32 - BONDS AND GUARANTEES

General

a bond or a guarantee is an arrangement under which the performance of a

contractual duty owed by one person (principal debtor) to another (beneficiary)
is backed up by a third party (bondsman, surety or guarantor)
to give financial protection where the principal debtor becomes insolvent

Where from?

parent company guarantees

financial institution

Nature of bonds
Payment
employers duty to pay contractor
contractor's duty to pay sub-contractor
contractor providing bond for employer in return for early release of retention
money
Specific obligations
a promise by a sub-contractor not to withdraw a tender
Performance of contract in general
every aspect of contractor's performance guaranteed

Types of bond

conditional: surety agrees to pay if and when specified conditions are satisfied,
usually a default (breach of contract) by the contractor
unconditional (demand bond): whether or not there has been a default unless
fraudulent (uncommon)

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33 - CONTRACT INSURANCES
Relevant Provisions in Main Contract

Clause 20 - Injury to persons and property and indemnity to employer

Clause 21 - Insurance against injury to persons and property
Clause 22 - Insurance of the works
Clause 22A - Erection of new buildings - all risks insurance of the works by the
contractor
Clause 22B - Erection of new buildings - all risks insurance of the works by the
employer
Clause 22C - Insurance of existing structures - works in or extensions to
existing structures
Clause 22D - Insurance for employer's loss of liquidated damages
Clause 22FC - Joint Fire Code compliance

Clause 20 - Injury to persons and property and indemnity to

employer

contractor to indemnify the employer for

any expense, liability, loss, claims or proceedings
arising by virtue of statute or common law
in respect of death or personal injury caused by the carrying out of the works
except as a result of negligence of the employer
or of any person for whom the employer is responsible
duty to indemnify the employer also covers damage to property (property
owned by third parties, parts of contract works for which certificate of practical
completion has been issued, and exiting property owned by the employer)
but only when damage was due to negligence, breach of statutory duty,
omission or default by the contractor, or those for whom he is responsible
not caused by specific perils (fire, lightening, explosion, storm, tempest, flood,
burst pipes, earthquake, aircraft and riot)
contractor can recover from any third party at fault

Clause 21 - Insurance against injury to persons and property

insurance to be taken out and maintained by the contractor for indemnities

given under Clause 20 to the employer
contractor does not take responsibility for a sub-contractor maintaining its
insurance, but will need to ensure that the sub-contractor carries such a policy
under the relevant sub-contract
contract administrator can instruct the contractor to take out and maintain an
additional joint names policy to indemnify the employer both against strict
liability to third parties and against any damage caused to the employer's own
property resulting from collapse, subsidence, heave, vibration, withdrawal of
support, lowering or ground water etc.

Clause 22 - Insurance of the works

insurance to remain in force until the issue of certificate of practical completion

or determination of the contractor's employment

Clause 22A - Erection of new buildings - all risks insurance of

the works by the contractor
Requirement
contractor to take out and maintain a joint names policy for all risks insurance
providing cover against physical loss or damage to work executed and site
materials

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Exclusions
damage to property arising from wear and tear, obsolescence, deterioration
work carried out as a result of design defects
professional negligence risk - insured separately
fitness for purpose risk
Failure of contractor to take out policy
employer can take out his own policy and set off the costs against monies due
to the contractor
Payment of insurance proceeds
contractor authorises the insurers to pay all insurance proceeds to employer
employer has to pay monies (less professional fees) to the contractor by
instalments
issued under architects' certificates at interim certificate periods
Partial completion
employer takes responsibility of the works taken back
Site materials
all unfixed and goods delivered to, placed on, or adjacent to the works and
intended for incorporation in them

Clause 22B - Erection of new buildings - all risks insurance of

the works by the employer
Requirement
employer to take out and maintain a joint names policy for all risks insurance
providing cover against physical loss or damage to work executed and site
materials
Exclusions
as above
Failure of employer to take out policy
contractor can take out his own policy and increase the contract sum by the
amount of premiums he has to pay.
Payment of insurance proceeds
no requirement
restoration of any loss or damage is treated as a variation

