Dust off the contract and pick up the policy. This article looks at the insurance provisions of the contract and outlines what happens when disaster strikes the building site. 

The Insurance Clauses

The JCT Standard Form of Building Contract 1980 Edition, as amended in 1986, contains three options for insurance against loss or damage to the works. Clause 22A applies to the erection of new buildings where the contractor takes out and maintains a joint names policy for all risks insurance for the full reinstatement value of the works. Clause 22B requires the same cover to be taken out and maintained by the employer. Clause 22C. 1 applies to works in, or extensions to, existing structures where the employer takes out and maintains a joint names policy in respect of the existing structures, together with the contents thereof owned by him for which he is responsible for the full cost of reinstatement, repair or replacement of loss or damage due to one or more of the specified perils. In Clause 22C.2 the employer also takes out and maintains a joint names policy for all risks insurance for the full reinstatement value of the works.

These clauses do not attempt to apportion risk but to define the contract insurance requirements. All of the options call for the insurance to be arranged on a joint names basis a policy which includes the contractor and the employer as insured , although others can also be included. Insurance cover is required to be in place for the duration of the project up until practical completion when the employer's buildings insurance should take over.

The specified perils are: fire, lightning, explosion, storm, tempest, flood, bursting or overflowing of water tanks, apparatus or pipes, earthquake, aircraft and other aerial devices or articles dropped therefrom, riot and civil commotion, but excluding excepted risks. These are such things as radioactive contamination and pressure waves caused by aircraft, which are not readily insurable in the commercial market and the contractor is not responsible for them.

In fact all risks does not actually mean what it implies as no insurance policy covers everything. It provides cover against physical loss or damage to the works executed and materials on site but excludes the cost necessary to repair, replace or rectify:

1. property that has deteriorated through wear and tear, rust and so on , being risks which are uninsurable

2. work executed which is lost or damaged as a result of its own defect in design, plan, specification, etc. on the basis that this is more properly a form of professional negligence risk

3. the consequences of war, invasion, etc. being effectively unavailable in the commercial insurance market.

Thus, the works are covered in all cases for all risks insurance, but existing structures and the contents therein are covered only in respect of the specified perils.

Clause 22C.4.3 foresees a situation where, for example, damage to an existing structure could be so extensive as to effectively frustrate the reinstatement or resumption of the works. This clause provides that 'if it is just and equitable so to do' the contractor's employment may be determined at the option of either party, subject of course to certain time periods and notices.

Policy Cover

An insurance policy is a contract between the insurer and the insured and will therefore contain further obligations, exclusions, and conditions. Unlike the building contract, there is no standard form of insurance policy for this type of contract insurance cover. Whilst many are similar they are not the same. They can extend cover beyond that required by the contract insurance clauses.

In particular circumstances it may not be possible to obtain cover for certain risks or specified perils, in which case the contract requires amending accordingly. Each individual policy wording should therefore be carefully considered and the interaction between the building contract and the insurance policy appreciated

Loss or Damage to the Works

In the event of a loss the contractor is obliged to reinstate the works and replace or repair any site materials lost or damaged. After any inspection required by the insurers, the contractor proceeds with the clearance of debris and reinstatement of the works as if they were a variation required by an instruction of the architect. It should be noted that all insurance monies are remitted to the employer who is then required to discharge such monies to the contractor under the usual procedure of architect's certificates. The employer will deduct from the insurance payments any amounts in respect of professional fees and other matters and also discharge those accordingly.

The value of the original works is not diminished by the loss, even though some of those works which have already been paid for are destroyed. The contractor is to be paid for all works properly executed and materials on site, as at the time of the loss. JCT Practice Note 22 provides guidance for the payment of insurance claims and recommends that separate 'reinstatement certificates' are issued for the repair of the work lost or damaged.

It is not uncommon during the process of reinstatement for the original project to be changed in some way. Most policies will contain a 'local authorities clause' which provides that variations to the original scheme, necessary as a result of a change in a statutory instrument after the loss occurs, can be incorporated and paid for by the insurers. The employer and the design team may also take the opportunity to change, improve or redesign some part of the project. Where this results in additional cost it is referred to as 'betterment' and will not be paid for by insurers but should be instructed by the architect separately.

Although not envisaged by the contract insurance clauses, most commercially written insurance policies will contain an excess. It is usual practice for the contract to be arranged such that the contractor bears the cost of the excess.

Contractor's Plant and Equipment

There is no requirement under the contract insurance clauses to insure for contractor's temporary buildings, plant, tools and equipment which are covered by the contractors all risks insurance cover. The JCT form remains silent on the matter of temporary works. In practice the policy extensions may cater for temporary works on the basis that they are in fact within the definition of the works. The definition of contractor's plant may also be open to interpretation. For example, insurers may regard scaffolding generally as plant, but it can be argued that scaffold being used as a support structure is temporary work and may therefore be covered by the policy. The matter may become an issue if different deductibles apply between the contract insurance and the contractor 5 c.a.r. insurance cover.

Profit

There is a principle in insurance that the insured should not profit from the claim. However, the reinstatement of the works is treated as a variation with the normal valuation rules applying. Any element of profit contained in the rates, oncosts, and daywork percentages used for the purpose of valuing the reinstatement cost is not usually adjusted.