Construction work: avoid the insurance gap (Cathy Hawkins)
Monday, July 17, 2017
Throughout my legal career I have witnessed the devastating consequences of construction projects that have failed to obtain all necessary insurance. Usually, it’s the party who commissions the work itself, rather than the contractor that is not properly insured.
One recent example is Sun Alliance v Scandi Enterprises, a Privy Council case (equivalent to the Supreme Court for some Commonwealth countries) that took place in Bahamas but could have very easily arisen in the UK where, under a number of the standard construction contracts, the responsibility to insure the building and the construction works are often separate.
In this case a building was developed but the parties only insured the construction work itself (i.e. the works) not the pre-existing building on which the works were constructed. After a fire, there was no insurance in place to pay for the repair of the building itself, a vital step before the works were repaired.
This is all too common and can lead to years of delays. For example, finding there is no cover for business interruption or advanced loss of profit (ALOP). One example was a new boutique hotel whose rebuild was delayed for 2 years which meant the owners lost a “first mover” opportunity in their area. Other issues might be, not realising that loss of income could continue beyond a 12 or 18 month period in a difficult situation such as a listed building.
The consequences are worse if the organisation behind the construction project, like an NHS hospital or charity project, could just about afford the cost of a project but has no more money. I have seen parties struggle for years trying to find a solution for the insurance claim money gap.
The lesson here is for policy holders to consider very carefully how they will be affected by a major event, including one that does not stop, but impairs the operation and where operational costs have to be incurred without full profit. These need a broker’s input, and specialist technical advice is the key, not just assuming the contractor’s insurance advisors will ”have their back”, without a wide reaching exploratory discussion.
Cathy has over 25 years’ experience in the financial sector and specialises in dispute resolution and insurance law. She is a member of Cubism’s financial liabilities team and advises policyholders on complex insurance claims.