The Construction team, together with the Insurance team, have prepared this glossary of terms to assist your understanding of some of the more common terminology used in insurance policies that you may come across in the construction industry.
Insurance is a vital element of any construction project, given the size of the potential liabilities of parties such as the employer, contractor and professional consultants, and the heavy losses that would be sustained if those parties did not have the financial resources to meet such liabilities.
The long-awaited Insurance Act comes into force in August 2016 and will bring far-reaching changes to the rules governing commercial insurance law with an impact on everything from duty of fair presentation to warranties. As part of a series of alerts on construction insurance issues, we will be releasing a brief guide to the new Act later in the year with some hints and tips on what clients can be doing to prepare for the changes.
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Aggregate limit of indemnity
The total amount of any insurance monies available to pay any and all claims, made under the policy during the policy period.
The total amount for which an insured will be responsible in respect of all claims made under the policy in one policy period.
A clause, which provides that a series of losses or claims should be treated as being only one claim for the purposes of applying the limit of indemnity and/or the policy excess.
The agent of the insured, the broker acts as an intermediary between you and your insurers. Working with you/your legal advisers, your broker should be able to help you with negotiating price/terms of cover; negotiation of the policy wording; the disclosure process; inception of cover, notification of claims and renewal. Brokers are regulated by the Financial Conduct Authority (FCA).
The payment which a broker receives by way of a percentage of the overall insurance premium and which will, therefore, attract insurance premium tax.
Covers physical loss or damage to the insured property, arising out of specified risks such as flood, fire and storm. Cover will vary according to its terms. Cover is usually on an events occurring basis.
Business interruption cover
Usually covers losses such as increased costs of working; loss of profit; loss of rent receivable; and loss of rent payable, as a result of an interruption to the business. Business interruption cover will generally be tied into (and contingent upon) there having been damage to property, which is insured elsewhere under the policy and which has led directly to the interruption in question. Cover will vary according to its terms.
The relevant insurer in the event of a claim under the policy is the insurer who was on risk when the third party claim was first made against the insured or the insured first notified "circumstances" to insurers which resulted in that claim, not when the event giving rise to the claim occurred, which may or may not be the same period of cover.
A condition of the policy, which must be complied with, failing which the insurer will be able to repudiate the claim in its entirety even if it has not been prejudiced as a result.
Contractor's all risks (CAR) insurance
Typically covers liability for physical loss or damage to the building works (including permanent and temporary structures) both on site and in transit, and site materials (including owned and hired in plant and machinery), whilst in the course of construction until practical completion. May be taken out by either the main contractor or the employer, and usually the main contractor, employer and funder are named as joint insureds. Cover is usually on an events occurring basis.
Contractor's pollution liability insurance
Usually covers a contractor in respect of its liabilities for third party property damage, personal injury and clean up costs as a result of pollution or contamination arising as a result of the contractor's works. Cover will vary according to its terms.
The amount of any claim for which an insured will remain responsible, and which insurers will deduct from a claim payment. Can be an excess based on each and every claim or an aggregate excess. Can also be affected by the aggregation clause.
Directors & officers liability (D&O) insurance
Covers directors and officers (and sometimes employees in a managerial position) in respect of claims made during the policy period, which allege wrongful acts on the part of the directors and officers. Cover will vary according to its terms, and can extend to reimbursing the company, where they have indemnified the directors and officers. Cover is usually on a claims made basis.
Duty of disclosure
The duty which every insured owes to its insurer to disclose all information to its insurer prior to inception of the policy, which is material to the underwriting risk and not to misrepresent any material facts (although this duty will change after August 2016, when the new Insurance Act 2015 becomes effective). Under the current law, any failure by an insured to comply with its duty of disclosure can presently lead to the insurer being able to void the policy from inception, meaning that no claims are paid, the premium is refunded and the company is effectively uninsured.
Each and every claim
The limit of indemnity is the total amount available for each claim made under the policy subject to the operation of any aggregation clause.
Employers liability insurance
Covers an employer's liability to its employees for death and personal injury arising during the course of their employment. A compulsory insurance under the Employers Liability (Compulsory Insurance) Act 1969. Cover is on an events occurring basis.
The relevant insurer in the event of a claim under the policy is the insurer who was on risk when the event occurred, which gave rise to the claim.
