Take cover

The insurance which is most often talked about in relation to construction projects is professional indemnity insurance; this article looks at two other types of insurance which are important in a construction context but which are less widely understood.

Non-negligent damage

Until the revision of Joint Contract Tribunal (JCT) contracts in 2005, this was often referred to as ‘clause 21.2.1 cover’ and is now sometimes referred to as ‘clause 6.5.1 cover’. However, ‘non-negligent damage insurance’ is a better term because cover of this type can also be put in place when other, non-JCT, forms of contract are used.

The insurance is not always put in place, and the JCT contract allows the parties to choose whether or not they want it for the particular project to which the building contract relates, and, if so, for what value. If this insurance is required, then it is taken out by the contractor, but the insurer has to be approved by the employer. The premium is paid by the employer as an addition to the contract sum and the policy documents have to be deposited with the employer.

The policy does not cover damage to the works which are under construction. Strangely, for insurance taken out by the contractor, it is the employer’s liabilities which are covered by the policy. Even more strangely, if the contractor
has been negligent or is otherwise in breach of contract or at fault, the policy does not pay out. What, then, is the policy intended to cover?

Key words relating to this policy are ‘collapse’, ‘subsidence’, ‘heave’, ‘vibration’, ‘weakening or removal of support’, and ‘lowering of groundwater’. One of the key exclusions from the policy is ‘injury or damage…which can reasonably be foreseen to be inevitable’.

In other words, the policy covers unexpected damage which is done to nearby land or property, simply as a result of the construction process being properly carried out or as a result of the new building coming into existence.

Nearby land or property

A couple of examples may help: A two-storey Victorian factory consisting of four walls and a roof was demolished and a new residential apartment block was built on the site. The foundations for the old factory comprised footings for the walls.
The new apartment block was much heavier and required much bigger and deeper foundations – essentially the insertion of a huge block of concrete deep into the ground.

Although it was not foreseen, this altered the
water table in the immediate locality of the new apartment block.
As a result of the alteration in the water table:

• The ground beneath one neighbouring building’s foundations started to dry out and the neighbouring building began to subside and crack; and
• On the other side of the new apartment block, the flow of groundwater was obstructed and the ground began to swell, causing ‘heave’ which lifted up a neighbouring building on that side so that it started to tilt and crack. 

In another case, a building required piled foundations. Piles are essentially hammered into the soft ground by a large machine until they penetrate or at least rest firmly on the harder rock beneath. Bizarrely, every time the hammer thumped down on a pile, the shock was felt in an office building a quarter of a mile away, to such an extent that the office building had to be vacated while the piling work was carried out, and afterwards some cosmetic repairs were required
to deal with cracked plaster.

A geologist’s report subsequently discovered that the piles were being driven on to a band of rock which curved in a shallow U shape. The piles were being banged on to one end of the U and the shock was being transmitted to the office building, whose foundations stood on the other end of it. The buildings in the quarter of a mile between the two were entirely unaffected because they were not resting on the curved stratum of rock.

In both of these cases, the employer as landowner was liable to the neighbours who were affected by the works, but in neither of these cases did the employer have any claim at all against the building contractor or any of the design team. None of
them had done anything wrong and it was not reasonably foreseeable that the inevitable result
of building the apartment block would be the collapse of buildings on either side of it. Nor was
it reasonably foreseeable that the inevitable result of constructing piled foundations would be vibration damage to a building a quarter of a mile away.

Non-negligent damage insurance provides cover for the employer in respect of this sort of event.

It is therefore sensible to specify that this sort of insurance should be taken out in any cases where there are buildings nearby, particularly where the new foundations are to be piled or significantly bigger than what was there before. It is common to take it out in respect of construction projects in city centres, and rarer to take it out when building on greenfield sites with plenty of space around. There are, however, no cut and dried rules – like most forms of insurance, it is a case of looking at the potential risks and weighing them against the premium.

Delay insurance

Building contracts specify a date for completion. They also normally specify a daily or weekly rate of liquidated damages which the contractor has to pay if he messes things up and finishes late. In order to be legally enforceable, these liquidated damages cannot be a penalty; they have to be a ‘genuine pre-estimate’ of the loss which the employer is likely to suffer as a result of getting his building late. Sensible employers therefore calculate carefully what it would cost them to get the building late, so that they can produce a justifiable liquidated damages figure. Sometimes the losses which the employer would suffer due to delay can be sizeable figures.

Building contracts also contain extension of time clauses, giving the contractor the right to claim an extension of time for completion (i.e. a deferral of the date for completion) if he is delayed by circumstances for which he is not responsible and for which he has not agreed to carry the risk.

This means that if something happens which delays the contractor, but for which he is entitled to an extension of time, the employer will get the building late and the contractor will not be obliged to pay liquidated damages. That leaves the employer bearing the loss of getting the building late, because the fact that the contractor was not at fault does not stop the employer suffering loss from not having his building on time.

Project-specific insurance

Some employers will not be too worried about this because they have business interruption insurance policies which will cover them for
this sort of loss. Typically these will be large organisations which own lots of buildings, so
that they and their insurers can view individual buildings in the same way as they view individual lorries, production machines, or any other business asset.

However, some employers do not have business interruption policies at all, or have business interruption policies which do not cover business interruption due to delayed construction of buildings. They will have to suffer the full cost of the delay, unless they take out some project-specific insurance to cover this risk. Such insurance is available.

In the past it tended to be available only where the delay was caused by fire, flood, or one of the other normal JCT contract ‘specified perils’ – it used to be known as ‘clause 22D cover’ and was limited to the amount of liquidated damages stated in the contract. The growth of the private finance initiative market has driven the insurance industry to develop more sophisticated products which offer more varied choices of cover, going by a variety of names including delay in start-up, advance loss of revenue, and advance loss of profit, all normally reduced to acronyms.

Being project-specific, the set-up costs for this type of insurance are not trivial, but on projects where the employer’s losses due to delay could be considerable, they are well worth considering. Indeed, in the private finance initiative/public private partnership context in which they developed, where completion of the building triggers the start of the revenue stream on which the entire funding structure depends, such insurance is more or less essential. SJ

Chris Holwell is a partner at Freeths