For commercial contractors (builders), the finer details in a construction contract can quietly amplify your risk – sometimes well beyond what your insurance will cover.

Before signing a construction contract, make sure you understand exactly what you’re agreeing to and how each clause could affect your insurances.

Here are 7 common contract clauses that can significantly increase a contractor’s exposure.

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1. Hold Harmless Clauses

The hold harmless clause is usually included by the principal (i.e. the developer or project owner) to provide them with greater protection. Under the clause, the contractor is required to indemnify the principal for losses the latter may suffer, including claims against the principal from unrelated third parties. To make the contract more balanced, you should look to remove entirely or include wording that reduces your exposure, as the contractor, proportionately by the amount the principal has caused or contributed to the loss or damage.

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2. Proportionate Liability Legislation (PLL)

In the event of a loss or damage, there may be several parties who are proportionately liable for that loss. A court will usually determine how that loss or damage is allocated to those parties based on their contribution to the loss or damage. This can include the site foreman, engineers, project managers, consultants, etc. In some instances, the principal will seek to opt out of the PLL within the contract, which effectively increases your risk exposure beyond your own contribution to the loss or damage. This is in direct conflict with general insurance policies which respond to the loss or damage caused or contributed to by the insured (and not the principal or other parties).

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3. Limitation of Liability

Principals or project owners commonly seek to cap their own liability on a project to a pre-agreed monetary value, say to $1 million. From a contractor's perspective, losses caused by the principal's negligence should not be capped because liability in excess of the cap will usually transfer to the contractor. Conversely, Limitation of Liability clauses can also be used by the contractor to limit the contractor’s responsibility for loss or damage caused by their negligence. This acts to protect the contractor, and indirectly, their insurance policies. This is commonly used where a contractor has a certain specialism or proven track record and therefore has stronger negotiating power.

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4. Novation in D&C Contracts

In order to provide sufficient details for contractors to provide competitive tenders, the principal may complete some initial work on the project, for example with architects or engineers. When the project is awarded to a contractor, the initial work completed by the principal and their consultants is novated to the contractor. In these insurances, you effectively inherit the work from the principal and their consultants and assume responsibility for the work completed. Under the contract, you would be negligent if something went wrong, even if it was caused by the principal's designers or engineers. To help protect you and your business, it’s best to update your professional indemnity insurance to cover the novation.

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5. Tripartite Deeds

A tripartite deed occurs between the principal, their lender and the contractor, and sets out rights and responsibilities around project financing and default. This creates a direct relationship between the financier and the contractor that would not usually exist without the deed, and adds additional risks to the contractor.

These risks can include:

• In the event that the principal defaults on their loan obligations, the financier will have “step into the shoes” rights meaning the bank becomes the principal and a working relationship must be established with a new and usually cumbersome financier.
• The contractor may have greater restrictions for terminating the contract and longer standstill periods (e.g. 90 days) where the financier decides whether to step in. The contractor must continue to perform and maintain the site without clear direction.
• The deed may require the contractor to consent to the assignment of the contract and give direct warranties about the design, workmanship and standard of the works.

These changes increase the risk exposure of the contractor and the insurance policies.

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6. Environmental and Site Conditions

Check whether the principal has included any environmental or site conditions within the contract. In some instances, they may want the contractor to take responsibility for the pre-existing condition of the site. This can be problematic if issues arise, for example if buried asbestos is found. Typically, liability associated with these issues wouldn’t be covered by a standard insurance policy because the site condition is considered an extra contractual liability that the contractor has agreed to commercially take on. If you do take on additional site liabilities, you should consider purchasing tailored environmental liability cover.

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7. Consequential Losses

Consequential losses can occur when a project is delayed and the principal suffers a financial loss. For example, an incoming tenant may choose to lease a property elsewhere if the project is delayed, resulting in an indirect financial loss to the developer. As the contractor, you should avoid agreeing to any consequential or indirect losses, and only be responsible for losses caused by your direct negligence.

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The Bottom Line

These contract clauses can silently widen a contractor’s risk exposure.

Before signing construction contracts, seek legal advice as well as assistance from your broker to understand how insurance and risk clauses can impact you and your insurance program.

As part of our work with commercial contractors, we can review construction contracts and liaise with your lawyers to provide advice and recommendations as to any impacts on your insurance program.

This also includes reviewing any insurance clauses, such as damage to persons and property and insurance of the works clauses.

It’s important to note that all information in this article is of general nature only. For specific advice, tailored to your unique circumstances, make sure to speak with one of our team.