It is essential for everyone involved in a building project to have a robust Liability policy in place to cover their involvement in the building works.
There are three main classes of cover that each professional needs to consider (in addition to property owners liability cover for property owners) – Public, Employers and Products Liability Insurance.
Public Liability Insurance
Public Liability Insurance covers claims made by third parties for bodily injury or property damage caused by the contractor’s activities during the build. For example:
- a passerby is injured by falling debris from a construction site.
- a neighbour’s car is damaged as a result of paint or concrete splashing.
The policy should include the activities of any employees used including labour only subcontractors. Bona fide sub-contractors should be covered by their own insurance policies. You should check that they have a suitable policy before you agree to use their services.
When buying Public Liability cover it is essential to choose a limit of cover that will be sufficient to meet the potential risks and liabilities arising from the project. As with any cover underinsuring will leave the contractor or developer vulnerable to financial losses in the event of a claim exceeding the policy limit. Consider the potential for job to cause damage to the surrounding area and the people that are in the vicinity when choosing how much to insure for.
Cover limits start at £1m and are available in £1m blocks. Working on a block of flats or Offices in the city might require a higher limit of £25m, whereas £2m or £5m cover might be suitable for work on an isolated small, detached house.
In some cases, the level of cover may be dictated by a client’s or project owner who may require contractors or developers to have specific types or levels of liability insurance before awarding a contract. Contracts should be carefully reviewed to understand liability insurance requirements and ensure compliance.
Employers’ Liability Insurance
Any business that controls the system of work carried out by other people is required by law to have Employers Liability cover. People affected include unpaid helpers, work experience students, temporary staff, and labour only sub-contractors.
Bona fide subcontractors (and their employees) should be covered by the subcontractor’s own policy. You should check that any bona fide sub-contractors that you use are covered by a suitable policy before you agree to use their services.
An employer’s liability policy covers claims made by employees who suffer injury or illness during the course of their employment with you. The policy will cover compensation and costs where you as the employer are responsible for causing the injury or illness. It will also defend you against claims made against you, even if you are found not to be liable for the injury or illness.
Products Liability Insurance
Products Liability Insurance covers claims for injury or property damage caused by products supplied or sold by the contractor. For example if a defect in materials or equipment used in construction leads to property damage or injury, products liability insurance would cover the resulting claims. The most common claim for this type of damage results from substandard plumbing joints, that later rupture, causing an escape of water.
Products Liability insurance isn’t included automatically with a builder or contractor’s liability policy so it is important to check that your policy includes this.
Cover is normally sold in blocks of £1m and may be linked to the public liability limit. It is important to consider the potential risks and liabilities associated with the project and not opt for cover limits that are too low, as this will leave you and your clients vulnerable to financial losses in the event of a significant claim.
Structural Guarantees
A Building Contractors products liability policy will normally exclude building defects or substandard work. To mitigate this risk, the property owner should purchase a structural guarantee where available. Similar to an NHBC guarantee this covers the building against defects for a period of time (normally 10 years) after the build is completed.
A Structural Guarantee is best purchased before building work starts as insurers will want to carry out inspections as the building emerges from the ground. These inspections can replace building control inspections in some cases. Please ask JCT Insurance Expert for details.
Other Insurances
Professional Indemnity Insurance
Professional Indemnity Insurance is sometimes confused with Liability Insurance. It is however a separate cover designed to cover very different risks to public and products liability cover.
A products liability insurance policy covers liabilities arising from products supplied, a public liability policy covers the physical actions that a contractor takes, and a professional indemnity policy covers the advice that is given. This can take the form of drawings, specification of materials or making on the job minor changes to plans.
Building Professionals such as Architects, Engineers, Electrical Contractors and other Construction Professionals providing design or consultancy services should all have Professional Indemnity Insurance as a matter of course. However, as the policy covers claims of negligence or errors in professional advice or services it is important that all contractors working on the project have cover if they are likely to make a change to a design, however minor.
