The Real Estate Committee of LEInternational is glad to present to you its quarterly Newsletter intended for individuals and businesses active in cross-border real estate operations. Our newsletter, drafted by real estate lawyers coming from, principally, Europe and America, seeks to provide you with a short overview of several foreign rules and regulations on a particular topic. The newsletter will also address specific issues in more detail as they relate to an individual country. If you are interested in receiving our newsletter each month or if you want to share your comments with us, please do not hesitate to contact us via our website. Enjoy !
What are the insurance requirements or recommended insurance needs for construction projects?
According to Austrian law, there is no compulsory insurance that must be in place for construction projects. However, it is recommendable to carefully consider how to best protect the people and the project involved.
Large construction projects always pose great challenges when it comes to choosing the right insurance. Whether the full co-insurance of the partners involved or subcontractors is required or a separately available coverage, important requirements need to be considered and evaluated to find the best insurance coverage. Therefore, it makes sense to insure major projects separately. Specialized insurance brokers offer combined and comprehensive project insurance usually with the following cover areas:
• Principal’s liability
• Environmental liability
• Environmental damage insurance
• Assembly and / or construction services insurance
• Transport insurance
• Business interruption
• Penalty insurance.
In Belgium, every architect is required to insure his professional liability, including the ten years guarantee (except the exemption regarding civil servants from the State, a Region, a Community or from the Buildings Public Company (”Régie de Bâtiments”)). Since July 1, 2018, contractors and other service providers from the construction field are required to obtain liability insurance to cover defects to new residential construction for a period of ten (10) years.
The insurance required under this new law protects the building owners against latent (hidden) or patent (apparent) defects when a contractor either builds or renovates residential buildings.
It is recommended that the owner of the construction project obtain “Tout Risques Chantier” insurance (TRC), which literally translated means “All Construction Site Risks.” This insurance is in place during construction activities. It is possible to purchase extensions for foreseeable maintenance periods. While not mandatory, most contractors will refuse to commence work if TRC insurance is not in place. TRC insurance protects the owner (whether a natural person or entity), the contractor(s), sub-contractor(s), and architects.
TRC insurance protects the building owner on three levels:
(1) Damage to the Property: In addition to covering natural disasters and damage caused by floods, fire, and bad weather, TRC insurance also covers construction site theft. Defects in workmanship or non-compliance with building codes are not covered by TRC insurance.
(2) Civil Liability to Third Parties: TRC insurance protects the parties from liability to third parties, including damage to neighboring buildings/property.
(3) Damage From Adjacent Properties: TRC insurance protects the parties from damage caused to the property by others, including damage caused by adjacent properties.
After substantial completion of the project, the TRC insurance no longer is in effect, and the owner(s) are protected by the ten-year insurance referred to above.
Contractors can also purchase civil liability insurance. However, this insurance does not cover damage caused to the work, defects, or non-compliance with regulations. In addition, it is important to remember that fire insurance does not apply while the project is still under construction.
Civil liability insurance can also be purchased after substantial completion of the building.
Regarding minor latent (hidden) defects, there is no required liability for the architect since the enactment of new laws on May 31, 2017. It is up to the building owner to make a claim on a case by case basis with insurance.
There are five key points on insurance for construction projects:
1. Construction projects can be high value and contractors are often exposed to substantial liability. Contractors will normally want to protect themselves with insurance, and often are required to do so under the terms of the building contract. Having an insured contractor is vital for the employer / property owner. The contractor may not be in a financial position to discharge its liability, if the time comes, without the insurance. Ensuring contractors cover their liability appropriately is in the interest of all parties.
2. Responsibility for the building, the works, plant and machinery and materials are normally passed to the contractor for the duration of the building works.
3. There many different types of insurance contractors may need to put in place, the most commonly seen are: all risks insurance, employers’ liability insurance, professional indemnity insurance, product liability insurance and public liability insurance. It is common to find that a contractor secures insurance cover for different types of insurance under one over-arching policy. In this instance, due to the wide scope of cover, it is advisable that the contractor checks the precise conditions of the policy it maintains to ensure that there are no gaps that liability can slip through.
