Construction Insurance - Practice, Law, Claims and Risk Management (eBook)

Published Date

January 2011

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Construction Insurance - Practice, Law, Claims and Risk Management (eBook)

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This new edition of the 1997 publication examines the various forms of construction contract and the different types of insurance available.

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This detailed publication examines the various forms of construction contract including the JCT contracts, NEC3, the Institution of Civil Engineers Conditions of Contract, the FIDIC contracts and the Institution of Mechanical Engineers (IMechE) Model Form M/F1. It sets out the parties to the contract and examines notable clauses and warranties. It also includes different types of insurance, risk assessment, underwriting, alternative risk financing and disaster recovery planning. Reference is made to case law and legislation. The book is essential reading for insurers and lawyers in the fields of construction and building design.







1.1 Introduction

1.2 Size of Construction Market

1.3 Legal Background

1.4 Statutory Influences

1.5 Vicarious Liability

1.6 Parties to a Construction Contract

1.7 The Employer

1.8 The Contractor

1.9 Sub-Contractors

1.10 The Developer

1.11 The Professional Team

1.12 Duties of the Parties

1.13 Limitation, Indemnity and Exclusion Clauses

1.13.1 Limitation Clauses

1.13.2 Indemnity Clauses

1.13.3 Exclusion Clauses

1.14 Use of Collateral Warranties

1.14.1 Nature of a Collateral Warranty

1.14.2 Background

1.14.3 Practical Problems with Warranties



2.1 JCT 2005 Standard Building Contract and Design and Build Form

2.2 JCT Standard Form of Building Contract 2005

2.2.1 Section 2 – Carrying out the Works

2.2.2 Section 6 – Injury, Damage and Insurance

2.2.3 Clause 6.5 – Contractor’s Insurance of Liability of the Employer

2.2.4 Excepted Risks

2.2.5 Option A – New Buildings – All Risks Insurance of the Works by the Contractor

2.2.6 Option B – New Buildings – All Risks Insurance of the Works by the Employer

2.2.7 Option C – Insurance by the Employer of Existing Structures and Works in or Extensions to them

2.2.8 Clause 6.8 – Definitions

2.2.9 Clause 6.9 – Sub-contractors – Specified Perils

2.2.10 Clause 6.10 – Terrorism Cover – Employer’s Options

2.2.11 Clause 6.11 – Professional Indemnity Insurance

2.2.12 Clauses 6.13 to 6.16 – Joint Fire Code

2.2.13 Section 7 – Assignment, Third Party Rights and Collateral Warranties

2.3 JCT 2005 Design and Build Contract

2.4 Effect of Joint Names Insurance Clauses

2.5 Joint or Composite?

2.6 The New Engineering Contracts (NEC3) 2005

2.6.1 Secondary Option Clauses

2.7 NEC Sub-contract

2.8 Other JCT and NEC Contracts



3.1 Institution of Civil Engineers Conditions of Contract 7th Edition 2003

3.1.1 Definitions – Clause 1

3.1.2 Assignment

3.1.3 Sub-contracting

3.1.4 Design Responsibility

3.1.5 Adverse Physical Conditions on Site

3.1.6 Safety and Security

3.1.7 Care of the Works – Clause 20

3.1.8 Insurance of the Works – Clause 21

3.1.9 Damage to Persons and Property – Clause 22

3.1.10 Liability Insurance – Clause 23

3.1.11 Accident or Injury to Operatives – Clause 24

3.1.12 Contractor’s Failure to Insure – Clause 25

3.1.13 Interference with Traffic and Adjoining Properties

3.1.14 Liquidated Damages for Delay

3.1.15 Responsibilities of Contractor for Highways and Bridges – Clause 30

3.1.16 Other Relevant Clauses

3.1.17 Vesting of Goods and Materials not on Site