For further details about Professional Indemnity Insurance please contact JCT Insurance Expert.
Legal Expenses
Another cover that might be included with a liability policy is Legal Expenses Insurance. Depending on the policy cover this might include cover for legal costs incurred in defending against certain types of legal disputes, such as contract disputes or employment-related claims. This cover (if given) is in addition to the legal defence costs cover that is included under the Liability and Professional Indemnity covers.
Damage to Property or Equipment
Some liability insurance policies may offer cover for damage to the contractor’s own property including plant, tools and equipment. This is normally designed for smaller risks and sole traders – wider cover can normally be obtained under a Contractors All Risks policy. JCT Insurance Expert can provide advice on which type of cover is most suitable for you.
Policy Exclusions and Limitations
It’s essential for contractors to carefully review their insurance policies to understand the cover provided and any exclusions or limitations that may apply.
Liability insurance policies can be complex documents with legal terminology and technical language. They often contain exclusions and limitations that may not be immediately apparent and can be difficult to comprehend. This can lead to misunderstandings about cover which could result in unexpected cover gaps when a claim arises or leave a project uninsured.
Disputes between contractors and insurance providers regarding cover interpretation or the handling of claims can delay claims and cause frustration for the contractor. It is important to use the services of an expert like JCT Insurance Expert to advise you on cover.
A common exclusion to be aware of is “Property being worked on”. This can have significant implications. If property being worked on is excluded from cover, the policy may not provide protection for damage to the property itself. This means that if the contractor’s activities result in damage to the property under construction or renovation, the insurance policy would probably not cover the costs of repairing or replacing that property.
This could have substantial financial consequences for the contractor and potentially jeopardise the success of the project, leading to disputes with clients or project owners who expect the contractor’s insurance to provide protection for their property throughout the construction process.
Claims Made Policies
Another potential issue for contractors is that some contracts of Liability Insurance, and all Professional Indemnity policies, are underwritten on a “claims-made” basis. This can significantly affect cover and how claims are handled:-
- Cover Trigger
Unlike occurrence-based policies where cover is triggered by the occurrence of an incident during the policy period, claims-made policies only provide cover for claims made during the policy period, regardless of when the incident occurred. This means that the policy must be active both when the incident occurred and when the claim is made for cover to apply. - Retroactive Date
Claims-made policies often include a retroactive date, which is the date from which the insurer will cover claims. Any claims arising from incidents that occurred before the retroactive date are typically not covered. It’s crucial for contractors to understand and review the retroactive date to ensure that it aligns with their previous cover and doesn’t leave them exposed to uncovered claims. - Extended Reporting Periods (ERP)
Also known as “tail cover,” an extended reporting period allows contractors to report claims for incidents that occurred during the policy period but were reported after the policy has expired or been cancelled. ERPs are typically offered as optional endorsements and may incur additional costs. - Continuous Cover Requirement
Maintaining continuous cover is essential under claims-made policies to ensure there are no gaps in cover. If a contractor allows their policy to lapse or switches insurers, they may lose cover for claims arising from past incidents unless they secure an appropriate ERP. - Claims Reporting Requirements
Contractors must report claims to the insurer during the policy period or any applicable extended reporting period for cover to apply. Failing to report claims in a timely manner could result in denial of cover. - Potential Gaps in Cover
Claims-made policies can create cover gaps if a contractor switches insurers or fails to maintain continuous cover. Without appropriate ERP or seamless transitions between policies, claims arising from past incidents may not be covered under the new policy.
Premiums
The cost of liability insurance premiums can be a significant expense for contractors, particularly for those operating in high-risk industries or undertaking large-scale projects. Rising premiums may strain the contractor’s budget if the project extends over one or more renewal date and could affect profitability.
Contractors with a history of claims, poor risk management practices, or involvement in high-risk activities may encounter difficulty in obtaining liability insurance cover. This can hinder their ability to secure contracts and conduct business operations.
