Including Existing Structures When Negotiating a Construction Contract
Material Damage insurance
The main construction contracts used in New Zealand are NZS3910, NZS3915, NZS3916, and NZS3917 (NZS). When using one of these contracts when there are contract works in the nature of additions, alterations, repairs, or maintenance to an existing structure or where the contract works are in the vicinity of another structure, the NZS contract states the principal will effect Contract Works insurance which includes the existing structure and/or other structures in the vicinity owned by the principal, including contents. This is aligned to the replacement values nominated in the Special Conditions (1) of the NZS contract.
There is, however, a provision in the NZS contracts which allows the principal to comply with this requirement under two separate insurance policies – Material Damage (MD) and/or Contract Works. In doing so, it is important to note that the same level of indemnity must be given to the contractor and subcontractors as if they were insured under a Contract Works insurance policy.
There could also be good reason to proceed with the MD insurance policy, one being that part of the asset is still operational and therefore Business Interruption cover is retained.
Achieving the same level of indemnity
As the contractor and subcontractors have no insurable interest in the existing structure/contents, they cannot be added to the MD insurance policy as an insured. Therefore, the ‘work around’ to comply with the ‘same level of indemnity’ provision is to obtain a waiver of subrogation from the MD insurer(s).
Challenges with Material Damage insurance policies
If the NZS contract Schedule (1) is completed with the full values included, then the principal (or their broker) must obtain a waiver of subrogation from the MD insurer(s) to those full values noted.
MD insurers are becoming a lot tighter on this, with common outcomes including:
• At worst, saying no, we won’t provide a waiver.
• Providing a limited waiver up to a (lower) specific amount.
• Alternatively, requesting the principal put some existing structure cover under the Contract Works insurance policy for damage arising from the contract works.
Important considerations
• It is at the discretion of the principal if they note their structures/contents under Schedule 1, Insurance - The existing structure or property is/ Other structures or property in the vicinity are/ contents insurance.
• The principal and the broker must review the values noted around the existing structures/contents and seek waivers to reflect those amounts.
• The MD insurer may require an aggravation premium. The additional premium reflects the increased risk of a claim while the structure is undergoing changes/in close proximity to a construction project and the removal of their subrogation rights against the contractor or subcontractor that caused the loss.
• The principal must own the asset(s) that is specified. The principal cannot name a neighbouring building that is in close vicinity that they do not own as they have no insurable interest in it. The neighbouring building is considered a public/general liability risk.
• If naming other structures in the vicinity, these must be in close proximity to the contract works and at risk of potential loss from something arising from the contract works.
• Be mindful that there could be very good reason not to include any values against existing structures/contents and therefore, it will be treated as a general liability risk for contractors and subcontractors.
Risk management and coverage
Ensuring the principal has agreed adequate coverage for existing structures/ contents in the vicinity of contract works with their insurer is crucial for mitigating potential risks and liabilities. This should be done before any construction contract is put out to tender and at the very latest before the NZS contract is signed. By carefully assessing the best insurance policy to insure the existing structures under, and the value to be insured, principals can protect their interests and comply with contractual requirements.
Collaboration with insurers and brokers is essential to navigate the complexities of obtaining the necessary waivers and coverage.