Carrying out building works regardless of their size and scope involves risks not only for the builder but the employer. The principal purpose of the building contract is to allocate those risks. That is done by way of the contract terms including the provision of indemnities and requirement for insurances.
This note deals with the Minor Works Building Contract 2016 (MW) and Minor Works Building Contract 2016 with contractor’s design 2016 (MWD). It looks first at the insurance provisions dealing with the Works including existing structures and then offers possible solutions where clause 5.4C is to operate i.e. those circumstances where clauses 5.4A and 5.4B are not appropriate. It then goes on to look at the indemnities provided by the Contractor relating to personal injury or death and in respect of loss, injury or damage to property.
Insurance Options for Works and Existing Structures
MW contains three insurance options, namely, insurance of:
- the Works by the Contractor (clause 5.4A),
- the Works and existing structures by the Employer (clause 5.4B), and
- the Works and existing structures by other means (clause 5.4C).
The Contract Particulars requires a choice to be made by deleting the two options that are not to apply. It is essential that a selection is made and communicated at tender stage and ultimately that the signed contract precisely reflects what has been agreed.
Deciding on the option that is to apply depends on the nature of the project and what insurance is available in the marketplace at the time. Because no two projects are identical and the fact that insurance is a specialist area it is essential that proper advice is obtained at tender stage. Insurance is a matter that should not be left to the last moment. The consequences of getting it wrong can be disastrous.
If the project is for new works only and there are no existing structures, clause 5.4A is applicable and clauses 5.4B and 5.4C should be deleted in the Contract Particulars. Clause 5.4A provides that the Contractor shall effect and maintain a Joint Names Policy for All Risks Insurance for the Works. All Risks Insurance is defined in the contract and insurance cover must as a minimum cover those defined risks. Despite its name an All Risks Policy does not cover all risks; there are significant exclusions and also Excepted Risks (also defined) which fall outside its cover.
A Joint Names Policy (defined in the contract) is a policy of insurance that includes both the Employer and Contractor as a composite insured, which means that the insurers have no right of recourse against any person named or recognised as insured. This is an important protection. The cover required is for the full reinstatement value of the Works. It may also include cover for professional fees which is 15% unless the provision is deleted or some other percentage is stated in the Contract Particulars. A Joint Names Policy providing All Risks cover for new works is widely available but care must be taken to ensure the policy taken out does in fact match the risks set out in the contract and is adequate to cover the full reinstatement cost and professional fees. Consideration of the detail is important because policies issued by insurers are not standardised.
The cover required may be provided either by way of a specific policy or through the Contractor’s annual all risks policy (CAR policy) provided the CAR policy is extended to recognise the Employer as a composite insured in respect of the Works. Once again particular attention should be given in respect of all exclusions in policies to ensure they do not go beyond those set out in the contract and that the cover provided matches what is required.
If the project involves existing structures clause 5.4B is applicable so long as the required insurance is available. Clauses 5.4B.1 and 5.4B.2 provide that the Employer shall effect and maintain a Joint Names Policy:
- for Specified Perils in respect of the existing structures and any contents owned by the Employer or for which he is responsible, and
- for All Risks in respect of the Works.
Specified Perils is defined in the contract and covers fire, lightning, explosion, storm, flood etc. but again excludes Excepted Risks. The level of cover is for the full cost of replacement cost, repair, or replacement of loss or damage due to such perils (clause 5.4B.1). This cover may be provided either by way of an extension to the Employer’s own cover for existing structures. Alternatively it may be achieved by a separate policy but care should be taken to avoid duplication of cover and unnecessary costs. However, its availability in either form may be restricted or not available in certain circumstances.
Existing structures increase the risk to insurers and the insurance market has been somewhat averse to offering such joint names insurance particularly where there is a tenant employer whose landlord controls the existing structures insurance or where the employer is a domestic home owner or occupier.
If existing structures insurance in Joint Names is not available or is only available at an unreasonable cost (this should be determined at tender stage) then one should use clause 5.4C.
The Joint Names Policy for All Risks in respect of the Works (clause 5.4B.2) is similar to that described for clause 5.4A above, but notwithstanding that it does not usually present the same problems in terms of availability, clause 5.4C is the appropriate option where insurance under clause 5.4B.1 cannot be obtained.
Clause 5.4C is to apply where clause 5.4A does not apply and clause 5.4B cannot apply because the relevant insurance is not available. As a consequence one has to make other arrangements and which clause 5.4C requires to be set out in documents to be specifically stated in the relevant Contract Particular. Those arrangements are dependent upon the circumstances and market factors at the time but there are three principal ways that one might proceed.
