This is the second instalment in a series of articles, the purpose of which is to provide clarity around the extent of cover required by construction businesses, be they main or sub-contractors under third party liability (TPL) policies.
TPL policies, sometimes referred to as public liability (PL) policies, protect contractors against liabilities arising from damage to property owned by, or injuries to, third parties arising throughout the course of their activities. Our first article acts as an introduction to TPL insurance, and in this second article we will consider what is products liability/completed operations liability insurance.
Products liability cover for some industries, for example manufacturing, is normally focussed on liabilities arising from the provision of a defective product. The defective product itself remains excluded but there is cover for third party injury, damage or so on caused by its defective condition.
If we translate this principle to the construction industry, it is evident that this can result in an unfavourable position for the contractor who has installed, erected or constructed defective works. If these works are deemed to be a product, which is a reasonable interpretation, there is a risk that they would be excluded by the TPL policy. On handover or completion, the works become third party property to the contractor, and if damaged through their defective condition, may result in a significant uninsured exposure.
For example, a contractor completes a student accommodation project, but a small defective component in the HVAC system starts a fire which results in the total loss of the building.
A correctly drafted contractor’s TPL policy should recognise this complexity and contain the equivalent of a “part products” exclusion. This restricts the defective products exclusion to the defective part only and retains cover for liability the resulting loss or damage to the non-defective parts. Whilst this has a “flavour” of DE or LEG defects exclusions, there is no direct similarity as we are considering coverage under third party insurances as opposed to first party (CAR) cover.
TPL policies are not restricted to the damage, but some direct consequential loss liabilities that arise as a result.
There is an additional complexity which also needs to be understood and provided for under a contractor’s TPL policy. Modern construction techniques have resulted in a much greater use of pre-fabrication and modularisation, as distinct from in-situ built elements.
Courts have created a distinction between liability arising from products (prefabricated and installed) versus completed contract works (assembled in situ from raw materials or components). There is a real risk that badly drafted policies can provide cover for only one or other or these two situations, resulting in a significant uninsured exposure for the contractor.
Careful analysis of the policy drafting is required in order to ensure that adequate post completion liability coverage us available and that the contractor’s risk exposures are properly protected.
The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.