Clause 22C - Insurance of existing structures - insurance of

works in or extensions to existing structures

for contract works, employer to take out a joint names policy and protect all
sub-contractors
for existing structures, employer to only insure against specific perils
insure existing structures and their contents if owned by him, or for which he is
responsible

Clause 22D - Insurance for employer's loss of liquidated

damages

employer to inform the contractor whether he should obtain a quote to insure

the employer's potential loss of liquidated damages

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only in respect of damage by an specific peril - contractor will be entitled to

extension of time, but employer will not be able to claim liquidated damages

Clause 22FC - Joint Fire Code compliance

employer and contractor to comply with the Joint Code of Practice on the
Protection from fire of Construction Sites and Buildings Undergoing Renovation
if stated in the appendix
contractors obliged to rectify breaches of the code if drawn to their attention by
the contract works insurer
contractors liable to the employer if a breach causes damage to the works

Sub-Contractors

required to observe, perform and comply with the provisions or the main
contract
indemnify the contractor against breaches by them of specific provisions in the
main contract
required to carry and maintain insurance to cover its liabilities in respect of
personal injury or death ensuing from work carried out by it

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CONTRACT INSURANCE UNDER JCT 98 WITH CONTRACTOR'S

DESIGN
General

contractor to carry out not only duties and obligations of a building contractor,
but also obligations as a designer

Contract Works Insurance

similar to JCT 98

Professional Indemnity Insurance: Design and Construct

under clause 2.5.1 , the liability of the contractor as a designer is limited to the
liability of an architect (reasonable skill and care, not fit for purpose)
this liability can be covered by a Contractor's Design and Construct PI policy
ensure that the design and build contractor carries PI cover as Clause 22
imposes no requirement

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CONTRACT WORKS INSURANCE POLICY

Damage to Works

the indemnity may be the repair, reinstatement or replacement of any property

lost or damaged, or a monetary payment of the same amount
the insured will be the employer and the main contractor, and possible subcontractors
loss or damage are covered, subject to a number of exceptions
the property insured is described in the policy schedule
the loss or damage must occur during the currency of the policy
the cover only applies to the contract site

Cover

usually arranged on an annual basis by a contractor, thus covering all contracts

possible for cover to be arrange on a single contract basis but more expensive

Extensions to the policy

Transit
anywhere within the territorial limits
excludes sea and air transit (heavier risk)
excludes motor vehicles (insures under motor vehicle policy)
excludes employees tools (too many small claims)
Principals
means the employer to comply with the contract condition that the policy should
be in joint names
Architects', Surveyors' and Consulting Engineers' fees
incurred in the reinstatement of the property insured consequent on its loss or
damage
Removal of debris
removing debris
transportation to dumping ground
dismantling or demolishing
shoring up or propping of the portions or property lost or damaged
Off-site storage
materials and goods whilst not on the site but intended for inclusion in any
contract works covered by the policy

Exceptions to the policy

Excess
means of encouraging the contractor to take care and of
eliminating small claims
Post-completion risks
contract works policy to cover risks of loss or damage during construction: once
contract completed, risk of damage passes over to employer
cover ceases at practical completion, except to the extent that it is necessary to
cover the contractor's liability under the defect liability clause
Existing Structure

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contract works policy to cover risks of loss or damage to contract works, but not
to employer's existing property
if the employer's existing property is damaged then the employer will only have
legal redress against the contractor if he can prove negligence
the employer may have already insured the risk under existing insurance
arrangements
or may effect special cover under clause21.2.1 against the specific risks of
collapse, subsidence, vibration, weakening or removal of support, or lowering of
ground water

Other exceptions
motor vehicles, vessels and crafts
breakdown and explosion of construction plant
trade risks: defective materials or workmanship, normal wear and tear
professional negligence risks: design defects
confiscation by government
losses due to unexplained disappearances
contract penalties for delay, non-completion or consequential loss or damage
cessation of work: failure to take precautions to protect the property
testing and commissioning

General Conditions

reasonable precautions
disclosure of material facts
adjustment of the premium
contribution - if there is another policy, the policy will not pay until the first
policy has been exhausted
cancellation - insurer's, but not the insured, have the right to cancel

