Unspecified Perils: who dropped that match?

United Kingdom

Insurance is a method of spreading risks in construction contracts. Once the elements of potential default have been dealt with, the unforeseen nasty surprises are left. Some are allocated to one or other of the parties (e.g. inclement weather conditions). Others are covered by insurance – e.g. terrorist activity. It's all imagined, drafted and covered in the JCT contracts.

Or is it? One apparently unfair consequence of the current JCT98 form is that the Employer bears the risk of loss or damage to existing structures caused by a fire which occurred due to the contractor's negligence. Not only does the contractor avoid liability, but he is entitled to be paid the costs of reinstatement, and gets an extension of time as well.

Under clause 20.2 of JCT98 the contractor is liable to the employer for injury or damage to property (other than to the "Works") insofar as it is caused by its negligence, breach of statutory duty or other default. However this liability excludes "loss or damage to any property required to be insured under clause 22C.1 caused by a Specified Peril".

Under clause 22 there are alternative clauses for insurance. Clauses 22A and 22B are for new building work and require all risks cover under joint name policies. Clause 22A insurance is taken out by the contractor and 22B by the employer. These policies must be for the full reinstatement value of the Works.

Clause 22C is applicable where work is being carried out to existing buildings. The employer takes out two insurances under this clause: existing structure and contents against "Specified Perils" and an all risks insurance policy for new work/extensions.

The policies are all to be in joint names, but the insurer does not have a right of subrogation to recover any of the monies from either of the named parties.

Most of the Specified Perils are events which could not be caused by the contractor, such as lightning and earthquake, but fire, which falls in the list, could be caused either by contractor negligence or by some other means.

Excluding liability for negligence is a tricky business and is not implied into contracts lightly by the courts. There is a three-stage rule to the construction of exemption clauses; from the Canada Steamship case:

  • Where the clause expressly exempts the party from negligence, effect will be given to that exemption.
  • Where there is no express reference to negligence, are the words used wide enough to cover negligence? If there is doubt, the words must be construed against the party seeking to rely on them.
  • If the clause is wide enough to exclude negligence, can the head of damage claimed fall within a legal ground for claim other than negligence?

One method of excluding negligence is an express provision that one of the parties is to bear the risk of a particular type of loss, or damage to a particular type of property. If such a provision is effective, then the liability of the other party will be excluded.

If the contract provides that a party must obtain insurance against a particular risk for the benefit of both parties, neither can be held liable to the other for negligence in respect of that risk. It is then a short step to contemplate that the parties agreed to provide insurance cover in respect of loss caused by the negligence of one of them, and hence that liability for negligence is excluded.

Thus, where clause 22C.1 JCT98 applies, the liability of the contractor to the employer under clause 20.2 does not arise in respect of loss or damage caused by Specified Perils to property referred to in clause 22C.1, and the employer bears the sole risk of damage to the existing structure, even if a Specified Peril is caused by the contractor's negligence.

However, clause 22C.1 does not oblige the employer to insure against consequential losses, so there is no such bar to recovery by the employer of loss of profit and other such financial losses arising out of the damage.

Other standard forms

Other contracts such as IFC98 and the Minor Works contracts are worded differently from JCT98 and their interpretation by the courts have resulted in a different risk allocation from JCT98.

Clause 6.2 of the JCT Minor Works Contract states that the contractor shall be liable for his negligence and shall take out insurance in respect of this liability (other than for damage to the Works). Clause 6.3B goes on to state that the employer shall insure against loss/damage to the existing structures and the Works by fire, lightning, earthquake etc.

This may seem very similar to the JCT98 provisions, but the key difference is that neither clause refers to the other; there is no overlap. So one clause is concerned with liability; the other, only with insurance. Clause 6.3B does not indicate that the employer must insure against Specified Perils howsoever caused, nor does it exclude damage for which the contractor would be liable under clause 6.2. The contractor will therefore be liable for negligently caused fire under this form.

A recent case also held that under the express provisions of the IFC84 contract (as it then was), the contractor would be liable for negligently caused fire. The distinction between the relevant clauses in the IFC contract and the JCT98 was very subtle and complex, but the insurance clause did not contain an express statement as to who bears the risk for damage, caused by fire.

This issue illustrates one of the major differences between the forms, and the need for clear drafting to give effect to risk allocation. If the intention is for the contractor to bear the risk of a negligently caused Specified Peril, then care must be taken. In the case of the JCT98 form, this will require an amendment.

For further information, please contact Vanessa Hall at [email protected] or on +44 (0) 20 7367 2670.