3.2 ICE Design and Construct Contract

3.3 Insurance under Government Contracts

3.4 Institution of Mechanical Engineers (IMechE) – Model Form M/F1

3.4.1 Care of the Works (Clause 43.1)

3.4.2 Purchaser’s Risks

3.4.3 Third Party Indemnities

3.4.4 Insurance of the Works

3.4.5 Third Party Insurance

3.4.6 Injury to Workmen

3.4.7 Purchaser’s Approval of Insurers

3.4.8 Exclusions from Insurance Cover

3.4.9 Remedy on Failure to Insure

3.4.10 Joint Insurances

3.4.11 Taking-over

3.4.12 Defects Liability

3.4.13 Latent Defects

3.5 Insurance of Process Plants



4.1 The FIDIC Contracts

4.2 Conditions of Contract for Construction 1999

4.2.1 Plant, Materials and Workmanship

4.2.2 Tests on Completion

4.2.3 Risk and Responsibility

4.2.4 Insurance

4.3 Conditions of Contract for Plant and Design–Build 1999

4.3.1 Risk and Responsibility – Section 17

4.3.2 Insurance – Section 18

4.4 FIDIC Contract for Electrical and Mechanical Work

4.5 FIDIC – The Sub-Consulting Agreement

4.6 Model Conditions for the Hiring of Plant

4.7 Construction Plant-hire Association – Conditions for Lifting and Movement of Goods Involving Crane Operation



5.1 Nature of the Cover

5.2 Analysis of the Contract Works Policy

5.2.1 Preamble or Recital Clause

5.2.2 Insuring or Operative Clause

5.2.3 Offsite Risks

5.2.4 Professional Fees

5.2.5 Debris Removal

5.2.6 Free Issue Materials

5.2.7 Reinstatement of the Sums Insured

5.2.8 Maintenance or Defects Liability Period

5.2.9 Expediting Expenses

5.2.10 Public Authorities

5.2.11 Plans and Documents

5.2.12 Immobilised Plant Recovery

5.2.13 Inflation Proofing

5.2.14 Speculative Building Work

5.2.15 Negligent Breakdown of Plant

5.2.16 Indemnity to Plant Owner

5.2.17 Continuing Hire Charges

5.3 Policy Exceptions

5.3.1 The Amounts Specified as the Insured’s Retained Liability

5.3.2 Money

5.3.3 Breakdown of Plant and Motor Risk

5.3.4 Exclusion of Defective Property

5.3.5 Damage Due to Fault, Defect, Error or Omission in Design, Plan or Specification

5.3.6 Market Design Clauses

5.3.7 Legal Cases on Design Interpretation

5.3.8 Loss or Damage after Completion of the Works

5.3.9 Existing Structures

5.3.10 Consequential Losses

5.3.11 Terrorism Damage

5.3.12 Other Exceptions

5.4 Policy Conditions

5.5 Policy Schedule



6.1 Liability

6.2 Employer’s Liability Insurance

6.2.1 Policy Wording

6.2.2 Contractual Liability and Indemnity to Principal

6.2.3 Avoidance of Terms

6.2.4 Policy Conditions

6.2.5 Policy Schedule

6.3 Public Liability Insurance

6.3.1 Insuring or Operative Clause

6.3.2 Limit of Indemnity – Aggregation Clause

6.3.3 Legal Costs

6.3.4 Indemnity to Other Parties

6.3.5 Joint Names Insurance

6.3.6 Policy Exclusions

6.3.7 Policy Conditions

6.3.8 Miscellaneous Aspects



7.1 Nature of Professional Indemnity Cover

7.1.1 Background

7.1.2 Comparison with General Legal Liability Covers

7.1.3 Claims Made Trigger Point

7.2 Reasonable Skill and Care – The Bolam Test

7.3 The Policy Cover

7.4 Incoming and Outgoing Partners

7.5 Retroactive Dates and Renewal Implications

7.6 Jurisdiction and Territorial Limits

7.7 Extensions to Basic Cover

7.8 Exclusions

7.9 Policy Conditions

7.10 The Policy Schedule

7.10.1 Occupation

7.10.2 Retroactive Date

7.10.3 Indemnity Limits

7.10.4 Deductibles

7.11 Design and Build Covers

7.12 Fitness for Purpose

7.13 Design and Build Policy Wording

7.13.1 Policy Extensions

7.13.2 Policy Exclusions

7.14 Underwriting Professional Indemnity Risks

7.15 Collateral Warranties and Insurance



8.1 Consequential Losses

8.1.1 Contractor’s Consequential Losses

8.1.2 Increased Cost of Working

