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The Conditions of Contract and the Maintenance Period Cover under the CAR Policy – cause for concern?

At the recent inaugural South African Association of Engineering Insurers (SAAEI) Annual Conference, one of the presentations focused on the various Conditions of Contract/Contract Agreements commonly used in the Construction/Building industry, the need to understand the insurance clauses contained in each of them, and how this would impact on the cover under the Construction Risks Policy. The presenter stressed the importance of the above, as the Policy will only provide cover to the extent required in terms of the Contract Agreement.

This reminded me of a claim which highlighted the need to clarify the Policy cover afforded to the Insured Parties, particularly in the event that damage to the Contract Works occurs during the Maintenance period.

The facts of the claim: 

  • The Contractor had completed the construction of a new warehouse building and it had been handed over. 
  • The Maintenance Period (Defects Rectification Period) had then commenced. 
  • Not long after the handover, the roof structure started to show signs of distress, and shortly afterwards, it collapsed.
  • Fortunately, no one was injured, but the repair/reinstatement costs were significant. 

The Employer/Principal had taken out a Construction Risks Policy to cover the Contract, and following the collapse of the roof, lodged a claim against his Policy. The Contractor had been included as an Insured Party. So far so good, but the question of Cover was not so straight-forward.

The first issue was that the cause of the collapse had to be determined, as the Policy only covers loss or damage to the Contract Works during the Maintenance period, provided this is as a result of a pre-existing cause/defect. Loss or damage to the Works due to storm/flood/fire/impact etc. occurring after handover is not covered.

Investigations carried out by Independent Engineers revealed that the cause of the collapse was the defective design of critical parts of the steel roof trusses by the Consulting Engineer, and not due to any defective workmanship on the part of the Contractor. The Employer was still of the opinion that he had a valid claim, as the collapse was still due to a pre-existing cause – but was he correct ?

An inspection of the Policy wording revealed that the Policy will cover loss or damage to the Works occurring during the Maintenance Period, but only if the Contractor is liable for such loss/damage under the Defects Liability or Maintenance Condition(s) of The Insured Contract.

This was an important point, as the commonly used Contract Agreements in the Market (JBCC/GCC/FIDIC etc.) state that the Insurance is to be in force from the commencement of the Contract until the Contractor’s responsibility in terms of the Works Risk clause has ended.

The Works Risk clause states that the Contractor takes full responsibility for the Works until handover to the Employer, as well as for any loss or damage to the Works arising during the Maintenance Period from a cause prior to handover, or caused by the Contractor when rectifying a defect. However, it goes on to state that the Contractor will not be responsible for such loss or damage resulting from the design of the Works by another Party.

From the above, it can be seen that the cover during the Defects Liability/Maintenance Period would not extend to indemnify the Employer in respect of damage arising during this period which is caused by or due to Defective Design on the part of the Engineer appointed by the Employer/Principal.

In this instance, since the damage that arose during the Maintenance Period was due to defective design by the Engineer appointed by the Employer, there was no cover in terms of the Policy. The Employer had to claim against the Engineer’s Professional Indemnity Policy, and established that there was insufficient cover under this Policy.

The above demonstrates the need for all the Parties to a Contract to understand their responsibilities in terms of the Contract Agreement, and the Risks that they have to insure against, as well as ensuring that the cover under the respective Policies will be sufficient.

For more information contact:
David Waterworth, Technical Specialist: Engineering | Specialty
Old Mutual Insure
david.waterworth@ominsure.co.za