4. It is a common misconception that the level of insurance a contractor is required in the building contract to obtain is the same as the cap on their liability. If the liability of the contractor under the building contract exceeds the amount the insurance policy covers, then the contractor will find itself responsible to make up the shortfall themselves, should they been deemed liable, which could put their assets at risk (and also reduce the chance the employer/property owner is adequately reimbursed).
5. It is important that an insurance policy meets the requirements set out in the building contract; the building contract may have minimum indemnity levels or scope of cover requirements, require that the insurance is in joint names or that subrogation rights are waived; all parties should review the contractor’s insurance to ensure compliance.
There are two required forms in construction projects between professional parties (i.e. non-owner/builder projects): NS 8405 and NS 8407 (Norwegian building and civil engineering contracts). The standards included in these documents are considered the industry norm and enjoy widespread acceptance and usage in the industry. In principle, construction professionals are free to adopt any terms in their contracts, but the standards included in the aforementioned forms are almost exclusively used and the terms included therein will form the basic point of reference when interpreting “non-standard contracts.”
Form NS 8405 is a Norwegian building and civil engineering contract and is used where the contractor is responsible for carrying out the project planned by the client, i.e. the contractor is responsible for the construction only, not the design/planning.
Form NS 8407 is the standard form for procurement and construction and is used where the main contractor is responsible for all or substantially all of the project, both in the design, planning, and construction of the building.
Both form contracts have various provisions meant to ensure the work of the contractor.
Clause 9 of form NS 8405 obligates both parties (owner and contractor), unless otherwise agreed, to provide security to ensure their contractual obligations, including interest on late payment(s) and the costs of collection in cases of default. Such security must be in the form of a personal guarantee and shall be granted without undue delay once the contract has been entered into and, at the latest, fourteen (14) days after receipt of the other party’s security. Alternatively, the security may be provided in the form of an insurance policy, provided the parties have agreed to this in advance.
Neither the personal guarantee nor the insurance may be limited by a condition giving the contracting party less security than required under Clause 9.
Unless otherwise agreed, the contractor must deposit security to ensure his performance of the contractual obligations during the construction period and for a defects liability period after completion.
During construction, this security will represent ten percent (10%) of the total contract price. Claims may be made against this security for matters the client invokes no later than at the time of tender of the completed project.
After acceptance of the completed project, the security is reduced to three percent (3%) of the contract sum for a period of three (3) years, unless otherwise agreed to.
The owner/builder of the project must also provide security to ensure his contractual obligations to the tune of fifteen percent (15%) of the total contract price. The contractor is under no obligation to commence construction until this security has been received. The security covers claims the contractor may bring against the owner/builder up and until substantial completion of the project (there are some claims that may be brought after completion).
Pursuant to Clause 10, the contractor shall maintain insurance on the part of the work that was within his scope of work. Insurance must also be taken out on the same terms and conditions as those which are common for the type of work involved, and shall include coverage for damage from fire, water, vandalism, and burglary. This insurance must be in place for the duration of construction, and must name the owner/builder as an additional insured (co-insured).
Contractors are also required to carry liability insurance for damage caused by his employees and/or subcontractors (or any third party associated with his scope of work). The policy must be for no less than 150,000 euros.
These insurance provisions work in conjunction with the regulation of contractors’ claims for payment in accordance with Clause 28. Unless otherwise agreed, contractors can require payment in installments of the total contract sum. Ten percent (10%) retainage is standard. The retention is to be paid upon substantial completion. Invoice amounts are subject to a value added tax (VAT).
The terms and conditions contained in contract form NS 8407 and NS 8405 apply to public works projects, but government entities are not required to provide any security.
Construction of administrative buildings (public projects), shopping malls or other construction projects have risks related to each and every stage of the construction. Insurance is available to cover the owners and the contractors during the process. If the owner pays for the project through a mortgage on the property, banks require insurance to be purchased in order to protect their collateral.
