|Construction and engineering activities are often hazardous. Sites can be dangerous places to work, ground conditions are frequently unexpected, existing structures can have hidden defects and the weather is always unpredictable.These uncertainties give rise to risks of loss, damage and injury – all of which have financial consequences.|
Insurance enables clients and contractors to transfer some of their financial risks to a third party in exchange for a premium, and has become a fundamental part of construction contracts. NEC is no exception. This article provides an overview of the insurance aspects of the NEC3 and NEC4 Engineering and Construction Contracts (ECC) and looks in particular at the ECC project manager’s duties.
Liability and insurance
It is important to recognise that liability and insurance are not the same. A contractor’s liability for specified types of loss or damage may be capped using ECC secondary option X18 on limitation of liability. However, it is not uncommon for the contractor’s total liability to be stated as ‘unlimited’.
A contract for insurance will include a maximum sum payable for the event covered, so unlimited liability means there may be an amount of uninsured loss that the party which is liable may be unable to pay.
Insurance policies also normally have an initial amount for which the assured is not covered. This is commonly known as the excess and referred to in ECC contract data as ‘deductibles’. A client wishing to know the deductibles for insurance provided by the contractor would need to request this information at tender stage.
Allocation of liability
Liability for risk is allocated between the parties under ECC core clause 8, which is called ‘Risks and insurance’ in NEC3 and ‘Liabilities and insurance’ in NEC4. Client’s liabilities are listed in clause 80.1 and include, for example, loss of or damage to the works, plant and materials due to war, strikes and civil commotion.
NEC4 takes a different approach to NEC3 in how the allocation of liability is expressed. Instead of listing only events that the client is liable for and stating everything is else is for the contractor, clause 81.1 of NEC4 ECC states the four specific events for which the contractor is liable. These are claims from third parties; loss or damage to works, plant, materials and equipment; loss or damage to client property; and death or injury of employees.
Minimum cover requirements
The default position under NEC4 ECC is that the contractor has to insure against the specific events it is liable for (clause 83.3), while the client has no such obligation. The contractor’s insurance is required to be in place from the starting date until the defects certificate is issued. This means the contractor must have a policy in place beyond the date of completion. With the exception of professional indemnity insurance, the obligation to be insured ceases after the defects certificate is issued.
The insurance table (NEC3 ECC clause 84.2 and NEC4 ECC clause 83.3) lists four events against which the contractor is to insure with a minimum amount of cover. Effectively these are the same as the contractor’s specific liabilities in NEC4 ECC clause 81.1. The fourth event, death of or injury to employees, is required by UK law under the Employers’ Liability (Compulsory Insurance) Act 1969 with a minimum cover of £5 million.
Checking insurance certificates
One of the ECC project manager’s duties is to review the contractor’s insurance certificates and decide to accept or reject them (NEC3 ECC clause 85.1 and NEC4 ECC clause 84.1). In making this decision, the project manager is required to ascertain if the insurance complies with the contract and assess the commercial position of the insurer.
Some easy checks can be made. For example, make sure that the name of the contractor is stated in the certificate, that the certificate is current and that the amount of cover is equal to or greater than that specified in the contract data. Beyond this project managers should seek competent advice – the client’s insurance broker or surety provider is a good place to start.
Indeed, it is becoming increasingly common for clients to provide project-wide insurance. In this case the project manager will need to obtain and submit for acceptance the insurance certificates to the contractor before the starting date (NEC3 ECC clause 87.1 and NEC4 ECC clause 86.1).
Design liability cover
The ECC core clauses do not require the contractor to insure against claims of negligence in its design. If the contractor’s liability is not limited to the standard of ‘reasonable skill and care’ (NEC3 ECC) or ‘skill and care normally used by professionals designing works similar’ (NEC4 ECC) by selecting secondary option X15, it is advisable that additional insurance for professional indemnity is stated by the client in contract data part one.
The first item from the insurance table in the NEC4 Professional Service Contract (PSC) (clause 83.3) and the relevant section of PSC contract data could be used to do this. That said, insurance cover for a fitness-for-purpose standard is unlikely to be available or competitive.
If secondary option X15 is chosen in NEC4 ECC, clause X15.5 requires the contractor to take out a professional indemnity insurance policy.
With the exception of employer’s liability insurance, ECC requires contracts for insurance to be in joint names (NEC3 ECC clause 84.2 and NEC4 ECC clause 83.3) and preclude a right of subrogation by the insurer (NEC3 ECC clause 85.2 and NEC4 ECC clause 84.2).
Subrogation is the act of the insurer stepping into the shoes of the assured with the intention of seeking damages from the party allegedly responsible for the loss or damage. A waiver of subrogation rights under a co-insured policy addresses the circuitry argument by preventing the insurer from making a claim against an insured party for the amount paid out to the other.
The ECC project manager’s duties in respect of insurance matters are limited but highly significant. Insurance and construction contracts are inextricably linked so a basic understanding of these is important and competent advice from a specialist is always recommended.