Contractors’All RisksandPublic LiabilityInsurance (Second Edition) by L J Piper ACII iii CONTENTS Page IntroductIon note ..................................................................v HIstorIcal Background..........................................................1 condItIons relatIng to Insurance ?????????????????????????????????????????3 InItIal contract Procedure ?????????????????????????????????????????????????18 tHe PolIcy Form ???????????????????????????????????????????????????????????????????20 tHIrd Party lIaBIlIty ???????????????????????????????????????????????????????????24 PolIcIes on an annual BasIs ????????????????????????????????????????????????26 tHe sum Insured ???????????????????????????????????????????????????????????????????27 metHod oF ratIng ?????????????????????????????????????????????????????????????????29 rIsk Factors ?????????????????????????????????????????????????????????????????????????31 PractIcal asPects oF underwrItIng ?????????????????????????????????????34 summary oF InFormatIon requIred to assess a rIsk ???????????42 contract Bonds ???????????????????????????????????????????????????????????????????44 contract works (macHInery) Insurance????????????????????????????47 decennale lIaBIlIty Insurance ????????????????????????????????????????????50 aPPendIx ................................................................................61 v INTRODUCTION NOTEF OLLOWING a request from the State Insurance Organisation of Iraq, a paper was prepared on the subject of “Contractors’ All Risks” and read at the Annual Insurance Seminar in Baghdad. This paper was subsequently published in two articles in the Post Magazine & Insurance Monitor and aroused interest not only in the London and overseas insurance markets, but it also gave rise to enquiries from Civil Works Contractors. This was not unexpected as it described aspects of an important class of insurance which poses many problems to all concerned in works of construction, and about which little information is available. In response to many requests, the subject has been dealt with more fully in the following Notes. When one considers the amount which has been written on other classes of insurance it is realised that much research remains to be done in regard to “Contractors’ All Risks”. A start might be made with closer collaboration between the various insurance markets, and although there is of necessity a limited exchange of information where large contracts are being placed, the first steps have yet to be taken to collate statistics, to stabilise rating levels, to agree basic cover terms and even to set up an advisory service to assist on technical points of underwriting and in the settlement of claims. The Bureau SECO in Belgium and Bureau VERITAS in France provide a pattern for such an organisation, but ways and means would have to be found to solve the important question of the cost of such a service, Progress along these lines could well be a future possibility. 1 HISTORICAL BACKGROUNDI T is on record that a Contractors’ “All Risks” form of cover was issued in 1929 for the building of the Lambeth Bridge over the Thames, but the development of this class of business is essentially post-war. In the first instance, its rapid expansion was due to the huge schemes of reconstruction which followed the cessation of hostilities, and rising living standards accelerated the building of schools, hospitals, housing schemes and power plants. Furthermore, the need for improved communications made the construction of new highway systems, viaducts and bridges, a top priority in economic planning. Another important factor was the vast sums of money made available by the International Bank for the building of hydro- electric installations, dams, irrigation and land reclamation schemes, across the developing countries of Africa, India, Pakistan, the Middle East and South America. The successful completion of so many of these great projects was undoubtedly helped by the coverage provided by the international insurance markets, not only in regard to the Works, but also for the extremely costly plant and equipment involved. The dominant factor, however, in the rapid development of Contractors’ insurance was undoubtedly the introduction of a clause into the Contract conditions that the Contractor must take out an insurance on the Works. This move was initiated as far back as 1930 when efforts had been made by the Federation of Civil Engineering Contractors and the Association of Consulting Engineers to standardise conditions for civil engineering projects, and a model form was produced; but although used by consulting engineers it was not generally adopted by local and public authorities. This attempt at uniformity was necessary as some Contractors elected to get insurance protection for Fire risks only, and others not to insure at all. The interests of Contractors also required to be safeguarded as in some instances they were obliged to accept onerous conditions, especially if they needed the contract 2 work in order to keep expensive plant from standing idle, or to retain the services of skilled workmen. But it was not until January 1950 that the organisations representing Civil Engineers and Contractors reached agreement on a second edition of the contract wording and the result was the I.C.E. or Institution of Civil Engineers’ Conditions of Contract. For the first time, a form of contract sponsored by all the authoritative bodies, both professional and commercial, came into existence. These Conditions have been revised periodically but are still known under this title. The main principles of the I.C.E. Conditions are the recognition that the Engineer’s requirements must be fully complied with by the Contractor during the progress of the work, and in the event of dispute the matter can be submitted to an independent arbitrator, although it is laid down that in general no arbitration may take place until the works are completed, in order to prevent delay in construction. This is in contrast to the previous practice where the engineer’s decision on many