Construction insurance types

Project insurance means many different things to many people and so the use of such a definition can cause confusion.

For many employers, obtaining a project specific policy that brings together various key covers under one insurance has a number of advantages. Perhaps the most significant advantage being that the employer controls the scope, terms, conditions, sums insured/limits of indemnity and levels of excesses applicable and also has control of the claims under the policy. Such policies usually provide cover under 3 main headings:

• contract works (CAR);
• public liability (PL); and
• consequential loss.

Consequential loss cover will usually only apply to those losses incurred by the employer resulting from the occurrence of insured loss or damage that leads to a delay in completion of the project.

The losses the employer may potentially incur are many. If the premises being constructed comprise of a new manufacturing or operating base, then there could be a loss of income, loss of profit, increased cost of working, etc. If the project is of a speculative nature, the employer may incur additional financing costs or a loss of rental income in respect of premises that are destined to be let.

Some of the major projects undertaken recently in the UK and across the world, are covered by another form of project insurance – a relatively new product that has sought to respond to the increasing demand for project partnering as a procurement route. Such project insurance is essentially an insurance package that may include professional indemnity (PI) insurance, contractor's all-risks insurance, public liability insurance, loss of anticipated income insurance and latent defects insurance.

The philosophy is that if an insured event occurs on a project, it is the insurance policy that will respond. The insurer waives its rights of subrogation so there is no need for the parties to the project to worry about who is to blame for causing the event or allowing it to happen. This approach to risk management enables project teams to be designed via an integrated team approach, rather than through the traditional approach.

The traditional approach is to clearly and precisely allocate risk and responsibility to the various team players and this has been blamed for creating a divisive team. The parties become more concerned with demonstrating that their own package of responsibilities has been adequately satisfied, than focusing on the needs and objectives of the client.

Project insurance is a specialist product. It is common for such insurance policies to be written with high levels of uninsured excess particularly for the larger contract values. In order to achieve the anticipated productivity gains from an integrated team approach, this uninsured element needs to be addressed. Some large client bodies are prepared to self-insure this element; others spread the cost around the project team according to a pre-determined formula.