UK: Insurance: a brief update

Last Updated: 31 March 2003

The global insurance market is currently in a state of flux following 9/11 and a series of high profile corporate failures (Enron, Worldcom. etc.). 9/11 itself is estimated to have cost the insurance industry £30-£40 billion.

The market has also become even tighter following the collapse of a number of insurers, most notably Independent Insurance whilst other insurers have "pulled out" of the higher risk areas of the market. Successful claims against insurers are on the increase. Exclusions are becoming wider and premiums are rocketing. Where does this leave the construction industry; an industry heavily dependent on managing risk through insurance?

Indicative of the way in which the construction industry is having to adapt to changes in the insurance market are its approach to terrorism cover and the changing professional indemnity and employer’s liability insurance markets.

Insurance against terrorism

Most JCT forms of building contract require an all risks insurance policy to cover the works (whilst being carried out) which will be taken out either by the contractor (Clause 22A) or the employer (Clause 22B or Clause 22C). Included in the definition of all risks is terrorism.

The problem is that since the IRA bombings in the 1990s most insurers have issued a standard exclusion limiting cover for damage by fire or explosion due to terrorism to £100,000 per event.

Full terrorism cover is obtainable but the contractor or employer now has to buy back the exclusion on payment of an additional premium which is credited to Pool Re.

Pool Re (Pool Reinsurance Company Limited) was established by the Government in the wake of the IRA bombings to act as an "insurer of last resort". The theory is that because the insurance market can lay off risk (via reinsurance) it can always offer increased cover for risks caused by terrorism so long as the employer or contractor pays the additional premium.

However, there are a number of problems with this system.

Firstly, the reinsurance facilities offered by Pool Re only cover a period of 12 months.

Consequently, when a building contract exceeds that period, there is a possibility that renewal might not be possible.

To prevent the employer or the contractor, through no fault of their own, being in breach of insurance obligations to provide full cover against fire and explosion, Amendment 3 to the JCT forms of contract was introduced.

Amendment 3 deals with the withdrawal of terrorism cover, giving the employer the option of determining the employment of the contractor or of requiring the contractor to complete the works on the terms set out if terrorism cover ceases while the works are in progress (viz. up to the date of practical completion).

Whilst this approach protects the contractor from being rendered in breach of contract through no fault of its own, it potentially exposes employers (and third parties e.g. those providing development finance) to greater risk. Most employers will have little choice but to continue with the works or face a significant financial loss should terrorism cover (if obtained) cease. This cessation could also place the employer in breach of any development finance or other third party agreements (agreement for leases etc.) unless these have all been harmonised to accord with the building contract insurance provisions.

Secondly, Pool Re originally only covered damage caused by fire or explosion.

Post 9/11 and in response to claims that "full terrorism cover" under the old system was somewhat of a misnomer Pool Re has now agreed to cover damage caused by biological and chemical contamination (e.g. anthrax), the use of aircrafts in attacks, impact damage, flood damage and as of January 2003, damage caused by nuclear contamination.

However, this is likely to prompt a rise in premiums that are charged to cover the extension of terrorism risk that insurers and ultimately Pool Re are expected to cover.

Thirdly, the definition of terrorism under the Reinsurance (Acts of Terrorism) Act 1993 which established Pool Re is much narrower than the definition under the Terrorism Act 2000. Of particular significance given 9/11, is that it does not cover terrorist activity for religious or ideological purposes. This issue remains to be dealt with.

Therefore, that which is excluded from cover is now defined more widely.

The risk balance matrix as between employer and contractor on terrorism cover has thus now shifted and it will be a matter of negotiation as between employer and contractor as to who bears the "uninsurable" risk. As indicated above, third parties will also have an interest in the outcome of that negotiation.

Professional indemnity insurance

Critical to developers and third party occupiers in the risk assessment of a project to be designed, built and occupied is that regarding liability for latent defects, i.e. those defects (usually design-related) which are not apparent at practical completion. Professional indemnity insurance provides a level of protection against this risk, which is currently acceptable in the market in place of that (to an extent sometimes) of the employer/developer.

There has been a gradual restriction of such cover (most recently as regards pollution and contamination and date recognition claims).

Also, with rises in professional indemnity insurance premiums (some reportedly up to 350%), availability of cover is becoming scarcer (and more expensive).

The standard obligation imposed upon contractors and consultants is to take out and maintain insurance with a "reputable" insurer and to notify the employer (and others) if such insurance is no longer obtainable at "commercially reasonable rates". This obligation is likely to become increasingly negotiated and the "goal posts" may have to shift in relation to what constitutes "reputable" or "commercially reasonable".

Employer’s liability insurance

Premiums for this cover (dealing with public liability against death or injury to persons or damage/destruction to property not forming part of the works) are also significantly increasing and some insurers have effectively even blacklisted particular sectors of the industry. Scaffolding, demolition, roofing and asbestos removal companies have found insurance cover particularly hard to obtain with many having to pay a substantial excess in the event of a claim.

Others are reducing the amount of cover they take out so as to avoid the rocketing premiums. David Bishop, parliamentary officer for the Federation of Small Businesses cited the example of a thermal insulation business on the South Coast which had reduced its employer’s liability insurance from £10 million to £1 million. Yet, their premium rose to £8,000 in 2002 compared with £1,200 in 2001.


As with terrorism cover, the non-availability or restrictive nature of professional indemnity insurance and employer’s liability insurance means that there is a greater likelihood that the extent of "uninsurable" risk on construction-related operations will become greater over time thus increasing the business risk of those involved in the construction industry.

It remains to be seen how employers/ developers, contractors and interested third parties, e.g. development financiers, and occupiers deal with this uncertainty. For those developers with a significant covenant (e.g. institutional investors) it may be that they have to fill the uninsurable "black hole" and assume the risk.

It may become more difficult for those seeking development finance where, as is often the case, margins are tight and there is no significant cash or capital reserve to rely upon. Ultimately however it is more likely that the construction industry will adapt to the changing market conditions and perhaps in line with Latham-esque principles the risk will be borne by the party most capable of managing it.

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.