8.1.3 Manufacturing Builders

8.1.4 Advance Rents and Interest Insurance

8.2 Delay in Startup (DSU)

8.2.1 Background

8.2.2 How Risks Arise

8.2.3 Why Standard Consequential Loss Insurance is not Sufficient

8.2.4 Assessment of Delay in Startup Risk

8.2.5 The Policy Cover

8.2.6 The Perils Insured

8.2.7 The Sum Insured

8.2.8 Indemnity Periods

8.2.9 Cover Extensions

8.2.10 Policy Exclusions

8.2.11 Policy Conditions

8.2.12 Increased Cost of Working

8.2.13 Other Features of DSU Cover

8.3 Employer’s Loss of Liquidated Damages

8.4 Latent Defects Insurance

8.4.1 Scope of the Cover

8.4.2 Underwriting Features

8.4.3 Technical Control

8.5 Performance Bonds

8.5.1 Scope of Bonds

8.5.2 Bond Underwriting

8.5.3 Risk Management on Bonds

8.5.4 Other Types of Bond

8.6 Credit Insurance

8.7 Civil Engineering Completed Risks Insurance



9.1 Physical Hazard

9.1.1 Type of Structure

9.1.2 Construction Methods

9.1.3 Causes of Loss or Damage

9.1.4 Perils

9.1.5 Construction Process

9.1.6 Foundations

9.1.7 System Building

9.1.8 Steel Framed Buildings

9.1.9 High Alumina Cement

9.1.10 Tall Buildings

9.1.11 Testing and Commissioning

9.1.12 Plant and Equipment

9.2 Specialist Areas

9.2.1 Airports

9.2.2 Bridges

9.2.3 Dams

9.2.4 Heavy Industries

9.2.5 Offshore Work

9.2.6 Oil and Chemical Risks

9.2.7 Power Stations

9.2.8 Quarries

9.2.9 Road Construction

9.2.10 Seaworks

9.2.11 Tunnels and Shafts

9.3 The Underwriting Process

9.4 Contract Works Underwriting

9.4.1 Sum Insured

9.4.2 Maximum Probable Loss

9.4.3 Policy Excesses

9.5 Practical Information Gathering

9.5.1 Third Party Risks

9.6 Reinsurance

9.6.1 Sources of Reinsurance

9.6.2 Methods of Reinsurance

9.6.3 Types of Treaty

9.7 Overseas Risks

9.7.1 Admitted and Non-admitted Policies

9.7.2 Difference in Conditions Policies

9.8 Placing of Risks



10.1 Introduction

10.2 The Risk Management Process

10.3 Identification of Risk

10.4 Analysis

10.5 Risk Control

10.6 Joint Fire Code – Prevention Checklist

10.7 Security on Site

10.8 Site Safety

10.9 The CDM Regulations 2007

10.10 Environmental Issues

10.11 The Control of Asbestos Regulations 2006

10.12 Terrorism Damage

10.12.1 Pre-attack Procedures

10.12.2 Post Loss Measures

10.12.3 Security Measures and Contingency Planning

10.13 Risk Management for Professionals

10.14 Contractors on Third Party Sites

10.15 Alternative Risk Financing

10.15.1 Mutual Risk Sharing

10.15.2 Finite Risk Insurance and Reinsurance

10.15.3 Multi-trigger Policies

10.15.4 Self Insurance and Captives

10.15.5 Adopting New Business Practices

10.15.6 Transfer to a Counterparty

10.15.7 Use of Capital Markets

10.16 Disaster Recovery Planning

10.16.1 Preparing the Plan

10.16.2 Keeping the Plan Up-to-Date

10.16.3 Benefits of a Disaster Recovery Plan

10.17 Claims

10.17.1 Legal Aspects

10.17.2 Notification

10.17.3 Investigation and Negotiation

10.17.4 Overseas Claims

10.17.5 Claims Settlement

10.17.6 Claims Agreements

10.17.7 Estimating and Reserving

10.17.8 Loss Adjusters

10.17.9 Acceptance Notes

10.17.10 Salvage

10.17.11 VAT in Construction Claims

10.17.12 Recovery by Other Parties

10.17.13 Global Settlements



As a Solicitor specialising in construction law, I know very well that construction creates a lot of work for lawyers and insurers as well as for builders. This is because construction work is complex and expensive, both to design and to carry out, and involves many substantial risks.


