What to look out for when insuring construction work
There are several common types of insurance in the construction sector, such as the Contractors’ All Risk (CAR) insurance, design insurance, which appears in the market under various names including building and design insurance or professional indemnity, and liability insurance. This last type of insurance is sometimes included as a separate section in the CAR insurance policy.
Even though failure costs in construction are high and there are numerous initiatives to reduce these, contractors are not in the habit of checking whether they have insurance cover for an emergency situation, a failed production process, damage to third parties caused by the works, or work overruns. Sometimes there is an obvious reason for this, for example if it is clear in advance that the loss is not covered or where the deductible is so high that it is not worth submitting an insurance claim.
In the ‘claims made’ system, failure to report damages or reporting them too late can also have potentially far-reaching consequences. The ‘claims made’ concept is vitally important in liability insurance. This concept is the result of a development that has taken place over the past few decades, whereby insurers have attempted to limit payments wherever possible for any deferred damages; this reduces the period after the commissioning of the works in which payments have to be made. Previously, the basic principle was to cover damage that had occurred during the term of the insurance, the ‘loss occurrence’ system. That, by the way, was the successor to the ‘act committed’ type of policy, which provided cover if the cause of the damage arose during the insured period.
The basic principle in the ‘claims made’ system is that the insured is held liable by the party suffering the loss during the insured period. In this system, it is therefore impossible to make a claim after the term of the insurance has expired because the so-called run-off period has been reduced to zero. Policies of this type are rare; the policy usually includes a short run-off period.
Failing to report a claim to an insurer or doing this too late can indeed have fatal consequences, but not necessarily. If the policy contains a provision that if the insurer is ‘inconvenienced‘ by the late claim, in the sense that it suffers loss as a result, its obligation to pay is reduced by the resulting loss. So it is well worth looking at this carefully.
Insurance law in the Netherlands is governed by the Dutch Civil Code, where Section 7.17 regulates the legal relationship between the insurer and the insured. The applicable policy terms and conditions also play an important role in this relationship. These terms and conditions, and any additional clauses and exclusions, are particularly difficult to assess. Insurance companies endeavour to limit their risk with all kinds of clauses. They include specific clauses relating to aspects of construction, such as concrete, sheet piling, piles cast in the ground, or coatings, but these specific clauses often do not clearly state the extent to which risk is limited. These clauses are regularly the topic of disagreements between the insured and the insurer. It then comes down to how to interpret the provision or clause in question.
Disrupted construction process is damage too
Another regularly recurring discussion regarding Contractors’ All Risk (CAR) insurance is the concept of damage, and in particular, whether a flawless structure was damaged afterwards. This discussion arises primarily with damage in the form of a disrupted construction process, for example piles cast in the ground which subsequently show deformation or a coating that blisters or does not bond. These are difficult discussions which can also involve the question whether or not the insurance cover is limited to parts of the work that have been completed and whether the policy includes cover for damaged construction materials. Another aspect of the discussion is how the construction process was disrupted, for instance a contractor error or an external cause.
We support insured parties (commissioning authorities, contractors, architects and consulting engineers) in construction related insurance discussions. This may include discussions with the claims handler or expert regarding the extent of a claim, the cover under the policy and the interpretation of the policy provisions, and may also include liability and professional and other indemnity issues. If it is not possible to reach a satisfactory solution by mutual agreement, we will take legal action as necessary, either through arbitration or the civil courts.
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