In construction contracts, indeed all contracts, allocation of risk is one of the primary objectives of the agreement. The Principal may be seeking to push down risk to its head contractor, who in turn is likely to try to push it down to subcontractors. Enter the realm of standard form contracts and the desire of Principals and Head Contractors to push down risk. As the risks gets pushed down, Head Contractors and Subcontractors will need to deal with the risk, by pricing it and managing, or pricing it and insuring against it. And therein lies the problem with what subcontractors agree to. Often, there is a disparity between what is sought and what the Subcontractor has insured under its standing policy.

The gap can lie in a variety of forms. For example, if a subcontractor assumes an indemnity (commonly for damage to persons and property not being the WUC), then usual policies will only respond to that liability if the liability would arise anyway under the common law. Some Contractors have negotiated with their insurer, via their broker, for a specific extension to the policy for hold harmless provisions. Others have not. Whether there is a gap will depend on the terms of the indemnity. The broader the terms of the indemnity, the more likely it is to fall foul of the contractor’s policies (public liability, in the case of personal injury and damage to property).

We have seen it on several occasions where a contractor will seek indemnity from its insurer, only for the insurer to provisionally accept a claim, albeit with the key qualification that it reserves its rights to refuse indemnity should the liability be determined not have arisen at common law under the contract.

Another gap can appear in construction contracts where the contractor agrees to name the principal and or the head contractor as a ‘named insured’ on its policies of insurance. As a named insured, the Principal or Head Contractor could make a claim under the contractor’s policy. This can have very serious consequences, particularly for the premium. If the contractor unwittingly agrees to this in the construction contract, but does not have the support of the insurer, and a liability arises, the contractor conceivably has a gap risk if the Principal or Head Contractor is not made whole, by way of breach of contract claim.

We also see gaps where a policy of insurance might indemnify for a particular amount for each occurrence but also in the aggregate. Sometimes the construction contract will be silent on the aggregation, instead specifying a per occurrence amount of indemnity to be held. Conceivably, this means that there is no aggregate, meaning the contractor is required to hold insurance up to a specified amount for each occurrence, with that amount restating after each occurrence. This can potentially lead to a very significant requirement for insurance, which if not held, puts the contractor in breach of contract for which the Principal can sue for damages for breach of contract.

There are a range of scenarios where indemnities under insurance policies may not reflect what has actually been agreed to in the construction contracts. In those instances, the contractor carries the risk at their peril. Mind the gap.