The only reason we have policies of insurance is to have a means of recovering some or all of our losses in the event a risk materialises. The concepts of risk and insurance are intertwined.
When trying to understand the provisions in your contract dealing with insurance, there are many questions to ask.
The first thing to ask is: “Does the contract specify the risks?” Unfortunately many contracts do not do this. Some such as JCT contracts do not even use the word “risk”.
The New Engineering Contract forms are up-front on risk. There are six categories of risk (eg risk of damage to works, materials and plant provided by the employer) that are laid at the door of the employer. All other risks are placed with the contractor.
Who takes the risk?
This brings us to the second question. To whom is the risk allocated? If you have a bespoke sub-contract, the likelihood is that nearly all (if not all) risk has been passed to the sub-contractor.
The final question is: “Which party is required to take out the necessary insurance cover? Furthermore what is the extent and duration of the cover required?”
Most contracts will have provisions to enforce insurance obligations. If a party does not take out the required cover, the other will reserve the right to do so and charge the premium to the defaulting party.
JCT contracts have two general categories of risk:
- Risk of physical damage and/or loss to the works and site materials.
- Risk of injury/damage to persons and/or property.
In respect of these risks, two types of cover is required – “all risks” cover for the first category and public liability insurance for the second.
With regards to physical damage and/or loss to the works and site materials, JCT has three options:
- In the case of new buildings the contractor is to take out “all risks” insurance (Option A).
- Alternatively the employer is to take out “all risks” cover (Option B).
- With regard to existing structures, the employer is to take out and maintain insurance in respect of existing structures and their contents; and
- “All risks” insurance of the works (Option C).
Under JCT, the contractor is liable to and must indemnify the employer in respect of claims arising from personal injury or death (to people other than the contractor’s employees for whom he is legally obliged to have employer’s liability insurance).
For this purpose, the contractor should have public liability insurance.
Sub-contractors should be protected against liability for damage or loss to the works from the specified perils. The contractor’s joint names “all risks” policy should also name sub-contractors as being insured on the policy.
Alternatively the policy should state that the insurer waives its rights of subrogation against the named sub-contractors. There is no express requirement to protect sub-contractors against loss or damage to existing structures and contents from the specified perils.
In a recent case, the court held that a sub-contractor was not liable for the re-instatement costs of damage to an existing structure by the specified perils.
He had priced his work on the basis that the cost of re-instatement would be met by the employer’s insurer.
Always assess the risks that may be allocated to you in the contract or in any warranty. Always check with your insurer that your policy(ies) address the risks.
Professor Rudi Klein is a barrister and chief executive of the SEC Group