Defects Liability

By Steve Nance

There are usually two types of cover available under the material damage section of the Contract Works policy. The first covers any material damage during the construction period. However, once the construction period ceases, many construction contracts enter into the “Defects Liability” phase. This is a period of time after practical completion of the works where the contractor is responsible for the making good associated with any defects in the works. This forms the second portion of the material damage section of the contract works policy. 

Many policies describe this as being the “Maintenance Period”. It is unclear as to how this term came about, but it is quite clear that the responsibility of the contractor is not one of maintenance, but rather of rectification of defects.  It is for this reason why the majority of contracts refer to this section of the contract as being the “Defects Liability” period.

It is the cover under this period that will be discussed in this item. Specifically, the types of cover which are available.

The wording of the Defects Liability Period/cover varies significantly from policy to policy. Generally speaking the policy provides cover for physical loss or damage to the contract works which occurs or “manifests itself” during the Defects Liability Period of the contract, but which originates from the contract works. It also provides cover for any physical loss or damage to the contract works which may occur when any of the insured parties attend the site to rectify any defects, or indeed any other works which the contractor is responsible for carrying out as a result of the contract.

For example, let’s take a building which has reached Practical Completion two months prior to a significant rainstorm. There is a 12 months Defects Liability Period under the construction contract. As a result of the rainfall, leaking occurs as a result of a defective membrane, causing damage to ceiling tiles, the electrical installations, and carpet (all of which formed part of the contract works) and other contents items which were owned by the tenant.

In this instance the loss occurred as a result of defective work which occurred during the construction period and as such would usually fall within the defects liability provisions of the contract. It is also arisen out of the contract works during the construction period. As a result, the policy will respond to the loss, but subject to the terms and conditions of the policy.  Depending on the wording, this would usually exclude the cost of making good the membrane, however would provide cover for physical loss or damage to other sections of the contract works. Given that the policy only provides cover for the contract works, it would not provide cover for the contents owned by the tenant, such as the desks, chairs, PABX installation, computer installation and the like. This would be more appropriate for a liability cover.

To continue the example further, the contractor re-attends the site to undertake the rectification of the membrane, as well as rectification of the other damage to the building, as well as some other defects. In doing this, he causes a fire which causes yet further damage to the building. As a second proximate cause, this is a separate event, however would also be covered as it is works being carried out by the contractor in complying with the requirements of the defects liability clauses of the construction contract.

The above is fairly straightforward, and is addressed in most of the construction policies, which the writer has seen.

There are, however, some circumstances which are not as straightforward.

Let’s take for example the situation where the Defects Liability Period under the construction contract either does not exist or is of a short period (say three months) under the construction contract. The policy, however, provides a 12 months “maintenance period” cover. Given that the contractor under various states legislation is responsible for repairing the defect, and as such also responsible for the resultant damage, would the policy respond? This of course depends on the wording of the policy.

Some policies specifically provide the necessary period of cover up to a maximum of the Defects Liability Period which is required under the contract. If therefore a contract has only a three months Defects Liability Period, then the policy would respond to losses up to three months after Practical Completion, but then would not provide cover for the events manifesting themselves during the nine months after this, being the maximum amount provided by the policy. Other more generous policies specifically state that they provide cover up to the end of the maintenance period allowed for in the policy. This suggests that even though the three months Defects Liability Period under the contract may have expired, cover would be provided up to 12 months, where this is the maximum allowable under the policy. This effectively provides cover where it may not be required.

Another issue is where some construction contracts actually allow for an extension of the Defects Liability Period. Typically this would be where a defect has originally been determined, and then repaired. Some contracts then require a new Defects Liability Period to commence at the completion of that rectification. Indeed, the writer has been involved in claims 27 months after Practical Completion where a Defects Liability Period of 12 months only had been provided. Whether cover is provided for this or not will again depend on the detailed words of the policy. Where a policy simply mentions that the cover provided will follow that of the construction contract, then where the construction contract does allow for this accumulated defects liability provisions, cover would probably be provided.

A further issue associated with the maintenance period under the contract can relate to the (usual) requirement that the cause has to arise out of the contract works which is carried out by the Insured and occur during the construction period. If we take the example of a defective generator which has been installed in our building and becomes badly damaged during the Defects Liability Period. What cover would be provided to the generator if the cause was a manufacturing defect within the generator itself, and the generator was manufactured some time prior to the contract commencing? The extent to which cover would be provided for both the generator and any resultant damage which may occur will again depend on the policy wording.

Further, most policies require the defect to occur at the construction site. Given the same generator, which was constructed off site, possibly overseas, even if the manufacture was during the construction period, cover may not be afforded to this. Again, this will depend on the policy wording, which is often tailored to suit the needs of the Insured.

