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Structural defects in high-rise construction

There has been much recent commentary in the media regarding the potential impacts of the appearance of structural defects in completed high-rise buildings. Here Marsh examines the role of insurance for owners, builders and designers / consultants.

17/02/2022 · 6 minute read

There has been much recent commentary in the media regarding the potential impacts of the appearance of structural defects in completed high-rise buildings in Australia. Here Marsh examines the role of insurance for owners, builders and designers/consultants.

What is a structural defect?

A structural defect is defined as actual physical damage to the designated load-bearing elements of a structure, or the ingress of water into the waterproofing envelope, attributable to a defect in design, workmanship or materials, to the extent that the structure becomes unsafe or otherwise unlivable.

What is the potential impact of a structural defect?

With respect to insurance, the liability of the parties involved in a construction contract is dependent on a wide range of factors, including:

  • the form of contract entered into and the liabilities imposed under that contract
  • the timing of the appearance of the defect or damage
  • the cause of the structural defect
  • the consequences of the defect.

In addition to determining the party responsible for the consequences of any structural defect, these factors will determine the appropriate type of insurance policy to respond to financial consequences including the cost of repair of reinstatement of defective work; claims for loss of income, diminution of value or alternative accommodation expenses.

The scope of the particular policies themselves will determine whether a particular structural defect falls within the terms of the coverage, and whether any specific policy exclusions will operate.

Insurance policies that may respond to structural defects

Professional Indemnity Insurance

Scope of Cover

  • Legal liability to third parties for claims for financial loss, first made against the Insured and notified to the Insurer during the policy period, where the claim arises from breach of professional duty (e.g. error in design or specification); or

  • Costs incurred prior to completion to mitigate a future claim, subject to prior notification to and agreement from the Insurer.

Timing of the appearance of the defect or damage
  • Damage would have to occur in the construction period or post-construction period; and the claim must be made against the Insured and notified to the Insurers during the period of insurance.

What does my professional indemnity policy cover in the event of a structural defect?
 

Insured

Not Insured

Defective materials

  

       ✖

Defective workmanship

  

       ✖

Defect in design, specification or other professional duty

       ✔

  
What are the major uninsured exposures under professional indemnity insurance?
  • Liability arising from defective materials or defective workmanship
  • Claims brought outside the period of insurance
  • Excludes the Builder's own "first party" losses

Contract Works Insurance (Material Damage)

Scope of Cover
  • The cost of rectification of physical loss or damage to the works.
Timing of the appearance of the defect or damage
  • Damage would have to occur in the construction period or defects liability period from a cause on-site during the construction period. 
What does my contract works policy cover in the event of a structural defect?
 

Insured

Not Insured

Rectification of damage

        ✔

  

Rectification of defects (in the absence of damage)

  

        ✖

Delay costs, indirect or consequential losses

  

        ✖
What are the major uninsured exposures under Contract Works insurance? 
  • Does not respond to rectification of defects in the absence of subsequent "damage" to the works
  • Excludes "improvements" in the original design, materials or workmanship, or the cost of rectification of defective parts of the works (dependent upon specific policy conditions)
  • Excludes damage occurring after the expiry of the defects liability period
  • Excludes indirect or consequential losses.

Advance Consequential Loss Insurance

Scope of Cover
  • Consequential losses (such as loss of revenue or increased holding costs) incurred during the indemnity period as a result of delay in completion arising directly from damage (insured under the Contract Works policy) to the Works, occurring during the construction period.
Timing of the appearance of the defect or damage
  • Damage would have to occur in the construction period.
What does my Advance Consequential Loss policy cover in the event of a structural defect?
 

Insured

Not Insured

Rectification of damage

  

       ✖

Rectification of defects (in the absence of damage)

  

       ✖

Principal’s Delay costs

       ✔

  

Builder’s liquidated damages

  

       ✖

Third Party consequential losses

  

       ✖

 

What are the major uninsured exposures under Advance Consequential Loss insurance?
  • Excludes consequential losses arising from damage occurring after the expiry of the construction period.
  • Excludes liability for third party consequential losses.

Inherent Defects Insurance

Scope of Cover
  • The building owner's cost of reinstatement of the completed Works damaged as a result of inherent defect in the structural works (foundations, columns, walls, floors, beams and other load bearing structures, stairs, internal pipes and the waterproofing envelope) which was undiscovered at practical completion (PC) following a technical audit, for a period of up to ten years after PC.
  • Coverage can be extended to cover loss of rent following insured damage.
Timing of the appearance of the defect or damage
  • Damage would have to occur in the post-construction period.
What does my Inherent Defects policy cover in the event of a structural defect?
 

Insured

Not Insured

Rectification of damage

         ✔

  

Rectification of defects (in the absence of damage)

  

       ✖

Third Party injury

  

       ✖

Third Party property damage

  

       ✖

Third Party consequential losses

       ✔

  
What are the major uninsured exposures under Inherent Defects insurance?
  • Excludes defects in non-structural works, internal components, fixtures, fittings, M&E services, and external works
  • Insurers retain rights against the builder/D&C Contractor for defects during the defects liability period
  • Damage caused by excluded perils (normally insured under operational property insurance policy)
  • Ingress of water during the first 12 months following PC.

Third Party (Public & Products) Liability Insurance

Scope of Cover
  • Legal liability to third parties for personal injury or property damage arising in connection with the Works or completed operations.
Timing of the appearance of the defect or damage
  • Damage would have to occur in the construction period or post-construction period
What does my Third Party (Public & Products Liability) policy cover in the event of a structural defect?
 

Insured

Not Insured

Rectification of damage

         

       ✖

Rectification of defects (in the absence of damage)

  

       ✖

Third Party injury

      ✔

       

Third Party property damage

       ✔

       

Third Party consequential losses

       ✔

  
What are the major uninsured exposures under Third Party (Public & Products) Liability insurance?
  • Excludes rectification of the Works themselves
  • Excludes liability arising from a breach of professional duty (e.g. error in design or specification) unless third party personal injury or property damage arises therefrom

 
Building the right insurance program

It is imperative that developers, builders and designers / consultants ensure that a robust and effective insurance program is in place to protect against the catastrophic consequences of structural defects in building construction, and that all parties to the construction contract fully understand the policy terms and conditions and what insurance solutions are open to them.

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