The construction insurance claim still costing property developers today

31 January 2019

As we approach the third decade of the 21st century, MIPIM 2019 focuses on the theme of Engaging the Future. However “those who cannot remember the past are condemned to repeat it”. And the warning of Spanish philosopher George Santayana, made back in the early 1900s, is just as valid today.

To disregard construction risk and insurance issues of the past would be a folly. In this blog, Will Bromfield (JLT Construction, Global Projects Team) looks anew at a major loss 13 years ago that has big implications for future urban projects, and for the property developers’ insurance policies purchased to protect these projects. As such, it should form a crucial element of any construction site risk assessment when a project is situated near transport infrastructure.

What happened?

On the morning of 30 June 2005, project works being constructed for a new store and car park for Tesco, the UK supermarket chain, failed. A bridge over a railway cutting collapsed and blocked the Chiltern Line at Gerrard’s Cross, England, for more than 50 days.

This was a serious loss which, thankfully, involved no injury or loss of life. However, the bridge collapse sent shockwaves through the insurance industry. And today, more than 13 years later, construction projects near railway lines face significant liabilities related to this type of incident.

What’s the situation for property developers now?

Real estate players have to manage an ever-increasing range of emerging risks that are driven by burgeoning cityscapes. With development space in urban locations at a premium, construction is on the increase near complex networked transport connections such as railway lines and infrastructure. Infrastructure owners are encouraging development and there will be no shortage of bids by developers for these projects.

Understandably, bodies such as Network Rail in the UK will not want infrastructure to be interrupted in any way by work on building projects.

Using Network Rail as an example, it is liable to pay damages under its track access agreements with train operating companies for infrastructure unavailability.

Therefore, as a condition to agreeing to the project, infrastructure owners often insist on compensation for their losses arising from the project, even when the developer or contractor isn’t strictly liable in common law. The compensation costs can also be extremely high, even for small amounts of disruption. Careful construction risk management, therefore, is a must.

It is crucial to note that these sorts of agreements make the developer liable to a greater extent than they would be under common law. This could leave developers facing huge uninsured liabilities.

Why did the Tesco collapse change the face of developers’ liability claims?

Chiltern Railways had insisted that the developer, Tesco, enter into a covenant in which it would indemnify Chiltern Railways for losses even where there was no damage to its property. This created a contractual liability beyond that which would arise in common law. A substantial payment was made to Chiltern Railways as compensation for its losses. This left the burning question: could Tesco recover from its liability insurer?

The answer was “no”. Litigation ensued and Tesco lost the case. The court agreed with the insurer both in the first instance and on appeal.

Tesco’s policy included coverage for legal liabilities arising from “nuisance, trespass, obstruction and other similar perils”. The policy also included a contractual liability extension. Taken on face value, this would seem to extend coverage to include obstruction-type losses.

However, the insurer argued that the contractual liability extension was not intended to pick up losses where the liability was solely contractual. The court agreed that the extension only covered risks that were co-extensive in tort and contract.

All of a sudden, insureds' brokers, loss adjusters and solicitors were all re-evaluating the extent of coverage and what this meant for the equilibrium between insured and insurer.

What is the insurance landscape for property developers building near railway infrastructure?

Nowadays, it is not uncommon to see these contractual indemnity-type agreements associated with construction projects. For example, where tower cranes are required to deliver city centre projects, there is often an element of over-sailing adjacent premises.

The owners of these premises may require some form of indemnity that is wider than common law remedies.

It is also commonplace for Network Rail to insist on an asset protection agreement (APA) for work in close proximity to its rail infrastructure. Again, these APAs create obligations that are more onerous than in common law.

These obligations can impact on either the owner or the contractor delivering the works. Without special considerations, these liabilities would not be insured by standard liability policies.

Development near railways: What are the construction insurance solutions?

With Tesco, the developer, being forced to shoulder significant financial liabilities in 2005, how should such a project (and its developer’s insurance) be managed differently in order to increase the chances of a more favourable outcome?

Risk management will always be a better option than relying on insurance. The solution depends on the party that is carrying the risk. 

For employers, the solution is unlikely to sit in their annual insurance programmes. It is more commonplace for these risks to be insured under project-specific contractual liability policies designed to respond specifically to the risks that are presented by each project.

However, it may be possible for a contractor to extend its annual liability insurances to include an element of cover for contractual liabilities which do not arise from bodily injury or physical damage. This is a very technical area and you should consult with a specialist construction insurance broker to determine the extent of cover that you have and might be available to you.

Further insurance considerations for owners and developers building near railway infrastructure

The construction insurance market has been “soft” for many years with abundant cover at low premium rates. However, we are starting to see signs of hardening and there have been a number of insurers who have chosen to withdraw from the market.

There is still plenty of capacity available but the time may be coming when some specialist covers, such as contractual liability policies or extensions, may be more difficult to come by. This absence of an insurance solution could result in more difficult risk allocation discussions between owners and contractors.

The first steps to resolving these issues are, as always, to understand the risks that you face and discuss these with specialist construction risk and insurance advisors.

Make construction insurance and risk management work harder for your company

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For further information please contact  Will Bromfield, JLT Construction, Global Projects Team on +44 (0)20 8108 9325 or book an appointment at MIPIM here.

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