This article was published in Summer 2018 Public RM, recently rebranded as stronger, the ALARM journal. ALARM is a membership organisation run by members, for members, supporting risk professionals that support our communities and citizens. For more information, please visit alarm-uk.org.
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Mathew Hussey and Graeme Merry, Environmental Directors in Gallagher’s Construction Services team advise on how to protect against land development risks, including contaminated land and contractor failure.

Councils are facing increasing pressure to deliver and develop surplus land to meet the UK’s growing housing demand and to create space for employment. Potential risks associated with contaminated land have been highlighted in a number of significant cases such as Corby Council and Redland Crest cases and others. This coupled with the recent collapse of another major contractor show that not all risks can be managed or engineered out and some degree of long-term risks will almost certainly remain.

Public sector organisations should use project-specific insurances to mitigate risks associated with land development, including contaminated land and contractor default.

Professional indemnity (PI) insurance - perception or reality?

The traditional route of using contracts to transfer liability is understood but there is a limitation in this approach: insolvency. If the company does not exist any financial settlement is unlikely. Importantly if a company doesn’t exist, neither does its public indemnity.

For contaminated land and other developments, clients often seek consultant and contractor PI insurance as a safeguard against potential long-term residual pollution problems, often under the misapprehension that it offers a direct benefit. However PI insurance is negligence-based, incepted primarily for the protection of the consultant or contractor against claims of negligence in their work or professional duties. The burden of proof for negligence is extremely onerous.

If a contract is in breach of the terms of the PI policy the cover can be invalidated and the contractor or consultant will have to defend and settle a claim. However most consultants or contractors will have a very low credit rating when compared to insurers. Warranty agreements usually require PI insurance for 12 years, provided it remains available at economic cost. PI insurance is annual cover rather than one-off for the period of the contract and the policy is claims-made. This means that any claims have to be made during the policy period. If the insurance is lapsed, cancelled or non-renewed at any time, there is no cover.

The majority of environmental PI policies are placed on an aggregate limits basis and are not ring-fenced to a particular project. If a consultant or contractor has entered into a number of agreements and suffers one or more claims during a policy period, the aggregate limit of indemnity could be exhausted.

How can you secure a project?

Selecting technically capable and experienced advisors and contractors is a key element of risk management. This should include using a qualified insurance professional to undertake due diligence of the insurance on offer.

PI insurance will provide some protection but has significant limitations, as outlined above. Often consultants have to rely on incomplete regulatory guidelines and what is definite may yet be resolved to any degree of confidence in both scientific and legal fields. The shifting sands of liability through scientific discovery and case law add to uncertainty.

Trying to protect your organisation against the wide range of risks merely through reliance on someone else’s insurance and contractual provisions is neither the only nor always appropriate option.

Project specific insurance

Increasingly landowners are acquiring contaminated land insurance, rather than putting the environmental risks onto other parties or retaining the risks. Various polices can cover third-party and regulatory claims for pollution liabilities, including consequential loss, property damage, bodily injury and on and off-site remediation costs.

Benefits can include:
  • A site specific ‘ring-fenced’ policy with long term duration of cover
  • Project-specific cover (contractors’ pollution liability cover) for the development phase based on a long-term occurrence based policy wording
  • Cover for change in law and applicable regulations
  • Cover for legal and technical defence costs
  • Cover for landowners’ and/or tenants’ business interruption costs
  • Flexibility to add additional insureds such as stakeholders, funders, tenants and others
  • Policy assignable with ability to stay protected as an additional insured
  • Secure credit rating with a regulated insurance company
  • Accountability in the risk transfer
Construction works and building

There are a number of options available for councils to insure risks and obtain cover that goes beyond that of contractors’ insurances via an owner controlled insurance programme (OCIP). It is increasingly common for owners to control insurances via an OCIP, where the project is large, complex or commercially sensitive. It is the owner who tends to suffer most if the insurance programme does not protect the project assets, liabilities and potential revenues. It is natural therefore that the owner should wish to control the insurance arrangements.

An OCIP is typically a combined contractors’ all risks and third party liability (CAR/TPL) insurance policy that is purchased by the owner. It covers all parties for insured perils and the owner, should they buy delay in start-up (DSU) insurance, for the delay in the delivery of the project.

Increasingly the benefits of latent defects insurance are being recognised. It provides cover for the cost of rectifying or repairing structural damage caused by a fault in the design, construction or materials of a new build, conversion or completed build project that may not be apparent at the time of practical completion.

The best time to effect this insurance is at the start of a construction project and the policy can run for ten or 12 years if under seal. Importantly the policy provides protection against contractors’ insolvency as insurers pay to rectify the problem even if the contractor no longer exists. There is no need to establish who is at fault or prove negligence and it can eliminate time delays and legal costs associated with legal proceedings.

Some contractors and consultants may accept unlimited transfer of liability but few can sustain large claims, payment delays or economic downturns, as recent history proves. Reliance solely on protection through warranties and PI provided by others brings inherent risks.

The insurance industry is the most regulated industry for the transfer of liability. Most other companies have very limited requirements to keep long-term financial reserves. For provision of suitable long-term financial protection against contaminated land and contractor solvency risks associated with land development, project specific insurance should be the preferred method. This could be argued as the only real way of providing long-term accountable protection on a sustainable basis.