Who is Insured – and Why?

By Steve Nance 

Unlike most other policies, the Contract Works Policy insures a number of parties. The purpose of this is because there are a number of parties involved in any one construction Project that are required to successfully complete that Project.

The Parties involved extend from the owner of the Project, as well as their financiers and directors/employees, as well as the architect, a bevy of engineers, quantity surveyors, and then you can even throw in a Project Manager. Then there is the main contractor and his consultants, a number of subcontractors, suppliers of materials (some of this being included in the above subcontracts), employees, executive officers, directors, and sometimes the mandatory “any other interested party” in the works.

Historically Insurers have accepted that multiple Insureds are required to be covered under the Contract Works Policy. By far the majority of Insurers have drawn the line at providing professional indemnity cover for the likes of architects and engineers, and as such, usually restrict cover for these parties to their onsite activities. For example, if an engineer knocks over a heat gun which causes a fire and burns the building down, then he would be covered for that. However, if the engineer provided a design which was faulty and caused damage to the building, then cover for the engineer would not be afforded in that instance (albeit that other parties would be covered), and subrogation against the engineer would be available.

Of course the case of GPS and Gardner Willis highlighted the ability of one party to be considered as another. In that case Gardner Willis, a consultant to the Project, was also deemed by the Courts to be a subcontractor, and as such was afforded the rights under the Policy as a subcontractor, which did not have a restriction for onsite activities only, albeit that there was a further clause in the definition of Insured under the Policy which specifically nominated engineers, restricting cover for them to onsite activities. As a result, many policies now have a clause which clarifies that architects, engineers and the like, for the purpose of the Policy, are not considered to be subcontractors as defined.

In this regard waiver of subrogation clauses also (sometimes) clarify this point.

Many policies now attempt to differentiate between the party who is purchasing the Construction Policy, often referred to as the “Named Insured” or “Primary Insured”, and everybody else. Usually the Policy includes the Principal as a “Primary” or “Named” Insured, and then qualifies the cover for the balance of the Insureds.

Many policies now restrict the cover for subcontractors to the extent that insurance is required under contract. In this regard, as to what contract is being referred to can sometimes be confusing. For example, some policies include the term “Insured Contract”, and then define this as being the contract entered into by the Named Insured. This of course will vary depending on the tier of Named Insured. For example, if a Head Contractor, then this will be a contract which was entered into between the Head Contractor and the Principal.  It will often be based on an Australian Standard (AS2124, AS4000, or the like) or other common forms of head contract. Most of these, whether realistic or not, requires the contract works insurance to include all contractors and subcontractors of both the Principal and the Head Contractor.

What then if a Principal contracts with one party, say a builder, to build a structure in which electrical components are to be installed, but then contracts separately with an electrical components manufacturing firm to manufacture and install the components. Does the Policy extend to include the electrical components manufacturer, even though it does not form part of the building contractors works, albeit that the components manufacturer is a “sub” contractor to the Principal.

Another tier of a Named Insured could be, say, a plumbing subcontractor. If this organisation is the Named Insured, then the Insured party would extend to include the Head Contractor (and arguably the Principal) and if the wording is such that subcontractors of the Principal are also covered, then arguably all the subcontractors of the Head Contractor, could be covered.

Indeed, the writer has seen wordings where, although clearly not the intent of the cover, has arguably included a number of parties outside of the scope of works of the subcontractor.

Another issue in relation to the idea of a Named or Principal Insured is that this party is usually defined in the schedule of the Policy. The theory is that if XYZ Constructions Pty Ltd has purchased the insurance Policy, then XYZ Constructions Pty Ltd would be the “Named Insured” in the schedule and that the definition in the Policy would then extend to include the Principals, their subcontractors, suppliers and the like as required.

Over the years, however, a number of schedules sighted by the writer (probably the majority of them) defined the Named Insured as not only the party which was intended to be deemed to be the Named Insured, but also “Principals, contractors and subcontractors, and other parties with an interest in the property”. If therefore the Named Insured in the schedule is defined as all of these parties, then clearly it is arguable that the extent of cover provided to a number of non related entities is also provided.

The other issue in relation to this is of course the requirement of the client. This is often forgotten. Indeed, the writer has had many discussions over the years with various clients who purchased insurance and, as a result of one of their subcontractors’ actions, has caused considerable damage. When the client, often the main contractor, is made aware of the fact that as subcontractors are covered under the Policy, and there is a valid waiver of subrogation clause, that subrogation against the subcontractor won’t be possible, and as such that the loss will go to the client’s loss record, which in turn will affect their future premiums, then this is not always accepted in “acceptable terms”.

Further, especially when subcontracts specifically require subcontractors to purchase their own insurance, as the client requires most of the risk to be transferred to others, the provision of a broad cover for all parties under the Policy seems unrealistic.

Of course the advantage of having everyone insured under the one Policy, without rights of subrogation, means that the Project will have some degree of certainty in relation to continuation, as if there is an occurrence, then a single Policy can respond without the potential ongoing conflict of subrogation between the parties.

From an Insured’s perspective, and in order to both minimise premiums and disruption/confrontation on a construction site, but also to provide the maximum cover should it be required, then not only does significant thought need to be put into who is to be an Insured party under the Policy, but also this needs to be coordinated with the head contract and/or subcontracts to ensure that a consistent and uniform understanding of cover exists.