Claims Conditions

notify insurer within three months of any events that may give rise to a claim
refrain from repairs until the insurer has had time to inspect
notify and assist the police in case of theft, loss or wilful damage to property

CLAIMS

dealt with by loss adjusters

OTHER LIABILITIES
Employers and Public

Contractors' Liability Insurance covers Employer's Liability, Public Liability,

Product Liability or Completed Works cover in respect of injury to third parties
or damage to their property, as required by JCT 98
Excludes Professional Liabilities (covered elsewhere)

Clause 21.2.1

insurance to be arranged in the name of the employer

to protect him in respect of his legal liability for damage to adjacent or
surrounding property
which is caused other than by the negligence of the contractor or his subcontractors (employer already protected against negligence under clause 20.2)

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LATENT DEFECTS (DECENNIAL) INSURANCE

General

ten-year non-cancellable policy

to indemnify the insured against the cost of repairing defects in the design,
material or construction of the building which were not discovered until after the
building had been completed
once a building passes to the owner, he insures it under a fire and perils policy
the cost of rectifying latent defects is not covered by a fire and perils policy
underwriters will only accept risk if satisfied by design - technical control
undertaken by specialists, who issue a certificate of (qualified) acceptance

The Insured

any person who acquires the freehold or leasehold interest in the premises
during the period of insurance therefore subsequent owners/tenants can be
insured

What the policy covers

Inherent defects
if there is no physical damage but an inherent defect in the structure is
threatening its stability the policy will cover the cost
damage to premises caused by subsidence, heave or slip of land is not covered
unless it arises from an inherent defect in the foundations
discovery of an inherent defect does not in itself constitute a claim since there
must be damage or threat of collapse
Policy exceptions
damage arising from fire and the perils normally insurable under a fire policy
damage arising from alterations, modifications or additions during the period of
insurance
damage caused by or contributed to by inadequate maintenance
damage exceeded from any process for which the building was not designed
faulty or inadequate weatherproofing unless requested at the outset

Period of Insurance

ten-year policy starts from the date of practical completion

but issued at the start of construction to enable compliance with Technical
Control
policy contains no cancellation cause

Maintenance Period
contract works policy is extended to give cover during the maintenance (defects
liability) period
risk of duplication of cover during that period
if during that period damage occurs that is covered by both policies, decennial
policy will only pay in excess of the amount payable under contract works policy

Sum Insured

a full value sum is total estimated cost of re-building the premises, including
provision for professional fees and removal of debris
a first loss sum is lower that the full value when the risk of a total loss may be
low

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Premium affected by:

type of building and intended usage

design and type of construction
foundations and site (soil) conditions
project location
amount of excess and indexation
basis of cover (full value or first loss)

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March 2000 Insurance

The Contractor notifies you that a domestic sub-contractor has caused damage to
the works by inadvertently leaving a tap running over the weekend. Explain the
contractual implications. (6)

Clause 22.3.2 the joint names policy shall provide recognition for the domesticsubcontractor or will include a waiver of any right of subrogation by the insurers
against the domestic sub-contractor for loss and damage by the specified Perils.
If the domestic sub-contractor is named in the policy then he will be protected.
However, if there is just a waiver of a right of subrogation against loss or
damage due to specified perils, then the insurer's may be able to make a
counter-claim against the domestic sub-contractor as leaving a tap running is
not a specified peril.

If the all risks insurance is by the contractor:

Clause 22A.4.1: shall give notice in writing to both the employer and the
architect of the extent, nature and location of the damage
The contractor will also notify the insurers
Clause 22A.4.2: the occurrence of such loss shall be disregarded in computing
any amounts payable to the contractor
Clause 22A.4.3: after any inspection required by the insurers the contractor will
restore the damaged work, restore and repair any site materials damaged,
remove and dispose of any debris, and proceed with the carrying out and
completion of the works
Clause 22A.4.4: the contractor shall authorise the insurers to pay all monies in
respect of the loss or damage to the employer, who will pay the amount (less
any professional fees) to the contractor in instalments under Interim Certificates
issues by the architect
The contractor shall not be entitled to any payment in respect of the loss or
damage other than the monies received under the insurance
If the all risks insurance is by the employer:
Clause 22B.3.5: the restoration of the loss or damage shall be treated as if it
were a variation required by an and architect's instruction under Clause 13.2
Therefore the contractor will be entitled to the full payment in respect of the
loss or damage, regardless of the amount paid by the insurers
Clause 25.4.5.1 and 26.2.7: the contractor may be entitled to an extension of
time and loss and/or expense due to the variation.

