Mecon Winsure’s Glenn Ross highlights two must-know contract issues that brokers can help clients avoid.
Contracts usually make the contractor or subcontractor responsible for the payment of any excess applicable to policies taken out by the principal or head contractor.
These excesses can be hundreds of thousands or even millions of dollars. It is not unusual for a contractor operating under such a contract to obtain Difference in Conditions (DIC) and/or Difference In Excess (DIE) cover in an attempt to ‘buy down’ the excess existing under the primary policy. Policies with higher excesses often have broader coverage than policies with lower excesses.
The requirement for a contractor to pay the excess is a contractual one. It is not contingent upon coverage under the contractor’s (underlying) policy. The primary policy with a higher excess might have less exclusions than the contractor’s policy – therefore, the primary policy is likely to respond to more loss or damage (above its excess) than the contractor’s policy. This leaves the contractor with a contractual, rather than a legal, obligation to pay the shortfall between the higher excess of the primary policy, and the indemnity (if any) provided by its own policy. This can be particularly onerous when the contractor is not actually responsible for the event, but is made liable by the terms of the contract.
Brokers faced with this situation must inform their clients of the potential risks and, where possible, research the primary policy to discern policy differences that may impact.
Note: In order for cover to apply purely to DIC / DIE, section 45 of the Insurance Contracts Act requires that details of the primary policy must be specifically identified in the ‘excess’ policy. If the details are not recorded, then normal contribution between two policies applies.
Principal supplied materials
Many contracts require a contractor to insure, or take responsibility for, materials or items issued to them ‘for free’ by the principal and destined for installation in a project. In such cases, the contract value (or turnover) of the contractor will not reflect the cost of such material issued. It will only reflect the cost of the labour and material associated with the installation of the principal supplied materials (PSMs).
Some policies automatically cover PSMs up to 10% of the contract value. In practice, that percentage allowance may have no relevance whatsoever to the actual value of the PSMs, but a broker may make an assumption that the risk is adequately covered.
There was an electrician whose policy covered contracts up to $200,000 with a 10% ($20,000) allowance for PSMs. The contract (circa $200,000) was to install three free issued (PSM) transformers for a power company. Before completion of the contract, flooding extensively damaged all three transformers. Their value? Over $1m each!
Brokers with policies having an automatic allowance for PSM should highlight this allowance to their clients to ensure that any greater requirement is notified – before the client assumes responsibility for PSMs.