Insuring Risk In Construction Projects

Lecture by: Laina Chan, Barrister Nine Wentworth Chambers, Sydney

For: University of Melbourne

Risk Diagram
Economic viability

Financiers
Cash flow can be impacted upon by delays Claims against the contractor Job delivered late

Developers
Job delivered with defects

Insolvency of major parties

Increased costs Design risk which can be laid off to design sub-consultants

Head Contractor
Unforseen site conditions

Construction risk in terms of defects supervision

Responsibility for the work of subcontractors

Design Consultant

Sub-Contractors

Specified, defect and warranty obligations

Delay, penalties and liquidated damages claims

Negligence and defective design

Monitor and ensure compliance with insurance requirements

Types of Insurance
Contractors All Risk policies;
Industrial Special Risk policies which take over insurance of the project once the works are complete;

Professional Indemnity;
Public liability insurance; Workers Compensation;

Compulsory third party motor vehicle; and

Marine cargo or transit.

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107

Common law exception to the rules of privity of contract and consideration;

Applicable in the context of public liability insurance and property insurance.

Insurance Contracts Act 1984

48(1) Where a person who is not a party to a contract of
general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the persons loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract.

16(1)

A contract of general insurance is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in a subject-matter of the contract.

17(1) Where the insured under a contract of general

insurance has suffered a pecuniary or economic loss by reason that property the subject-matter of the contract has been damaged or destroyed, the insurer is not relieved of liability under the contract by reason only that, at the time of the loss, the insured did not have an interest at law or in equity in the property.

Contract Works Policies

No cover for defective workmanship and design

But what does this mean?

Graham Evans & Co (Qld) Pty Limited v Vanguard Insurance Company Limited
(1987) 4 ANZ Insurance Cases 60-772
all risks of physical loss of or damage to property of every kind and description (including the whole of the Contract Plant, Equipment, Materials and Supplies up to but not exceeding the respective sums insured in the Schedule owned by the Insured or for which the Insured may be responsible or, prior to any occurrence for which may be made hereunder, assumed responsibility, used or to be used in part of or incidental to the Insureds Contracting Operations detailed in the Schedule.

Chalmers Leask Underwriting Agencies v May Nicholas Limited (1983) 155 CLR 279
loss or damage directly caused by defective workmanship, material or design or wear and tear or mechanical breakdown or normal upkeep or normal making good but so that this exclusion shall be limited to the part immediately affected and shall not apply to any other part or parts lost or damage in consequence thereof Vehicles passing over a coffer dam damaged the coffer dam (which was alleged to be defective). Flood waters breaching the coffer dam and caused damage to the construction works including leaving behind deposits of silt and debris. Q: Is the cost of rectifying the damage to the construction works (but not the cost of repair of the coffer dam) insured under the policy?

Walkers Civil Engineering v Sun Alliance & London Insurance PLC & Ors (1999) 10 ANZ Ins Cases 61418
Similar exclusion clause to clause construed in Chalmers Leask The insuring clause provided: This section, subject to the limitations, exclusions, terms and conditions hereinafter mentioned, is to insure in respect of occurrences happening during the period stated in the Schedule against all risks of physical loss of or damage to property of every kind and description (including the whole of the contract plant, equipment, materials and supplies up to but not exceeding the respective sums Insured in the Schedule) owned by the insured or for which the Insured may be responsible or, prior to any occurrence for which claim may be made hereunder, have assumed responsibility, use or to be used in part of or incidental to the Insureds Contracting Operations detailed in the Schedule wherever the said property may be located in Australia or whilst in transit within and between any place or places therein.

Walkers Civil Engineering v Sun Alliance & London Insurance PLC & Ors (1999) 10 ANZ Ins Cases 61418
Exclusion 2(c) provided:

This insurance does not cover loss or damage directly caused by defective workmanship, construction or design or wear and tear or

mechanical breakdown or normal upkeep or normal making good

but this exclusion shall be limited to the part which is defective and shall not apply to any other part or parts lost or damaged in consequence thereof.

Walkers Civil Engineering v Sun Alliance & London Insurance PLC & Ors (1999) 10 ANZ Ins Cases 61418
Three sewerage treatment plants

Cement poured onto fibreglass sewerage tanks to counter hydrostatic ground pressure
Fibreglass tanks defective

Rectification works included the removal of the concrete

Q: Is the insured entitled to indemnity for the cost of the removal of the concrete?

Cementation Piling & Foundations Limited v Aegon Insurance Co Limited and Commercial Union Insurance Co PLC [1995] 1 Lloyds Rep 97
The losses suffered by Cementation fell into three distinct areas: (1) Rectification of the gaps and/or voids in the walls;

(2) Removal of the sand fill from the dock bed; and (3) Grouting and filling behind the walls of the voids from which the sand fill had escaped.

Cementation Piling & Foundations Limited v Aegon Insurance Co Limited and Commercial Union Insurance Co PLC [1995] 1 Lloyds Rep 97
The policy excludes: (2) the cost of replacing or rectifying defects in design, materials or workmanship unless the property insured suffers actual loss, destruction or damage as a result of such defects. However, initial costs of introducing improvements, design, material betterments or or corrections in the rectification of the workmanship causing such loss or damage shall always be excluded.