Golfing in the UK!

A few blokes from the Australian insurance industry, a couple of doctors, an accountant, a bed manufacturer and a few ring-ins got together in the UK to play some of the best golf courses in the world. Birkdale, Turnberry, St Andrews, and Carnoustie amongst them. And didn’t they have a great time!

Efficient Use of Service Providers in Liability Claims

By Filip Damjanovski

The general insurance industry has been under increasing pressure to deliver positive returns to company shareholders. In an environment where revenue growth is nominal and investment yield limited, insurers are making concerted efforts by insurers to reduce costs.

However reducing costs does not have to entail a slash and burn policy of eliminating external expenditure such as service suppliers (i.e. lawyers, adjusters, investigators). Indeed the claims management process benefits from the skills that everybody in that chain brings.

It is not uncommon for a claims handler to delegate claims based on the “monetary value” of a claim and many times this can be justified, however often this is not the most efficient way of dealing with a claim.

Having a good understanding of the role of service providers such as loss adjusters, lawyers and investigators will ensure that the quality of the insurer’s claims service is kept at a high level and at the same time minimising wasted costs that are incurred by engaging service providers on a traditional “monetary value” basis.

For example, the natural response to receiving a claim for a large quantum sum may be to send it to lawyers. Understandably this is because of the perception that a large exposure requires a “safe pair of hands” to deal with it. In fact, the complexity of a claim is rarely determined by the quantum of the claim and often “small” claims are far more complex in terms of the issues they raise than “large” claims.

Alternatively it may be perceived that if the claimant is represented by lawyers it means legal proceedings are imminent and warrants lawyers being appointed to act for the insurer. In actual fact, often the reason that a claimant has decided to retain lawyers is because the claimant feels that he/she was not engaged with (in discussion) in good faith at an earlier stage of the claim process.

Decisions to be made in the claims process

1. Notification of claim – The insured or broker approaches the insurer and lodges a claim or notification of an incident. They will provide basic facts about the incident and any relevant correspondence to provide a basic outline of the incident. This information allows a claims handler to get a “gut-feel” for the claim. A claims handler can request any other information that they feel is necessary for them to be able to determine what further steps ought to be taken at that stage.

2. If the claims handler has much of the relevant information required or is able to obtain any further missing details from the insured and/or claimant by a simple email or phone call, then there is very little that an adjuster, lawyer or investigator can add to the claims process but cost and delay. If not, the claims handler may decide that an external service provider is best placed to provide what is required within a reasonable timeframe and cost.

3. If the claims handler has previously engaged with the claimant and/or their legal representative and it is clear that the parties have exhausted attempts to resolve their differences and the issues remain in dispute, then the natural progression is for the claimant to commence legal proceedings. At that point the insurer ought to engage lawyers in order to protect both the insurer’s and the insured’s interests.

4. However, if a claim is notified and much of the information required to make a decision is missing, irrespective of the size of the claim or whether the claimant is dealing with the matter personally or through lawyers, it is prudent to first engage a loss adjuster.

5. A loss adjuster is best placed to gather the information from all parties (insured, claimant, third parties, witnesses), collate documentation and evidence, take statements, attend to the loss location, take photographs, and then provide the claims handler with a factual report weighing up the strengths and weaknesses of the claim and make recommendations with respect to the further conduct of the claim, as well as comment on the potential impact on policy response and address quantum issues.

6. At that point the claims handler should have sufficient information to make a decision as to how to resolve or progress the claim. If the loss adjuster has raised issues that require legal advice (or clarification of a legal position), it is at that point that it becomes prudent for a claims handler to engage lawyers to address the specific issues raised (again, all with a view to allowing the claims handler to make a decision as to how to resolve or progress the claim). Likewise, if the investigations reveal that further specialist expertise is required on a specific point, then it would be prudent to engage the relevant consultant to address the specific issues raised.

What benefits can a loss adjuster provide?

When a claim requires investigation, a loss adjuster is generally best placed to obtain the relevant information available from the parties involved in the shortest timeframe.

An adjuster is usually able to secure a visit to the location of the loss and with very few exceptions is able to speak with all parties involved in order to obtain an unfiltered account of events and facts. This enables an adjuster access to places and people that other service providers will not have the benefit of.

The loss adjusting process can be undertaken in a conciliatory fashion (as opposed to the adversarial style of litigation). It follows that with the expectation that the insurance process is in play, all parties involved are generally eager to assist a loss adjuster in furthering the claim. Thus an adjuster is able to move the claim process forward further and quicker than others.

