship, theft, negligent use of machinery, et cetera.
Under the first option, the contractor is to take out, prior to commencement and maintain until practical completion, all-risks insurance covering loss or damage to or destruction of the works, covering any loss, damage or destruction for the full value of the works. There must be provision for the cost of the site clearance, professional fees,VAT is required in relation to reinstatement.
The insurance must also cover on-site materials and goods delivered to and intended to be incorporated in the work. In the alternative formulation, the employer is to take out and maintain all-risk insurance covering the works and ancillary items.
Under both alternatives, the contractor or the employer has to maintain all-risks insurance covering loss damage or destruction of the works during the defects liability period, which arises from a cause which occurred prior to the commencement of the defects liability period or if caused by the contractor, in the normal course of operations carried out by him for the purpose of complying with his obligations in the defects liability period.
The monies received under the policy less certain deduction for professional fees which are to be paid to the employer, have to be paid into a joint account in the name of the contractor and employer. They are to be paid to the contractor by instalments under certificates by the architect in relation to the portion of works done.
The contractors has to maintain the all-risks insurance cover. It is not entitled to payments in respect of rebuilding or replacement other the money, under the policy by way of payment. Where the employer is to maintain the all-risks insurance, the employer has to pay the shortfall to the contractor on foot of architect’s certificate, if the amount insured is inadequate.
Terms of Insurance
The liability and all risks insurance policies are to be with insurers approved by the employer, such approval is not to be unreasonably withheld. The all-risks policy is in the joint hands of the contractor and employer.
The contractor is to comply with the terms and conditions of the insurance policy. Similarly the employer has to comply with the terms where he is the party liable to insure.
The permissible exclusions in the policy are set out in the contract. They are relatively limited in nature. The RIAI, Construction Industry Federation and Society of Chartered Surveyors, acting jointly publish permitted wordings for exclusions from the standard insurance cover under the contract.
Each party prior to commencing work is produced to the other for inspection any policies of insurance, which it is required to maintain together with proof of payment.
Where loss is excluded from cover in accordance with the terms of the contract (because for example, it is not insurable) then on the occurrence of such loss of damage by reason of that excluded insurance risk, are to be disregarded in computing amounts payable to the contractor. If it just and equitable, the employment of the contractor may be terminated at the option of either party. After such notice, either party may apply to an arbitrator for determination that the termination of the contract was just and equitable.
If the termination is not effected, or if it is effected but not upheld, the contractor is to make good and reinstate the loss or damage and proceed with the works. The reinstatement or making good of the loss are deemed a variation. Notwithstanding the above process, the contractor is to rebuild, repair and make good, at its own expense, loss damage or destruction to the works due to the fault, defect or omission in design by the contractor, its employees or agents. This does not include nominated subcontractors and nominated suppliers.
The contractor is not responsible to the employer for errors and omissions in the design provided to the contractor by the employer or a design prepared by a nominated subcontractor or nominated supplier.
Where the works involve alteration or extension of existing structures, then the existing structures and their contents are at the risks of the employer as regards loss or damage under the insurable risks (fire, flood, et cetera.). Where the contents of those existing structures are not the property of the employer, the contractors shall indemnify the employer against liability which the employer may incur to third parties by reason of the loss or damage caused by negligence, omissions, default of the contractor up to the minimum amount specified for project liability, but not further.
The employer is to maintain insurance against the damage and destruction risks to include a waiver of subrogation against the contractor and its subcontractor. If the employer defaults, the contractor may insure itself against the risks, in which event, it is entitled to have the amount added to the contract sum.
Existing structures being part of the structure or building under over or adjoining works being constructed, or parts of the structure which gives support to such structure, or structures which are owned by the employer or associated companies for which the employer or those companies are responsible.
In broad terms, the contractor does not suffer financial penalty if damage or loss results from an uninsured risk. However, events may occur in which it is reasonable to terminate the contract. The matter is subject to a reference to arbitration for fairness and reasonableness of the circumstances. If it is decided to proceed with the work, the work is a variation and it is accordingly paid for as if it is a variation.
Defects in the Work
Damage due to defective design is broadly treated as if it is the contractor or employer’s responsibility as the case may be. It is the employer’s responsibility where it arises from the employer’s nominated contractor or specific requirements. Damage due to design is a permitted exclusion from the all-risk policy because of the difficulty in obtaining what is effectively professional indemnity cover. Ideally, the contractor should have design insurance if possible.
There is limited scope for insurance for defects in the work. Decennial insurance provides cover for the employer for a period of 10 years arising from defects to designs, materials, workmanship, and construction. The insurance is expensive, if it is available at all, given the risks in underwriting.
Practical issues arise in relation to liability for negligent design on the part of contractors and subcontractors. Many/most contractors do not have personality indemnity insurance against negligent design. Professional indemnity insurance may be available under the contractor’s all-risk insurance cover.
Further complications arise where works and design are provided by contractors and in particular, nominated subcontractors. The damage will generally be the responsibility of the contractor, though not if the damage is caused by faulty design on the part of a nominated subcontractor
There may be requirements for subcontractors to provide collateral warranties, undertaking direct obligations to the employer. Most such warranties require that the subcontractor maintain a defined level of professional indemnity insurance for a period after completion.