Since its inception, construction insurance has been transacted on the basis of each of the parties involved in construction providing insurance cover compatible with there sponsibilities allocated to it and the liabilities to which it is exposed. Its purpose has been and still is to ensure that the completion of the project is not hindered by financial problems emanating from loss or damage due to hazards and risks eventuating during the period of construction. Although the owner/employer and the designer must obviously be conscious of the lifetime hazards and risks related to the location of the project, construction insurance is usually only expected to deal with the project’s exposure to risk during its construction and the Defects Notification Period that follows.
The conventional method
Besides the usual insurance cover required by any business activity, four insurance policies became associated with construction: Contractors’ All Risks, Public Liability, Employer’s Liability and Professional Indemnity; see Chapters 12 and 13 above. The Contractors’ All Risks insurance policy was specifically developed for the purpose of covering, in one document, a project under construction against any physical or tangible loss or damage due to all insurable risks. The liability policies were adopted for use in construction and the four policies, combined, became firmly established as the appropriate method of providing insurance protection when, in the 1950s, standard forms of conditions of contract required them to be issued. This method became conventional and accepted in many parts of the world, helped by the international nature of the insurance business; see Chapter 7 above. It remained essentially the same, despite the inevitable evolution of different concepts based on local custom, national traditions and domestic law. The conventional method of providing insurance protection has functioned, in the main, well enough with few problems and disputes, although as time passed overlaps and gaps in the cover usually provided became evident.1 Overlaps and gaps in the insurance cover played an important role in large projects and their effects increased proportionately with the increase in size of a construction project.
Overlaps and gaps
Overlaps occurred generally when the same insurance cover was obtained by more than one of the parties involved in construction. The effect of overlaps is essentially two-fold; the first effect is cost, and is reflected in higher premiums paid initially by the contractor, reimbursedin part or in total by the owner/employer and finally by the consumer or the community at large. The second effect is a complicated insurance arrangement, which is reflected in multiplicity of insurance policies, possibly of different wordings, and from different insurers, each with a promise that might never be kept. Duplication in the insurance cover takes place mainly due to any one or a combination of the following:
In projects where more than one main contractor is employed on an individual construction project, the number of policies required multiply in proportion to the number of main contractors employed. The obvious overlap in cover occurs with respect to public liability insurance required from each of the contractors employed on the project.• One of the problems created by the employment of nominated subcontractors in accordance with the earlier editions of the FIDIC and the ICE Conditions of Contract was related to the multiple productions of insurance policies. Clause 59(1)(a) of these conditions was interpreted by some contractors to mean that all nominated subcontractors must provide their own Contractors’ All Risks and Public Liability policies. The overlaps, which resulted from this duplication of cover must not only have been very expensive but also into lerable. However, that clause was fortunately revised in the latest editions of these conditions of contract to read as follows:
the nominated Subcontractor will undertake towards the Contractor such obligations and liabilities as will enable the Contractor to discharge his own obligations and liabilities towards the Employer under the terms of the Contract…The interpretation of this revision was taken to mean that the nominated sub-contractor does not have to produce his own Contractors’ All Risks and Public Liability policies but that he would be insured under the main contractor’s policies.2 However, despite that revision, some contractors continued to demand from nominated subcontractors similar insurances to those he is required to provide, resulting in the overlap. It is worthwhile noting that should there be a single set of insurance policies, their wording should be adhered to by nominated subcontractors covered by such policies, as any ordinary subcontractor would have to do, in order to enable the main contractor to discharge his own obligations and liabilities towards the owner/employer.• Although it is more expensive in the overall context for each subcontractor to obtain his own insurances and therefore to duplicate the cover, it nevertheless might be worthwhile for the main contractor to shed part of his obligations under the contract to subcontractors. This trend, which became established through the employment of nominated sub contractors, was also required by some contractors from domestic subcontractors. The insurance over lapis then even more serious and more costly.• In some international contracts, the contractor is obliged to insure locally with a national insurance company. Certain conditions may sometimes be imposed by the national insurance company which might cause the contractor to be concerned that, when claims arise , he is either unprotected or he is not in a flexible position to do what is needed to be done. In such a situation, the contractor is obliged to take out a second insurance cover outside the country in which he is working. For example, where strict currency controls exist in a certain jurisdiction, the contractor might have to obtain a second insurance policy outside the jurisdiction, should he require to purchase replacement parts manufactured abroad. Gaps on the other hand are more numerous than overlaps when the insurance cover is executed in accordance with the conventional method. They also have a more adverse effect, sometimes a ruinous one, if not taken care of. They can be divided into three categories, as follows:
A .Gaps created through the existence of uninsurable risks; B Gaps created due to lack of insurance cover either through the manner in which the business is transacted; or due to the insured’s lack of knowledge and awareness of the risks; or due to the Insured’s wish to self-insure ;C Gaps due to the use of the conventional method of providing insurance protection.
