9 Indemnity and insurance
9.1 One of the most important functions of a building contract is clearly to allocate liability for the risks inherent in any construction operation, i.e. the risks of accident, injury and damage to property. Should any such incidents occur, it is vital that there should be no room for dispute about who is liable for the losses, and that all concerned should be clear about what procedural steps must be taken. Ambiguity in the contract can only lead to confusion and delays, which will benefit neither party.
9.2 Normally, a building contract will set out the specific events for which the contractor is liable, and require the contractor to indemnify the employer in respect of the resultant losses, for example for injury to persons or damage to neighbouring property. In DB16 these liabilities are allocated under clauses 6.1 and 6.2. Clause 6.1 makes the contractor liable for, and requires indemnification of the employer against, losses or claims due to injury to or death of persons, or damage to neighbouring property which has been caused by the contractor’s negligence. The indemnity protects the employer in that, if an injured party brings an action against the employer, rather than against the contractor, the contractor will bear the consequences of the claim. In practice, the employer can either join the contractor as co-defendant or bring separate proceedings against the contractor.
9.3 In practice, the indemnities given to the employer by the contractor are quite worthless if the contractor has insufficient resources to meet the claims. DB16 therefore requires the contractor, under clause 6.4, to carry insurance cover to underwrite the indemnities required under clauses 6.1 and 6.2.
9.4 In addition to the requirement for insurance against claims arising in respect of persons and property, the contract contains alternative provisions for insurance of the works under clauses 6.7 to 6.11 and Schedule 3. There is also an optional provision requiring the contractor to take out insurance for non-negligent damage to property other than the works (cl 6.5).
Injury to persons and damage to property caused by the negligence of the contractor
9.5 Clause 6.4 requires the contractor to carry insurance to cover injury to persons and damage to property other than the works which arise from the carrying out of the works. The contractor must be able to provide evidence that this insurance has been taken out. If the contractor defaults, the employer may take out the insurance and recover the costs from the contractor as a debt (cl 6.4.1 and 6.12).
9.6 Clause 6.4.1.1 requires that the insurance in respect of personal injury or death of any person in a contract of service with the contractor should comply with ‘all relevant legislation’. The contractor’s liability in respect of personal injury or death of employees is met by an employer’s liability policy. This has been compulsory since the Employer’s Liability (Compulsory Insurance) Act 1969. The statutory requirement is for a cover level of £5 million, although in practice most standard policies provide cover of at least £10 million.
9.7 The contractor’s liability in respect of third parties (death or personal injury and loss or damage to property including consequential loss) is met by its public liability policy. Insurers advocate insuring for a minimum of £2 million for any one occurrence, although a higher amount may be required by some clients. The contractor must insure the indemnities required under clauses 6.1 and 6.2 up to the amount stated in the contract particulars. However, liability at common law for claims by third parties is unlimited, and any amount specified in the contract is merely the employer’s requirement in the interests of safeguarding against inadequacies and in no way limits the contractor’s liability under clauses 6.1 and 6.2. Furthermore, it is recognised in footnote [47] to clause 6.4.1.2 that it may not always be possible to acquire insurance cover for all the indemnities required in clauses 6.1 and 6.2. For example, the insurance market has removed gradual pollution from its public liability policies. This in no way affects the contractor’s duty to indemnify.
9.8 The liability and duty to indemnify are both subject to exceptions. In respect of liability for personal injury or death, these are qualified in that the contractor is not liable where injury or death is caused by an act of the employer or a person for whom the employer is responsible (cl 6.1).
9.9 In respect of damage to property, the contractor is only liable to the extent that the damage is caused by negligence or breach of statutory duty or other default of ‘the Contractor or any Contractor’s Person’ (cl 6.2). The contractor is therefore liable only for losses caused by its own negligence. It is made clear in clause 6.3.4 that the definition of ‘property’ excludes the works, up to practical completion of the works or a section, except parts taken over by partial possession.
9.10 Clause 6.3.1 also excludes, where Insurance Option C applies, liability for ‘any loss or damage to Existing Structures or to any of their contents required to be insured under that option that is caused by any of the risks or perils required or agreed to be insured against under that option’. This means that, where Insurance Option C is applicable, the contractor is not liable for losses insured under paragraph C.1 and caused by the listed perils, even where the damage is caused by the contractor’s own negligence. This point is now expressly stated in clause 6.3.2 (where a paragraph C.1 replacement schedule is used, the liability is subject to exclusions and limitations set out under that schedule; cl 6.3.3). The clause 6.3.2 exclusion was inserted to clarify matters following a series of cases on older versions of the contract that reached the opposite conclusion (National Trust v Haden Young, London Borough of Barking & Dagenham v Stamford Asphalt Co.). It should be noted that the contractor might remain liable for some consequential losses (Kruger Tissue v Frank Galliers).
