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INSURANCEINCONSTRUCTIONCONTRACTS:AFEWTHINGSTOKNOW
byEuanLloyde.lloyd@tamimi.com(mailto:e.lloyd@tamimi.com)

Therearemanyrisksinanyconstructionproject.Themajorityoftheserisksare
usually assumed (and priced) by the contractor during the construction phase,
whotypicallycoversthisexposurebytakingoutvariousinsurancepolicies.
Insuranceinconstructioncontractscanbecomplicatedandthepurposeofthisarticleistoprovideanoverview
ofsomekeyissuestobeawareofinthisintricatearea.
TypesofInsurance
ThemostcommonformsofinsuranceunderaconstructioncontractintheMiddleEast,include:
AllrisksinsuranceThisinsuresagainstphysicaldamagetotheworks(andusuallymaterialsonsite).All
risksinsurancetypicallycoversthefullreinstatementvalueoftheworksplusamarkupforanyancillary
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costs(suchasconsultancyandprofessionalfees)thatareincurred.
Ascontractorsgenerallyhaveglobalallrisksinsurancepoliciesthatcoverallitsprojects,itisgenerallymore
costeffectiveforcontractorstomaintainthisinsurance.Oncetakenover,theriskintheworkspassestothe
employer,whoneedstoensurethattheworksareadequatelyinsured.
Althoughdefectsareusuallyexcludedfromallrisksinsurancepolicies,wordingcanbepurchasedthatprovides
cover for damage that a defect causes to other parts of the works. For this insurance to be meaningful, the
different components of the works must be carefully and clearly delineated. This insurance is only generally
available if the works are being undertaken in accordance with well established (rather than evolving)
constructiontechniques.
ProfessionalindemnityinsuranceThisinsurescontractorswithdesignresponsibility(i.e.underdesignand
buildcontracts)againstliabilityarisingoutofprofessionalnegligenceandwillrespondif,forexample,designs
donotcomplywiththerequirementsoftheunderlyingconstructioncontract(althoughitisnotuncommonfor
professionalindemnityinsurancetoexcludecoverforfitnessforpurposewarranties).
Professionalindemnityinsuranceismadeonaclaimsmadebasis(ratherthanwhenthebreachofprofessional
dutyactuallyoccurs).Thismeansthatprofessionalindemnityinsuranceisgenerallyrequiredtoremaininplace
untilanylimitationperiodends(which,intheUAE,is10years).Theamountofprofessionalindemnityinsurance
coverthecontractorisrequiredtohaveinplaceisgenerallydeterminedonacasebycasebasis,dependingon
theextentandthecomplexityofthedesignworksinquestion.
Professional indemnity insurance is also the most important insurance policy that design consultants (such as
architectsandengineers)arerequiredtohaveinplace.
PublicliabilityinsuranceThisprovidescoverforliabilityarisingoutofdeathorpersonalinjurytothird
parties(butnotthecontractorsemployees,whoshouldbecoveredbyworkerscompensationinsurance)or
damagetopropertybelongingtothirdparties(butnottheworks,whichiscoveredbytheallrisksinsurance)
priortotheworksbeingtakenover.
WorkerscompensationinsuranceThisinsuresthecontractoragainstliabilityforthedeathorpersonalinjury
toitsemployees(usuallyonsite)whenperformingtheworks.
Ifanemployeeofacontractorcausesthedeathofathirdparty,theSharialawappliedinmanyMiddleEastern
countries allow diyah or blood money to be claimed by the victims heirs from the individual who caused the
fatality. The level of compensation in the UAE, for example, is currently set at AED 200,000 per make.
Contractorssometimespurchaseadditionalinsuranceagainstthisliability.
DecennialliabilityinsuranceUnderArticles880to883oftheUAECivilCodethecontractor(and
supervisingarchitect)arejointlyliabletotheemployerforaperiodof10years(fromthedatetheworksare
takenover)foranydefectthatthreatensthesafetyorstabilityofthebuildingorifthebuildingsuffersatotal
orpartialcollapse.Decennialliabilitycannotbecontractuallyexcludedandcontractorsoftentakeout
insuranceagainstthisliability.SimilardecennialliabilityregimesapplyinmostotherMiddleEastern
jurisdictions.
Delayinstartupinsurance(DSU)Unlessthecontractorisentitledtoreliefunderthecontract,contractors
arecustomarilyrequiredtopayliquidateddamagestotheemployeriftheworksarenottakenoverbythedate
forcompletionor,dependingonthenatureoftheworks,failtosatisfyspecifiedoutputcriteria.
However, liquidated damages are customarily capped at 10% of the contract price. Caps of this nature may
meanthattheemployerisnotfullycompensatedforanylosssufferedandeventhoughcapsondelaydamages
can sometimes be set aside (and damages reassessed so that they correspond with the actual loss suffered),
thiscanbeaslow,uncertainandexpensiveprocess.
For this reason, employers sometimes (especially if the works are project financed) take out DSU insurance
whichprovidescompensationforlosses(includinglossofrevenueandotherconsequentiallosses)arisingoutof
latecompletionaswellasotherformsofdelay(suchasforcemajeure).
Keyprovisions
Apart from the basic requirement to take out and maintain insurance policies, other important ancillary issues
regardinginsuranceinclude:
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JointnamesCertaininsurancepolicies(especiallypublicliabilityinsurance)aregenerallytakenoutinthe
jointnamesoftheemployerandthecontractor(aswellasafunder)sothat,forinstance,theemployeris
insuredagainstanyliability(vicariously)incurredbyreasonofabreachbythecontractor.Asamatterof
goodorder,coinsuredpartiesshouldobtaincopiesofthepolicythattheyareinsuredundersotheyknow
exactlywhattheyarecoveredfor.
