What's In A Clause?

By Steve Nance

When it comes to most insurances, the answer is everything. Let’s take an annual contract works  material damage policy for example.

The most important clause, yet one which is probably the most overlooked, is the Insuring Clause. This generally says that the insurers will indemnify the insured for damage to insured property from any cause that is not excluded occurring at the location during the construction period and subject to the conditions of the policy.

Let’s look at the various components of the clause.

“The insurers” – these are detailed in the policy, and can range from a single insurer through to a whole panel of insurance companies, both in Australia and overseas. If a panel, is there a lead insurer clause, or do all insurers have to agree on all decisions?

“Indemnity” – books have been written about the word indemnity, but it is still arguably the most important word in this clause. It says that the basis of the insurance is indemnity, clearly subject to any other clauses in the policy which may alter this basis, such as a “Basis of Settlement Clause”.

“The insured” – you have to look at both the schedule and policy wording to get a clear indication of what this means. Does it include subcontractors, suppliers, consultants, project managers and the like, or is there only one or two parties insured under the policy. Don’t forget any construction involves numerous people from various companies who combine their skills under contract to ensure the successful completion of the project.

“Damage” – damage is usually defined in the policy, and usually includes the words physical loss or damage. When is something damaged? Is it damaged or lost just because it is not usable or is defective?

“Insured property” – what constitutes insured property? Does it include the entire hillside into which the cut is being made, or just the cut and what is being constructed in the cut? Does it include the structure which has just been partially demolished as part of its refurbishment? If the insured declares a contract cost, what is included in that cost? If that’s the limit of the sum insured, then what about the expediting expenses which the insured will incur in reconstruction, irrespective of any professional fees, removal of debris, and mitigation costs, or other costs which will naturally form part of the expenses of reconstruction.

“cause not excluded” – oh yes, the exclusions. There are normally a few standard ones, such as watercraft of aircraft and consequential loss (whatever that means) but there can also be some very specific ones, depending on the risk involved. Such could include  piling and retaining walls, tunnelling, and the like. There are also the faulty WMD (workmanship, materials, and design) exclusions of which there are numbers of different types, sometimes requiring a vivid imagination to interpret.

“Occurring at the location” – so when the builder manufactures his own kitchens in the shed in his backyard, and the fire happens in that shed, is the loss covered or not? What if the ute rolls over on the way to the site? What if the damage occurred at the transformer manufacturers premises in China, and was not realised until the final inspection on site? Or when the thing blew apart during commissioning? Much will depend on the definition of this in the schedule, and indeed the wording of the policy.

“During the construction period” – what is the construction period. Is the policy on a turnover basis, or a contracts commenced basis? Is there a run-off clause, and does this apply to all contracts? Is this different to the period of insurance, and how is this defined? Do we have a maintenance/defects liability period, and how is it defined?

“Subject to the conditions” – reasonable precautions, notification of loss, alteration of risk, loss accumulation, waiver of subrogation and cross liabilities. Are these relevant to any particular claim? So if all of the repairs have been completed when the loss is notified, has the insured reasonably proven his loss, or has the insurer been prejudiced? Is the bridge which the insured is constructing as part of his building project and alteration of risk? And to what degree is the insurer entitled to recover against a supplier?

And the fact  is if all of these boxes are not ticked, the insuring clause is not triggered, so the policy does not apply.

In the writer’s opinion, the insuring clause is the most important clause in the policy. It outlines in simple terms what the policy is there for, and what it covers. Each of the words in the insuring policy are very important, and although supplemented by the rest of the policy, still needs to be carefully considered on each and every claim.

What Liability Insurance Is Not

By Andrew Bristow

Let’s face it – most people don’t understand insurance.  And to many of those who do, liability insurance is still a bit of a mystery.  So when we speak to insureds about their liability claims, we often have to explain how liability insurance works.

The principle is deceptively simple.  You take out a policy which protects you against your legal liability to others, so if you get sued, there is an insurer behind you to settle the claim or defend it as required.  But many insureds have no real understanding of what their policy covers – and, often more importantly, what it does not.  So – let’s identify and clarify a few common misconceptions, by setting out some things that a liability policy is NOT:

It is not a guarantee of your performance or products

If you don’t do your job properly, or if your product doesn’t work, your liability policy will not help you unless property damage or personal injury results.  A painter whose work is uneven or unsightly will have to bear the cost of correcting the defect.  However, if other property is damaged, say by overspray onto other surfaces, the policy will respond in relation to cleaning and restoring the damaged property.  Similarly, if an appliance fails to work and needs replacement, that is a problem for the supplier or manufacturer, not the liability insurer.  If the appliance injures someone because of a fault, the liability policy will come into play.

It is not a Public Relations fund

There has to be a legal liability, or a reasonable expectation of one, before settlement can be considered.  If you are not liable, your insurer will not settle the matter just to maintain your good relationship with the aggrieved party. While insurers do make “commercial settlements” in some situations, these are still founded on the prospect of the Insured being found liable, even if liability is debatable.

It is not a license to break the law

If your actions are illegal, you may be in breach of your policy conditions.  If you are fined or otherwise penalised by a government authority, the policy can’t help you.

It is not an excuse for reckless behaviour

Strangely enough, even though a liability policy covers negligence, most include some form of condition requiring the insured to take reasonable care to prevent damage or injury.  While in theory this seems incongruous, in practice it means that you need to show that you did not act recklessly or deliberately cause the damage or injury.  For example, policies often require appropriate enquiries as to the presence or location of underground services to be made before excavation commences, or specific safety and fire protection measures to be in place before welding or other hot works.

It is not a debt collection mechanism

Contractors who have lodged a liability claim often face the problem of progress payments being withheld by their principal until the claim is resolved.  Insurers are usually mindful of this, but will not compromise their investigation and assessment of the liability claim in order to protect your cash flow.

Insureds often learn these lessons the hard way – when they have a claim against them and are being pressured by various parties.  Liability adjusters therefore have to be mindful of these issues and clarify them early in the piece in order to manage expectations and achieve an appropriate resolution of the claim.