There are physical risks to people and property. Heavy things are carried over the site, and surrounding areas, by cranes. Excavations are carried out. Power cables and gas mains are affected. Paint and insulation materials are sprayed, dust of various sorts is created, welding is carried out. All of this is done by large numbers of people working in close proximity to these hazardous processes, to one another and to members of the public, passing the site or working in buildings adjoining it.


There are also the commercial risks of vital buildings being delivered late (for a host of reasons, not all of them the contractor’s fault), of buildings having to be vacated and repaired as defects in their design or construction are discovered, or of the insolvency of various parties, leaving work only half done. The scope for consequential loss is great.


It is, therefore, no surprise that the involvement of insurers and lawyers in the construction industry is greater than in most other industries. They are not, however, involved only when things have gone wrong. Lawyers and insurers also work together beforehand:


  • To identify risks
  • to produce contracts that allocate the risks between the various parties to the construction process in the most sensible and economic way
  • to produce insurance policies to cover those risks
  • to produce strategies to minimise losses if the worst happens.


Clients involved in the construction industry need proper advice from their insurers and from their lawyers. Neither can give it unless they have a sound knowledge of the way in which the law (in general and construction contracts in particular) allocates the various risks and what insurance is available to cover them. This book is essential reading for anyone trying to understand these issues. It also includes helpful chapters on risk assessment, risk management and the underwriting and claims processes. It will be a major help to all involved, directly or indirectly, with construction or building design insurance.


Christopher A Holwell

Freeth Cartwright LLP




The first edition of Construction Insurance was published by Witherbys in 1997. Much has changed since then, particularly the JCT Contracts, which have undergone two updates since 1997. We have also seen rapid development in the use of the New Engineering Contract (NEC 2005), which forms the nucleus of the many contracts for the Olympic Games facility in 2012. Other major forms, such as ICE, FIDIC and IChemE, as well as the main construction plant hire condition (CPA), have all undergone changes in that period.


Case law has also been prolific, particularly on the subject of liability under joint names clauses.


The need to update the publication has been uppermost in my mind for some time, and I am grateful to the current publishers for the opportunity to provide this updated guide to the practice of construction insurance.


John D Wright


Author: John D Wright

Witherbys titles are developed using scripts developed by technical experts that are peer reviewed within work groups. Typically, they seek to improve understanding of the regulations, recommendations and guidelines issued by Industry.

Witherbys staff have significant expertise in the fields of navigation and hazardous cargoes as well as in the presentation of complex subjects in a graphic and easy to understand manner.

Title: Construction Insurance - Practice, Law, Claims and Risk Management (eBook)
Edition: Second
Number of Pages: 249
Product Code: WS1277EA
ISBN: ISBN 13: 978-1-85609-433-7 (9781856094337), ISBN 10: 1-85609-433-2 (1856094332)
Published Date: January 2011
Binding Format: Hardback
Author: John D Wright

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