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 of 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 injury of 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 nor secondary option X15 using the NEC3 ECC require the contractor to insure against claims of negligence in its design. Secondary option X15 with the NEC4 ECC fixes this problem with the requirement to professional indemnity insurance stated in X15.5. If secondary option X15 is chosen in the NE4 ECC, this limits the contractor’s liability for its design to the standard of ‘skill and care normally used by professionals designing works similar to the works.’
If the parties have agreed not to limit the contractor’s design liability, X15 will not apply and neither will the obligation to provide the equivalent insurance cover. In the absence of X15 the contractor’s liability normally extends to the more onerous standard of ‘fitness-for-purpose’, for which insurance is unlikely to be available or affordable. However, it would still be advisable for both the client and the contractor to have insurance cover for the lower standard, i.e. ‘skill and care normally used by professionals designing works similar to the works.’ In these circumstances it is advisable that additional insurance for professional indemnity is stated by the client in contract data part one (83.2). For this, the wording of X15.5 (NEC4 ECC) could be used.
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.
Daniel Contract Management Services Ltd
An edited version of this article was first published in the NEC User Group newsletter Issue No. 91 May 2018 (page 4) and can be downloaded here.