Storm damage: Under the weather

The Met Office has reported that the winter of 2013/14 was the wettest in England and Wales since records began in 1766. The cost of the winter storms and flooding has been estimated at £1.1bn according to the Association of British Insurers. Its members received 17,500 flood claims and 421,500 storm damage claims between 23 December and 28 February.

The industry expects to pay out £650m in claims relating to storm damage. It was reported in Building (“Severe weather hits growth”, 17 April, page 18) that this caused a 2.8% reduction in construction output for February. However, in addition to the delays and disruption suffered, the storms will have caused damage to buildings as well be they existing, or in the process of being constructed.

It is thus important to consider what the requirements are for proving storm damage under the usual insurance policy wordings and what may be the policyholders’ remedy. It is also important to consider who bears the liability for the delays to any ongoing building projects.

Insurance policies relating to dwellings will normally respond and indemnify claims where there is storm damage. In order to give rise to storm damage, there has to be some sort of violent wind, usually accompanied by rain or snow. Storm does not mean persistent bad weather, nor does it mean heavy rain or persistent rain by itself. It is doubtful whether wind or rain on their own would constitute a storm. The policy will not respond where the damage is due to lack of maintenance. Nor can it be called upon to indemnify where the damage is due to defective materials or bad workmanship.

Establishing the cause of critical delays and financial losses to building projects is a common and recurring theme

Where there is an ongoing building project which has yet to be practically completed, the Contractor’s All Risks (CAR) policy will indemnify where there is a damage due to a storm.

The insurance covers the works, the materials and the reasonable cost of removal and disposal of debris, and shoring and propping up the Works. The cover must also extend for the full reinstatement value of the Works plus any agreed percentage to cover professional fees. The definition of ‘all risks’ excludes loss or damage due to wear and tear and any design or workmanship defects.

The JCT Standard Forms provide options as to who is to procure the CAR policy but in any event it is to be procured in the Joint Names of the Employer and the Contractor. This confers a legal entitlement on the part of the Contractor to be paid for its works from the proceeds derived from the CAR policy.

In addition under the JCT Standard Forms, storm damage is considered to be a “Specified Peril”. Thus clause 2.29.9 of the JCT Standard Building Contract confers on the Contractor the benefit of an extension of time and thus relief from LADs if it can be shown that the delay was due to damage caused by the storm. The critical delay would extend to the consequences of the storm, being the duration of time spent in the reinstatement and making good the damage.  No doubt the duration of the storm itself would also be a  ground for an extension of time being classified as an exceptionally adverse weather condition. In such situations, employers may wish to insure against their inabilities to claim LADs for the period of the critical delay.

However, the JCT Standard Forms do not allow the contractor to claim its direct loss and/or expense. Thus it will not be entitled to recover any of its prolongation costs or additional resources utilised as of necessity following the damage to the works. This is a risk which it will bear itself.

Subcontractors’ rights to be indemnified for losses due to the Specified Perils such as storms are recognised by the JCT forms. The CAR policy procured should provide for recognition of each subcontractor as an insured. Alternatively, there should be a waiver of insurer’s rights of subrogation which they may have against each and every subcontractor.

Establishing the cause of critical delays and financial losses to building projects is a common and recurring theme. The same test will apply to insurance claims where there may be competing causes. One may be an insured peril and the other may be an excepted peril.  It will be necessary to establish what the proximate cause of the damage is.

Insurance operates as a risk transfer mechanism which allows the losses of the few to be borne by the contributions of the many. The payments by insurers due to storm damage this winter will surely be reflected by increase in the next year’s premiums – beware!

Jeffrey Brown is a partner at Veale Wasbrough Vizards