INSURANCE FOR THE CIVIL & CONSTRUCTION INDUSTRY
We recently asked Dirk Gouws (National Underwriting Manager at AC & E Engineering Underwriting Managers) to shed some light on the meaning of having your name on a Contractors All Risk policy (“CAR policy”). Here is what he had to say:
When should a Contractors All Risk policy be in the name of the employer?
If the Employer appoints a Main Contractor and sub-contractors it may be better for the Employer to arrange the works insurance. If the contractor has arranged the policy, it is not always possible to extend cover for the Employer’s risks; the employer can only buy project delay cover if he has arranged the works insurances and the Employer’s policy will satisfy investors/financiers. A Property Owner also has an absolute liability for damage to adjacent property arising out of removal of support to such property and will generally not be able to buy a stand-alone Removal of Support Liability policy.
What are the advantages of a Contractors All Risk policy that is in the name of the owner?
Some benefits of the Employer arranging the insurance are: the Employer will know that insurance is in place (contractors policies may be cancelled or aggregate limits exceeded on other contracts); the quality of the cover, wording & insurer is known; it is less likely that there will be gaps in cover – that is if the foundation & piling contractor completes his work and leaves site, who is insuring the completed foundations; reduces admin – you don’t have to run around collecting proof of insurance from 57 sub-contractors (and again at every annual renewal); only one SASRIA coupon is arranged.
In the event of a claim, a single deductible is applied to the claim in most cases, even if more than one contractor’s works is damaged.
So if an employer is applying for finance to construct, build or rectify a building, is it correct in assuming the Contractors All Risk policy must always be in the name of the employer?
Generally true, noting that the Employer could appoint a Turnkey Contractor who could arrange project insurance which will satisfy the banks if project delay cover is not a requirement. If the finance provider deals with project finance regularly they usually have an insurance advisor who could prescribe what cover is required and who will review the proposed policy to ensure that it provides the necessary cover before binding cover. The finance provider may also require the policy to be ceded to them or alternatively that the proceeds of all claims be paid into a trust account; the contractor will not necessarily agree to such measures.
This is not to say financiers will not accept a contractor’s policy, but the banks often ask the contractor to cede the proceeds to them, without understanding that the contractor is responsible to rectify any damage to the works in terms of contract and only receives the indemnity payment on completion of repairs. A construction guarantee may provide more peace of mind for the banks & employers alike as this would protect against contractors absconding before completing the works.
What are the advantages of a Contractors All Risk policy that is in the name of the contractor?
In terms of the conditions of contract, the contractor is responsible for the care of the works and for reinstating any damage at his own cost, whether a policy was arranged by the employer or the contractor. The contractor has peace of mind in the knowledge that he has a policy with an insurer that he knows and the contractor deals with his own broker, whom he trusts to assist when a claim occurs. The contractor can also decide on the amount of the deductible as the Employer often requires a high deductible to reduce the premium. The contractor may also have an existing annual policy with low rates based on past performance; a CAR policy also establishes an “insurance profile” for the contractor. The Contractor’s Policy approach works best for projects where the contractor is responsible for the entire project from start to finish (no gaps in cover)
If the CAR policy is in the name of the employer and a claim arises, would this affect the contractor’s claim history? If not, who does it affect?
No, any claims reflect against the Employer’s history in the first instance (contractor may not even be known)
If there are multiple contractors working on a project and the CAR policy is in the name of the employer, how does it affect all parties concerned in the event of a claim?
The policy will respond in respect of damage to the works and the indemnity settlement will be paid to the Employer, unless the conditions of contract provide for payment to the Contractor or sub-contractor. Each contractor should receive the proceeds relating to the damage to their works, less any provision in the finalised claim for professional fees or other Employer’s costs.
Can the CAR policy be in the name of both the employer and the contractor, if yes why would it be placed this way?
It is not uncommon for the conditions of contract to specify that the policy must be in the joint names of the Employer and Contractor but often the Contractor is not named in the policy schedule; the reasoning is that the Employer may appoint a different contractor or could even replace a contractor who did not perform as required.
Could you give me a break down of which contracts require the policy to be in the name of the employer and which should be in the name of the contractor i.e JBCC, NEC, FIDIC
There isn’t really a standard; most conditions of contract specify which party is responsible for arranging insurance in the Contract Data Sheet or an Addendum to the Conditions. The standard approach in terms of JBCC, however, is for the Employer to arrange insurance where the works entail working on existing property belonging to the Employer as he has direct insurable interest and an interest in ensuring that the correct cover is arranged.
To read our blog on Why You Need Contractors’ All Risk insurance, click here.
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