Gaps through uninsurable risks
main contractor to shed part of his obligations under the contract to subcontractors. This trend, which became established through the employment of nominated sub contractors, was also required by some contractors from domestic subcontractors. The insurance over lapis then even more serious and more costly.• In some international contracts, the contractor is obliged to insure locally with a national insurance company. Certain conditions may sometimes be imposed by the national insurance company which might cause the contractor to be concerned that, when claims arise, he is either unprotected or he is not in a flexible position to do what is needed to be done. In such a situation, the contractor is obliged to take out a second insurance cover outside the country in which he is working. For example, where strict currency control sexist in a certain jurisdiction, the contractor might have to obtain a second insurance policy outside the jurisdiction, should he require to purchase replacement parts manufactured abroad. Gaps on the other hand are more numerous than overlaps when the insurance cover is executed in accordance with the conventional method. They also have a more adverse effect, sometimes a ruinous one, if not taken care of. They can be divided into three categories, as follows: A Gaps created through the existence of uninsurable risks; B Gaps created due to lack of insurance cover either through the manner in which the business is transacted; or due to the insured’s lack of knowledge and awareness of the risks; or due to the Insured’s wish to self- insure; C Gaps due to the use of the conventional method of providing insurance protection. A Gaps through uninsurable risks These gaps must exist no matter what method is adopted to provide insurance as they are due to the very nature, concept and legal principles of insurance. They are:1Fortuity: A risk is uninsurable if its probability of occurrence within a specified period of insurance is 100%, i.e. the risk is certain to occur. Fortuity is therefore a prerequisite to insurance, see page 195. Unfortunately, however, it is not easy to define words such as fortuitous, foreseen or accidental in advance of an agreement, thus leaving an amount of uncertainty about the quality of the insurance contract. It is ironic for such uncertainty to surround an area of which an insured wants to be most certain, i.e. that he is in factinsured.
Insurance policies are written with conditions, exclusions and memoranda which define the cover and its limitation as far as possible. When a loss or damage occurs resulting in a claim, it is necessary to establish the cause in order to find out whether any of those conditions, exclusions and memoranda apply. Depending on such application, the insurance cover may be valid or it may not. However, a gap occurs in cases where it is not possible to establish readily the cause with sufficient precision to satisfy an assessor ALTERNATIVE METHODS OF INSURING 373
of the validity of the insurance claim. The gap is created by the delay in settlement of the claim, especially if the delay is protracted and the claim is a large one.
3 Disclosure of all relevant information and compliance with conditions:
As discussed in Chapters 6 and 7 above, the insurance agreement is a contract of utmost good faith and as the insured is in possession of all relevant facts when he makes his insurance proposal, the onus is on him to divulge all relevant information connected with the insurance matter, as it may influence the insurer either in accepting to insure or in assessing the applicable premium. If this is not done adequately, the insurer may deny the cover when a claim is made. Similarly, the insured must comply with the policy conditions during the currency of the insurance period as these are the conditions of his agreement with the insurer. Non-compliance with a relevant clause may leave the insured in breach of contract and thus without cover.
4 Consequential loss:
Although some consequential losses are insurable, there are others that are not. To separate the insurable type from the uninsurable, one has to consider the possibility of assessing the amount of loss suffered. If the amount of loss can be assessed, such as is the case in loss of profits following delay in completion, the risk is insurable. Otherwise, it is not, see page 349 for definitions of consequential loss.
5 Tangible loss or damage must occur:
The insurance policy covers any tangible loss or damage due to certain risks which form the basis of the insurance contract. However, if such a risk eventuates and is discovered prior to the occurrence of loss or damage, the onus is on the insured to take all necessary steps to rectify the situation at his own cost. For example, if a structural defect is discovered in a foundation prior to its causing collapse of the supported structure, no claim is entertained by the insurer for rectifying the defect even if that defect or its consequence is an insured risk. But, if the defect is not discovered and the structure collapses, the insured is covered in respect of the loss or damage sustained by the insured element. This principle forms one of the major obstaclesin providing a meaningful cover against latent defects in construction projects.
6 Defective workmanship and material:
As discussed in Chapter 12, insurance is not, and should not be, extended to cover a part which is defective in its workmanship or in the material used in its construction. It must be noted however that this limitation does not apply to consequent damage of parts properly constructed or to manufactured parts in respect of which a manufacturer’s guarantee can apply.
7 Political risks and risks cover by government:
In some countries, certain risks are covered by the state and are therefore not the subject of insurance. For example, the risk of nuclear reaction is covered in the United Kingdom by its government. In the strict sense, this type of risk does not form a gap. However, where such risks are not covered by government or where government cannot provide such cover, as is the case in respect of political risks, a gap would exist.