A good liability adjuster should be able to undertake the investigations, obtain as much of the facts as possible, understand and filter through the relevant issues and make meaningful recommendations for the further management of the claim, keeping in mind the commercial aspects of the claims process and where appropriate attempting an early resolution of the matter to avoid unnecessary and expensive litigation, thus saving the insurer both time and money in resolving the claim.

Ultimately the management and resolution of an insurance claim is all about quality and timely information – something that a loss adjuster is often best placed to provide.

At Technical Assessing we have many experienced and knowledgeable liability adjusters with a range of backgrounds and qualifications who are familiar with both the claims and litigation processes.

Film Insurance

By Peter Brown

The Wikipedia definition of Insurance reads as follows:

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment.  It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

In our daily lives we are well used to handling the full range of claims for property damage, in particular Contract Works and general liability including Public and Products and Professional Indemnity.

However, there is one area of specialised insurance in which Peter Brown and Bill Matthews from the Brisbane Office of Technical Assessing have developed a niche and that is Film Insurance.

Film Insurance provides insurance on films, television productions and commercials from short productions to full-length features.  The underwriting of Film Insurance is normally the domain of specialist underwriters in this field both locally, in the UK and USA.  There are a number of types of cover available, the main ones of which are as follows:

Film Producers’ Indemnity

This cover, also known as Cast Insurance, provides for the increased costs incurred due to the death, injury or illness of nominated personnel who are considered essential to the continuation of the Production.  Typical people insured are the Director, Producer, Director of Photography and Principal Actors.  Cover is normally taken out for pre-production and shoot, however, in some instances cover may also be taken out for the post-production period.

Negative Film Risk

Cover is provided for the increased costs incurred due to the loss of, or damage to, negatives and video tape and other forms of content media.  This Policy also normally provides cover for the risks of faulty stock, faulty cameras and faulty processing.

Multi-Risks

This particular cover is normally split into three sections:

• Props, set and wardrobe;
• Office contents;
• Cameras, lighting and electrical equipment.

It should be noted that a lot of the equipment used in a production is hired in from specialist hire companies and it is important that responsibility for insurance is clarified at the commencement of hire.

Extra Expense

This section of the Policy protects the Production Company for increased costs incurred following damage to props, sets, cameras, equipment or facilities –it provides protection to cover the costs of delays caused by material damage to property.

Public Liability

This Policy covers the Production Company for claims made for death, bodily injury or property damage to third parties other than employees of the Production Company.

Errors and Omissions

This Policy protects the Production Company and distributors for claims for libel, slander, defamation, plagiarism, breach of copyright, invasion of privacy and theft of rights and includes the legal fees incurred in the defence of the claim.

This class of business can lead to the handling of some extremely varied and interesting claims as illustrated in a cross section of claims handled by Peter and Bill over the last few years.

(i)             Loss of 5 minute scene during filming of “Scorched”, a made-for-tv movie shot in Sydney;

(ii)            Loss of day’s shooting of 40 second commercial entitled “Bush Tucker Man” for Electrolux due to poor weather conditions in Broken Hill.  Filming extended leading to increased production salaries and extended hire costs for equipment;

(iii)           Hirer failed to return hired camera equipment from renter of broadcast and professional video equipment.  Equipment located in Lebanon and most of it successfully recovered;

(iv)          Disruption to filming of “Farscape 2” production due to illness of leading actress.  Major cost to extend and change film production program;

(v)           Substantial claim for additional expenses incurred due to the delay in commencement of Principal Photography due to health issues suffered by leading cast member;

(vi)          Contamination of electronic event screens by foreign matter generated during filming resulting in claim for reinstatement of damage;

(vii)         Fire in sound stage destroyed building, cameras and equipment owned by third party suppliers.  Sound stage building required reinstatement and a substantial claim eventuated for disruption to rental income during the period of the construction.

The writer will discuss Contingency Insurance in an article later this year.

Informal Settlement Conferences

By Derek Blackwell

As well as undertaking factual investigations of liability matters, loss adjusters can engage in investigating a claim and running a claim to a resolution whether that be a claim settlement with a third party or denying liability to a third party. As part of this process we regularly attend Informal Settlement Conferences.

The Process

The first part of the process is when information and instructions are received from the insurer. After reviewing this, a factual investigation is carried out so that all of the facts are known and can be substantiated. This is particularly important so that I am well prepared as to what to expect. Contact is then made with the claimant and/or their lawyer with a view of arranging a settlement conference. I always insist that the claimant is there as well as their lawyer so that we can get a better feeling for what the claim is all about. There is nothing like eyeballing someone to know what the truth is likely to be.

