What is an annual insurance programme?

An annually renewed policy that is intended to cover the vast majority of a contractor’s or employer’s activities during the agreed period. The policy will contain exclusions or restrictions for certain types of activity, which will require project specific insurance to be covered.

How does a civil liability professional indemnity policy differ from a negligence based?

A civil liability PI policy will cover any civil liability (arising from the provision of professional services) that is not otherwise excluded under the policy. In comparison, a negligence-based PI policy will respond to claims arising from professional negligence only. Civil liability is the wider form of cover.

What does class of business (CoB) mean?

Class of business, or CoB, is an insurance term used to describe individual categories of insurance defined according to the perils insured or the nature of the industry for which the product is intended. For example, construction all risks.

What is a condition precedent to liability?

A condition precedent to liability is a condition which must have its terms satisfied fully before an insurer can be considered liable for a specific peril. For example, an insurer might require 24/7 CCTV to be in operation in order for losses from theft to be insured. Conditions precedent are in effect for the duration of the contract and the condition must be satisfied at the time of a loss. It is not merely enough for the condition to have been satisfied at some point during the contract, otherwise an insurer may be within their rights to deny a claim, i.e. the insurer has no liability when the condition is not being complied with.

What is construction all risks (CAR) insurance?

CAR insurance covers the works of a construction project against physical damage arising from all risks, except those specifically excluded. CAR also covers materials for incorporation in the works, property temporarily occupied for site offices and construction plant and equipment (CPE).  CAR insurance normally covers a project for its duration, and reverts to the owner's property insurance upon completion. Cover is provided during the defects rectification period for damage arising from defects occurring during the construction period.

What is the construction period?

The period during which the physical works are carried out on site, commencing with the first activity and finishing on completion or handover.

What does contractor’s plant & equipment (CPE) include?

CPE refers to machinery and equipment used to undertake construction projects. CPE is reusable and not ultimately incorporated within the project works, a clear differentiator to construction materials. There can be some ambiguity as to the precise nature of certain equipment, which could be defined as CPE or temporary works, such as scaffolding.

What is contractual financial loss?

Contractual financial loss (CFL) is similar to contractual liability insurance (CLI – defined below) and is an amended form of third party liability (TPL) insurance that covers legal liabilities arising from specific contractual undertakings, including those passed on by Network Rail Asset Protection Agreements where a penalty for not keeping a track available is paid to a Train Operating Company. Since the now infamous Tesco -v- Constable case, normal TPL policies will only indemnify for liabilities in tort or coextensive in tort and contract. However, there are situations in which employers or contractors may incur liabilities beyond this common law position and some of these will involve triggers which do not cause damage to the track to make it unavailable. CFL insurance policies have been created to cover this non damage exposure. Miller has the first CFL facility ever to be secured from the UK insurance market.

What is contractual liability insurance (CLI)?

CLI is an amended form of third party liability (TPL) insurance that covers legal liabilities arising from specific contractual undertakings, as opposed to those in common law. Since the now infamous Tesco -v- Constable case, normal TPL policies will only indemnify for liabilities in tort or coextensive in tort and contract. However, there are many situations in which employers or contractors may incur liabilities beyond this common law position. CLI insurance is one solution for these potential liabilities.

What is cyber insurance?

Cyber insurance covers losses relating to damage or loss of information from IT systems and networks. Policies generally include significant assistance with and management of the incident itself, which can be essential when faced with reputational damage or regulatory enforcement.

What is a deductible?

This is a method for insureds to retain risk. The deductible, expressed as a financial amount, is deducted from the sum insured or limit of indemnity provided by the policy. For example, a policy that has a £5m sum insured with a £1m deductible will pay a maximum of £4m. Deductibles are most commonly used on property risks whereby the finite value of the physical insured property makes an excess inappropriate. Often wrongly confused with excess (see below). 

What is the defects liability period (DLP)?

The period following completion or handover during which the contractor remains liable for defects in the works. The first 12 or 24 months of the DLP may carry additional obligations (see defects rectification period).

What is the defects rectification period (DRP)?

This period is also referred to as the maintenance period in some forms of contract. The DRP commences once a project is completed and handed over to the employer, owner or client. The DRP is normally the first 12 or 24 months of the defects liability period (DLP) in which the contractor is obliged to return to site to rectify defects within the contract works. For the balance of the DLP, the contractor remains responsible for defective work but is not obliged to return to rectify those defects.

What is delay in start-up (DSU) insurance ?

A policy which indemnifies the project owner or employer for losses arising from delayed completion caused by a physical damage loss during the construction period. DSU is bought in conjunction with CAR insurance and can indemnify for loss of profits, additional project finance costs or acceleration measures to mitigate either of the former.