Contractors who implement robust risk management practices can help reduce the likelihood and severity of incidents that could lead to liability claims. This could include implementing safety protocols, conducting regular inspections, and providing employee training. These types of measures can help reduce the cost of cover and may be a requirement of cover in some cases.
There are two basis of premium calculation – per capita and turnover/wages. Per capita policies are most suitable for small contractors and are based on the number of employees. For turnover/wages policies the premiums are based on an estimate of wages made at the start of the cover, followed by a declaration at the end of the policy year. If the wages or turnover has exceeded the estimate, then an adjustment premium is payable.
Premiums for claims-made policies may initially be lower compared to occurrence-based policies, but they can increase over time as the risk of claims being made on older policies grows. This is known as “loss development” and can lead to higher premiums in subsequent policy periods.
Subcontractor Liability Issues
Contractors may face challenges in ensuring that subcontractors they hire have adequate liability insurance cover. Failure of subcontractors to maintain proper insurance could expose the main contractor to additional risks and liabilities in the event of a claim.
It is normal practice for bona fide subcontractors (Electricians, Plumbers, Scaffolders and the like) to have their own insurance cover. Labour Only Subcontractors (Bricklayers, Labourers etc) should be included as employees under the main contractor’s cover.
Contractors should obtain and verify certificates of insurance from subcontractors to confirm that they have the necessary insurance cover in place. This should include checks to make sure the cover limits are adequate, that it covers the number of employees to be used, any contract limits are appropriate, any special provisions or endorsements and that the business description covers the work to be carried out.
The main contractor should keep a record of the subcontractor’s policy details and a copy of the certificates of insurance, remembering to get an updated copy when the policy falls due for renewal, Failure to obtain and verify these certificates could result in gaps in cover or disputes over liability in the event of a claim.
Where the contractor is relying on the subcontractor’s insurance cover, they will need to check that the cover includes an “indemnity to principal”. This holds the main contractor harmless from certain liabilities and allows claims made against the main contractor to be passed to the sub-contractor’s insurers for attention.
Contractors should clearly define the scope of work to be performed by subcontractors and they should also ensure that their liability insurance cover coordinates effectively with the cover carried by subcontractors to avoid gaps in cover. Failure to coordinate cover properly can lead to disputes over which party’s insurance policy should respond to a claim.
Issues with subcontractor’s policies can be a significant problem when a claim arises. To mitigate these insurance problems, contractors should establish clear communication and expectations with subcontractors regarding insurance cover and contractual obligations. They should also work with experienced legal and insurance advisors to review contracts, verify insurance cover, and address any potential risks or liabilities associated with subcontractor relationships before the contract commences.
Review and Renewals
Contractors must ensure that their liability insurance policies are renewed in a timely manner to avoid gaps in cover.
It’s important to remember when buying cover that the needs may vary from year to year/project to project depending on the size and nature of the construction projects due to be undertaken during the policy period.
Contractors should stay updated on changes in insurance regulations and legal requirements to ensure compliance.
Failure to comply with regulatory requirements could result in penalties or legal consequences.
Liability insurance needs can also change as businesses grow or circumstances evolve and so Contractors and Developers should regularly review their insurance cover to ensure it remains adequate and up-to-date.
How Much Will a Public, Products and Employers Liability Policy Cost?
The cost of a policy varies depending on the cover chosen. your turnover, wages, experience and types of building worked on and where it is being undertaken. Insurers will also consider if you are working at height, depth, enclosed spaces or using heat. If you have had previous claims, this can also affect the premium.
It’s worth seeking advice from an insurance broker to help you find suitable cover. JCT Insurance Expert is a Chartered Insurance Broker, with many years’ experience in Construction cover, including contractors liabilities and all risks policies.
We can carry out a market search and obtain quotes from multiple insurers on your behalf. We can also advise on the other important cover factors, such as cover limits, exclusions, conditions, and policy terms.
Get a Quotation
For a quotation, help or advice call JCT Insurance Expert on 01825 745 410 or email enquiries@eig.email Or download, complete a proposal form and send it back to us.