I have attended hundreds of settlement conferences during my life as an adjuster. On one occasion I attended the offices of a solicitor in Geelong. His client  had consumed cleaning fluid which was somehow mixed into her morning coffee. On the way to work the claimant became seriously ill and when at work an ambulance was called and she was transported to St Vincent’s Hospital in Melbourne. The outlet where she had purchased her coffee refused to disclose the product data sheet to the treating doctor. She was just about to undergo a stomach pump when the insured’s head office made contact with the hospital, providing all of the necessary details.

Most of the above was not known to me at the time of the conference, or included in the claim notification papers. Adding insult to injury, the insured had mislaid or lost several demands from the third party, making the third party even angrier, and forcing her to the services of the solicitor.

When I arrived at the claimant’s solicitors’ office his file was somewhat larger than mine! I only had instructions to settle for $5000, though it was clear the extent of the injuries suffered were not appreciated at that time. The claimant was thoroughly annoyed, not having received an apology or assistance. Following several phone calls with my instructing principal that matter resolved at $20,000 all inclusive. This was considered by all to be a very fortuitous outcome.

On another occasion I attended the claimant’s solicitor’s office where the “claimant” was both mother and son. The son had crushed his fingers (but fortunately not broken them), in the doorway of a shopping centre. The Insured had sensibly assisted in the resolution process by apologising and delivering a Tonker Truck on the second day of my informal meeting. What was not known to me at the time was that the mother suffered from depressive anxiety disorder and was hospitalised for 2 days as a result of this incident. The matter settled at $3,000 all inclusive.

The above two examples demonstrate the importance of disclosing all information before the settlement process can begin.

In another incident I was acting for an engineering company who had provided defective bearings to a government research vessel who claimed $360,000 for repairs and lost revenue. We identified the bearings that damaged the propeller seals and the vessel had to be dry docked. The claim consisted of both insured and uninsured components of the claim.

An Informal Settlement Conference was held at the government contract shipyard and government representatives were present via telephone conference. After one and a half days negotiating we shook hands at $175,000, which was a great outcome.

Some time ago I was involved in a matter where a child pricked his finger on a syringe in an Adelaide cinema where the syringe had been left on a cinema chair. I made contact with the parents showing empathy and ensuring that all of out of pocket expenses will be met and that we will do whatever we can to assist the medical process. It was an agonising nine months for both the family and the writer until the medical all-clear was given. The parents were clearly relieved, and at my final meeting I admit to having a tear in my eye also. I had a telephone conference with the claims manager, and as a result of that discussion we agreed to fly the whole family (mum and dad, son and daughter) to the Gold Coast Sea World Nara Hotel. Insurers paid for air flights, accommodation, and theme park entries. “Mum and Dad” agreed not to pursue the matter further.

This highlights that by showing empathy for a legitimate claim, and becoming involved in the process, that a good and acceptable outcome can be achieved to the benefit of everyone.

In another matter, and whilst on holiday in Adelaide, I had become aware that a statement of claim had been issued in the magistrate’s court for $80,000 in a matter I was handling for a hire car driver who slipped and fell. An appearance needed to be filed in court and the insurer had asked me to make urgent contact with a solicitor who agreed to an impromptu Informal Settlement Conference. I had no instructions from London Underwriters. It was always understood, though, that when underwriters had been put on notice that it was a matter for settlement on best possible terms rather than attempt to defend it. I lined up lawyers just in case conference “fell over”. Whilst I had no instructions, I counted the claimant’s expectations of $80,000+ costs with an offer of $20,000 all inclusive, which quantum was in my view reasonable. What transpired was that the lawyers that I instructed gained an extra 28 days before we needed to file an appearance in the court.

The liability loss adjusters at Technical Assessing are proactive and can jump in and assist in an urgent situation, and settle while the court process is going through, making the whole process more efficient.

We are also proficient at professional indemnity claims. In one case a building consultant gave a pre-purchase inspection report to a propose purchaser saying everything was fine with the home, except it wasn’t. It was subsiding badly.  We were of the opinion that the insured was clearly negligent despite the insured having the opposing view. At that informal settlement, the third party was represented by both a solicitor and a barrister. Their expectations were of a settlement of well in excess of $100,000, acting on behalf of a third party. We settled at $90,000, based upon inspection reports, claims for out of pocket expenses and repair costs. Had this proceeded, the costs alone could have exceeded this.

The clear advantages of a settlement conference include:

-        A quick and speedy resolution of the claim;

-        At the best possible cost to insurers; and

-        The ability to close a potentially long-tail claim in the most economical way.

All our liability team at Technical Assessing are experienced and knowledgeable in this process, and our clients can feel comfortable with us handling their Informal Settlement Conferences where applicable. 

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.