What the large print giveth, the small print taketh away

2019-10-04T09:47:24+00:00October 4th, 2019|Features|

Some professions are more vulnerable than others when it comes to public risks – those doing major construction and building work certainly count among those. They face too many risks not to have adequate insurance in place.

By Eamonn Ryan

The risk in projects has over the years been devolved from main contractor to sub-contractors. (Eamonn Ryan)

The risk in projects has over the years been devolved from main contractor to sub-contractors. (Eamonn Ryan)

The construction landscape is a constantly evolving one, in which sub-contractors are caught between a rock (contractors dumping all the construction risk on them) and a hard place, which is desperation for work – even high risk work for low margins. More than one has gone under by skimping on insurance.

When it comes to construction, you don’t want to take any risks because the chances are something is bound to happen anyway. You want to be prepared and covered for when it happens and keep your people, company and assets safe. This is why insurance in the construction industry is so important and also why it’s illegal to not have minimum insurance policies in place when doing any construction work.

In this tough environment, says, commercial underwriting manager at Standard Insurance Limited, contractors face new emerging risks that need to be identified, and if possible mitigated or avoided. “There are however some constants: there will always be different site conditions, contractors, sub-contractors, workers, blueprints, construction materials and equipment involved. Fortunately, there is insurance cover available to protect yourself when things go unexpectedly wrong.”

Compliance standards need to be adhered to and these can be onerous, for example if a warehouse is being built, fire equipment, SANS standards, taking square meterage and occupation load into account, would all need to be met.

Why is cover so important?

Construction insurance is paramount if you work on any construction project or are a construction company. “Sites are unpredictable, and anything can happen at any time. Contractors are ultimately responsible for what happens on site and it is for this reason that insurance cover is so important. You need to make sure you have the necessary insurance policies covering your business in the unfortunate event something happens to someone onsite, to the building or structure you build, or to any of your construction equipment,” says Hughes.

The final fittings in a home are most at risk as workers hasten to complete everything before deadline. (Eamonn Ryan)

The final fittings in a home are most at risk as workers hasten to complete everything before deadline. (Eamonn Ryan)

Michael Stromberg of constructioncoverage.com says the following:

“Construction Insurance is a broad categorisation of insurance policies that provide protection during construction projects. In reality, the term ‘construction insurance’ refers generally to insurance that related to construction projects, and it is not itself an actual form of insurance.”

So, which covers fall under this collective? What cover should you purchase? Professor Tinus Maritz, Acting CEO of the Joint Building Contracts Committee (JBCC), says that construction insurance is one form of insurance you do not want to DIY: “The cost of a policy can vary tremendously depending on a variety of factors, and your insurance broker will assist you in ensuring you have the correct cover for your unique individual needs at the best price.” It is a highly specialised form of insurance in which not every insurance company is active. The primary underwriters involved are Lombard Guarantee, AON, Hollard Insurance and Standard Insurance.

Like with any insurance, the cost of the cover depends on a range of factors including one’s claim experience, risk management policies and quality as a contractor, says Maritz. “There’s no fixed rate – it changes.”

Maritz explains that legally, a contractor is required to have the following insurances (on top of Professional Indemnity, which is part of the short-term insurance policy of any professional):
Contract works (often called Contractors All Risk [CAR]):

  • Transit
  • Off-site storage
  • Site risks
  • Defects liability period
  • Public liability

“It is either the contractor or the employer who takes this out, and it is enforced via the contract which spells out who will take out the insurance,” says Maritz. In many instances the employer will wish to do so because it may have a large number of projects underway, of which the current is just one of many covered in an umbrella policy and which it can get cheaper than the contractor.

“Everyone employed on a site must have Public Liability, as an incident can happen to anyone. This, together with SASRIA, is part of any short-term insurance policy and we all have it.”
Then there are some secondary insurances, which are not always a legal requirement but are often taken out for particular reasons:

  • Contracting parties Workman’s Compensation Act compliance
  • Contracting parties common law liability compliance
  • Construction equipment – All Risks cover for contractors and sub-contractors
  • Motor vehicles liability insurance
  • Multilateral Motor Vehicles Accident Fund Act no.93 of 1989
  • Balance third-party and passenger liability

“A big concern these days is high risk insurance: lateral support, marine cover for imported equipment and marine advanced loss of profits. The former is compulsory for State projects, but otherwise is not, but covers risks where the loss can (and has) bankrupted contractors. Contractors and developers will sometimes take a chance on the geotechnical report, and when things go wrong it can bankrupt them,” says Maritz.

Contractor concerns

Professor Tinus Maritz, Acting CEO of the Joint Building Contracts Committee. (Eamonn Ryan)

Professor Tinus Maritz, Acting CEO of the Joint Building Contracts Committee. (Eamonn Ryan)

One of the biggest concerns contractors have with underwriting is the quantum of the deductible (or excess), as well as misunderstandings as to whether something is a single or multiple claim, says Maritz. The deductible is sometimes so high as to make the cover meaningless in the case, for instance, of storm damage. “The size of the deductible must be transparently stated in the policy – and contractors must understand and take note. This becomes an issue where the employer takes out the insurance and the deductible applies to the contractor when he makes a claim for whatever reason. In that instance, the contractor would be wise to qualify the contract that he will rather take out his own insurance and can negotiate it with his underwriter. He should also qualify his tender for the project,” says Maritz.

