INTRODUCTION

Graham Woodall is a general practice Building and Civil Engineering Surveyor and Construction Project Manager with well over 40 years experience in the construction industry, during which time he has gained experience in many aspects of the industry from contracting through speculative house building to design and supervision. After qualifying in 1979 he went on to study Law, achieving a degree in 1984. By that time he decided to combine his knowledge of the construction industry with his legal skills and did this by joining the staff of a major firm of Chartered Loss Adjusters. He then spent many years dealing with issues affecting insurances of the construction industry, both across the UK and overseas, before establishing his own practice.  

In this capacity, in addition to providing traditional surveying services of many types, he has provided assistance on a consultancy basis to a wide range of clients within the insurance industry including Companies, Underwriters, Loss Adjusters and Policyholders.

The purpose of this paper is to provide a broad outline of the way in which the insurance industry operates, highlighting the personalities and types of insurance that are of particular interest to those professionals primarily engaged in the construction industry.

The paper goes on to describe the type of services that appropriately qualified and experienced surveyors and engineers can provide to the insurance industry which may be of interest to those seeking to broaden their client base if in private practice and to suggest rewarding career opportunities for those in employment.

THE INSURANCE MARKET

The insurance market is made up of various types of companies, societies or syndicates. Lloyds Underwriters are individuals with proven but unused assets who take a premium and pay out in the event of a loss. They usually form themselves into syndicates of any number with equal or unequal shares. A syndicate sometimes then underwrites a share of a big risk with other syndicates or companies.

Companies are essentially the High Street names. They have shareholders like any other type of company and are controlled by the ratio of assets to risk.

Self-insurance can be accidental such as under insurance or deliberate to save premiums by putting the same amount into reserve a fund in case it is ever needed.

Captive Insurers are similar to self-insurance arrangements but take it one step further by setting up their own company and often insuring other parties as well for a premium.

Reinsurance is an arrangement within the market itself, to off-set risks. Sometimes this of setting is in its entirety, a little bit like a bookmaker laying off a bet. The loss of an Insurer is the amount paid to a claimant either for an incident or for a series of incidents over a period of time or when the loss reaches a certain value. The Reinsurer becomes the Insurer’s Insurer.

BASIC PRINCIPLES

Proximate Cause

Is the direct event leading in an unbroken chain to the damage complained of and claimed for. Several cases of fire damage arose from the San Francisco earthquake of 1906 as fires broke out. Fire policies do not necessarily cover earthquakes and in those days they usually did not. In several leading cases of the time, it became established that if the earthquake started the fire then the proximate cause for the purposes of insurance liability was earthquake and not fire.

Insurers are entitled to strict proof of a valid claim. The onus is on the Claimant to prove the case at his own cost.

Fire cover will usually include smoke damage and damage from extinguishment water. However, this will only apply when there has actually been a fire. Contrary to the proverb, it is possible to have smoke without fire.

Heavy rain, even over a long period of time does not constitute a storm for insurance purposes. The leading case for this legal fact remains Oddy v Phoenix in which prolonged heavy rain caused a landslip to occur and for a retaining wall to collapse. Landslip cover was not in force and the claim was based upon the suggestion that heavy rain constituted a storm. It did not.

Flood requires a large and sudden movement of water. A three inch depth of water in a small room was not considered sufficient to be defined as flood in the case of Young v Sun Alliance.

Water damage is quite different to flood, this is usually linked to burst pipes or overflowing of fixed apparatus.

Insurable Interest

Insurable interest is to ensure that genuine Policyholders only can claim. There has to be a loss suffered by the Claimant. It would be against Public Interest to allow an outsider to insure against damage to property that was not his. More especially where life cover is involved, there are very strict rules as to whose life one can cover, for obvious reasons.

Value at Risk

This is the measure of the maximum loss that can be envisaged. Referring specifically to Buildings Insurance, the Value at Risk on a reinstatement basis is the cost of temporary repair or support following a major incident, clearance of the site and reconstruction in the same form as the damaged or destroyed building. It should include professional fees, Local Authority fees and compliance with current Regulations, all of which can be regarded as extensions to policy cover. The matter of Value Added Tax sometimes creates difficulties and imbalances, with a different approach being taken according to whether or not a Policyholder is VAT registered.

Average

Average is the means by which a claim is adjusted in the event of under insurance. Payment is made in the same proportion as the sum insured bears to the Value at Risk. Put simply, if it is agreed that the Value at Risk is £1,000.000.00 but that the sum insured has only been set at £500,000.00, then any claim will be paid out in the same proportion to its value, that is to say 50% in this illustration.

Deductibles and Excesses

Deductibles are really just large excesses and in practice both are applied at the end of a claim calculation. They are the amounts that the Policyholder pays himself in respect of any claim made. The point is to discourage small claims and the wording is therefore along the lines of “the Policyholder will pay the first £500.00 of any loss”.     

