It’s crucial to have clear agreements and thorough insurance policies that can tackle these ambiguities, ensuring that both material damage and liability are well covered. This careful planning and understanding can help avoid costly surprises and ensure a smoother construction process.
I guess it’s a hazard of the job: whenever there’s a construction mishap making the headlines, I can’t help but wonder whether it involves one of our clients. It’s almost like clockwork: The news breaks, my ears and eyes instantly go into overdrive listening and looking for any indication as to who is involved. And sometimes, I get the call saying we’ll be handling the claim.
Inherent industry risks
Despite initial perceptions, after further investigation, often the construction industry isn’t to blame for the incident. Take for example when the roof of Notre Dame de Paris caught fire in April 2019 whilst the roof was under refurbishment. No conclusive evidence could be found as to the root cause of the fire. That said, it is undeniable that the construction industry inherently carries a certain level of risk. Nowhere is this truer than in narrow urban environments where proximity to other buildings can result in unintended damage from heavy machinery or vibrations. In this setting, limited access also heightens the likelihood of delays and accidents, compromising safety protocols.
Furthermore, older urban areas where the properties are vulnerable to damage are often a hotbed of potential risks. Here excavation can destabilise foundations or disrupt underground utilities, leading to costly repairs and potential liabilities.
Insurance considerations: Existing property and care, custody or control
Before construction begins, it is important to conduct a pre-construction survey to document the condition of the respective properties. This serves as a baseline for any claims that may arise during construction. Contracts between the builder and the client should also clearly define responsibilities and liabilities for existing property, and insurance coverage should be reviewed to ensure it aligns with the risks posed. In projects involving existing structures, it’s crucial to clearly distinguish between what works are insured under the construction policy and what falls under existing structures, which might be excluded or covered under different terms or a separate policy.
Including existing property in an insurance policy extends the coverage to this property. The risks covered might differ from those in the main policy, and specific conditions may apply. For example, the insurance may combine existing property with care, custody, and control provisions, though this isn’t always the case in every policy.
The soft market phase often results in insured property not being clearly specified, with the “sum insured” replaced by a first-loss limit. This creates greater ambiguity in the event of damage, as it must be determined whether the damaged property qualifies as existing property or property under care, custody, or control.
Care, Custody and Control (CCC) pitfalls
Care, Custody and Control (CCC) is crucial in construction insurance, especially in narrow environments. It determines responsibility for the property involved and the surrounding area. The problem is that legal interpretations vary by jurisdiction. In one UK case, control meant legal rather than physical control whilst another (Canadian) case looked at who oversaw the property and if the other party still used it normally. Meanwhile, Australian courts have clarified that control can be both legal and actual, and multiple parties can have simultaneous control over an item.
Other examples include the Canadian Supreme Court ruling that a rug tacked to the floor and damaged by a contractor was not under their CCC, despite being in their physical custody. Similarly, on another occasion two cranes operated by drivers from the supplying company were not considered under the insured’s CCC but remained with the supplier.
So, what does all this mean? Simply that the innocuous terms of care, custody and control can vary across jurisdictions and when included in a contract need to be clearly understood before works are carried out.
Property vs liability coverage: understanding the differences
It’s important to understand the difference between property coverage and liability coverage when considering construction risks. Property coverage typically deals with material damage to the physical work being done, while liability coverage addresses potential harm to third parties. When it comes to existing property, it’s essential to ensure that these assets are properly covered. This is often done through specific endorsements to the main insurance policy, which can extend coverage to include existing structures. If these structures aren’t clearly included, you might find – depending on the insurance policy structure – that any damage to them is not covered at all, leading to significant financial risk.
One of the trickiest areas is understanding what falls under the builder’s responsibility when it comes to property in their care, custody, or control. For instance, in some cases, property on the construction site but not being actively worked on might not be considered within the builder’s responsibility; an undeniably grey area if something goes wrong.
Tackling the ambiguities
It’s crucial to have clear agreements and thorough insurance policies that can tackle these ambiguities, ensuring that both material damage and liability are well covered. This careful planning and understanding can help avoid costly surprises and ensure a smoother construction process.
Diligent analysis of surrounding exposures and how the insurances will understand these is an important aspect. While the exposure regarding damage to the works can be grasped better and is rather straightforward as a concept, exposures relating to existing property and care, custody and control – including possible indirect losses – warrant attention.
Sources:
Pascal Jaut
Insurance Specialist Construction & Real Estate
T +43 664 883 80 536
