When insuring existing structures which form part of a construction project, brokers risk exposing themselves to providing uninformed advice and thus a professional negligence claim.
There are a number of common mistakes often made in the consideration of such insurance – insurance of which may fall to one, or both, of two types of insurance: Material Damage and/or Public Liability.
When dealing with complex or high-value existing structures undergoing alteration or refurbishment (in whole or in part) it is sometimes anticipated that such structures will be catered for utilising the (usually) significant limits of liability provided in construction liability policies. In so doing, one must consider the following aspects:
- Standard contract conditions make a contractor responsible for any loss or damage to “property of the Principal, including existing property” or loss or damage “arising out of, or as a consequence of, the carrying-out of the contract.”
- Generally public liability policies will have an exclusion relating to the “part being worked immediately upon”. The part being worked upon is exposed to broad interpretation. However most fit-outs for specific tenants in multitenanted buildings [which are indemnified by a construction liability policy] will provide “flow-on” cover with respect to the areas accommodating other tenants.
- All public liability policies are triggered by an insured’s “legal liability” for a given occurrence. Malicious damage by third parties and storm damage are two examples of damage for which a contractor may not necessarily be legally liable.
- Generally, public liability policies will exclude “liability assumed by contract unless an insured would otherwise have been legally liable.” Thus, because a contract may require an indemnity* from a contractor, it does not necessarily follow that a public liability policy will respond. (*Indemnities assumed by contract, for which a contractor would not ordinarily be liable, are generally considered to be an entrepreneurial or commercial-risk undertaking on the contractor’s part. Risk-aware contractors would know this).
- Exposure to liability for vibration, weakening or the removal of support. Many policies exclude the risk and/ or require the risk to be quantified and added.
- Ownership of the existing structure. If the existing structure belongs to an insured party, a cross-liabilities clause is necessary [which will insure all parties for damage they may cause, as if they were all individually insured, unless such damage to an existing structure is caused by its owner].
- If any existing structure (in whole or in part) is passed in to the care custody or control of the contractor, appropriate sum insured allowances must be made and any specific policy terms and conditions relating to care, custody or control must be taken in to account.
Insuring existing structures (for their entire value or on a “first-loss” basis) for a nominated amount, under a material damage policy, removes the onus by an insured to prove legal liability and it mitigates the liability exclusion for the part being worked immediately upon [unless as a result of fault, error or defect in workmanship, design or material – which is a common material damage exclusion]. It essentially renders obsolete the exclusion for vibration, weakening and removal of support damage to existing structures. It mitigates the issue of owner’s own damage and mitigates some contractual indemnity requirements (which may not ordinarily also be legal requirements). It also removes any care, custody or control issues [usually inherent in liability policies].
There are other issues to consider, including:
- Heritage listed buildings are often required to be declared by construction insurers. Old buildings were constructed without the benefit of strict building codes and performance designs. They have invariably deteriorated over time. Like-for-like materials can be hard to obtain, often expensive, or indeed are unobtainable and such structures are more susceptible to damage by vibration, fire and water than modern structures. Accordingly, replacement values can be very unreliable even those obtained from experts! (But experts usually have PI policies…..)