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JCT 2005 suite of contracts and its impact on risk and insurance clauses
Construction contracts have always been a fertile ground for litigation. The costs of claims can be extremely high and this means the cost of insurance will continue to rise. The 2005 JCT suite of contracts has been overhauled with the intention of reducing the number of disputes. In this document, Berrymans Lace Mawer, Zurich's legal partners provide a resume of the changes in relation to insurance issues.
Introduction
The fact that the construction industry relies upon a large number of diverse trades and professions acting in harmony has historically always provided a risk for insurers and customers alike. The high number of litigation and insurance claims reflect the many risk factors. The intensive nature of the business dictates the close working relationships of many different parties including the professional risks of architects and consulting engineers and the operational risks of contractors and subcontractors which can all escalate the risk of professional indemnity, public and employers liability claims. Throw into the mix the physical risks associated with construction sites and their hazards such as theft, fire, structural collapse and vandalism and there is major scope for costly and often complex claims. The liability chain can be problematic with detailed commercial contracts, indemnity provisions and penalty clauses to consider. Losses can also be complex with the adverse impact that claims have on items such as loss of revenue/profit, delay and penalty clauses as well as the insolvency issues. Losses typically arise through: the process i.e. materials, workmanship, heat work, security, health and safety procedures; lack of skill and care and failings in design, specification, workmanship or materials; environmental factors such as weather, ground conditions, proximity to hazards such as rivers, sea or mine workings; close proximity of different contractors, subcontractors and professionals on site, leading to a significant public liability risk as well as employer's liability exposures arising from carrying, lifting, working at height, confined spaces, collapse, dropping, toppling etc; failure to complete a contract on time, resulting in financial losses (this may be due to insured perils or insolvency of a contractor).
Thus we see that the scope for claims is considera ble and that claims can arise from a variety of sources. Premiums and legal costs can therefore be higher to reflect the degree of complexity and specialist skills required. It is also common to have higher excesses to avoid the insurer managing a deluge of smaller and often time consuming claims. In order to create some order in the often complex legal chain contracts have been created to provide clarity and consistency in the management of construction risks.
The contract
Most commercial building work is carried out under a standard form of contract, with or without amendments. Most new building work is carried out under the JCT 2005 contract which has replaced the JCT 1998 contract. Summary of Changes The insurance provisions in JCT 2005 remain largely unchanged from those provisions which were contained in the JCT 1998 form of contract. The format has changed so that the insurance provisions are included within a schedule rather than the body of the contract. Where there is a contractors designed portion, the contractor must, immediately after the contract has been entered into, take out a professional indemnity insurance policy with a limit of indemnity of the type and in an amount not less than that stated in the contract particulars (JCT 2005 clauses 6.11 and 6.12). The employers loss of liquidated damages cover has been dispensed with. This was contained in clause 22D of the JCT 1998. The joint names definition has been clarified along with the position of subcontractors. In terms of dispute resolution, in the JCT 1998 form the default position was that the parties would arbitrate, whereas in the JCT 2005, litigation is the default position, although the parties may agree to arbitrate if they want to. A new clause 9.2 has been added to JCT 2005, which provides that the default procedure for adjudication proceedings will be the Scheme for Construction Contracts. This means that the cumbersome rules included in JCT 1998 (clause 41A) have been largely omitted. The JCT 2005 contract has developed the policy of introducing third party rights into the contract where stated in the Contract Particulars. This must be looked at in conjunction with the insurance policy wordings because the insurance industry has not traditionally adopted the Contract (Rights of Third Parties) Act 1999. Typically, this is still written out by the contracting parties who prefer to rely on collateral warranties.
Where are the insurance sections in the JCT 1998 and JCT 2005 contracts?
Insurance provision
Indemnity clause (requires the contractor to indemnify the employer for injury on site) Indemnity clause (requires the contractor to indemnify the employer for injury or damage to property) Confirmation that the works are excluded from clause 20.2 (6.2) up to the date of practical completion Contractor is required to take out Employers and public liability insurance. Obligation on Contractor to take out joint names insurance Excepted risks for the purpose of the above clauses Contracts works insurance. There are variations depending upon the type of build and who is obliged to insure Definitions clause Obligation on the party who insures to provide for recognition of each sub contractor as an insured or include a waiver Allows the employer to determine the employment in the event that Terrorism cover is withdrawn during the course of the works
JCT 1998
Clause 20.1 Clause 20.2 Clause 20.3 Clause 21.1 Clause 21.2 Clause 21.3 Clause 22.1 Clause 22.2 Clause 22.3 Amendment 3 to 1998 form (introduced in 2001) Clause 22A Clause 22B Clause 22.C.1 Clause 22.C.2 None
JCT 2005
Clause 6.1 Clause 6.2 Clause 6.3 Clause 6.4 Clause 6.5 Clause 6.6 Clause 6.7 Clause 6.8 Clause 6.9 Clause 6.10
Contractor is obliged to take out joint names cover for new build all risks insurance Joint names insurance where the employer elects to insure in joint names Requires a joint names policy for specified perils in relation to existing structure and contents Requires a joint names policy for works on existing structures and includes all risks insurance Requirement for Contractor to take out professional indemnity insurance for Contractor designed works
Schedule 3 Option A Schedule 3 Option B Schedule 3 Option C.1 Schedule 3 Option C.2 Clause 6.11 and 6.12 New provision not previously included.
Summary
The new JCT 2005 contract looks very different to the JCT 1998, however the insurance provisions have not significantly altered. It is important to bear in mind some key points when advising insureds, most notably the new provision relating to the contractor's responsibility to take out professional indemnity insurance for any contractor designed aspects. Even where this is taken out, the insurance is only going to cover design liability and it should not be taken as being insurance for all the contractor's liability. The risk of a contractor becoming insolvent is still a significant issue, and can be dealt with through performance bonds or credit insurance. The obligations on the contractor is to insure against employers' liability risks and even in circumstances where the employer has to insure the works, the contractor is liable for plant, temporary buildings and negligence of their employees.
This information is intended for the benefit of the recipient only and is not intended to be published for communication to any other parties. This information is designed to keep readers abreast of current developments, but it is not intended to be a comprehensive statement of law and no liability for errors of fact or opinions contained herein is accepted. Readers are reminded that it is prudent to take early professional advice on any case you consider to be fraudulent.