Construction Insurance and UK Construction Contracts

Marshall Levine and Roger ter Haar KC

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CHAPTER 6 Placing the insurance

Formation of insurance

6.1 In the 25 years since the first edition of this book, the process of placing insurance has been changed radically by the massively increased use of computers and by use of the internet. However, although the process has changed, the underlying considerations remain constant. 6.2 In large construction projects, several insurance companies and/or Lloyd’s syndicates are likely to participate in order to spread the risk. The formation of insurance arrangements will usually commence when the insured approaches its specialist construction broker with details of the risk to be covered including contractual details. The broker will discuss the project with the owner/employer or the contractor (and possibly also the contractor’s estimator and engineer), depending upon who is placing the risk. The broker may well (probably should) ask his client the types of questions he would expect the underwriter to ask. The broker will advise on the appropriate form of insurance and relevant insurers for the risk. The broker will then compile a summary of the proposed insurance contract on an insurance slip for presentation to an underwriter known to be experienced and well respected in construction insurance. 6.3 The underwriter will also be presented with “placing information”, consisting of proposal forms, details of the insured, detailed accounts of previous losses (typically for the past three to five years) particularly in the case of annual floater type policies (not so often in respect of substantial one-off policies), surveys of the insured’s risk-management techniques, background information etc. and any other information likely to be material to the underwriter’s consideration of the risk, such as the contracts, specifications and a summary prepared by the broker of the main features of the risk. The broker will usually supply the underwriter with a breakdown in value of the property to be insured, for example, buildings, foundations, subsoil etc. Details of the risks relevant to construction insurance are discussed in above. 6.4 The broker acts as intermediary, and will negotiate the terms of the insurance on behalf of his client, the insured, and answer any questions the underwriter may raise. Details of the project will be discussed with the underwriter and in the vast majority of cases the underwriter will be able to decide whether to participate without reference to his consultant engineer or a site visit. If the project is large or has unusual features a site visit may be arranged or the broker may produce photographs. The potential insured is under a duty to reveal all material facts. It is the broker’s task to procure that information and to place it before the underwriter on

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behalf of his client. Part of the skills expected of an insurance broker is to know and to advise his client as to what the underwriter will need to be told about. The broker’s presentation to the underwriter will rely on two foundations: first, the slip; and secondly, the placing information presented in support of his arguments. Slips have tended to become longer and more complicated over recent years, particularly as the courts have frequently identified problems with placing slips and policy wordings, and ever-increasing verbiage relating to compliance. 6.5 When the leading underwriter has decided to accept the risk, he will stamp the slip and add his initials (referred to as “scratching” the slip or, in the case of a following underwriter, “adding his scratch”), a reference number, and the percentage of the risk (and therefore premium) that he will accept. The broker will usually plan to offer a proportion of the risk to perhaps six or seven underwriters unless the risk has very unusual characteristics, in which case a larger number of underwriters will be approached. Once the leading underwriter has agreed to underwrite a proportion of the risk, the broker will then take the slip on to the next company (or Lloyd’s underwriter). When the slip is subscribed for at least 100% the broker will prepare a cover note for the insured and distribute a policy wording to insurers for their signature. Insurers and insured should eventually each receive a copy of the policy. 6.6 Lloyd’s has not traditionally specialised in construction insurance, although a few syndicates have written this type of risk, and this part of the market has expanded with the arrival of Lloyd’s companies established by insurance companies such as Liberty, C.V. Starr and Travelers. Lloyd’s has occupied a unique position in commercial activities for nearly 300 years, during which time many practices arose which, although well understood by those involved with Lloyd’s, were frequently difficult to reconcile with general legal principles. However the advent and impact of the Insurance Conduct of Business Rules (“ICOB”) and, more recently, the London Market Group (“LMG”), have enhanced the aims of the Financial Conduct Authority (previously the Financial Services Authority) and has toughened the way brokers must present risks to insurers and underwriters and behave towards their clients, for whom they are agents. The FCA and ICOB are regulatory bodies with wide powers. Under the LMG there are now prescribed structures for the market reform contracts, now mandatory, which are designed to remove or at least minimise the chance of omission or misunderstanding in the marketing process. 6.7 Historically, the slip system by which a contract of insurance is formed at Lloyd’s (as well as in the company market) has proved to be one of the most problematical areas of all. When Lloyd’s is involved the risk is likely to be placed as follows:

(1) Only a Lloyd’s broker is able to approach Lloyd’s underwriters, therefore the insured must first appoint the correct intermediary (which may be the same broker as above).

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