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:
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.
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:
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.
First party cover for existing structures may be secured by:
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.
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.
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.