This blog is a basic note on insurances and is aimed at those involved on a construction related project for perhaps the first time. We often request insurances certificates but parties are unsure as to why we do this and this blog aims to address this.
There is no doubt that insuring works to be performed by a contractor, consultant or sub-contractor is of vital importance to any construction project. It is important for two main reasons. The first is that it covers the insured against an insured liability. The second is that the insurance provides comfort to the client, should the client need to make a claim, such as for defective design. There are various types of insurance policies issued on construction projects such as Product Liability, Employer’s Liability, Public Liability, Professional Indemnity and Contractors All Risk. Some companies may also obtain Directors and Officers (D&O) and, increasingly, Cyber insurance.
Going back to basics, it is important to review any insurance certificate disclosed by the insured for several reasons. We have come across many insurance certificates where the name of the insured is different to that required such as by the contract. Whether it is a misspelt name, only referred to in part, or the wrong type of legal entity (LLP, Plc, Ltd), it is important that these details are correct. A reason for this is so that the beneficiary can, at any early stage, be mindful that the insured may seek to place reliance on and make a claim under the insurance certificate.
We also need to see insurance certificates to check that the insurance value and basis detailed on the certificate is correct when reviewed against what the client requires as adequate insurance. We do this to ensure the insurance arrangements are back to back with the express requirements of the building contract, warranties and appointment documents. The insurance required of each party, such as each member of the design team, should reflect the value and nature of the works to be performed and perhaps also the value of the overall project.
The wording of the insurance certificate also indicates the type of basis on which the insurance is held which can be critically important. For example, if an insurance certificate has an Each and Every basis, and the certificate indemnity limit is £5m, several claimants may bring various unrelated claims, but each claim will be subject to a limit of £5m. An alternative basis can limit all claims together to no more than the indemnity limit in any one policy year (known as an Aggregate basis). This means that if the insurer has already paid out the indemnity limit of £5m two months into the policy year, then the insurer is not liable to pay any more claims during the remaining 10 months which means that those further claims are effectively uninsured. Remember also, these limits will include legal costs. The “each and every” claim policy is likely to give a party wishing to bring a claim more security but it is likely to be more expensive for the contractor or consultant to purchase because it exposes the insurer to greater risk. These examples show that it is crucial to understand the needs of your client when agreeing a particular type of indemnity basis.
From a client perspective, we always aim to ensure that appropriate insurance cover is in place, to protect the insured, in the event of a claim arising in the future as absent this the impact on the client can be unhelpful.
A further insurance back to basics Blog will follow.