Back to basics: An introduction to construction insurance policies

7 minute read
24 April 2023

Insurance is a vital element of any construction and engineering project. The potential liabilities of parties such as the employer, contractor and professional consultants are significant, as are the losses that would be sustained if those parties did not have the financial resources – or appropriate insurance cover – to meet such liabilities.

Almost all construction projects are therefore supported by insurance: without adequate insurance cover, funders may not be willing to proceed and projects may therefore be withdrawn.

In certain circumstances statutory obligations will also underpin the need for insurance.

As part of our Back to Basics series of insights, we discuss below some of the types of insurance that are often maintained by parties in the construction industry, the main types of risks to which they respond, and the scope of the cover they offer.

Construction all risks (CAR) insurance

All risks insurance is designed to cover the risks of accidental physical damage to the works or materials on site. A CAR policy is typically procured by either the contractor or the employer, but will generally cover several parties on a joint names basis, e.g. contractor, employer, subcontractors, professional consultants, suppliers, funders, etc. CAR policies may operate on either an annual basis, or a project-specific basis.

The relevant construction or engineering contract:

  • will usually specify which party is responsible for procuring a CAR policy – however in practice it is often the contractor who does so;
  • will typically require the CAR policy to remain in place until practical completion; and
  • should be carefully considered to ensure that the CAR policy reflects the risk allocation set out in the contract. For example, any party accepting a risk under the contract must ensure that it has adequate insurance cover to enable it to discharge its liability should the risk materialise (and should consider any excess under the CAR policy).

When CAR cover is taken out for a particular project, the project policy is often said to offer 'tripartite' cover, since a project policy is typically (although not always) divided into three different sections covering:

  1. Damage to insured property, e.g. arising from flood, adverse weather, fire, explosion, theft or vandalism. There are a number of common exclusions in this section, for example damage arising from defects, corrosion / wear and tear, design errors or poor workmanship.
  2. Consequential financial losses caused by a delay in start-up (DSU) of the construction project, arising as a result of damage falling within the scope of (1) above. If the delay is caused by one of the exclusions (e.g. defects), or is not on the critical path, it will not be covered. This is a complex area and often requires expert evidence and / or delay analysis to confirm whether or not the policy will respond to a particular delay.
  3. Third party liabilities: this covers accidental damage to property owned by a third party or injury to a third party. It will not, however, usually cover an insured party's liability to its own employees. This should be covered by the insured's employers' liability insurance.

As with any insurance, the insured amount under the policy is the maximum sum for which the insurer may be liable: however the policy holder will be required to prove the amount of loss actually incurred.

Professional indemnity insurance

Professional indemnity policies insure against liability arising from professional negligence. In a construction context, such liability usually arises from breach of a contractual duty, such as the obligation to exercise reasonable skill, care and diligence.

The parties to a construction project who are usually contractually required to hold such insurance include professional consultants such as surveyors, architects and engineers, as well as others with design responsibility, such as contractors under a design and build contract and subcontractors with partial design responsibility.

Maintaining a professional indemnity policy can be important, since it would respond to losses caused by design errors – however, it would not cover defective workmanship, nor would it respond if the professional has made any contractual assertions of fitness for purpose.

Unlike a CAR policy which is typically maintained until practical completion, the professional indemnity insurance that will respond will be the policy that is in place when a claim is intimated or made. That policy may well be different from the policy that was in place at the time of construction if a claim is made years after the event.

Public liability insurance

Public liability insurance protects against claims made by third parties, typically members of the public such as customers, suppliers, visitors or passers-by, in respect of injury, death or damage to property. Again, it will not cover the insured's liability to its own employees, which will be covered under the insured's employers liability insurance.

Whilst there is no general legal obligation to obtain public liability insurance, in the construction context it is often required either by the underlying construction or professional services contract, or by clients.

There is not usually any need for it to be maintained after practical completion, since it operates on an "occurrence" basis, i.e. it responds to damage suffered during the period of the policy, irrespective of when the negligent act occurred and when liability for the damage is established.

Product liability insurance

Often combined with public liability insurance in a single policy, product liability insurance protects against liability for third party injury or property damage arising out of products supplied by a business.

In the construction sector, contracts will often include terms requiring a party which designs, manufactures or supplies a physical product or technology to maintain a product liability policy.

Latent defects insurance

This 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. Policies will tend not to respond unless the defects have caused damage or there is an immediate risk of damage. 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 to 12 years after practical completion.

If you have any questions about this article, please get in touch with Sam Holland, Richard Green, Emma Knight or Jatinder Sahota.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.