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On a separate project the Contractor notifies you that a recently constructed floor
and wall have collapsed. Explain your course of action and the contractual
situations in the following situations:
1. The Contractor notifies you that the collapse is due to a runaway truck owned
by the neighbouring haulage firm crashing into the wall. (7)
2. Where no fault has been identified. (7)
Course of action of the architect and contractual situation in both
situations:
Stop the work
Ensure that the contractor has notified the employer
Ensure that the contractor does not repair any work until the insurers have
carried out their investigation
Notify the Planning Supervisor
Instruct the Structural Engineer to carry out a structural report
Assess measures to be taken to restore the site to a safe condition
Ask the QS to go to site to value the work damages
Ensure that the contractor has disclosed all of the facts to the insurer
In situation 1:
The insurance money will be dealt with as described above
The insurers will be able to use their right of subrogation against the
neighbouring haulage firm
In situation 2:
Carry out a full investigation to determine who's fault it was:
1. Design fault
2. Contractor's fault
3. Specified peril
Contact PI insurer's in case to notify them of a circumstance that may lead to a
claim
Advise other consultants to do the same
If the damage was caused by a specified peril, it will be covered by works
insurance
If a design fault, will be covered by PI insurance

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March 1998 Insurance and Antiquities

A fire breaks out and damage occurs during refurbishment works to a building
insured by the employer in accordance with Clause 22C. Describe the contractual
situation and the actions you would take. (Note that the fire is defined in the
Insurance Policy as a Specified Peril). (10)
All risks insurance by employer:
Clause 22C.4: contractor shall give notice in writing to both the employer and
the architect of the extent, nature and location of the damage - architect to
ensure that the client has been informed
The contractor will also notify the insurers - architect to ensure that this has
been done
The architect is to ensure that work stops on site until after inspection by the
insurers
Clause 22C.4.1: the occurrence of such loss shall be disregarded in computing
any amounts payable to the contractor
Clause 22C.4.2: the contractor shall authorise the insurers to pay all monies in
respect of the loss or damage to the employer
Clause 22C.4.3.1: the employment of the contractor may be determined within
28 days of the occurrence of the loss or damage by notice from either party to
the other. Within 7 days of receiving the notice, the party may invoke dispute
resolution procedures or accept the determination
Clause 22C.4.4: if no notice of determination is served then,
Clause 22C4.4.1: after any inspection required by the insurers the contractor
will restore the damaged work, restore and repair any site materials damaged,
remove and dispose of any debris, and proceed with the carrying out and
completion of the works
Clause 22C.4.4.2: the restoration of the loss or damage shall be treated as if it
were a variation required by an and architect's instruction under Clause 13.2 architect to issue an instruction covering the variation to carry out this work
Therefore the contractor will be entitled to the full payment in respect of the
loss or damage, regardless of the amount paid by the insurers
Clause 25.4.5.1 and 26.2.7: the contractor may be entitled to an extension of
time and loss and/or expense due to the variation - architect to ascertain
entitlement to extension of time and loss and/or expense
During the early stages of a project you receive a fax from the contractor stating
we have uncovered during excavations, what we suspect to be the remains of a
medieval graveyard. Describe the contractual situation and the actions you would
take. (10)

