Insurance for Contractors
Douglas Brown
Just as contractors and craftspeople working on historic and listed buildings need a raft of specialist skills and equipment, so their administrative support systems need to reflect that specialism and protect them in the modern world of liability and litigation.
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| The 1920s cinema in Whiteladies Road, Clifton, Bristol: redundant historic buildings pose complex insurance issues both when empty and when being conserved or converted to a new use. |
Insurance policies are a key cornerstone of that protection. The more you understand the insurer's point of view, the better you can manage your actual and perceived risks to secure better insurance terms and premiums. It is perfectly possible to buy an off-the-shelf standard business or construction policy to cover the basic areas of liability. However, these policies may provide adequate cover for damage caused to a modern building, but not for one constructed of traditional materials and hand run plasterwork, for example. All of us involved in conservation and heritage have a responsibility to protect both the tangible and intangible values of the buildings we work on, as well as the people affected, so the advice of a broker who appreciates what we do, and the attendant costs in doing it, is necessary if an appropriate level of cover is to be arranged. Unfortunately, few insurers are sufficiently interested in this field to provide policies which offer adequate cover.
Historic buildings can be extremely expensive to repair, and during a programme of refurbishment or conservation they are exposed to greater risks than normal, making some insurers wary. There is, for example, the increased risk of theft and arson if the building is left empty during the works, and historic fabric may hide structural faults which pose a risk to the people on site, as well as to the future of the building. Furthermore, the dearth of specialist contractors and craftspeople means that sensitive work is often carried out by people who simply do not understand what they are doing.
Insurance for conversion work is a particular problem. Although most insurers are happy to insure the buildings once converted, the insurance capacity for cover during the preceding period is depressingly low.
Contractors engaged in commercial property renovation and restoration also find it almost impossible to get any meaningful level of insurance and quite often end up proceeding with contracts that provide little or no insurance for the existing structure at all.
Contractors working on private houses regularly face problems getting insurance that complies with standard contract conditions, such as those of the Joint Contracts Tribunal (JCT). If the house is privately owned, it is likely that JCT conditions will be used to govern your contract with the householder. The conditions often request that the policy is held in the joint names of the contractor and the property owner, which makes household insurers wary because it leaves them with no third party to sue in the event of loss.
WHAT INSURANCE DO I NEED?
Existing structure cover. Owners who are renovating their house themselves will need 'existing structure' cover. If a contractor is employed, standard construction contracts require the cover to be held jointly with the owner. However, adequate cover for existing structures can be expensive and, in some cases difficult to obtain due to their vulnerability when unoccupied or undergoing renovation or restoration.
The problem is compounded when the property concerned is listed or constructed from unusual or inflammable materials (timber framing or cladding, thatch, wattle and daub, clunch or cob for example). In this case you'll need an insurer who has spent time cultivating markets to deal with these types of construction.
Perhaps the most difficult cases arise where a building is being converted to an entirely new use. Recent examples include the conversion of churches into flats, former public buildings such as swimming pools into offices, and even an industrial chimney to a private house. These developments represent significant challenges for insurers and require careful broking to ensure that the merits of each particular risk are brought through to entice the insurer to provide better cover. When quoting for this type of work, try to put yourself in the shoes of an underwriter. Is the site easily secured? What is the neighbourhood like? What are the original construction materials? What sort of condition is it in now, and how will it have deteriorated by the time the contract starts? Take some photographs, warts and all, of the building for your records, and forward them to your broker; pictures really do tell a thousand words.
LIABILITIES
Employers' liability. A significant area of concern for any main contractor should be their subcontractors' insurance provision. If the subcontractors are labour-only, and do not carry their own insurance, then it is highly probable that the main contractor's insurance will operate: you effectively become their employer and need employers' liability cover. Where bona fide subcontractors (providing both labour and materials and carrying their own insurance) are engaged, make sure that all relevant liability covers are in place, and also that there are no onerous policy conditions such as 'application of heat' warranties that are likely to negate the subcontractors' cover if they cause a loss through negligence.
Public liability. For buildings in poor repair, the period prior to renovation is a concern for many insurers. Poor lighting (if any), water ingress, rotten timbers, and falling masonry are all areas for potential claims against the owner or contractor by anyone on the site, invited or not. This could range from building inspectors to vandals. As your common-law liability to each remains the same, it's as well to remember that you can't contract out of personal injury or death. The contractor's liability for safety on site starts on day one of the contract, so be prepared to shore up and restrict site access first before starting work.
CAR (Contractors All Risks) cover. This is insurance for the works in progress and acts to fill the gap between the cover for the property as it was and as it will become. Make sure that your sum insured is adequate for the contract as most CAR policies carry an inner limit for project costs. In practice this means that the figure should exceed the value of the contract. Although it's arguable that demolition costs could be excluded from this, the savings gained by attempting to strip this out are minimal. Be aware, too, that the costs involved in restoration following a loss may well be unusually high, and that the initial projected costs can and often do overrun. Leave yourself 25 per cent over and above your largest contract.
