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Existing structures risk to the Contractor

By Nick Harman and Daryl Robinson | February 17, 2023

Property undergoing construction or refurbishment presents a higher risk of loss or damage than static property. How can you ensure you avoid responsibility for uninsured losses?
Casualty|Climate|Environmental Risks
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Both contractors and principals/owners often misunderstand the responsibility for insuring “existing structures” where a project includes the incorporation of work already completed. This risk can take many forms, for example:

  • Engineering firms performing plant overhauls on existing facilities
  • Most sub-trades working on completed structures (especially those with service divisions such as air conditioning, plumbing or electrical contractors); or
  • Contractors working with existing structures, such as extending existing buildings, refurbishment works, retention of facades on historical buildings, or plant expansion projects.

Confusion often arises as to who is responsible for reinstating such existing structures should damage occur, given they are not part of the contractor’s project works and any current property/ISR cover put in place by the principal/owner will usually exclude loss or damage to property undergoing construction, erection, alteration or addition and any consequential business interruption. This exclusion may not apply where the value of the work is below a specified amount, for example less than 10% of the policy limit of liability, or $500,000, whichever is the lesser.

Public liability

It is often assumed that the risk of damage to these structures is covered by the contractor’s Liability insurance. However, this is subject to a number of factors:

  1. The liability policy is dependent on the contractor being legally liable for the loss or damage. This may not be the case for example on storm or vandalism claims, which may occur through no fault of the contractor.
  2. Liability policies may exclude (or sub-limit) property in the care, custody, or control of the contractor. Therefore, even though liability may apply, the full cost of building reinstatement may fall outside the policy cover.
  3. The Liability policy will exclude damage caused by defective workmanship to the part or parts of the property affected. The part being worked upon can be subject to broad interpretation and may exclude a significant part of a re-worked building.

Clearly the responsibility for existing structure cover should be determined at the outset under the contract, and if the intention is for cover to apply on a “first party” basis regardless of liability, the building should be insured under a contract works extension or principal controlled policy as set out below.

Property/ISR vs contract works

First party cover for existing structures may be secured by:

  • Endorsing the principal or owner’s property/ISR policy to remove the exclusion relating to property that is undergoing construction. As the risk is no longer one of a static property, the insurer may charge an additional premium or apply a higher deductible during the construction works phrase. However, any cover under the property/ISR cover can be set aside for the same period, offsetting this cost. Under this option, Insurers will wish to retain full rights of recourse against the contractor in the event damage was caused by their negligence
  • Including “existing structure cover” under the contract works policy during the time works are being undertaken. This can be done under the contractor’s annual policy, but if the value of the existing structure is significant compared to the value of works being undertaken, it may be easier for the owner to secure cover under a project specific contract works policy. This is particularly the case should consequential loss cover be required which can be included at the principal/owner’s expense.

Under the second option, as the contractor is an insured under the policy, recovery rights are not available - a distinct advantage to the contractor. However, regardless it is preferable that the construction contract conditions provide that the insurer waives any subrogation rights against the contractor.

Contract conditions

Under the second option, as the contractor is an insured under the policy, recovery rights are not available - a distinct advantage to the contractor. However, regardless it is preferable that the construction contract conditions provide that the insurer waives any subrogation rights against the contractor.

It would be prudent for the contractor to seek an indemnity from the principal to minimise recovery actions and also provide for the circumstance of a loss exceeding the replacement value of the existing structure and/or the limit of indemnity of the contractor’s public liability insurance policy.

Appropriate contract conditions prepared by experienced construction lawyers are likely to minimise lengthy and costly litigation in the event of loss or damage to an existing structure. This is particularly the case with heritage listed buildings, which will require a Dilapidation Report and careful consideration of the cost to reinstate, given current building codes and the need to find original materials.

Managing existing structure risk

Existing structures can take many forms, but the contractor should not automatically assume responsibility for any existing buildings under the contract and owners should not assume full cover applies under standard contract conditions. Failure to carefully consider cover for the existing structure prior to works commencing can result in uninsured losses.

Property undergoing construction or refurbishment presents a higher risk of loss or damage than static property. WTW can help ensure that as a building owner, your asset is properly protected and as a contractor, you are not accepting responsibility for uninsured risks. This entails careful consideration of the contractual framework and then seeking optimal insurance coverage alternatives, so that both parties can be assured the risk and asset are comprehensively protected.

Authors


National Manager, Construction New Zealand

Account Director, Construction

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