Murphy’s Law in the context of Contractors All Risks insurance
A developer/contractor took on a project in the north of Israel involving the construction of a large commercial centre with deep foundations for a two floor underground car park.
The total contract value was more than NIS 100 million, although at the initial stage they only obtained a construction permit for the deep foundation works and arranged an insurance policy for these works only. The contractor, who was in a hurry, started the construction works with the partial insurance cover rather than arranging a policy in advance for the total contract value of the entire project.
“What can happen from excavation and pile wall works?” he asked himself, making a disastrous mistake. In the construction industry, especially as insurance goes, Murphy’s Law often works overtime…
The pile walls collapsed. What happened with the insurance claim?
Shortly before completing the excavation and pile wall works, the contractor discovered with astonishment that the sonic integrity tests in the piles indicated that they were too short and did not reach the base of the excavation site. The only option was to re-do all of the work and it cost the contractor around NIS 5 million to rectify the situation.
However, because the insurance the contractor arranged only covered the value of the works that had been approved by the authorities – NIS 12 million, and since the extension under the policy covering the loss – Faulty design, faulty workmanship and faulty materials carried a limit of 10% of the total contract value, the contractor found himself short of NIS 3.8 million. If he would have arranged cover for the total contract value of the entire project at the outset, he would have benefited from a limit under this extension of NIS 10 million, which would have fully covered the loss.
To add salt to the wound…
Not only did the insured have to fund the uninsured difference himself, but he also experienced great difficulty in finding an insurance company that was willing to insure the project for the total contract value after he had already made a big claim.
This is a sign of the times in the Contractors All Risks insurance market – insurance companies avoid writing high-risk projects, often by explaining that their reinsurers prohibit them from accepting projects that have already started or have a negative claims experience.
Starting a construction project without arranging Contractors All Risks insurance for the total contract value of the entire project can have devastating results. This is a common mistake on the part of developers and contractors, often arising from pressures they are under due to the challenging situation in the construction industry.
So, regardless of pressures and time constraints, an important rule is not to start the project without arranging full insurance cover for the total value of the entire project. In the construction industry, Murphy’s Law quite often works overtime…