Co-insurance

Co-insurance is where two or more companies or syndicates share the risk in agreed proportions. On a schedule, the Lloyds proportion is usually given as last on the list irrespective of how great that proportion may be. The companies are listed in order of size of share and there are rules governing the claims handling procedures and how the others must respond to the actions of the lead office.

Dual or Multiple Insurance

This often arises accidentally and it is where two policies cover the same loss whilst not being similar in other ways. A Fire policy and an All Risks policy may both cover the same incident but in different ways with different excesses or by having different average requirements.

Contribution

This is where there is dual or multiple insurance and the means by which the proportions are calculated is most frequently known as the Independent Liabilities Method. In simple terms, the amount to be paid by each Co-insurer is a proportion of what that Insurer would be paying if he was the only Insurer. In cases where each one of two Co-insurers would independently be liable for the whole amount of the loss, then they would in this illustration be responsible for half each. An example of how this can arise can be seen under a domestic arrangement where the sum insured on the building might be (say) ££200,000.00 but the household contents insurance might be (say) £50,000.00. In the event of a fire affecting both buildings and contents, which required the policyholder to seek alternative accommodation whilst repairs were carried out, the cost of such accommodation may amount to a sum below the maximum that would have been paid by both the Buildings Insurers and the Contents Insurers in isolation. If so, then they would pay 50% each despite the fact that the buildings sum insured was very much higher than the contents sum insured.

Subrogation

This is where the Insurer steps into the shoes of a Policyholder in dealing with a third party. There are cases in which a primary indemnity is given by the Insurer for the convenience of the Policyholder but, legally, another party was responsible for causing the damage. Any legal action that follows will be funded and arranged by the insurance company but action will be taken in the name of the Policyholder.

LATIN JARGON

As in the legal profession, quaint old Latin expressions are far less frequently used these days than in the past. Nevertheless, they do still appear from time to time and the following are a few examples of the more common ones.

Contra Proferentum

This means that if there is an ambiguity then it must be construed the way least favourable to the party who wrote it. If an insurance policy is written in a complicated and ambiguous way therefore the interpretation given at law to it would be the way that suited the Policyholder rather than the insurance company the better.

Uberrimae Fidei

This means the utmost good faith. The proposer always knows more about the risk, both moral and physical hazards, than the Insurer and there is a duty therefore to disclose everything. An insurance Underwriter sitting in an office in London cannot possibly know as much about the risk for which a party is proposing to obtain cover as that party does and the duty is therefore upon the proposer to tell the potential Insurer everything he knows whether or not it is patently relevant.

Caveat Emptor

This is a very general term meaning buyer beware. In brief, make sure you know what you getting into and don’t whinge about the small print at a later date.

Ex Gratia

This is a payment made without obligation or admission of liability usually when Insurers think that the Policyholder has made a genuine error and has suffered a financial loss as a result.  

Ab Initio

Literally this means from the beginning and it is the point at which policies are usually voided and result in a return of premium if it is concluded that they should never have been issued in the first place for whatever reason.

Ultra Vires

This means acting beyond power. More common usage is found in Company law than insurance law but it can affect liability issues in the insured party was acting in dealing with a third party in a way that was not envisaged by his Professional or Public Liability Insurers.

THE PLAYERS

Brokers

These people simply sell insurance policies and take commission from Insurers as well as sometimes a fee from the Policyholder. Lloyds Brokers are special in that they alone have access to Lloyds Underwriters but operate similarly otherwise. Syndicates are groups of individuals who have formed together to take a risk either long term or for one particular deal. Names are the individuals. They have to prove their assets but do not have to pay them out in advance of any claims being made against the risk they share. Agents, legally speaking can be other things, but in insurance matters are usually the servants of a particular company in selling policies (like brokers but only for one company). They can get confused as to whether they are Agents for the company or the policyholder. Underwriters is the general terms for names and syndicates. Insurers is usually the term used for a company or a schedule of companies.  

Loss Adjusters

These are professionally regulated and qualified by the Chartered Institute of Loss Adjusters. They have a duty to calculate the extent of liability correctly and impartially and to calculate the value of a claim and to recommend appropriate payment by Insurers to the Policyholder. Nowadays they can act for claimants as well as for Insurance companies but they still have to do so professionally. Loss Assessors, on the other hand, have less professional restriction and in practice are almost always devoted to making the most of a claim on behalf of the Policyholder. There are cases in which a very busy or very rich Policyholder may simply choose to engage a Loss Assessor to handle the dealings involved in making a claim on his behalf and is willing to pay a fee for doing so. The distinction is that the insurance cover, with some exceptions, does not extend to paying fees for Loss Assessors in the same way that it would pay the fees of Engineers or Surveyors. In almost all cases, the fees of Loss Adjusters are paid by the instructing Insurance Company or Underwriters.

