It is critical that building contractors pay attention to the policy wording in any insurance they take out. While the premium explains cost, the wording tells you exactly what you have bought.
In the modern construction environment, contractors face much larger challenges than those commonly associated with building projects. Today, these players are faced with the task of managing compounding operational, contractual and environmental risk, with the knowledge that failing to proactively manage these risks means they are essentially sacrificing margin before the work even begins.
Dan Payton, CEO at CivilSure, points out that it is a given that every contractor working on a project takes out the relevant insurance policies. However, he notes, where most contractors buy insurance based on the premium, the clever ones focus on policy wordings. CivilSure has partnered with the Master Builders Association North (MBA North) to help contractors mitigate risk through its legal advisory and insurance consulting services.
The OC challenge
“The operative clause (OC) is really the key to the claims door. It sets out the event that must occur before the policy can respond. You could say the starting point of any claim is still whether the loss or damage falls within that operative clause,” he explains.
Under a typical Contractors All Risk (CAR) policy, this means there must be unforeseen physical loss or damage to insured property, occurring at the contract site during the period of insurance, from a cause that is not otherwise excluded.
“Take unusually heavy rainfall as an example. If the rain causes an unexpected flood that physically damages the works, the physical damage may trigger the policy, subject to its terms, deductibles and exclusions. But if the site is simply waterlogged and the contractor cannot work for two weeks, that delay does not automatically become an insurance claim.”
This distinction is important. CAR insurance is principally designed to respond to insured physical loss or damage. Consequential losses such as project delays, penalties, lack of performance or loss of contract are generally excluded unless specific cover has been arranged. In other words, the flood damage and the commercial consequences that follow it are not necessarily insured in the same way.
Another challenge arises where an employer appoints several contractors and subcontractors to perform different parts of the same project, such as a building contractor undertaking the structural works and a civil contractor responsible for earthworks and compaction.
“When several parties are working on one project, having each contractor arrange completely separate project insurance can create gaps, overlaps and uncertainty over whose policy should respond when something goes wrong.”
One solution is principal-controlled insurance (PCI), where insurance is arranged for the project as a whole and the relevant contractors and subcontractors are included for their respective interests. This is reflected in CAR wordings where the insured can include the employer, contractor and subcontractors to the extent required by the contract conditions.
“We generally prefer to see the insurance responsibility clearly allocated at the start of the contract. Where PCI is used, the parties know which policy is intended to protect the works and who is included under it. But subcontractors should never simply assume that the principal’s policy gives them everything they would have had under their own insurance.”
Talk to the experts
There can still be an important catch with PCI: the deductible or excess.
“The project policy may have been structured around the size and risk profile of the overall contract, rather than the size of an individual subcontractor’s package. An excess that is commercially manageable for the principal or main contractor could be significant for a subcontractor carrying out only a small portion of the works,” adds Payton.
What is important is that the excess under a PCI policy is not normally calculated simply as a percentage of the overall contract value, nor is it automatically apportioned according to the subcontractor’s share of the works. The applicable deductible is determined by the policy schedule and may differ, depending on the type of loss, such as a major peril, theft or malicious damage, or another insured cause.
This means a subcontractor carrying out only a relatively small portion of a large project could still find itself exposed to a deductible that was set with the overall project risk in mind. The subcontractor therefore needs to understand not only whether it is included as an insured party, but also what cover, limits, exclusions and deductibles actually apply to it.
“This is where a contractor’s own annual CAR policy can become particularly valuable. Depending on the wording, it may contain a Difference in Conditions or Difference in Deductible provision designed to address certain shortfalls between the contractor’s own policy and project-specific PCI.”
However, this should not be presented as automatic. For example, the Difference in Conditions/Deductible provision applies only in specified circumstances; requires PCI turnover to be declared in the schedule; does not simply override restrictions deliberately imposed on the project policy; and expressly states that the extension benefits the insured contractor rather than subcontractors generally.
“The lesson is that being named under a project policy is only the first question. Contractors need to know what opens the claims door, what happens once they are through it, and what financial exposure remains with them after the policy responds,” he concludes.