During the construction process and prior to completion, the cost of the insurance is usually related to the estimated value of the building after completion. The basic insurance usually covers damage from natural disasters. However, it also may cover liability for damage caused by third parties. This coverage is normally required by banks, so if you are forced to take a loan to build the project, insurance will be mandatory.
While insurance is not mandatory for all construction projects, it is regularly acquired in practice. Insurance companies offer a wide variety of property and construction insurance products, including those which cover technical risks and third party liability.
In Sweden, there are two well-established forms outlining the General Conditions for most commercial construction projects: AB 04 and ABT 06. These forms stipulate and require contractors to obtain “all-risk” insurance to insure against damage caused to the work of construction and the property. Future business owners are usually named as additional insureds.
The amount of the insurance policy is based on the replacement value of the complete project, including labor. Furthermore, it covers third-party liability for activities called for in the construction contract. In order to calculate the amount of insurance needed, it is not less than 200 times the base price amount (as of 2018, one (1) price base was equal to approximately 4,500 Euros). Insurance is required from the commencement of work on the project up to and including two (2) years after completion and approval of the project. The policyholder’s excess shall not be more than three price base amounts.
For residential (single or two-dwelling housing projects), there is likewise a form contract that is normally used: ABS 18. This form contract is used for both new construction and remodels/renovations. The insurance requirements required on the ABS 18 are identical to those in AB 04 and ABT 06, with the following exceptions. Under ABS 18 the owner shall always be listed as an additional insured (co-insured). Furthermore, the policyholder’s excess shall not be more than one price base amount. For these projects there is also a legal requirement for “completion protection”: Insurance or bank guarantees that are intended to help the owner if a contractor, for example, declares bankruptcy or for some other reason cannot fulfil its commitments. Completion protection insurance shall include reasonable compensation for (a) additional costs for completing the work, (b) costs for remedying errors noted by the inspector on a final inspection, and (c) costs to remedy damage to the building caused by such errors. It is the owner/builder who must ensure that there is completion protection on his or her project.
UNITED STATES OF AMERICA
Insurance requirements on projects are generally not mandated by law, but instead are governed by contracts between the parties. Money lenders will normally require insurance on construction projects and it is advisable to insure construction projects even if no lenders are involved. The types of coverage and insurance minimums vary, and generally depend on the owner.
Contractors are required to be licensed by the different states. The licensing agencies normally require contractors to purchase (1) a bond (“License Bond”) to cover any defects or negligence in their work and (2) carry workers compensation insurance to protect their employees (and the building owners) in case one of their employees is injured during construction. Unfortunately, the license bonds usually are for a nominal sum and will not cover the costs of most construction…or most defects caused by negligence. It is for this reason that builders and contractors carry liability insurance. A good practice is for the builder to require the contractor to purchase general liability insurance (usually for a minimum amount of $1M) and to add the property owner as an additional insured (co-insured) on the policy.
Often large construction projects will require the purchase of “performance bonds”, which in essence are insurance policies to guarantee the completion of the project. If the contractor fails to perform, or otherwise gets terminated from the project, the performance bond company will cover the cost of obtaining a new contractor and the materials in order to complete the project.
Contractors, for their part, usually carry liability insurance to protect themselves in case of error or accident. In order to guarantee payment, contractors, subcontractors and material suppliers have “mechanic’s lien” rights: If they are owed money on the project, they can place a lien on the property itself and force the sale of the property in order to pay them for the work and materials supplied to it. Mechanics liens are limited to private works projects and are not available against public agencies (there are different remedies to ensure payment against public agencies, including “stop notices” that give the claimant a lien against the undistributed construction funds). In addition, public works projects and some large private works projects include “payment bonds”, which are essentially insurance policies that guarantee payment to contractors, subcontractors, and suppliers on the construction projects.
Insurance requirements and the legal issues related to construction projects are extremely technical, and require experienced legal professionals to guide you through the process. It is important that you understand your rights and responsibilities before you start in the construction process.