What is directors’ & officers’ (D&O) insurance?

Directors and officers have specific duties, responsibilities and powers relating to their positions. If a director or officer is found to have acted outside of their terms of reference, civil, criminal or regulatory proceedings can be brought against them. D&O insurance covers the cost of defending these proceedings, as well as any compensation costs that arise from an unsuccessful defence.

What is employers’ liability (EL) insurance?

EL insurance protects employers against liabilities incurred to employees for injury, disease or death caused during the course of their employment. This compulsory insurance is intended to protect the employer’s liability to the claimant. As a result, the employee must prove that the employer has been negligent or breached its statutory duties in relation to safe equipment, places or systems of work to be successful in a claim for damages. The policy will indemnify the employer in respect of these damages as well as any legal or defence costs incurred throughout the process.

What is an endorsement?

An endorsement is a formal amendment to a contract of insurance. These are prepared when an aspect of the risk changes for agreement by the underwriters. An additional premium may be charged in circumstances where the risk change is significant.

What are environmental risks?

Development frequently occurs on brownfield sites, which may have been exposed through a previous use to pollution or contamination. Whilst efforts may have been made to remediate these sites, there may be pollution and contamination exposures to both future occupiers of the site and/or to third parties who might be affected should the pollution or contamination migrate to their site/property or into an aquifer.

What is an excess?

The excess is the level of risk retained by the insured, expressed as a financial amount. Once this figure is exhausted by a loss, the insurer will pay the limit of indemnity or sum insured in “excess” of the retained risk. For example, a policy that has a £5m sum insured with a £1m excess will pay a maximum of £5m after the insured has paid the £1m excess. Often wrongly confused with deductible (see above).

What is a follow insurer?

Follow insurers review terms offered by lead insurers (see below) and decide if they are acceptable. If so, they agree to participate on the insurance placement at the leader’s terms, conditions and premiums. In some circumstances, the follow insurers may agree to be bound by the decisions of the lead underwriter.

What is group personal accident & travel insurance?

An insurance policy that provides protection to nominated employees should they suffer an illness or injury whilst acting on behalf of their employer (on a business trip/overseas placement/secondment or the like). The indemnity under the policy is usually for medical expense and, in respect of certain injuries, such as loss of limb, sight etc., a defined sum. 

What is housebuilders’ all risks insurance (HAR)?

Most CAR policies are written for traditional contracting activities, where there is an employer, contractor and subcontractors. The protection these provide are designed around the contractual framework of traditional contracting and are not always appropriate for speculative development projects where there may not be a traditional employer and contract. An example of this is the cover provided during the maintenance or defects rectification period, which is not applicable to speculative residential development where the existence of a residential warranty product may be more appropriate to consider.
A housebuilders’ all risks (HAR) policy is specifically written for businesses undertaking these projects and provides more tailored protection for speculative residential developments as opposed to general traditional contracting.

What is the Joint Code of Practice for Fire Prevention on Construction Sites (Joint Fire Code or JCoP)?

The Joint Fire Code is a guide for contractors and their employers to prevent fire losses on site. Now in its 9th edition, it was first published in 1992 following a series of devastating fires on construction projects. The Code includes a series of best practice recommendations to prevent, detect and combat fire and seeks to ensure that these issues are given proper consideration during the planning and design stages of the project. Failure to observe the Joint Fire Code can result in withdrawal or invalidation of insurance protection.

What is Judicial Review insurance?

A Judicial Review is a type of court proceeding in which a judge reviews the lawfulness of a decision or action made by a public body. It is a challenge to the way in which a decision has been made, rather than the rights and wrongs of the conclusion reached.
Following any grant of planning permission is a critical six-week Judicial Review period where an interested party can challenge the decision. It can often take up to six months thereafter for the case to then be heard in the High Court. A successful challenge can result in planning permission being quashed and needing to be reconsidered; potentially resulting in substantial abortive costs, contractual penalties, and loss in the market land value for the developer.
Judicial Review insurance can transfer such risks to insurers, thereby removing progression barriers and achieving greater financial certainty for both the developer and their financiers. A policy will typically cover resultant damages and compensation, planning / demolition / reinstatement costs, associated professional fees, market valuation reduction and/or debt interest.

What are landbank risks?

Developers maintain a landbank of sites that they have purchased or taken an interest in for future development. These can be clear sites or contain buildings, which may or may not be retained or refurbished as part of any future development. These sites can be affected by trespassers or weather perils, and at the very least should be subject to a property owner’s third party liability (TPL) insurance.
Vacant property on pre-construction development sites is regarded as high risk by insurers and may be subjected to restricted coverage, such as limited perils, increased excesses and additional risk management obligations.
In addition, the value of such landbank could be affected by many things, including a loss of value should permission to develop not be granted.