“Another point which contractors often misunderstand is that each and every claim carries a separate deductible.” He gives the example where on three separate occasions the wind blew off the side-cladding on a project and the contractor thought he could make a single claim. In fact, the excess had to be applied three times.

Where a sub-contractor is working on a project where the contractor has taken out the insurance, it will similarly be the case that the excess will be for the account of the sub-contractor where its work is at fault; but if it is general weather causation then the contractor would pay the excess. “Parties don’t always understand the relationship between the parties – the employer, the contractor and the sub-contractor – although it will be clearly spelled out in the contract.”

Maritz lists another area of confusion as being latent defects. “There may be a defect which was not evident at the time of project completion but reveals itself, as a roof leak for instance, only when the first rains come. By this time the home may be occupied, and the occupant suffers damage to his or her personal possessions such as furniture and electrical equipment. Who’s responsible to pay for what? If it had rained earlier, the defect would have been picked up and the contractor held responsible. The loss must be very clearly distinguished between the works and the personal belongings, with the latter being the responsibility of the tenant or owner, under his own insurance policy. The contractor will not be responsible for the computers and other household belongings.”

Maritz emphasises that this is another reason why a contractor should be professionally advised by an experienced broker, as he may otherwise not be insured, may be under-insured or have a claim declined for incorrect information at the time of underwriting.

The case of damage done to a sub-contractor’s work, say a plumber, by subsequent workers such as tilers, is not typically an insurance claim but is covered under the contract and is claimable from the other sub-contractor as damages. “However, the onus of proof is always difficult,” he says.

Angela Hughes, commercial underwriting manager at Standard Insurance Limited. (Standard Insurance)

Angela Hughes, commercial underwriting manager at Standard Insurance Limited. (Standard Insurance)

“These issues are always contained in the contracts: the problem is that sub-contractors are so desperate for work that they often don’t read what may be a whole page full of onerous terms and conditions. Sub-contractors are currently in a difficult position. Contractors tender as low as possible to get work, and then force sub-contractors into onerous conditions to try claw back some of the profit. Enforcing terms such as ‘cleaning up after’ can save the contractor itself considerable amounts of money, by forcing the responsibility on to the sub-contractor,” says Maritz.

The underwriter’s perspective

Peter Suremann, underwriting manager in the Construction Guarantee business of Lombard Insurance Company, says, “The general principle of insurance is that the contributions of the many (through payment of premiums to an insurance scheme) should cover the losses of the few. Actuaries employed by the insurers ensure that premiums are set at levels such that the insurance losses and insurance-related expenses do not exceed the total premium income of the insurer. When you claim on an insurance product, your premium might increase after you claim or you might lose a no-claims bonus, or in the worst case, the insurer might not offer you future cover if you have a very high claims history. However, the insurer does not have the right to recover the full amount of the insurance claim from you – unless there was a fraudulent claim. Your ongoing contributions to the insurance scheme provides the insurer enough ‘comfort’ to continue to provide the insurance cover for you. In the event that you stop paying your premiums, your cover may be suspended or cancelled in terms of the policy wording.”

Hughes says there are five policies that a contractor should consider. “These are a Contractors All Risks Policy, a Multiperil Commercial Policy, a Plant All Risks Policy, Machinery Breakdown Policy and a Performance Guarantee.”

Contractors All Risks (CAR)

“This policy is an All Risk policy covering you or, by written contract, your sub-contractors, onsite during the course of construction. Cover can be arranged on a once-off basis. Cover is based on the value and risk profile of that specific project. The cover will end when the project is complete. Alternatively cover can be arranged on an annual basis. Annual polices are slightly more comprehensive than the once-off cover. You’ll be quoted on your company’s annual projection figures and maximum contract value. An Annual CAR policy will cover all projects your company undertakes for 12 months are based on your annual turnover. The annual policy is more cost-effective option.”

What is covered (main inclusions):

Physical loss or damage to the insured property. The Contract Works should cover the full replacement value of the work being undertaken, that is the cost of rebuilding at today’s prices. Included hereunder is Free-Issue Material:

  • Surrounding property
  • Inland transport
  • Maintenance
  • Testing and commissioning
  • Removal of debris
  • Off-site storage
  • Public liability
  • Removal of support
  • Loss of profits

What is not covered (main exclusions):

  • Tools and equipment
  • Property belonging to sub-contractors
  • Faulty design or workmanship
  • Vehicles
  • Professional Indemnity cover
  • Consequential loss
  • Non-performance or project delays

Multi-peril Commercial Policy

This policy covers the business assets of the construction company against perils such as fire, special perils, business interruption, theft, public liability to name a few. A Commercial Policy is structured according to one’s unique needs. Covers that should be considered are:

