Insuring against terrorism

The JCT recently issued a revised Standard form of building contract. By a strange coincidence, the key amendments relate to insurance provisions, particularly in relation to the impact of terrorist acts.

Terrorism is now defined as "any act of any person acting on behalf of, or in connection with, any organisation with activities directed towards overthrowing or influencing any government de jure or de facto, by force or by violence". This is a broad definition, and would encompass the recent atrocities. The party responsible for taking out the all-risks insurance should ensure that the policy adopts an equally broad approach.

Although there is no indication (as yet) that insurance companies are reducing the areas of cover available to construction projects, there is a distinct possibility that premiums will be increased. The amended form allows the contract sum to be adjusted to reflect the net increase in the premium for terrorism cover over that allowed for in the preliminaries.

In the event that cover cannot be obtained, it lays down the available options. On receipt of a notice that suitable terrorist cover is not available, the employer can choose either to end the contract or to proceed with the work. If the employer chooses to proceed and damage is caused by a terrorist act, the contractor is obliged to restore the work, but the restoration, including the removal of debris, is treated as an architect's instruction. Further, the employer cannot reduce the amount payable to the contractor because of any act or neglect on the part of the contractor which may have contributed to damage. The risks to both time and cost are therefore transferred to the employer.

The amended form has, however, introduced an inconsistency into the original insurance provisions. There are a number of exclusions to all-risks insurance that have not been amended, including war, acts of a foreign enemy or hostilities. If seeking to avoid a claim, insurers will find it difficult to rely on the war exclusion because the group responsible for the attack is required to have sovereign status, or actual or de facto government status. However, the references to an "act of foreign enemy or hostilities" may be sufficiently vague to assist. These phrases should be clarified to ensure they do not contradict the revisions relating to terrorist attack.

Other standard forms adopt differing approaches to the threat of terrorism. Under GC /Works/1, there are three insurance options. The first gives the contractor discretion to choose the scope of all-risks insurance appropriate to the work. Clearly, this allows a reduced level of cover.

If the employer has more specific requirements, a second option can be chosen. This allows a summary of essential insurance requirements to be attached to the abstract of particulars in the contract. It enables the employer to incorporate detailed requirements commensurate with the anticipated threat.

The third option provides a more pragmatic approach to the problem. Where the employer is a public authority, it assumes the risks of loss or damage, although this is limited to the amount that would have been insured under the other alternatives. This principle of self-insurance is extended to work within existing structures, where the employer assumes the risk for loss and damage, including that caused by terrorism.

The Institution of Civil Engineers' conditions of contract identify the acts of foreign enemies or hostilities as excepted risks. Again, the confused terminology used for global terrorism, and the lack of definition of these terms makes their application difficult. Under clause 20(3)(b), any loss or damage arising from an excepted risk is rectified at the expense of the employer. However, the contractor takes full responsibility for the care of the work, so if the act or omission of the contractor contributed to the loss, the engineer can apportion costs accordingly. The cost risk attributed to the employer is therefore more balanced than the provisions under JCT98.

Clearly, parties to construction contracts must ensure that an appropriate allocation of risk has been considered. The GC/Works/1 and ICE forms achieve a more balanced approach; however, care should be taken when using the amended JCT98.