What is latent defects insurance (LDI)?

LDI protects a completed property against inherent (or latent) defects in design, workmanship or materials that become apparent in the structure or waterproofing of a building. The policy acts as a benefit to the property as it will respond quickly following the identification of a defect to prevent imminent damage. This avoids the time consuming and potentially expensive process of identifying who is responsible for the defect, and pursuing them with legal action, as insurers will respond to a claim under the policy in the first instance.

What is a lead insurer?

The lead insurer on an insurance placement is the underwriter that sets the terms, conditions and premiums for the risk in question. The lead insurer may also be responsible for managing the insurance market’s response to claims. In some cases, all of the participating insurers may be bound to follow the lead insurer’s decisions on altering cover, premiums or claims. All other insurers are referred to as follow insurers (see above).

What are legal indemnities?

This is an umbrella term for a suite of insurance products that protect property owners or lenders from issues relating to the ownership or development of the property. These products include - absence of easement or right of way, access or ransom strip indemnity, forfeiture of lease, defective title, judicial review, restrictive covenant and rights to light.

What are lender’s insurance requirements?

These are stipulations made by a project financier or mortgage company to protect an asset which is the subject of a loan or is used as collateral for a loan. In construction insurance, these normally arise from project financiers who want to ensure that the insurance programme protecting the works in progress is in place and effective, includes the lender in the event of a default and extends to protect other risks such as revenue loss arising from delayed completion.

What is a limit of indemnity?

This is the financial limit of insurance purchased by an insured under a liability policy. Limits of indemnity can be expressed in different ways, including “each and every loss” meaning the limit is available for each claim, or “in the aggregate” which means that the policy has a finite limit.

What are liquidated damages?

Liquidated damages are pre-determined damages (for example as an amount of money payable) set at the time that a contract is entered into if the one or other parry fails to meet its obligations. In relation to project delays, these can be daily, weekly, or monthly amounts which are intended to be a genuine pre-estimate of the loss suffered by the counterparty as a result of the breach.  They are often used where calculation and vouching of the loss would be complex and time-consuming.
A pure financial loss is a financial damage suffered due to lack of service, non-performance or any other event that does not result in injury or loss/damage to property.

What is a limitation of liability clause?

This is a provision in a contract the limits a company’s exposure in the event of a claim.

What is marine cargo insurance? 

Marine cargo insurance covers losses arising from physical damage to goods whilst being transported around the world, whether by road, rail, sea or air.

What are modern methods of construction (MMC)?

A broad term encompassing non-traditional building and construction techniques, which can be undertaken off-site or on-site depending on the circumstances. These techniques range from the prefabrication of complex and high quality modular units in factory conditions, to the use of automated equipment to simplify, reduce risk and accelerate works carried out in situ.

What is motor insurance?

A compulsory insurance in the UK, motor insurance covers a vehicle owner or operator for third party liabilities arising out of the vehicle’s use. These liabilities are commonly in respect of damage to other vehicles and injury to other drivers, passengers and pedestrians. Wider forms of cover are available to protect the owner’s vehicle against damage as well.

What is a net-contribution clause?

When more than one party is liable for the same loss or harm, a net contribution provision states that the contractual party's liability shall be restricted to the fair and reasonable (or just and equitable) amount that a court would apportion against it.

What is an owner controlled insurance programme (OCIP)?

A comprehensive insurance programme designed for a specific project (or series of projects) arranged by the owner or employer, as opposed to the contractor. An OCIP provides the employer with a greater selection of products, plus more control over the cost and coverage provided.

What is parametric insurance?

Parametric policies operates differently to traditional insurance policies, as they are built around a pre-defined event for which payment is made should the event occur. The insured does not have to prove a loss has occurred in order to receive payment. Instead, the occurrence of the pre-defined event triggers the policy, and payment is made. This creates certainty for the insured to assist with financial and risk mitigation planning.

What are part exchange properties?

It is not uncommon for housebuilders to accept a purchaser’s property as part payment for a new home. These part exchange properties are normally insured against loss or damage pending sale to protect the housebuilder’s interest. These are normally insured under the housebuilder’s property or construction all risks (CAR) insurance programme, although special considerations (such as restricted coverage, increased excesses or additional risk management obligations) may apply if the properties are vacant or unsold for an extended period of time.

What is premium?

The premium is the consideration paid by the insured to the insurer in return for the indemnity offered in the insurance contract.

What is the Principals’ Clause?