The amount of any claim for which an insured will remain responsible, before payment is made by insurers. Can be an excess based on each and every claim or an aggregate excess. Can also be affected by the aggregation clause.
Excess layer insurer
An Insurer that covers specified losses incurred by the insured in excess of a stated amount, which is insured by a primary layer insurer, for example an excess layer insurer may provide cover of £5 million in excess of £1 million, which is insured with another insurer.
A term in an insurance contract that exempts the insurer from liability for specified types of loss. An exclusion may apply throughout a policy or it may be limited to specific sections of it.
Indemnity to principal clause
An indemnity to principal clause in an insurance policy extends cover to a principal if he is sued alongside his contractor as a result of that contractor's actions.
Joint names insurance
Where two or more people, with separate insurable interests, take out a policy from the same insurer under a single insurance policy, such as the employer and building contractor. Each joint insured has separate rights under the policy and is entitled to make a claim. Insurers are not entitled to exercise rights of subrogation against a joint insured.
Latent defects insurance
Covers the cost of repairing, replacing and/or strengthening new-build properties, in the event of an inherent defect in the structure arising out of poor design, workmanship or faulty materials, which is only discovered after practical completion. Cover is provided on a no fault basis. The insureds are typically the owner of the premises, the developer and the funder. Cover usually lasts for 10-12 years after practical completion.
An insurance professional who is appointed generally by an insurer to handle the defence of third party claims in respect of which an indemnity is sought under an insurance policy.
An insurance professional who is appointed generally by an insurer to investigate the cause of loss, calculate the value of a first party claim and establish its validity under the terms of the insurance policy.
An insurance professional who is appointed by the insured to prepare substantial and/or complex claims to be submitted to insurers and to negotiate the best terms of settlement on the insured's behalf.
Noting the interest of a third party on to an insurance contract. Market practice but legally ineffective.
Pollution legal liability insurance
Covers liabilities for clean up costs, third party property damage and personal injury as a result of claims made against the insured following pollution or contamination of land. Claims should be defined to include service of statutory notices etc. Cover will vary according to its terms. Cover is generally on a claims made basis.
The payment for insurance cover. Calculated by reference to the risk. Attracts insurance premium tax.
The insurer who provides the first layer of cover over and above the policy excess.
Product liability insurance
Covers liabilities for third party property damage and personal injury caused by a defective product, such as lifts or cladding. Will not cover damage to the product itself. Consider financial loss extension. Cover will vary according to its terms. Can be on a claims made or events occurring basis.
Professional indemnity insurance
Covers legal liabilities for negligent acts, errors or omissions (usually including breach of the contractual obligation to exercise reasonable care, skill and diligence when for example, undertaking a design) arising during the course of the provision of professional services. Generally a requirement for professional consultants such as engineers, architects, surveyors and project managers, as well as building contractors that owe a design responsibility. Can be on the basis of a professional body's minimum terms for example, RICS. Cover will vary according to its terms. Cover is on a claims made basis.
Covers all major participants in particularly large construction or engineering projects. Typically operates in the same way as an all risks policy, but may also include public liability and product liability, professional indemnity, latent defects and buildings insurance.
Public liability insurance
Covers legal liabilities for third party property damage and personal injury to third parties other than the insured's own employees. Cover will vary according to its terms. Cover is on an events occurring basis.
The insurer's insurer.
The restoration of cover following its exhaustion as a result of a loss either on payment of an additional (reinstatement) premium or automatically depending upon the terms of the reinstatement clause.
Run off cover
An insurance policy, which provides cover in respect of claims made against the insured during a fixed period of time but which relate to events occurring prior to inception. For example: a six year run off Professional Indemnity insurance policy taken out on the winding up of a partnership will generally provide cover for claims made up to six years after the winding up, which arise as a result of wrongful acts committed prior to winding up.
The automatic right, which an insurer who has paid a claim under a policy, has to step into the shoes of the insured and to exercise any rights, which the insured has against a third party in connection with the loss claimed under the policy and in order to recover the insurer's loss. The risk to the third party of facing a subrogated recovery claim can be minimised contractually or by inclusion of a waiver of subrogation clause under which insurers agree not to exercise rights of subrogation against a particular party or parties.
Covers material damage caused by an act of terrorism. Can be obtained as a "stand alone" policy, or as an extension to buildings insurance or commercial combined policy.
An individual or firm that is authorised by an insurer to enter into contracts of insurance on behalf of the insurer.