Construction 2016 Risk Outlook

09 December 2015

What's the issue?

The construction industry is changing and technology is increasingly taking on a far greater role, such as the advance of Building Information Modelling (BIM) and the inevitable influence of 3D printing. Different manufacturing techniques are also becoming more common. Offsite prefabrication and modularisation are increasingly common in mechanical and electrical systems and bathroom pods. In the UK, contractor Laing O'Rourke has made a substantial investment in a specialist manufacturing facility which is challenging not only traditional techniques, but also the low capital requirement/low margin business models of its UK construction industry peers.

It's safer and cheaper and takes unnecessary stress out of the construction programme. Complex products are manufactured in clean, secure factory conditions with superior quality assurance regimes instead of construction or assembly on project sites that may be exposed to cold, heat, moisture etc. The risk of personal injury is greatly reduced and manufacturing can be programmed for delivery to site on a just in time basis.

Why will this be an issue in 2016?

Traditional insurance programmes haven't necessarily kept up with the speed of change in the construction industry. As a result there are some pitfalls that need to be understood and avoided.

Prefabrication occurs in a wide variety of areas with different levels of complexity. Contrast, for example, simple precast reinforced concrete floor beams with a bathroom pod, both of which could be found in a straightforward building project. Both are manufactured off site but there are very different levels of complexity involved in each.

Some construction insurance coverages require the identification of the defective part of the works, which may be excluded in either contact works or liability coverages. It is common practice in the event of a claim for insurers to consider the entire modular component as being defective. Not an issue for an individual floor beam as this seems a common sense interpretation but not so favourable in the case of the entire bathroom pod that is excluded because of a badly designed tap.

What does this mean for risk and insurance?

Careful modification of the policy wording is required to avoid this issue. For years many contractors' liability insurances have used the expressions "completed contract works", "completed operations" and "products" synonymously. The recent case of Aspen -v- Adana Construction provided some interesting insight into this issue. The insured had erected a tower crane using an in-situ cast mass concrete base. The anchor bolts became detached from the base and the crane fell. Adana claimed under its liability policy citing the products liability extension. The court found that the base was not a product as it has been made on site from raw materials as opposed to having been manufactured and then subsequently sold to a customer.

What Adana needed was a completed contract works, or completed operations extension to its liability policy. There are many more examples of items used in modern day construction that will fall outside the category of completed contract works or completed operations. Contractors’ liability policies must therefore encompass both products liability and completed contract works or completed operations extensions.

Author: 

David Cahill has extensive knowledge of joint venturing on major civil engineering construction programmes having worked on some of the UK’s most prestigious projects. This includes acting for National Grid in relation to its £ multi-billion capital expenditure programme to renew its gas and electricity transmission infrastructure. David leads a team in JLT’s UK Contractors’ Group and is a specialist in UK Construction insurance and risk issues. 

For more information contact David Cahill, Partner, Construction on +44 (0)20 7558 3482