Hired-in plant cover. Under Construction Plant-hire Association (CPA) conditions you are required to insure for the replacement value of the plant and equipment that you are hiring. You will also be liable for any continuing hire charges that accrue whilst plant is being repaired or replaced. Make sure that only correctly trained staff use hired-in plant as the HSE is becoming increasingly intolerant of accidents involving operator error where inadequate training is a factor.
MANAGING YOUR RISK EXPOSURE
Careful consideration of the risks and the insurance policies of others involved in a project may help to reduce your premiums and ensure that the level of cover is suitable.
Heat warranty conditions. Check your subcontractors' policies for warranty conditions affecting the use of naked flames or heat-generating machinery such as blow-lamps, heat guns and even space-heating equipment. If a policy does not specifically exclude their use, warranty conditions will usually apply. These often place the onus on the policy holder to cover any inflammable materials prior to work starting, carry fire extinguishers with them, and revisit work up to an hour after completion to check that no materials are smouldering or burning. If this warranty is breached, it is highly likely that the insurance will fail to operate in the event of a claim, leaving you with a very angry client. Take a copy of your subcontractors' schedules and satisfy yourself that they are adequately insured. If in doubt, ask your broker.
Height warranty conditions. In addition to heat warranties, check subcontractors' policies for limits on working height as most policies apply a restriction of sorts. Although the use of access equipment has improved safety in recent years, the enforcement of insurer warranties and HSE requirements has become more aggressive.
Naive or inexperienced clients. It can be dangerous to assume that your client's insurance is adequate. Some insurers place a limit on the size of contract they are prepared to see undertaken while their policy is on standard terms, and owners are often unaware that they may need to purchase additional insurance for the duration of the works. Indeed, they may not even have advised the insurer that work is taking place. Another problem is that, because insurance in this sector can seem expensive to non-business buyers, some clients may simply close their eyes in the hope that their existing arrangements will be enough. Make sure that you exchange correspondence which makes it plain who is insuring what, whether or not this is stated in your contract. Apart from the risk that the client may not have fully understood the contract, JCT minor works contracts are often used on projects that are much larger than the contract was intended for. If you are in any doubt as to the ability of your client to administer this important aspect, request details of their insurance and pass it to your broker to verify the suitability of the cover.
Insurers who don't understand the problems. Many insurers produce standard products for the building industry; these range from large-scale Contractors All Risks policies to single project small-works insurance. The vast majority, because they are driven by standard practice, deal badly with the issues of listed and heritage buildings. For example, if you worked on a stately home and caused it to burn down, your indemnity limits for fire could be set artificially low at say £1 million; whereas a reinstatement using authentic materials and techniques could easily cost £3-4 million. Therefore it is vital that if you specialise in this area of construction, you advise your insurers accordingly or seek out a specialist broker; you may also find them useful in helping your clients with insurance problems to enable work to go ahead.
Subsidence. Ground movement or subsidence is a difficult area for insurers of properties in poor condition. It is often unclear what damage is caused by neglect rather than genuine subsidence and therefore most are unwilling to give cover other than for fire. Some policies will offer wider cover at a price, and some homebuyers are pressed into unnecessarily expensive distress purchases to fulfil lenders' requirements. If you are involved in pre-sale estimating, advise your client of these issues and put them in contact with a specialist broker as early as possible, bearing in mind that the property must be insured from the moment sale/purchase contracts are exchanged.
Adjoining properties. Where properties in separate ownership share elements of structure or fabric, such as the dividing wall in a terrace, cover for accidental damage to the adjoining premise must be factored into the insurance programme. Don't presume that the property next door is in good condition: it should be surveyed and its condition recorded prior to the commencement of works and, if necessary, extra work should be carried out to ensure its safety.
Site security. When quoting for potential work, consider site security from the insurer's perspective. Be mindful of preventing malicious damage and theft, as well as accidents which could lead to personal-injury claims. The insurer will be happier dealing with an unoccupied site that is adequately guarded and boarded up than with a property with open access. As a minimum you should consider:
- boarding up ground-floor windows and doors, and any first-floor window with flat-roof access
- water, gas and electricity should be suspended
- erecting signs that alert visitors to the potential dangers
- securing plant that could cause damage or injury.
In the tricky area of renovating period or listed properties, many insurers are reticent at best; although some companies do have an understanding of the area. The best way to secure the right cover at realistic rates is to go through a specialist broker who can:
- help you manage the risk to improve the proposition to the insurer
- act as your advocate and give the insurer a detailed picture of the risk
- guide you through the trauma of a claim.
When a loss occurs it's a heart-stopping moment, and probably not one you'd wish to face alone.