Policyholders

This is a self-explanatory term sometimes referred to as “the Insured”.

Joint Names

A good example of this for the construction industry is Employer and Contractor under the JCT conditions or indeed most other standard forms of contract.

EMPLOYMENT POSSIBILITIES

Advisory

Either as a staff member or on self-employed basis, specialist surveying or engineering advice can be given to insurance specialists such as Loss Adjusters and Brokers. Most insurance companies have at least one senior member of staff who is a qualified Surveyor or Engineer to provide in house advice and all medium to large firms of Loss Adjusters have Surveyors and Engineers on the staff.

Practical

Also either on the staff or on a self-employed basis Engineers and Surveyors can be given responsibility for the investigation of claims in respect of identification of the cause and extent of damage followed by the design and supervision of remedial work.

Educational

Presentations are frequently required to companies on staff training days or, as today, on CPD events.

NATURE OF WORK

Domestic Insurance Claims

Damage can result from fire, flood, burst pipes, storm, subsidence and various other events known to Insurers as perils. Investigation into the causes and remedies are sometimes straight forward but sometimes more complex particularly domestic subsidence. The Surveyor or Engineer, when all enquiries into cause and extent have been satisfied, will be charged with the preparation of specifications and schedule of works, obtaining tenders for the works and providing supervision of the works through to completion. In addition to these basic functions, there is the matter of ancillary legislation such as the Party Wall etc. Act 1986 and the Construction (Design and Management) Regulations 2015 to take into account.

Commercial Claims

Material damage claims are normally dealt with in a similar way to those involving domestic claims but, in addition, there is the matter of Business Interruption to take into account. Business Interruption is a class of insurance previously better known as Consequential Loss insurance and fundamentally is divided into two parts. Part one involves the increased cost of working and the Surveyor or Engineer should give advice as to how a business can continue to function, even in a reduced way, rather than close down completely. A fundamental principle is that the business should not spend £100.00 to save £50.00 but if £50.00 is spent to save £100.00 then that £50.00 is a valid head of claim under the Business Interruption policy. The second part of the policy involves loss of profit and this can sometimes be a specialised and complex area. It involves the indemnity period, activity trends immediately before and immediately after the incident and the taking into account of any operational savings enjoyed by the claimant whilst the business was running at a reduced level. It must be said that this is an area covered more frequently by Accountants than Engineers but there are many instances in which Quantity Surveyors in particular are ideally suited.

Contractors All Risk Claims

Again, Quantity Surveyors in particular are often well suited to the evaluation of a loss sustained by a contractor before the completion of a building.

Public Liability Claims

This is a class of insurance that embraces all manner of businesses but as far as construction companies are concerned it is an area in which suitably experienced Surveyors or Engineers can provide a very useful service.

Professional Indemnity Claims

An increasing number of claims are made against Surveyors in particular but Engineers and other professionals too. Who would be better placed to deal with these issues than a professional similarly experienced and qualified to the party against whom the claim is being made.

Calculation of Value at Risk

This is another area where Quantity Surveyors in particular have expertise. Value at risk has already been defined but, as far as buildings insurance is concerned, this almost always involves the estimation of the total cost of repairing or rebuilding the subject matter.

Calculation of Indemnity

Insurance cover is frequently given on the basis of reinstatement or what is often known as “new for old”. I some cases either by design of as a means of compromise for under insurance, cover is given on what is known as an indemnity basis. This means that the Policyholder is to be paid the value of the item he has lost, taking into account wear and tear. For example, if the roof of a house eighty years old is damaged by fire then one method of calculating the indemnity would be to suggest that the roof had a life expectancy of perhaps one hundred years of which only twenty years was left. In that case, the actual cost of reinstating the roof would be established but only 20% of that cost would be paid to the Policyholder. In practice, a far more generous approach is normally taken particularly to elements such as the main fabric of a building, with appropriate adjustment being more commonly made against internal decorations and finishes which in any event have a much shorter life expectancy.

Improvements/betterment

During a reinstatement process, a Policyholder will frequently wish to incorporate changes to improve the building and the cost of this would normally be admitted to the claim provided it did not exceed the cost of reinstating on a like for like basis. If the cost of the improvements does exceed the admissible amount then the Policyholder would be expected to make an appropriate contribution.

Certain improvements are enforced by Building Regulations and the like and most policies are extended to allow form this.

Report Writing

It is of vital part of the work of a Loss Adjuster or a Surveyor or Engineer assisting a Loss Adjuster to be able to write a report. There are certain formats in which reports must be presented to Insurers and the Chartered Institute of Loss Adjusters does have an examination on that subject. 

Marketing

As with most service professions, marketing in the form of making presentations to potential clients is an increasingly important aspect of the work.