Generally speaking, a party named under an insurance policy can make claims under that policy and it is also
commonforinsurerstoberequiredtowaivetheirrightsofsubrogationagainstcoinsuredparties.Thismeans
that the insurer agrees not to seek to recover against a coinsured party (i.e. the employer) even if the insurer
paidoutonaccountoftheactionsoftheemployer.
Itisimportantthat,iftwoormorepartiesareinsuredunderthesamepolicy,thepolicyprovidesthatnoactor
omissionofacoinsuredparty(i.e.misrepresentation,nondisclosureorfailuretonotify)willvitiatethepolicyor
otherwiseprejudicethecoveroftheothercoinsured(andnonbreaching)partiesunderthepolicy.
CrossliabilityItisusualforcontractsthatareinjointnamestocontainacrossliabilityclause.Across
liabilityclauseessentiallymeansthateachpartyisinsuredinitsownrightasifaseparatepolicyhadbeen
issuedand,assuch,thepolicywillrespondtoliabilityincurredbyonecoinsuredpartytoanothercoinsured
party.
InterestnotedonapolicyItisimportanttodistinguishbetweeninsurancebeingtakenoutinjointnamesand
apartysinterestbeingsimplynotedonapolicy.Althoughapartywhosenameisnotedonapolicyhasthe
righttoshareininsuranceproceeds,partydoesnothaveanydirectrighttoclaimunderthepolicy.
Furthermoretheinsurergenerallywillnotwaiveitsrightsofsubrogationagainstapartywhoseinterestis
notedonthepolicy.
PeroccurrenceorintheaggregateItisimportanttocheckifinsurancecoverisprovidedonaperoccurrence
or on an aggregate basis. For the employer, cover on a per occurrence basis is obviously advantageous as, if
insurance is provided on an aggregate basis, a previous claim could severely impact on (and even completely
exhaust) the amount of available insurance. This point is made all the more relevant if the insurance is not
projectspecific,asaclaimfromoneprojectcouldmeanthatnocoverisavailableforanyotherprojects.
DeductiblesEmployersshouldcarefullyassessthelevelofthedeductibleunderaninsurancepolicyto
ensurethatthedeductibleisreasonableandnotprohibitivelyhigh.Excessivedeductiblescouldleadtoarisk
beingeffectivelyuninsured.
ExclusionsInsurancepoliciesarenormallysubjecttoexclusionsthatmayrestricttheamountofavailable
cover(i.e.someinsurancepoliciesexcludecoverforguaranteesandliabilityfordelaydamageswhilefitness
forpurposewarrantiesarealsoarelativelycommonexclusion).Itisthereforeimportantforemployersand
contractorstoreviewtheextentofcovertoassessthesuitabilityofapolicyinlightoftherisksthatarelikely
tooccurunderthecontract.
LendersinterestsAspartoftheirsecuritypackage,alendermayrequireanassignmentoftheborrowers
rightsunderinsurancepoliciesandmayalsowishtobenamedasthelosspayeeoftheinsuranceproceeds.
Additionally,lendersmayprefertouseinsuranceproceedstopayofftheloaninsteadofreinstatingtheprojectif
theprojectisdestroyedorbadlydamaged.Iflendersrequirethisability,careneedstobetakentoensurethat
thisrightisaccommodatedbytheunderlyinginsurancepolicy.
IdentityofinsurersEmployersusuallyimposeminimumrequirementsregardingthecreditworthinessof
insurerstoreducetheriskofinsurersdefaultingontheirpaymentobligations.
CapsonliabilityItisacommonmisconceptionintheconstructionindustrythatacontractorsliabilityfora
particularrisk(especiallyforbreachofprofessionaldutyornegligence)isimplicitlycappedattheamountof
insurancethatthecontractorisrequiredtohaveforthatrisk.
Thisisnotthecase.If,forexample,thecontractorisrequiredtohaveprofessionalindemnityinsuranceofUSD
5 million per claim, the contractors liability, for say a defective design, is not automatically capped at USD 5
millionperclaimandtheemployermayseektorecoverfromthecontractorsassets(oranyadditionalinsurance
policythatthecontractorhasinplace)foranylossincurredthatexceedsUSD5million.
Expresswordingisrequiredforacontractorsliabilitytobelimitedand,eventhen,locallaws(suchastheUAE
Civil Code (i.e. Article 390(2)) can be invoked upon to reassess and adjust preagreed caps on liability so that
the injured party can only recover damages to compensate it for the actual loss sustained arising out of the
breach.
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Finalnote
Thedraftingofinsuranceclausesusuallyrequiresacontractorstowarrant(or,inotherwords,guarantee)thatit
hassatisfiedalltherequirementsimposedbytheconstructioncontract.Assuch,theserequirementscannotbe
taken lightly and may result in an inadvertent (and serious) breach of contract if they are not adhered to. It is
thereforeimportantthat,priortoexecutingacontract,eachparty:
ensuresthatitunderstandstheextentofitsinsuranceobligations
makessurethattheinsurancerequirementsarereviewedbyitslegaladvisortoensurethattheyare
consistentwiththeunderlyingobligationsunderthecontractandconfirmwithmarketnorms
confirmswithitsinsuranceadvisorthattheinsurancerequirementsunderthecontractcanbeaccommodated
bytherelevantinsurancepolicies(andalsodeterminesanycostimplications)and
checksthatanynecessaryamendmentsaremadetotherelevantinsurancepoliciestoensurethatthe
contractuallyagreedinsurancerequirementsareadequatelyreflected.

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