The National Trust for Places of Historic Interest and Natural Beauty v Haden Young Ltd (1994) 72 BLR 1 (CA)
The National Trust employed a contractor to carry out repair works to Uppark House, South Harting, West Sussex. The main contract was on terms substantially similar to MW80. Haden Young was sub-contractor for the renewal of lead work on the roof. During the course of the works a fire broke out, causing extensive damage, which Haden Young admitted was caused by the negligence of its workforce, and the National Trust brought a claim for damages. Otton J found the sub-contractor liable at first instance, and that the employer’s liability to insure under clause 5.4B only extended to matters not caused by negligence. Clauses 5.2 and 5.4B formed a coherent and mutually supportive structure. Haden Young appealed, but the appeal was dismissed. Although the Court of Appeal agreed that the sub-contractor was liable, it disagreed with the reasoning of the lower court, stating that there was no reason why there should not be an overlap, in other words why the employer should not be required to insure for matters for which the contractor was liable under clause 6.2. However, the damages recoverable from the contractor under clause 6.2 would be reduced by the amount recoverable by the employer under the clause 6.3B insurance.
London Borough of Barking & Dagenham v Stamford Asphalt Co. Ltd (1997) 82 BLR 25 (CA)
Barking & Dagenham employed a contractor to carry out repair works to a school. The main contract was on MW80, 1988 revision. Stamford was sub-contractor for the renewal of lead work on the roof. During the course of the works a fire broke out, causing extensive damage, which Stamford admitted was caused by the negligence of its workforce, and the Borough brought a claim for damages. The Court of Appeal found the contractor liable for the damage caused, preferring the reasoning of Otton J in National Trust v Haden Young to that of the Court of Appeal in that case. It should be noted that the wording of clause 6.2 (now cl 5.2) has been adjusted to make it clear that the contractor is not liable for damage to property insured under clause 6.3B (now cl 5.4B).
Kruger Tissue (Industrial) Ltd v Frank Galliers Ltd (1998) 57 Con LR 1
Damage was caused to the existing building and works by fire, assumed for the purposes of the case to be the result of the negligence of the contractor or sub-contractor. The construction work being carried out was on a JCT80 form. The employer brought a claim for loss of profits, increased cost of working and consultants’ fees, all of which were consequential losses. Judge John Hicks decided that the employer’s duty to insure for ‘the full cost of reinstatement, repair or replacement’ of the existing structure and the works under clause 22C (and therefore contractor’s exemption from liability under clause 20.2) did not include such consequential losses. A claim could therefore be brought against the contractor for these losses. (Note that DB16 now provides for professional fees coverage to be required as part of the works insurance.)
Damage to property not caused by the negligence of the contractor
9.11 The liability for damage to adjoining buildings, where there has been no negligence on the part of the contractor, is not covered under clause 6.2. Subsidence or vibration resulting from the carrying out of the works might cause such damage even though the contractor has taken reasonable care. This risk may be quite high in certain projects on tight urban sites or in close proximity to old buildings. In such cases it may be advisable to take out a special policy for the benefit of the employer.
9.12 In DB16 there is an optional provision for this type of insurance under clause 6.5. If it is expected that the main contractor may be required to take out this insurance, then this must be stated in the employer’s requirements, and the amount of cover entered in the contract particulars. The employer must then instruct the contractor to take out the policy, if it is required. The cost is added to the contract sum. The policy must be in joint names and placed with insurers approved by the employer. The policy and receipt are to be deposited with the employer.
9.13 This insurance is usually expensive, and subject to a great many exclusions. If it is required, then the policy must be effective at the start of the site operations, when demolition, excavation, etc. are carried out. The text of clause 6.5 was revised in 1996 to take account of the wording of model exclusions compiled by the Association of British Insurers. The policy should be checked by the employer’s insurance advisers to ensure that any exclusions correlate with clause 6.5 and that the policy provides the cover that this clause requires.
Insurance of the works
9.14 There are three options for covering insurance of the works (Options A, B and C), and the applicable option should be selected in the contract particulars (cl 6.7). In all cases, the policies are to be in joint names, and cover must be maintained until practical completion of the works, or termination, if this should occur earlier. The ‘Joint Names Policy’ definition was reworded in 1996 to make it clear that, under the policy, the insurer does not have a right of subrogation to recover any of the monies from either of the named parties. The works insurance policies must, in addition, either cover sub-contractors or include a waiver of any rights of subrogation against them (cl 6.9.1). This coverage is in respect of specified perils only, and not the full range of risks covered by ‘All Risks Insurance’.
