Insurances

Question 1

What is the difference between insurance and indemnity?

Answer 1

1. Indemnity = to protect against legal responsibility or to compensate (open ended).
2. Insurance = a fund that enables the indemnifying party to make any payments that may arise. It includes time and financial limits.
3. The contract sets out the insurances required to cover the indemnities that the party is liable for.

Question 2

What is a performance bond?

Answer 2

1. PBs give the employer a guarantee of payment up to a stated amount of money should they suffer a loss because of the contractor’s breach of his contractual obligations.
2. Typically provided by banks and insurance companies (usually 10%).
3. The premium for taking out the bond is added to contract sum.

Question 3

How would the employer call for payment of a performance bond?

Answer 3

1. The employer would have to prove that the contractor has defaulted in their obligations under the main contract and that a loss has been suffered.

Question 4

What are the pros and cons of a performance bond?

Answer 4

1. Pros
   a. Protects the interests of a 1 off developer.
   b. Can be used in a difficult economic climate where risk of insolvency is higher and PCGs are risky.
   c. Provides the employer with a financial guaranteed payment.
2. Cons
   a. Shouldn’t really be needed if the contractor is reliable and capable.
   b. Unnecessary premiums added to the contract sum.
   c. Could be expensive if a serial developer.

Question 5

When would a performance bond be used?

Answer 5

1. If the developer is doing a one-off scheme.
2. If the contractor is new or unproved.
3. If the economic climate increases risk of insolvency.

Question 6

When does a performance bond expire?

Answer 6

Typically, at PC or they are linked to the making good defects timeline.

1. Octagon
   a. 5% Performance Bond.
   b. No reduction in value.
   c. Expires on the date in which the Practical Completion certificate is issued.
2. Essex St
   a. 10% Performance Bond.
   b. Reduces to 5% at Practical Completion.
   c. Expires 6 months after the date on the Practical Completion certificate.

Question 7

What is a Parent Company Guarantee?

Answer 7

An arrangement where the contractual performance of one company in a corporate group is underwritten by the other members of that corporate group. This means the guarantor must complete the works itself if it can or pay the financial equivalent.

Question 8

What are the pros and cons of a PCG?

Answer 8

1. Pros
   a. Do not need to be paid for.
   b. Can be unlimited.
   c. Can make the PC responsible for performance as well as a financial guarantee.
2. Cons
   a. Not as secure as bond due to the financial link between companies and a PB is provided by a 3rd party.

Question 9

What is a retention bond?

Answer 9

1. An alternative to the normal contractual retention provisions whereby the employer withholds monies from the contractor which does not help cashflow.
2. A bond will increase in value from the start of a project to mirror retention normally held.
3. May reduce in value upon practical completion.
4. Clients should be wary of hidden costs such as loss of interest and cost of RB being passed onto client in tender.
5. Will benefit contractor’s cash flow.

Question 10

Why would you use a retention bond?

Answer 10

1. When the client does not wish to withhold retention on the contractor but required some assurance or financial cover for rectifying defects.

Question 11

Have you used a retention bond? If so, please provide an example.

Answer 11

1. Octagon
   a. £1,000,000 maximum amount.
   b. Gradually increases every month.
   c. 24-month rectification period (linked with homes warranties etc)
   i. 12 months after PC = reduced to £500k.
   ii. 24 months after PC = £0.

Question 12

Are you aware of any other bonds?

Answer 12

1. Advance Payment Bond
   a. APBs are a way to protect the payment of an advance to a contractor in construction projects.
   b. Useful for the contractor to maintain cashflow.
   c. Provides financial protection for the employer.
2. Materials Off Site Bond

Question 13

Have you used an Advance Payment Bond before? Provide an example.

Answer 13

2. Octagon
   a. Value = £850k.
   b. Expiry = 1) payment from Bondsman 2) last interim payment 3) XX date.

Question 14

What insurance mechanisms are you aware of under the JCT D&B?

Answer 14

1. Contractor’s public liability insurance
   a. Covers expense, loss, liability, claim or proceedings for personal injury or death arising from the carrying out of the construction works, or loss or damage to property other than the works.

Question 15

What insurance mechanisms are you aware of under the JCT D&B?

Answer 15

2. JCT Clause 6.5.1 Insurance (non-negligence)
   a. Provides cover should there be damage to a neighboring property due to the works that are carried out, and the cause of which is not the result of negligence.
   b. Covers both the contractor and the client. Joint names. Contractor takes out.
   c. For situations where there may be damage with no clear negligence.
   d. Risks covered under JCT are: Collapse, Subsidence, Heave, Vibration, Weakening or removal of support, and Lowering of groundwater.

