Works Insurance and Latent Defects Insurance
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The document discusses various types of insurance related to construction projects, including all risks insurance, latent defects insurance, and options for insuring works under JCT contracts. All risks insurance covers physical damage to works and materials, and is often maintained by the contractor. Latent defects insurance provides protection for inherent defects discovered after practical completion up to a specified threshold. While it has advantages over collateral warranties like being freely assignable, there are also gaps in protection if no warranty package is also in place. The document also notes potential issues with Option C of insuring works under JCT contracts and ways to address them.
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Works Insurance and Latent Defects Insurance
- 1. Kate Kennedy December 2015 Works insurance and latent defects insurance
- 2. | What does all risks insurance cover? 1 June, 2016This is the Title2 • Physical damage to the works and site materials • The parties can decide whether the contractor or the employer will insure • Often the contractor maintains all risks insurance because it carries such cover in the course of its business • Sometimes regular developers will maintain their own
- 3. | JCT Requirements/Joint insurance/Noting 1 June, 2016This is the Title3 • The JCT usually requires all risks insurance to be: • Maintained until practical completion • In the joint names of contractor, employer and any other party with an interest in the project • Joint insurance means: • That in the event of a claim, neither joint insured can recover more than their loss and the insurer cannot subrogate against either of them
- 4. | Noting on insurance policies 1 June, 2016This is the Title4 • Being noted on an insurance policy usually means being notified that: • There is any claim made on the policy • Something occurs that invalidates/threatens to invalidate the policy • The policy lapses • Being noted on the insurance does not entitle you to make a claim
- 5. | Works Insurance/All Risks Insurance – Options A, B, C 1 June, 20165 • Option A – where a new building is to be constructed and where the contractor is required to take out all risks insurance for the works • Option B – where the employer takes out such insurance • Option C requires the employer to: • Take out and maintain a joint names policy in respect of the existing structures • Take out and maintain a joint names policy for the Works (i.e. an ‘all risks’ insurance policy)
- 6. | Potential problems with Option C 1 June, 2016This is the Title6 • Consequential losses arising from damage to existing structures are excluded from the JCT requirements. • May be a multi-let building insured by the landlord • Taking out insurance may be excluded from tenant’s lease • Or the tenant may find he can only take out such insurance at great cost
- 7. | Ways to get round unamended JCT Option C issues 1 June, 2016This is the Title7 • Landlord may be amendable to naming the employer and contractor as joint named parties on its policy • The tenant could insure the entire structure itself • Discussions may need to be held between contractor and employer to discuss a hybrid approach (check contractor’s public liability insurance, can the employer take out an additional layer of insurance to cover this) • Make sure insurers are involved in any hybrid solution (and obtain written confirmation that the structure covers JCT requirements) • Conclusion – Option C insurance should be approached with caution
- 8. | One final point on All Risks insurance under JCT… 1 June, 2016This is the Title8 • GD Construction (St Albans) Ltd vs Scottish & Newcastle plc • Neither party is liable for damage caused by specified perils (e.g. fire). • Even though the fire was the fault of the contractor, the contractor escaped liability because Option B was chosen under the JCT and the employer neglected to take out All Risks insurance itself. • So check all insurances are in place and that they cover what they are supposed to!
- 9. | Latent Defects Insurance Policies 1 June, 20169 What does an LDI policy cover? • Latent Defects Act 1980: “defects that are not immediately apparent and which cannot be discovered by a reasonable inspection of the property” Why are they on the rise? • Buyer expectation • Tenant expectation • Risk-averse developers
- 10. | Key Elements of LDI Policies 1 June, 201610 • Offers protection up to a specified threshold (usually the reinstatement value of the building) for some inherent defects discovered after practical completion • In order to put an LDI policy in place, you would usually need to notify the insurers before you start works • You can purchase them retrospectively but this is expensive • Take effect 1-year after PC
- 11. | How do they compare to a collateral warranty package? 1 June, 201611 LDI Policies Collateral Warranty/TPR Package No fault policy Need to prove loss Endure 12 years 6 or 12 year duration Freely assignable to successors Limited assignments Insurer offers strong covenant Contractor must remain solvent Extent of cover narrow Broader protection offered Premiums can be high Costs are well-known Policy Excesses No Excess equivalent
- 12. | LDI – Closing thoughts 1 June, 201612 • Ease of making a claim makes a strong argument for taking a policy out if you can • But there will be significant gaps in construction protection if no CW/TPR package is also put in place • Engage with your LDI insurer early
- 13. | MERRY CHRISTMAS! 1 June, 2016This is the Title13
- 14. Olswang: Changing Business. www.olswang.com Kate Kennedy +44 20 7067 3773 kate.kennedy@olswang.com Berlin +49 30 700 171 100 Brussels +32 2 647 4772 London +44 20 7067 3000 Madrid +34 91 187 1920 Munich +49 89 206 028 400 Singapore +65 6720 8278 Paris +33 17 091 8720 Thames Valley +44 20 7071 7300