9.15 Insurance Option A and Option B deal with the insurance of new building work and require ‘All Risks’ cover under joint names policies. A definition of ‘All Risks’ is given in clause 6.8 and refers to ‘any physical loss or damage to work executed and Site Materials and against the reasonable cost of the removal and disposal of debris’. There is also a list of exclusions, which includes the cost necessary to repair, replace or rectify property which is defective, loss or damage due to defective design, loss or damage arising from war and hostilities and ‘Excepted Risks’ (except as provided by terrorism cover). Footnote [51] explains that cover should not be reduced beyond the exclusions set out in the definitions. It also points out that ‘All Risks’ cover that includes the risk of defective design, although not required, may be available. If the policy provided is likely to differ in any way from the requirements in the contract this must be discussed and agreed before the contract is entered into. Even in a so-called ‘All Risks’ insurance policy there may be further exclusions, and the employer’s insurance advisers should carefully check the wording of each policy.
9.16 Option A insurance is taken out by the contractor and must be for the full reinstatement value of the works, including professional fees, to the extent entered in the contract particulars. The contractor is responsible for keeping the works fully covered and, in the event of underinsurance, will be liable for any shortfall in recovery from the insurers.
9.17 Option B insurance is taken out by the employer, and must be for the full reinstatement value of the works, including professional fees. The employer is responsible for keeping the works fully covered and, in the event of underinsurance, will be liable for any shortfall. 9.18 Option C is applicable where work is being carried out to existing buildings. It includes two insurances, both taken out by the employer. The existing structure and contents must be insured against ‘Specified Perils’ as defined in clause 6.8 (Option C.1). (The main difference between ‘All Risks’ and ‘Specified Perils’ is the omission in the latter definition of risks connected with impact, subsidence, theft or vandalism.) New works in, or extensions to, existing buildings must be covered by an ‘All Risks’ insurance policy (Option C.2) and, as with Options A and B, must be for the full reinstatement value of the works, including professional fees.
9.19 In cases where the employer may have difficulty in obtaining the joint names insurance for the existing building, which might be the case with tenants and homeowners, the contract now offers an option whereby the parties may ‘disapply’ Option C.1 and replace it with alternative provisions. This must be stated in the contract particulars, which must also describe the document in which the alternative provisions are set out. The employer will need to consider what these provisions might be before tenders are sought, and there are likely to be negotiations before the matter can be finalised. All relevant insurers should, of course, be consulted and (particularly for inexperienced employers) specialist advice may well be required.
Action following damage to the works
9.20 The procedure is similar under Insurance Options A, B and C. The contractor must notify the employer in writing of the details of the damage as soon as possible (cl 6.13.1). Although not required to do so by the contract, the contractor or employer, depending on which has taken out the policy, should also inform the insurers immediately on becoming aware of the damage. After any necessary inspection has been made by the insurers, the contractor is then obliged to make good the damage and continue with the works (cl 6.13.4). Under all three options, the contractor authorises the payment of all monies due under the insurance policy to be made directly to the employer (cl 6.13.3).
9.21 Clause 6.13.2 states that ‘the occurrence of such loss or damage to executed work or Site Materials shall be disregarded in calculating any amounts payable to the Contractor’. Payments that have already been made are not affected by the occurrence of the damage. In addition, any work that was completed after the most recent payment, but was then subsequently damaged, should be included in the next payment.
9.22 Under Option A, the contractor must take out insurance for the full reinstatement value of the works, plus a percentage to cover professional fees if this is required in the contract particulars (A.1). The insurance monies paid to the employer, minus the part of it to cover professional fees, but without any removal of retention, should be included in separate reinstatement work statements as the work is carried out, issued at the same time as the usual payment notices (cl 6.13.5.1). If the amount paid by the insurers is less than it costs the contractor to rebuild the works, the contractor is not entitled to any additional payment (cl 6.13.5.3), except in limited circumstances related to a reduction in terrorism cover. The risk of any underinsurance therefore lies with the contractor.
9.23 Under Options B and C, the rebuilding, restoration or repair work is treated as a change (cl 6.13.6), and therefore the contractor is less at risk and the employer will have to bear any shortfall in the monies paid. Under clause 2.26.2.9 the contractor is entitled to an extension of time for delay caused by loss or damage due to any of the specified perils. In addition, if the work is treated as an instruction under clause 3.9, the contractor may be entitled to an extension of time and to claim for loss and/or expense under clauses 2.26.1 and 4.21.1 (see paragraph 6.31). In all cases, the entitlement appears to extend even to cases where the damage was caused by the contractor’s negligence.
