Exceptions rule

When you take out your "All-Risks" insurance policy, you may feel some security and comfort that you and your building operation are covered against, well, all risks. Unfortunately, there is virtually no insurance cover – not one that is affordable, at least – that will truly cover a contractor or employer against all risks encountered on construction jobs.

All insurance is subject to exceptions and exceptions to exceptions. There will almost always be an excess relating to each insurable event, which will often make it impossible to claim. The typical example is constant thefts from sites where there will be an excess of, say, £250 per theft. If the claim is not put in promptly, the insurance company can avoid paying. If the insured has even innocently forgotten to mention something that might impact on the cover when applying for it, the insurance company can avoid liability.

The first gap in the "All-Risks" cover is insurance against the contractor's own bad workmanship; this is almost always excluded. Although the consequences of the defective workmanship may be covered, the contractor itself will have to pay for the rectification of the bad work. This gap in cover often extends to bad design on design-and-build jobs.

The second danger area is that, where the insurance policy is in "joint names", one insured cannot usually sue another co-insured for the events insured against. The reason is that the insurers are going to pay in any event, so the assumption is that the parties did not intend to sue each other for the insured events even if they arose as a result of the other's negligence or other default. So, a co-insured subcontractor will often escape liability even though its blowtorch-bearing workman burned down the nearly complete building that the innocent co-insured main contractor is required to finish.

A recent Court of Appeal case illustrates another gap found in construction-related insurance policies. In Pilkington United Kingdom vs CGU Insurance (28 January 2004), the court had to address what the meaning of "damage" was in an insurance policy. Pilkington had made and supplied toughened glass panels for the roof of the Eurostar Terminal at Waterloo Station in London. A small number fractured, and it was said that the cause was the presence of some impurity that had not been removed in the manufacturing process. Eurostar decided not to replace the panels but to install safety devices to prevent any fractured glass falling into public areas.

Pilkington would have been better off under the insurance policy if all its glass panels had failed

Eurostar sued Tarmac, the main contractor, which "joined in" Pilkington. Pilkington's insurers, who had written a global liability insurance policy, refused to pay out and was itself sued after Pilkington settled with the other parties.

The insurance covered "loss of or physical damage to property not belonging to" Pilkington "caused by any … thing supplied" by them. The Court of Appeal held that Pilkington had to establish some physical damage caused by the glass. For that purpose, a defect or deterioration in the glass itself was not itself sufficient; there had to be a loss resulting from physical damage to property. Eurostar had, wholly reasonably, taken precautions to guard against future damage or injury, and the costs of those precautions were not covered by Pilkington's insurers because the damage had not actually occurred. Pilkington would have been better off under the policy if all the panels had failed.

Many insurance policies require the insured party to inform the insurer of any event that might give rise to a claim and thereafter take steps to prevent or limit the possibility of the insured event causing loss. The insured can find that it receives no benefit if it fails to do so.