Clause 5.4C particulars – Possible Solution 1
Works and existing structures: See if the proposed contractor’s insurers would be prepared to provide Joint Names cover under a Works policy for both the Works itself and the existing structures. If this is acceptable to the insurers the wording of clause 5.4C Contract Particulars would simply reflect such arrangement as a requirement e.g. The contractor shall effect and maintain a Joint Names Policy for All Risks Insurance for the full reinstatement value of the Works (plus the percentage, if any, stated in the Contract Particulars to cover professional fees) and for the existing structures together with the contents of them owned by the Employer or for which he is responsible, for the full cost of reinstatement, repair or replacement of loss or damage.
The actual wording will depend on whatever arrangements are available.
Clause 5.4C particulars – Possible Solution 2
Works: For the contractor to insure the Works for All Risks Insurance in the Joint Names of the Contractor and Employer; in those circumstances clause 5.4C particulars (in part) would then state that the wording of clause 5.4A is to apply.
Existing structures: The above would then leave the question of existing structures which generally the Employer would have already insured or have insured by its landlord (where relevant) on its behalf. Where the Employer already has insurance in place it must notify his insurer that building works are to be carried out and also ensure that appropriate cover is maintained. Where the Employer has a landlord it should always notify the landlord of any proposed building works and involve the landlord prior to making any other arrangements for insurance so as to avoid duplication of insurance and increasing costs. Where the Employer has not taken out insurance for existing structures it should do so.
Clause 5.4C particulars should then in addition set out the position regarding insurance of the existing structures and where necessary require the Employer to insure in its own name. The level of cover is for the Employer to agree with the insurer.
In this situation, the Contractor not being a joint named insured would receive no cover under the Employer’s policy for existing structures. The Contractor would cover its liability for any damage to those existing structures under its public liability cover required under clause 5.3.2 or by an extension of such policy.
Clause 5.4C particulars – Possible Solution 3
Works: The Employer may decide to insure the Works for All Risks Insurance in the Joint Names of the Employer and Contractor; clause 5.4C particulars could state that the Employer shall effect and maintain insurance as set out in clause 5.4B.2.
Existing structures: The existing structures part of Possible Solution 2 above is equally relevant to this situation.
Depending on the project location, its nature and whether the contractor is to design part of the works there might also be insurable risks in respect of i) loss that the employer may incur as a result of injury or damage to adjacent property where not caused by negligence, ii) professional indemnity in respect design carried out by the contractor, and iii) terrorism. MW and MWD do not provide for those insurances.
Should the advisers feel a need for such insurance it would be prudent to consider using the Intermediate Building Contract 2016 rather than amending MW16. As regards contractor’s professional indemnity insurance under MWD it has not been felt necessary to include such insurance in the published form because of the relatively low risks anticipated in respect of design under such a contract. Where such risks are otherwise, consider using the Intermediate Building Contract with contractor’s design 2016.
The above insurances provide a large measure of protection with regard to the works that arise under a building contract but they should be seen against the background of indemnities provided under the contract. The provision of Indemnities by the contractor to the employer is an important part of the allocation of risks and as such indemnities provide redress where the employer suffers as a result of the contractor’s failure in regard to them. Now because an indemnity can only be as good as the financial strength of the contractor it is also necessary to take out and maintain insurance in respect of those potential liabilities.
Many employers carrying out building works, whether a new build, an extension or alterations are far from clear as to the risks involved and, to reiterate, it is essential that proper advice is obtained.
MW16 requires the Contractor to provide two significant indemnities to the Employer regarding claims against the Employer. One (clause 5.1) in respect of personal injury and death arising out of or in the course of or caused by carrying out the Works; the other (clause 5.2) in respect of loss, injury or damage to property where due to negligence, breach of statutory duty, omission or default of the Contractor or any Contractor’s Persons (defined by the contract).
There are exclusions to those indemnities and they are equally important. With regard to personal injury or death the indemnity does not extend to an act or neglect of the Employer, Employer’s Persons or any Statutory Undertaker (all of whom are defined by the contract). With regard to loss, injury or damage to property the indemnity given does not extend to the Works and/or Site Materials (which is the subject of the separate insurance referred to above). Neither does it extend to any existing structure nor its contents for which insurance under clause 5.4B applies or as it may be limited or excluded by operation of clause 5.4C insurance where it applies.
It is also important to recognise that the exclusion of Contractor’s liability and indemnity, where clause 5.4B applies, operates regardless of any negligence, breach of statutory duty, omission or default of the Contractor or any Contractor’s Persons.
Under clause 5.3 the Contractor is required to effect and maintain insurance arising out of the liabilities referred to in clauses 5.1 and 5.2. This requirement to insure does not limit or affect the indemnities. It is also important to recognise that public liability insurance taken out by the Contractor may not be coextensive with the indemnities given and therefore the Contractor remains at risk for any shortfall.