At a glance
- There are hundreds of construction fires every year in the UK, slowing down projects and racking up build costs
- Standard contract terms often exclude or limit the recovery of such losses
- We look at how to manage construction fire risk, including the importance of fairly allocating contractual liabilities between parties
There are hundreds of construction fires every year in the UK, leading to delays and spiralling costs for both building owners and contractors.
“Construction fire risk can’t be totally removed, but it can be minimised,” explains Stewart Powell, Zurich Property Major Loss Team.
It is essential for all parties to a construction project – both employer and contractor – to be armed with a basic knowledge of construction fire risks and the impact of contractual clauses on attributing potential liabilities.
Most common causes of construction fire
There is a wide range of risks that can potential cause fire at during construction projects. Hot works, however, is by far the most common cause of serious construction fire. Welding, soldering and grinding are likely to be involved at some stage of a construction project, and all require careful management.
Arson is another common cause of fire on construction sites, particularly on those left unoccupied during evenings and at the weekend. The damage to an active construction site can be particularly significant, not least in terms of business interruption.
Construction sites are also likely to store flammable materials, requiring vigilance against common causes of ignition, such as:
- Wiring and cable faults or deterioration
- Faulty electrical appliances
- Open flames (including from cigarettes and lighters)
Construction contracts and clauses
The causes of fire are varied, but the bulk of the £400m losses experienced each year can be attributed to human error, with responsibility falling on a particular party.
However, construction contracts commonly include terms that seek to prevent or significantly limit the recovery of such losses. Many construction contracts include, for example, terms where the employer essentially gives up their right to recover losses due to contractor error, via mechanisms such as joint names policies and waivers of subrogation.
While there can be advantages to these contractual mechanisms, it is important for customers to understand that they have both pros and cons – their impact should therefore be carefully considered before signing any contract.
Joint names policies
Joint names insurance is particularly common if a policy has been taken out specifically for a construction project. The advantage is that all parties know the deal they are striking, insurers are kept in the loop from an early stage, premiums are adjusted accordingly and can be easily factored into the cost of a project.
Joint names also means that insured parties won’t look to each other for redress and will instead rely on the insurance policy covering the project – reducing the time that may otherwise be spent in legal battles.
“Joint names is not a panacea however” warns Stewart Powell. “A large claim resulting from negligence by a contractor could ultimately lead to much higher premiums for the employer further down the line.”
While employers are not obliged to take out joint names policies, many contractors (and often the most reputable) will require them before commencing a project.
Waivers of subrogation
Waivers of subrogation exist to more clearly define when insurers are ineligible to recover losses against anyone who has the benefit of the waiver. There can be advantages to structuring insurance this way, not least in avoiding delays due to arguments of liability.
However, when an employer waives the right to a recovery against a contractor, it is important to consider the potential risk to claims histories and associated premium increases. When in doubt, employers should pick up the phone to insurers, who will be able to help weigh up the pros and cons.
Selecting the right contractor
Given the prevalence of joint names policies and waivers of subrogation in construction projects, it is particularly important that the employer takes measures to reduce construction fire liabilities. “As an employer, one of the key things is the selection of a suitably qualified and experienced contractor,” explains Stewart.
Failure to conduct due diligence on contractors (including sub contractors), can rack up large costs for employers. Stewart points to a recent case involving a contractor working on a £60,000 roof repair contract, where a fire ultimately caused £18m worth of damage.
Due to the contractor breaching its hot works warranty, the insurer declined to indemnify the employer. This was a very serious matter for a small business with minimal assets and liquidity, underlining the importance of comprehensive contractor vetting.
“It is important to see evidence of previous work, relevant liability covers and permits, including hot work,” says Stewart. “Recommendations and examples of previous work can also go a long way towards indicating whether a contractor is suitable for a project.”
Selecting the right contractor can often be a case of appointing the right project manager. A knowledgeable and experienced project manager will grant access to a wider range of vetted contractors, support risk management and will also come with their own insurance policies.
Talk to your insurer
Ultimately, maintaining open levels of dialogue with insurers is one of the best ways to minimise construction risks and to ensure construction contracts are suitable.
Talking to your insurer will not only ensure that a construction project is appropriately covered, but that the most suitable construction contract has been taken out for the project in question.
For more information on construction fire, construction contracts and insurance considerations, please speak to your local Zurich contact.
You can also find out more and access helpful guides and insight with our new Fire Risk Resource.