Question 16

What insurance mechanisms are you aware of under the JCT D&B?

Answer 16

3. Works Insurance
   a. Insurance Option A
   i. the Contractor is required to take out and maintain a Joint Names Policy for all risks insurance for the works
   b. Insurance Option B
   i. the Employer is required to take out and maintain a Joint Names Policy for all risks insurance for the works
   c. Insurance Option C
   i. the Employer is required to take out and maintain (a) a Joint Names Policy in respect of the existing structures and their contents, and (b) a Joint Names Policy for all risks insurance for the works.

Question 17

What insurance mechanisms are you aware of under the JCT D&B?

Answer 17

4. Professional Indemnity Insurance
   a. protects you against claims for loss or damage made by clients or third parties as a result of the impact of negligent services you provided or negligent advice you offered.

Question 18

What insurance mechanisms are you aware of under the JCT D&B?

Answer 18

5. Employer’s Liability Insurance
   a. pays the legal costs and compensation if an employee sues for a work-related injury or illness. It’s a legal requirement for almost every type of business to have this cover in place.

Question 19

Explain the difference between ‘in the aggregate’, and ‘each and every’?

Answer 19

1. In the aggregate = limit of indemnity over 1 year for multiple claims.
2. Each and every claim = the total limit of indemnity for every claim over 1 year.

Question 20

What is Subrogation?

Answer 20

A legal technique where the insurer steps into the shoes of the insured in order to take the benefit of any legal rights or remedies they may have against a third party responsible for the loss i.e. if you get into an accident which isn’t your fault, your insurance company will pay you the compensation, and step into your shoes, to claim the compensation back.

Question 21

What does Joint Names mean?

Answer 21

Where the employer and contractor are insured under the same policy. Having an insurance policy in joint names stops the insurer having the right to subrogation against the other party if they caused the loss.

Question 22

What are the RICS PII insurance requirements?

Answer 22

1. Indemnity Levels
2. £100k or less turnover = £250k minimum PII.
3. £100k to £200k turnover = £500k minimum PII.
4. £200 or more turnover = £1m minimum PII.
5. Uninsured Excess
6. £10m or less turnover = 2.5% of the sum insured or £10k (greater of).
7. £10m or more = No limit.

Question 23

What is a Reinstatement Cost Assessment?

Answer 23

1. Professional Standard Document.
2. An RCA estimates the cost of rebuilding a property after damage, covering materials, labour, and cleanup.
3. Used for insurance purposes.

Question 24

What are the different types of RCAs?

Answer 24

1. Day one reinstatement
   a. Most common basis UK buildings are insured on.
   b. Claims are settled on a ‘new for old’ basis.
   c. The sum insured is made up of two elements:
   i. Declared Value = cost of rebuilding and associated on costs at the commencement of the insurance period without inflation.
   ii. Inflation Provision = a percentage uplift selected by the insured to cover inflation during the insurance year and subsequent period for designing, planning, tendering, and actual re-construction. Typically, between 15 to 50%.
2. Reinstatement including inflation provision
   a. 1 sum insured inclusive of an allowance for inflation and it is this sum insured (unlike day one which has 2 parts; declared value and inflation provision).
3. Reinstatement less wear and tear (‘Indemnity’ basis)
   a. Rarely used, but the surveyor would undertake an assessment based on depreciated aspects of the works i.e. brickwork wear and tear might be small but the services may have little to no life remaining and therefore no value.
4. Obsolete buildings
5. Site clearance, debris removal and ‘making safe’ costs only
6. Second-hand value of building materials

Question 25

You mention you have produced an RCA for Singer Hall; please explain the process you undertook to complete this? What type of RCA was this?

Answer 25

1. Type: reinstatement including inflation provision.
2. Steps undertook:
   a. Initial assessment = details of the property, and site visit.
   b. Data collection = gathering project specifics, abnormals, plans, measurement, materials etc.
   c. Cost estimation = construction costs, property size, age and condition, materials used, specifical features, locations, regulations and inflation.
   d. Final report = how we came up with XX value.

Question 26

What costs are included with an RCA?

Answer 26

1. Depends on what type of RCA, however most RCAs will include the following:
   a. Demolition and debris removal.
   b. Net rebuilding costs (frame, external, services, etc).
   c. Professional and statutory fees.

Question 27

What factors do you need to consider when completing an RCA?

Answer 27

1. Location.
2. Whether the building is listed or not.
3. Whether the building is in a conservation area.
4. Age of building.
5. Specialist materials.
6. Etc.