  • Property cover – covering buildings from fire and perils;
  • Fire cover – for fixtures and fittings, stock, plant and machinery;
  • Business Interruption cover – helps replace lost income following an insured event where one’s business is unable to operate. This cover helps replace lost profit, wages or rental income that results from things like fire or storm damage;
  • Theft cover – covering the theft of stock;
  • Business All Risks – covering tools and non-motorised equipment from theft and damage;
  • Electronic equipment cover – covering electronic devices from theft and damage;
  • Motor – covering sedans, LDV’s, trucks as well as special types;
  • Goods in transit – covering one’s own goods in transit;
  • Employees’ liability – covering the contractor when their employee is injured at work and they are held liable. Importantly all employees should be registered in terms of the Workman’s
  • Compensation Act as all claims need to be submitted to COID (Compensation for Occupational Injuries and Diseases) first;
  • Public Liability cover – helps protect your business from liability claims. This can include customer slip-and-fall accidents and damage to someone else’s property that your business causes.
  • Extensions that Hughes recommends include:
  • Work away – most policy wordings automatically include this. This will cover employees when they are working away from the Insured premises;
  • Product liability; and
  • Defective workmanship.

Plant All Risks Policy

  • This policy covers one for the loss of, and damage to, plant and equipment, whether it is owned or it’s hired-in. What is covered (main inclusions):
  • Physical loss or damage to the plant item. Cover can be based on new replacement value or agreed value
  • Hired in costs – cover should be requested
  • Hired out costs – cover should be requested
  • Credit shortfall cover – cover should be requested
  • Public Liability – cover should be requested
  • What is not covered (main exclusions):
  • Road cover, other than crossing sites, unless policy has specifically been requested
  • Damage due to wear and tear

Machinery Breakdown Policy

This policy, as the name indicates, covers you in the event of your machinery breaking down.

What is covered (main inclusions):

  • Specified plant and machinery
  • Unforeseen and sudden breakdown of plant and machinery

What is excluded (main exclusions):

  • Loss or damage due to wear and tear
  • Loss or damage to consumables
  • Incompatibility
  • Viruses

Performance Guarantees

A Performance Guarantee is issued by an insurance company or bank (Lombardy is the major player here) to a contractor to guarantee the full and due performance of the contract according to the plans and specifications.

Construction guarantees and performance guarantees are also an important form of insurance. “In this way you can ensure the insurer takes on the risk of guaranteeing various terms and conditions – this will be determined by whether or not you are a builder of repute, have a good track record and income statement, for example,” says Hughes.

Dos and don’ts

“With so many risks facing the construction industry making sure you have all the correct covers in place can be daunting, here are some practical ‘dos and don’ts’ to assist,” says Hughes:

  • Do make sure all your construction contracts are in writing
  • Do make sure that any subcontractors you engage with have adequate cover in place
  • Do make sure that any specialist (such as architects and quantity surveyors) you contract with have Professional Indemnity cover in place
  • Do make sure that your employees are fully trained and fit for purpose
  • Do make sure your plant and equipment is well maintained and evidenced
  • Do make sure the site is secure and appropriate signage is in place
  • Do engage with a broker to do a full needs analysis on your business and insurance needs
  • Do disclose all material information.
  • Do read your terms and conditions as well as your schedule and wording
  • Do negotiate your excesses
  • Don’t reduce covers to save costs. Rather shop around for more affordable cover
  • Don’t hire unregistered or unskilled employees
  • Don’t take on more contracts than you are able to handle. Non-delivery affects your reputation as well future insurance contracts
  • Don’t start a project without cover in place

“Right at the start I mentioned the evolving landscape the construction industry faces,” says Hughes. “Some of the emerging trends that have been identified, both globally and in South Africa, are:
Green Technology – Green construction is fast expanding. This implies that construction methods are changing to include environmentally friendly and sustainable materials. Some are incorporating materials made from recycled plastics or cigarette butts.

  • Modular and prefabricated construction – This trend is on the rise as it saves companies time and money. Less waste is also produced.
  • BIM (Building Information Modelling) – BIM manages and generates computer representation of the projects prior to building them. Owners can design BIM models and maintenance schedules. This helps to predict job costs and viability of projects.
  • Project Management Software – This trend has been in existence for some time and continues to gain momentum. More and more construction companies are incorporating technological advancements into their projects.
  • Drones – This is one of the fastest growing trends. Companies are using drones to rapidly map large areas. They can produce valuable aerial heat maps and thermal imagery. The advances in drone technology and software assist in providing real time actionable data and can enable rapid decision making. Globally, drones are also being used to improve employee safety.

“These trends can impact insurance covers as it changes your risk profile. Happily, the majority of them assist with managing risks reducing insurers exposure which results in lower insurance costs.

“Construction and Insurance are complex industries. It is important to engage with teams that understand your business, risks and needs. Standard Bank and Standard Insurance Limited have these teams in place accompany you on your journey,” concludes Hughes.