TPL insurance often includes a principals’ clause.  This satisfies the commonplace contractual requirement that the policy is extended to indemnify any employer or principal as co-Insureds but only to the extent required by such contract or agreement.  The clause waives all rights of subrogation or action that the insurer may have against the employer or principal provided that they act observe the terms and conditions of the policy.

What is professional indemnity (PI) insurance?

PI insurance protects businesses and individuals for liabilities arising from the execution of professional activities and duties. For construction risks, this is most commonly the case for design activities, although there are other activities that fall within that definition such as surveying and project management. For more details, visit our PI product page.

What is property & business interruption insurance?

Completed, operational and occupied properties are protected by property insurance. This can be arranged on an “all risks” basis (covering all loss types or perils, except those that are excluded or a specified perils basis (covering listed perils only). These policies can be extended to include a section protecting any loss of revenue from a business that might be operating within the property and/or the loss of rental income of a property developer/owner.

What is Rights of Light insurance?

Rights of Light grants building owners or tenants the right to maintain a pre-determined level of light through defined apertures. There are various ways for a party to acquire Rights of Light, such as grant by express right in title or rule, or implied grant, or most commonly by prescription following continuous enjoyment of light over a 20-year uninterrupted period. Rights may remain with neighbours even after buildings are demolished and rebuilt if such apertures continued unabated. Construction projects will commonly obstruct the light of existing neighbouring properties, and therefore any neighbour who has a Rights of Light may be entitled to seek legal remedy to any infringement, primarily in the form of an injunction.
Rights of Light insurance can transfer such risk to insurers early in the development process, allowing developers to benefit from increased budget and profit certainty, alongside a reduced delay risk. A policy will provide an indemnity basis of cover in perpetuity, for a one-off deposit premium charge, and typically cover legal costs involved in addressing claims, compensation settlements, abortive design and construction costs, and/or loss in land value in the event of enforced curtailment.

What is single project professional indemnity (SPPI) insurance?

SPPI is a policy of insurance, often multi-year, dedicated to a specific construction project. Limits of indemnity are aggregated across the duration of the construction period and any extended reporting period that may apply. It provides cover for professional negligence claims from third parties against the participants in the project (commonly design and construct contractors, engineers, designers and architects).

What is a Surety bond? 

A surety bond is a financial instrument issued by an insurance company in the form of a ‘Guarantee’ that certifies the successful performance of one party to another under a contract. The bond provides monetary compensation to the Beneficiary/Employer in the event that specified obligations are not performed by the contractor due to a breach of contract or default. 

How does a surety bond differ to insurance? 

Though issued by an insurance company, a surety bond does not operate as a risk transfer mechanism like traditional forms of insurance. Issued on recourse terms, it is considered a line of credit; or in accounting terms, a ‘contingent liability’ off balance sheet. The availability of capacity and pricing is therefore driven by the financial covenant of the contractor/bonded Principal.

Counter Indemnity - given the recourse nature of bond facilities, a pre-requisite is the entry into a Deed of Counter Indemnity in favour of the surety. This is a legal agreement that affirms the surety’s common law position to seek a recovery from the contractor/bonded Principal should there be a call under a bond. 

What is third party liability (TPL) insurance?

TPL insurance protects against common law liabilities to others incurred by an insured. Most usually, these policies will indemnify against claims for injury, damage, nuisance, trespass and the like. Insurers provide an indemnity where it can be shown that the insured is legally liable for the loss.

What are the typical types of bonds required under a construction contract? 

Performance Bond – a guarantee issued by the contractor (Principal) in favour of the Employer (Beneficiary) to guarantee the obligations under the contract. Issued as a percentage (%) of the contract, typically 10% for contracts in the UK providing financial protection to the Beneficiary in the event of non-performance by the Contractor 

Advanced Payment Bond – a guarantee issued the by Contractor in favour of the Beneficiary to guarantee upfront payments for goods or services needed under the contract following either Insolvency or the misuse of funds.

Retention Bond - a guarantee issued the by Contractor in favour of the Beneficiary who in turn waives their contractual right to deduct retention monies from the sums due to the contractor under the contract for the work completed. The bond value represents the amount of retention that would have been held which is typically between 3-5% of the contract price.  

Section Bond (Road & Sewer Bonds) – guarantees the obligations of a developer under the respective section agreement to the adopting local authority or water authority.  Enables the local authority to access funds to satisfy the developer’s outstanding obligations, should they default on the particulars of the agreement.

What does Utmost Good Faith mean?

The normal rule of caveat emptor (‘let the buyer beware’) does not apply to contracts of insurance.  The insurer relies on the insured making a full disclosure of matters which perhaps may not appear important to the insured but could be all important to the insurance underwriter.  The insurer must have full information on which to base their assessment of whether to accept the risk and, if they do accept it, what premium they required.