Clause 34.1: all antiquities found on site are the property of the employer
Clause 34.1.1: the contractor shall not disturb the remains, and shall cease
work that would endanger the remains
The architect should ensure that work ceases
Clause 34.1.2: the contractor shall preserve the remains in the position found
Clause 34.1.3: the contractor shall inform the architect
The architect should contact the archaeology department of the borough or
county council to inform them of the discovery and ask advice
Clause 34.2: the architect shall issue instruction as to what is to be done, which
may require that the contractor permit the examination, excavation and
removal of the item by a third party
Clause 34.3.1 the architect shall ascertain any entitlement the contractor has to
loss and/or expense

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Clause 34.3.2 as a relevant event, the architect shall ascertain any entitlement
the contractor has to an extension of time

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34 - LAW, INSURANCE AND LIABILITY

Law
Criminal Law
determines limitations on people's behaviour
legal action - punishment of individual by state
Civil Law
determines rights and liabilities between parties in particular circumstances
civil action - "claimant" claims remedy for act or omission by "defendant"
remedy: damages, declaration of rights, order to do or refrain from doing
something
claims in Contract: dependent on terms and conditions of contract (from client)
claims in Tort: negligence, nuisance, trespass, defamation or breach of
statutory duty (from client or third party)

Types of Insurance
Liability Insurance
the insurer will indemnify the insured against damages and legal costs payable
to a third party
compare to third party car insurance
Loss Insurance
the insurer will indemnify the insured against loss or damage which that person
has suffered, whether caused accidentally or by someone else's negligence
compare to fully comprehensive car insurance

Liability Insurance

public liability policies (for those who provide a physical service, contractors)
professional Indemnity policies (for those who give advice, prepare designs etc.,
consultants)
the insurer's legal duty is owed to client not victim

Third Parties (Rights Against Insurers) Act 1930

where a person or company becomes insolvent, any claim the insured person
could have made is automatically transferred to the victim
however, the Act only transfers to a claimant those rights which the insured
already had against the insurers, and these only arise when the person has
been held liable to the claimant
therefore, unless a successful claim is made against the company while it still
exists, the victim cannot take action
and, where a person who has become bankrupt has failed to comply with a
condition of his liability insurance policy, the insurers will be entitled to refuse
payment to the victim, just as they could have refused to pay the client

Loss Insurance
Subrogation
where the loss insurer pays the client in respect of a loss that was someone
else's fault, the insurer is entitled to take over legal rights the insured person
could have exercised against the third party
the insurer will seek, by suing in the client's name, to recover from the third
party the amount that was paid to the client
no rights of subrogation against any person who is insured under the same loss
policy

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35 - PROFESSIONAL INDEMNITY INSURANCE

What is it?
An indemnity to the architect (the Assured) by an insurer (the Underwriters) for:

any claims made against the Assured during the period of the policy in respect
of civil liability incurred by the Assured or others acting on behalf of the Assured
in the course of the Assured's Professional Business
any loss sustained by the Assured during the period of the policy as a result of
dishonest or fraudulent acts or omissions of any present or former partner,
director, employee or others acting on behalf of the Assured in the course of the
Assured's Professional Business
defence costs for claims up to limit of liability, with Underwriter's consent
proportion of defence costs for settlements in excess of limit of liability equal to
proportion of limit to settlement

Why buy it?

Compulsory since 1998 under ARB rules

Claims brought through increasing tendency to blame
Claims brought to stall a fee demand
May be required by client
Joint and several liability of partners

Claims made

PI insurance covers claims made during the period of insurance

When proposing for insurance, architect must notify insurers of any past
circumstance
Failure to do so could void the contract
During period of insurance, the architect must notify insurers of any new
circumstance
Any subsequent claim is deemed to have been made during the period of
insurance
Run-off insurance is needed after end of business

The insured

Practice
Present partners and directors
Future partners and directors for breach of duty in previous practice
Former partners or directors for breach of duty while still in practice (6yrs)
Estate, heirs and executors of the above
Employees

Limits of Indemnity

Aggregate limit for all claims made in one year

Limit for each and every claim with unlimited aggregate
Higher the limit, higher the premium
Must comply with professional body's minimum requirement
Must satisfy client requirement
Must provide for foreseeable contingencies - what type of work, past and
present?
Must be affordable - how much is the practice worth?
Generally, three times gross fee income

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