9.24 Either party is given the right to terminate the employment of the contractor where there is extensive damage to existing structures, and if ‘it is just and equitable’ to do so, by means of a 28-day notice (cl 6.14). The question of termination might arise, for example, where an existing structure to which work is being carried out has been completely destroyed, and it would be unreasonable to expect the contractor to rebuild. If the other party disagrees and feels that the project should continue, it must invoke the dispute resolution procedures. If the contract is terminated, the provisions of clauses 8.12 (except for 8.12.3.5) will apply. It should be noted that this right is in addition to the right under clause 8.11 of either party to terminate the contractor’s employment should the works be suspended for a period of two months due to loss or damage caused by any risk covered by the works insurance policy or by any excepted risk (cl 8.11.1.3).
Terrorism cover
9.25 Under clause 6.10 the contractor (where Insurance Option A applies) or the employer (where Insurance Options B or C applies) is required to take out terrorism cover. This can be done either as an extension to the joint names policy or as a separate joint names policy, and must be taken out in the same amount and for the required period of the joint names policy. ‘Terrorism Cover’ is defined as ‘Pool Re Cover or other insurance against loss or damage to work executed and Site Materials (and/or, for the purposes of clause 6.11.1, to an Existing Structure and/or its contents) caused by or resulting from terrorism’ (cl 6.8). Pool Re Cover is also a defined term, and stands for ‘such insurance against loss or damage to work executed and Site Materials caused by or resulting from terrorism as is from time to time generally available from insurers who are members of the Pool Reinsurance Company Limited scheme or of any similar successor scheme’. Although there have been difficulties in the past in obtaining such cover, at the time of writing the insurance market is prepared to cover terrorism risks. If cover is not available, or is likely to differ from the contractual requirements, then, as with insurance generally, the details must be agreed before the contract is signed.
9.26 If the insurers named in the joint names policy decide to withdraw this cover and notify either party, that party must immediately notify the other that terrorism cover has ceased (cl 6.11.1). The employer must then decide whether or not it wishes to continue with the works, and notify the contractor accordingly (cl 6.11.2). If the employer decides to terminate the contractor’s employment, the provisions of clause 8.12 apply (cl 6.11.4, see Chapter 10). Otherwise, should any damage be caused by terrorism, this is to be dealt with under clause 6.13 or 6.14 as appropriate (cl 6.11.5).
Professional indemnity insurance
9.27 Under DB16 the contractor is required to carry professional indemnity insurance (cl 6.15). The level and amount of cover must be inserted in the contract particulars. If no level is inserted, it will be ‘the aggregate amount for any one period of insurance’, and if no amount is stated then no insurance will be required. There is a provision for inserting a level of cover for pollution or contamination claims. In addition, if the expiry period is to be 12 years from practical completion then this must be indicated, otherwise the period will be 6 years. The insurance must be taken out immediately following the execution of the contract, and maintained until the end of the stipulated expiry period. The contractor must provide evidence of the insurance if required (cl 6.15.3).
Joint Fire Code
9.28 The Joint Fire Code (cl 6.17 to 6.20) is designed to reduce the incidence of fire on construction sites. It is an optional provision selected in the contract particulars but, as compliance with the code may reduce the cost of some insurance policies, its inclusion should be carefully considered. If it is included, then both parties undertake to comply with the code and to ensure that those employed by them also comply.
9.29 If a breach of the Joint Fire Code occurs, the insurers may give notice to either the employer or the contractor of remedial measures they require and the dates by which these must be put into effect. If either party receives such a notice, they must copy it to the other (cl 6.19.1). If the notice sets out measures which conform to the contractor’s existing obligations under the contract, then the contractor should put the measures in place (cl 6.19.1). If the contractor does not comply with the notice within seven days, the employer may employ and pay others to effect such compliance (cl 6.19.2).
Other insurance
9.30 There remain risks to the employer that are not covered by the DB16 insurance provisions. For example, if the contractor is caused delay by one of the specified perils, an extension of time would normally be awarded under clause 2.26.2.9 and the employer will not be able to claim liquidated damages from the contractor for that period. There will therefore be a loss to the employer. Should the employer wish to be insured against this loss of liquidated damages, then special provisions must be made, as there is nothing in DB16 which deals with such loss. The possible risks should be explained to the employer, but it should be noted that there are often problems with such insurance, as liquidated damages are payable without proof and, traditionally, insurers only pay on proof of actual loss. As a result, only one or two firms are currently willing to offer cover, and the price tends to be high.
9.31 There are other forms of insurance which are not covered by the provisions of DB16, and which the employer might wish to consider. The employer is the party best placed to assess possible loss. Where there are likely to be business or other economic losses, then these can be covered, albeit at a price. It is also possible to insure against defects occurring in the buildings by means of project-related insurance. This insurance is relatively expensive and limited to a ten-year ‘decennial’ loss. Irrespective of blame, it means that funds are available to remedy the defects, which will occur most often in the first eight years of the life of a building. Project-related insurance should include subrogation waiver, and does not reduce the need for professional indemnity cover.