matters was final. Another feature was the condition giving the Contractor a right of reimbursement if he encountered working conditions which could not have been reasonably foreseen by an experienced Contractor. This recognises the difference between Civil Engineering and building projects, in that the former are more exposed to unknown forces of nature, such as underground water pressure and soil conditions. Under the old contract forms, the Contractor usually had to carry this risk of encountering such hazards, often causing serious loss. Some contract wordings also made the Contractor liable for the results of Faulty Design, but the I.C.E. Conditions relieve him of this responsibility, which is placed on the Engineer. The importance of these Conditions, which are now in their fifth edition, is emphasised by the fact that in 1957 they were adopted as the basis for “The Conditions of Contract (International) for Works of Civil Engineering Construction” by the International Federation of Consulting Engineers and the International Federation of Building and Public Works. 44 CONTRACT BONDST HIS brief survey of contract insurances should include a reference to the relative Bond Covers, which form a specialised class of insurance in themselves and which fall under the following headings. PERFORMANCE BOND This is an undertaking or, as it is frequently known, a Contract Guarantee, that the Contractor will properly execute the work. It is a simple wording making the surety responsible for the Penalties specified in the contract, for non-performance or delays. The financial stability and experience of the Contractor in the particular class of work are of paramount importance and must be established beyond possible doubt, but many other aspects must be examined which could impede or stop the progress of the work, such as supply of suitable labour and materials, accessibility of the site for transit of plant and equipment, the hazards arising from the nature of the work, and even the political situation. Important features are that the surety should have the right to take over duties which the Contractor has failed to carry out and also that the Bond is written subject to an effective Counter Indemnity. This type of Bond is usually for a percentage of the contract price, normally 10%, but in the States and Canada where bonding is more widespread, the amount of the Bond is often the contract price, a practice which sometimes taxes the capacity of the insurance market. BID BOND The intention of this Bond is to prevent the tender which is sometimes made as a “gesture” and to ensure the good faith of the bidder. It is usually a small percentage of the contract price and falls away when the tender has been awarded. But its importance should not be minimised in that the surety is responsible if the bidder is awarded the contract and then fails without proper reason to take it up. The surety must pay to the 45 Principal the difference between the bid made under the Bond and the bid on which the contract is finally completed. A request for a Bid Bond should be treated seriously and not as a formality, for the reason that it is proof of the bona fides of the Contractor to undertake the contract if awarded, which means, in effect, a guarantee that he will be able to furnish a Performance Bond. If this were not forthcoming the surety would be liable under the Bid Bond. SUPPLY BOND This is similar to a Performance Bond but it is concerned with the proper delivery of materials and the production of goods, rather than the actual construction. The chief factor here is whether the materials are available from a number of sources, or whether they are a specialised product in limited supply. RETENTION MONIES BOND Building contracts usually provide for the Contractor to receive payment as the work progresses, subject to Engineer’s Certificate that the work has been done satisfactorily and this procedure is necessary to finance the Contractor for the next stage of the work. But there is also a provision that the Principal retains a proportion of the price as a deferred payment for a time to provide a security that the work has been carried out properly. The amounts so retained can be substantial—enough to put some strain on the Contractor’s finances. Such monies can be released on the provision of a Retention Monies Bond. In the special circumstances, the surety should stipulate that the Contractor bears a share, say 25%, of the liability. MAINTENANCE BOND This is usually part of the Bond for proper performance and is rarely issued separately. It is a form of professional indemnity that the completed work will be of the required quality and will function satisfactorily for the period specified. The preceding are the types of Bond most frequently in connection with construction contracts, but many met other 46 varieties are issued, particularly in North America against the payment of labour and materials and the financing of projects. In underwriting such Bonds, particular consideration should be given to the provision of a Counter Indemnity from an independent source, and possibly the acceptance of a deposit or title to approved securities. Where the Bond is required by a Subsidiary or associated Company, it is advisable for the Counter Indemnity to be obtained from the Parent Company. This is essential where a nominal Company is set up to handle an overseas contract for purposes such as local taxes and subsidies. Whilst the Guarantor has certain rights of recovery following payment under the Bond, the circumstances in which the Bond is invoked usually mean that the contracting firm is in difficulty. The Counter Indemnity should, therefore, embrace, jointly and severally, the personal estates of the Directors. In special circumstances it may be necessary to obtain the Counter Indemnity from an outside source, such as a commercial firm of undoubted financial standing. For overseas contracts, the effectiveness of the Counter Indemnity should be cleared with the Exchange Control Authority. A specimen wording for a Counter Indemnity is shown in the appendix.