The effect on construction all risks and third-party liability policies.
Offsite manufacturing and prefabrication generate different risk considerations to traditional ‘in situ’ methods.
The insurance considerations must also be better understood and translated into effective placements.
Two different policy types are affected; construction all risks (CAR) and third party liability (TPL) and we consider the impact on both.
Construction all risks
It is commonplace for defect exclusions to differentiate between the defective works and those which are defect free but damaged as a consequence.
This is straightforward when works are constructed in situ, but more complex for prefabricated works or modular components. In CAR claims, these items are treated as one discrete part and the presence of any fault can render the entire item defective in terms of the policy.
For example, if a precast concrete beam is defective, it would be logical to treat the entire component as defective. However, this may not be the case for an entire bathroom pod where only one fitting is faulty.
CAR policies require very careful drafting to avoid these issues.
The key here is how the policy treats damage to handed over works. In the past, contractors have relied on either product liability or completed operations extensions.
The recent Aspen Insurance UK vs Adana Construction case has changed everything. Adana had constructed an in situ cast tower crane base, which failed after handover.
The court ruled that items constructed in situ were not products, as this indicates something manufactured or assembled offsite and subsequently installed. Critically, the crane base was constructed from raw material on site.
This changed the best practice approach for contractors overnight. TPL policies must now provide extensions for both products and completed contract works or there is a risk of a serious post completion loss being uninsured.
For further information, please contact Josh Everett, Partner on +44 20 7528 4734