Frequently Asked Questions

We are the project manager on a project where an NEC3 Engineering and Construction Contract (ECC) is being negotiated with the proposed contractor. The contractor proposes to include secondary option X18 and to limit its total liability to about half of the construction cost for part X18.4. Our concern is that the lower X18.4 limit would impact on the insurance requirements under the first item in the insurance table to cover the loss of or damage to the works. As an example, should the substantially complete building burn down, would the contractor’s insurance now be limited to the value of the X18.4 clause?
Option X18 limits the contractor’s liabilities to the employer in certain circumstances. Part X18.4 limits the contractor’s total liability to the employer for all matters except the excluded matters listed. This is the total liability so, no matter how many claims are made, the total liability for all of them will be limited to the amount stated. In your example, it would mean if the building fell down the day before it was to be taken over as a result of something the contractor did wrong, the employer could only recover half the construction cost – which is obviously not right. 

The insurance table in clause 84.2 includes the minimum amount of insurance that the contractor has to take out. The contractor can, and often will, take out more – in this case the insurance minimum should be at least the build cost. It is important however to understand that the contractor remains liable, with or without insurance, subject to any limits in X18. 

Also, the insurance company only has to pay out what the contractor is actually liable for because the insurance company is in effect standing in the contractor’s shoes. Therefore, if the contract limits the contractor’s liability to only half the construction cost, that is all the insurance company will have to pay even if the actual insurance cover is greater.

Before making any decisions, we would strongly recommend that you and your client get professional legal and insurance advice.

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