Cementation Piling & Foundations Limited v Aegon Insurance Co Limited and Commercial Union Insurance Co PLC [1995] 1 Lloyds Rep 97
In deciding whether the costs of rectifying the gaps and voids in the wall (category 1) were covered by the policy, the court looked at the exclusion clauses in the policy:

It is common ground that an exception clause cannot extend the cover from which the exception is made. It is also, however, common ground that the terms of an exception clause may provide material from which the Court can discern that the first possible meaning of the indemnity clause is to be preferred to another or second possible meaning.

Cross Liability Clauses

What do they mean?

What is the defence of circuity?

Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors; Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547
The policy had three sections:
Section A provided insurance for loss or damage to property owned by the insured or for which the insured may have been responsible. Section B covered legal liability under the terms of any contract maintenance or defects liability clauses for loss and/or damage in identified circumstances

Section C set out various terms and conditions.

Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors; Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547
Transfield Holdings Pty Ltd

Transfield (Head Contractor)

Transfield Bouygues JV
Subcontracted with JV to construct a section of railway

W&D Elliot Earthmoving Pty Ltd (Elliot)

DN Pearce & Maintenance Pty Ltd (Pearce)

Connell Wagner

Coffey

Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors; Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547
The Insuring Clause provided relevantly:
The Insurers hereby agree, subject to the limitations, terms and conditions hereafter mentioned, that they will: (a) Pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as compensation for: (2) loss of and/or damage to and/or destruction of property and/or the Loss of Use thereof; in respect of and/or arising out of Occurrences happening anywhere in the Geographical Limits during the Period of Insurance in connection with the Construction Operation and/or Other Business Operations and/or Products Liability/Completed Operations and/or Property Insured detailed in the Schedule.

Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors; Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547

Exclusions applicable to Section C

This section shall not apply to liability: for damage to property owned by the insured

Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors; Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547
The cross liability clause provided:

Each of the persons comprising the Insured shall for the purposes of this policy be considered a separate and distinct unit and the words the Insured shall be considered as applying to each of such persons in the same manner as if a separate policy had been issued to each of them in his name alone and the Insurers waive all rights of subrogation or action which they may have or acquire against any of such persons. Provided that nothing in this clause shall be deemed to increase the limit of the Insurers liability under this policy in respect of any one occurrence.

Waiver of Subrogation
How wide is too

Does a waiver of subrogation clause only apply to claims covered by the policy?

GPS Power Pty Ltd v Gardiner Willis Associates Pty Ltd

[2000] QSC 075
The insurers agreed that in the event of the insurers indemnifying or making a payment to any insured(s), the insurers shall not exercise any rights of subrogation against any other insured(s) hereunder.

The insurers also agreed to waive any rights and remedies or relief to which they may become entitled by subrogation against [a]ny insured named or described by this policy.

Larson-Juhl Australia LLC v Jaywest International Pty Ltd (2000) 11 ANZ Ins Cases 61-472 and 61-500
The New South Wales Court of appeal affirmed the decision of Master MacReady who construed the following clause literally and held that there was nothing in the clause to confine the generality of the phrase shall waive any rights and remedies or relief :

14.8.1 The insurer shall waive any rights and remedies or relief to which it is or may become entitled by subrogation against:
1. 2. Any co-insured (including its directors, officers and employees); Any corporation or entity (including its directors, officers and employees) owned or controlled by any insured or against any co-owner of the property insured.

Thiess Contractors Pty Ltd v Norcon Pty Ltd

(2001) 11 ANZ Ins cases 61-509
Should a plaintiff who had suffered loss as a result of a defendants negligence,
but is the beneficiary of an insurance policy covering that loss, have the sum that it has received from the insurer taken into account to reduce the damages recoverable from the defendant?

Thiess Contractors Pty Ltd v Norcon Pty Ltd

(2001) 11 ANZ Ins cases 61-509
In its defence, Norcon denied that it was a joint tortfeasor with Thiess Contractors. It also pleaded the following paragraph: 5. Further or alternatively, if the second third party [the respondent] breached clause 8.04 of the Norcon Subcontract as alleged or at all, which is not admitted, then:at all material times the first third party [the appellant] had taken out its own public liability policy of insurance (the Policy), the further particulars of which the second third party is not presently aware; the first third party has made a claim, or is entitled to make a claim, pursuant to the Policy with respect to any liability that it has in these proceedings; further or alternatively to subparagraph (b) above, the first third party has been granted indemnity pursuant to, or is entitled to be granted indemnity pursuant to, the Policy; by reason of the matters pleaded above, there is no loss or liability in respect of which the first third party is entitled to claim indemnity pursuant to any other policy of insurance; the insurer or insurers on the Policy are not entitled to exercise a right of subrogation so as to claim pursuant to another policy of insurance on behalf of the first third party; the first third party has suffered no loss by reason of any breach by the second third party of clause 8.04 of the Norcon Subcontract.

(a)

(b) (c)

(d)

(e)

(f)