… While Mike Grant of law firm Weightmans says half the contractors it surveyed felt let down by insurers. Does this reflect badly on the policies or on firms’ failure to understand them?
Ever wondered why you bother paying insurance premiums? Well you’re not alone. According to recent research carried out for Weightmans, consultants and contractors have little confidence that “all risk” and professional indemnity insurance cover will provide a safety net when misfortune strikes. Half of those interviewed expressed these concerns. Should the construction industry be disturbed by such findings and what has given rise to them?
For many in the construction industry, calling on insurance cover is a last resort – a safety net when all else fails. Insurance is a necessary evil, goes the conventional wisdom, and nobody really understands it or is interested by it. This philosophy underpins the view that there is an increasing gap between the expectation of what insurance cover provides and the reality of what it delivers. This often generates the feeling that, in some way, insurers are avoiding their rightful obligations, which in many cases is simply based on a misunderstanding of what the policy means.
It is easy to understand how this view has crystallised. In recent years insurers have not accrued big returns from stock market investment. This has created a more aggressive approach to the management of business and scrutiny of expenditure, particularly in relation to claims. Underwriters have been far more willing to reject claims upon legitimate grounds than historically has been the case.
Evidence of this trend has been seen in the courts over recent years. Cases such as Pilkington UK Ltd vs CGU Insurance plc (2003) and Amec Civil Engineering Ltd vs Norwich Union Fire Insurance Society Ltd (2003) demonstrated insurers’ resolve in testing the wording of contractors’ all-risk policies in court and their reluctance to pay out on the basis of the most generous interpretation of a policy’s wording. Similarly, Lumbermens vs Bovis Lend Lease emphasised the need to ensure that a claim presented under a professional indemnity policy was done so in a clear and specific fashion, sufficient to trigger policy response. Commentators have used these cases to argue that such policies do not cover all liabilities on a construction site.
However, rather than confirming that insurers are pulling a fast one and using the small print to wriggle out of payments, these trends highlight the need for construction firms to move insurance up their agendas, and not just deploy it in a final, desperate attempt to avoid catastrophe.
In an industry where huge amounts of time is spent drafting and revising documents, time needs to be spent identifying what risks a project presents, how they can be dealt with and which risks must be insured. Understanding the nature and extent of these risks is likely to mean that appropriate insurance cover is obtained and that it is regarded as part of a project’s risk management solution.
The wording of the policy must be read and understood. If something starts going wrong on site, a design-and-build policy, for example, may have a mitigation of loss or rectification of damage clause. These clauses are likely to require underwriters involvement as soon as the problem arises to ensure that indemnity is forthcoming. A failure to notify insurers may result in a multimillion-pound loss borne by a contractor, and that may put it out of business.
The industry needs to put insurance at the forefront of its thinking. It ought to be used as part of a risk management programme designed to deliver a project on time, on budget and to avoid the uncertainty generated if insurance coverage issues arise. This will reduce the risk of a failure to indemnify by insurers, with all that that implies for a project – or the existence of a business.
Mike Grant is head of construction liability at law firm Weightmans. Email him at firstname.lastname@example.org