Blog question: Liability Under a Contract Works policy
I received this question and as I have had a few on this subject before I thought it time to post an article on the topic. The question was:
Good Afternoon Allan
Just wondering if you can clarify the following:
I currently have a builder insured on a Contract Works policy. Due to the client wanting extra cover (Contract Works) and also due to the increase turnover and payments to sub-contractors. A combined contract works and liability policy is going to be more economical for the client.
The current policy is an Occurrence policy however the contract works policy only commences when the client starts a new project in the insured period.
If I was to cancel the Liability policy at completion of the clients current job and commence liability with the contract works policy would the Contract Works policy respond in a similar scenario down below.
1st Jan 2016 Insured with Liability policy – A plumber welds a join in copper pipe
1st Jan 2017 Policy Cancelled and Liability moved to contract works policy
1st Jan 2018 The weld done on 1st Jan 2016 comes undone and floods house
Would the the Liability policy respond as the weld was done while they held cover? or
Would it be the responsibility of who holds the liability at the time of occurrence?
Craig [surname and email provided]
My answer was as follows:
There are a few traps if relying upon a mixed program encompassing Trade Policies and Site Specific Contract Works Policies. There is the risk that there will be no finished products cover and liability cover for other premises, property and activities such as yards and storage premises and marketing activities may not be covered if the Business is not properly described in the Schedule.
Regarding your question about the weld, it should be remembered that liability policies usually cover bodily injury and property damage occurring during the period of insurance. That is the loss, injury or damage has to occur when the policy is in force NOT when the faulty work or negligent act too place, which could have been years before.
The wording of the Annual Contract Works Policy in standard form including the method of assessing the premium suggests that the intention of Contract Works policy is to provide indemnity only in respect of contracts carried out during the period of the policy or otherwise named in the Schedule and for which premium has been paid.
To cover the loss occurring on 1 January 2018, the policy will need to be arranged on the basis that the cover includes works and liability arising therefrom carried out prior to the date of inception of the Annual Contract Works Policy.
An Annual Contract Works Policy is obviously superior to current arrangements but in your negotiations with the Insurer you need to focus on the following points.
- That the Policy is extended to include past contracts and contracts in force at the time of changeover. This will require an extra premium and usually this is done by declaring for the first provisional premium, the contract value of those works in force less the value of progress payments to date plus an allowance for prior completed works.
- The wording must address the contractual position existing between the Builder and his contractors and subcontractors. Some builders will include the interests of all parties including financiers under Section 1 but not under Section 2 requiring Contractors and sub-contractors to have their own liability policies. If they do that they need to have a regime in place to ensure that the contractors and sub-contractors have sufficient coverage and that their policies are kept in force until practical completion and the expiration of the Maintenance Period of projects. You need to consider the contract terms existing between the builder and his contractors and sub-contractors.
- The Contract Works policy you are referring to has a Run-Off provision in its Cancellation Condition so that the cover continues until each construction commenced during the period of insurance is completed. However NO cover would be provided for products liability arising from prior completed works. If the Client is still in business, to avoid a messy situation it would be better to have a further provision included for cancellation at the option of the Insured that enabled a complete termination and seamless transfer to another Insurer.
- Premium Payment. The policy provides for the payment of a provisional premium. Rather than paying a premium based on the full value of contracts if they extend beyond 12 months, insurances are often arranged on the basis of declared value conditions where the first and renewal premiums are assessed on the estimated value of work to be carried out during the period of insurance and adjusted at the end. This should be considered. The client would still have to pay something to an Insurer as a consideration for picking up the long tail relating to past contracts.
Hope this helps and explains what can be quite a complicated area of insurance.
I do love it when I hear the television ads say insurance is easy! What a load of rot.