Construction insurance types

Contractor's all-risks or contract works insurance (CAR) is insurance that is usually taken out by a contractor to cover loss or damage to the works and materials during construction. Such policies usually contain a list of industry-standard exclusions, which have the effect of excluding cover in the event of damage caused by certain events, such as war or nuclear contamination, although the extent of these will vary from one policy to another. The insurance will compensate for claims arising out of loss or damage from all events otherwise excluded.

CAR insurance is usually taken out in the joint names of the contractor and the employer as is required by the vast majority of standard forms of contract. Under the standard JCT forms there is a requirement for certain subcontractors to be included as joint insureds for certain perils or for insurer's rights of subrogation against such parties to be waived in respect of those perils. Sometimes, subcontractors and consultants are also included as joint-named parties across the board. This type of insurance may be obtained by means of an annually renewable policy covering all the contractor's work during the policy period and cover generally ceases when the works are handed over to the employer.

Annual CAR policies usually contain restrictions relating to the contract value and scope of work undertaken. Special arrangements will be needed for projects falling outside the scope of those covered, either by specific agreement (endorsement) under the existing policy or by a contract specific policy.

Additional insured parties, such as funders, can also be added to CAR policies by endorsement. CAR policies will also, almost without exception, exclude liability for liquidated damages. This can expose the contractor to a considerable risk if it is not able to obtain an extension of time from an employer under the contract. Under the JCT standard forms of contract, the contractor is entitled to an extension of time for delay caused by any of the specified perils. However, the definition of specified perils consists of a finite list of events narrower than that covered by the CAR insurance. For example, damage inflicted by vandals is covered by the CAR insurance, but is not a specified peril. With the contractor unable to recover liquidated damages through CAR or other insurance, they will have to bear them themselves – a potentially significant exposure.

If works are being undertaken largely within or on an existing structure (for example, if they are extension, re-fit or refurbishment works), then the JCT’s standard forms of building contract require that the employer takes out both CAR insurance for the works, and insurance for the existing structures and the contents thereof owned by the employer or for which it is responsible. Such an arrangement makes sense as it may help to avoid arguments regarding the apportionment of the costs of the remedial works following insured loss or damage between the new works and the existing structure.

However, there are several potential complications in relation to this. The JCT’s standard forms of building contract require that the cover for the existing structures, taken out by the employer, are in the joint names of the employer and the contractor.

This means that the insurers of the existing structure are being asked to provide cover not only to their insured, probably the building owner, but also to the contractor and subcontractors about whom they know nothing. Increasingly, there are cases of insurers declining to provide cover on this basis or, if they do, seeking significantly increased premiums to provide cover that meets the contractual requirement.

A further complication may arise where the employer is not the owner of the building or is not the party responsible for insuring the building. For example, a multi-tenanted office block where one tenant is having works carried out. All too often a standard JCT form is signed and just as work is about to commence they discover that the employer cannot provide the cover that is required to meet its contractual obligations. Even if it is possible to obtain such cover, the cost thereof may be greater than the value of the works being carried out.

Many landlords, and/or their insurers, are unwilling to add parties such as contractors working for tenants to their policies. It is not infrequent that the employer is left in a situation where it has signed a contract that contains insurance obligations with which it simply cannot comply.

It is vital, therefore, that insurance is not left until the last minute and that all appropriate steps are taken to ensure that the insurances the various parties are required to effect can and have been put in place. In the event that they cannot, there must be time for relevant changes to be made to the contract to reflect what can be reasonably be achieved so that the employer is not put in a position where either party can hold the other to ransom.