Cutting your losses

Insurance is of ever-increasing importance to contractors as the value of potential losses, claims and awards gets higher. Ascertaining what is adequate insurance can be difficult. There is a baffling range of policies available. This article focuses on some "optional" forms of insurance, those not usually prescribed by the standard forms. It then confronts some potential problems.

Insurance options
Professional indemnity If you have any design responsibility, it is essential to take out professional indemnity insurance to cover your legal liability for any negligence in design. A word of warning: the extent of a contractor's design responsibility is not always obvious. You may be required to ensure that the design is fit for the purpose for which it is intended. Although some insurance companies are prepared to provide cover for such a standard, the cost may be prohibitive. Advice from brokers should be taken before a binding contract is finalised. If your design liability is limited to a pre-determined sum, do not assume that this should be the limit of insurance cover. For example, the contractual limitation may not include consequential damages.

Environmental At the beginning of every project you should assess whether there is likely to be an environmental risk and insure accordingly. A third-party liability policy usually covers one-off incidents of pollution whereas a separate policy will cover gradual pollution as well. It should cover liability to third parties and clean-up costs. Environmental insurance is very expensive.

Plant and equipment/Building Any loss or damage to a contractor's plant and equipment could cause huge cost and delay. Consider insuring against this, particularly where any specialist equipment is being used. In addition, where you have hired-in plant you may want protection against potential claims by the owner should you damage it. Where you are building near to the employer's existing buildings, make an assessment of likely damage to the buildings and take out insurance to cover it.

Key man There are often particular employees whose presence is essential to the project. Key man insurance is available in the event that these persons become unavailable. You will usually be asked to justify the amount that each employee is insured for.

Health and safety Keep up-to-date with health and safety legislation and subsequent insurance needs. For example, the Home Office has recently confirmed that it plans to go ahead with its corporate killing proposals. Insuring against a criminal act is obviously not an option, but directors' and officers' insurance can be taken out which will cover legal expenses incurred in defending both civil and criminal actions. Insurers will recover these costs should the party be found to be guilty.

Legal expenses Whenever an insurance policy is taken out, you must check that it has legal expenses insurance. This should cover the cost of a claim and the defence of a claim. Check that it includes cover for expenses incurred in an action taken to reduce the costs of a claim. Remember that legal expense insurance will never fund an action that does not have a reasonable prospect of success, but it is for the insurance company to establish this.

After-the-event Should you have no cover in place, after-the-event insurance is an option in the event of litigation (see Neil White's column, above).

Potential problems
There is huge potential for overlap of insurance. You cannot recover the same loss twice – the insurance companies each contribute a proportion of the insured loss. This often leads to arguments and subsequent delays in payment. It is a worthwhile exercise to undertake a regular review of existing policies to ensure there is no duplication. Aside from avoiding subsequent problems, there will also be a cost saving.

Contractors often forget that professional indemnity insurance is not retroactive unless specifically stated to be so. Nor will it provide future protection. Ensure that you are covered at all times. Often, such policies are renewed annually.

Insurance contracts are contracts of the utmost good faith and you have a duty to disclose all material facts to the insurer. You are usually requested to warrant that what you have stated is correct and that you are not withholding information. Your insurance cover will be lost if this is not the case.

You should always be aware of the policy conditions.

If they are not met in any way, your insurer may refuse to pay out on any claim. Ensure when taking out the policy that either the exclusion clause forbidding extensions of liability is deleted or there is a general statement in the proposal that you will give collateral warranties in the course of your business. Remember that once you have

a claim, you must be very careful to notify insurers within the time specified, disclose information requested and do not under any circumstances admit liability without their consent.

All too often, insurance is ignored as being complicated or an additional overhead that further reduces the margin of return on a project. It is in fact a tool of risk management and should be used accordingly.

Awareness is key to insurance: know what your potential losses and liabilities are, establish what cover you have, reduce duplication and extend the cover to minimise risk.