11.16 A right to sue does not amount to a right of restitution. It still requires litigation. Reliable and timely restitution has been shown to result only from first party material damage non-cancellable insurance98. Within the terms of the policy, repairs are funded on proof of relevant damage, without proof of fault. Such arrangements may be statutory or discretionary. An advantage of a statutory system is that it can provide a clear framework for the rights and responsibilities of the industry and clients.
11.17 Some insurance provision is already available within the United Kingdom". The Joint Contracts Tribunal is in the process of drafting its own latent defects insurance policy.
The Association of British Insurers told the Review that latent defects insurance has not been a strong feature of the market so far in Britain through lack of demand. If, however, the market improved and demand strengthened, it would be possible to provide ten year latent defects cover and thereby obviate the need for widespread collateral warranties.
11.18 There are two ways by which latent defects insurance can be made widely available in the form of restitution as of right. They are:
1. To adopt the French decennial guarantee system (as in the Loi Spinetta 1978, as amended in 1983). This is a statutory system linked to the Code Napoleon, and cannot be set aside by contract. It does, however, involve strict liability on all producers of building projects unless they can show that the damage was beyond their control. Liability is for damage discovered within 10 years of acceptance which "affects the solidity of access roads, main conduits, foundations, structural elements, enclosing or covering works and fixed equipment"; or "which renders the works unfit for their intended use". Timely restitution in France involves clients, except for exempted bodies in the public sector, taking out compulsory "Dommage Ouvrage" cover, which is project based and automatically assigned to future owners. It provides a fund to carry out damage repair without seeking to establish liability and without any provision for excess. Producers are required to insure their decennial liability, That responsibility falls upon contractors, professionals and manufacturers or suppliers of components, or any one else bound by contract to the client, but not subcontractors. Both sets of insurances are for the entire statutory liability. Litigation is avoided in practice by a concordat apportioning responsibility for payment between the insurers. Only about 10 cases a year now go to court. About 85% of cases are settled within 20 working weeks. The cost of insurance has fallen sharply, having originally been high. The estimated aggregate cost of it, as apportioned between the client and construction team, is about 3.5% of the total cost of the project.
2. "BUILD insurance for non-domestic clients. This is either financed by the client (currently about 1% of construction cost) or with the cost shared/ apportioned between the principal participants such as clients, lead consultants and contractors (who might then require their main subcontractors to contribute) and which is recommended to exclude rights of subrogation. Such policies were originally intended to cover the structure, including foundations and weather shield envelope. They do not normally cover engineering services, which is regarded by clients as a serious weakness. It is however possible to insure separately against M&E failure for between 1 and 5 years. "BUILD policies can also involve cover for loss of rental income or additional rental expenditure.
11.19 Since clients can already obtain "BUILD insurance if they so wish, it might asked why it should be thought necessary to stimulate demand. The introduction of mandatory insurance would be a logical extension to the recommendations of the Liability Working Party, which themselves require legislation. If the insurance companies were to become significant players in construction quality and standards (as opposed to all-risks or other site based insurance which they currently cover as part of the Standard Forms of Contract), they would insist upon their own involvement in supervision100. In France, technical inspectors or technical control bureaux are employed by clients to check drawings at various stages and inspect the work on site. Such supervision by client's representatives often results in a discount on the insurance premium. The technical inspectors are an officially recognised profession, independent of the insurance companies and are widely believed to have helped to raise standards of construction in France. Some such inspectors are also employed by contractors as safety or quality consultants. (This is a possible new role for Approved Inspectors in Britain, or other suitably qualified technical experts.)
11.20 Another benefit of substantial involvement by the insurance companies would be to extend knowledge of defects and how to rectify them. 'The Construction Quality Forum, launched last November by the Building Research Establishment in conjunction with some representatives of the industry, clients and professions, aims to provide systematic feed back on building problems and draw up a defects data base. However, the equivalent organisation in France, the AQC, is financed by a levy on insurance premia. It collects information on defects and issues advice and guidance notes accordingly. An insurance system in Britain could provide significant additional funding for a research, development and information service by an addition to insurance premia, payable to such an agency (see also Chapter 7, paragraphs 7.39 to 7.40).
11.21 While this will take time to achieve, an agency might become capable of running the registers based on CMIS and ConReg. Insurers who are taking risks on quality will undoubtedly wish to satisfy themselves of the standards of performance of the consultants, contractors and subcontractors whose work they are insuring. They might develop a "Star" system, with premia linked to the standard of the firms concerned. Some firms may find it difficult to get insurance or, if the client is paying for the cover, to get work on projects paid for by the client. If that restricted the activities of poor performers, clients and the industry as a whole could only benefit.
11.22 Such insurance should be limited to specific building projects. It is not required in civil engineering in France (though the engineer is normally insured), and there is no obvious need to extend it to civil engineering or process engineering in the United Kingdom101. The insurance industry has indicated that it would welcome a mandatory contractual requirement for defects liability insurance, but does not, in principle, support statutory requirements.
11.23 The French dual system of compulsory producers' decennial insurance and clients' damage insurance is an attractive option, but is too large a step. It would seem reasonable at this stage to bring within the mandatory insurance system all new commercial, retail and industrial building work, subject to a de minimis cut off point in value,102 including work for public sector clients such as offices or industrial premises. The basis of the requirement should be as set out for "BUILD insurance in paragraph 11.18(2) above. This should be discussed with the insurance industry to establish, inter alia, the appropriate timescale for its introduction.
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98 See the "BUILD report" op cit and "Restitution for Latent Defects: There must be a better way" paper by Professor Donald Bishop to the Barbican conference, December 1993, to be published by the CIC. I am grateful to Professor Bishop for his guidance on this section ofthe Report, and some others.
99 For example, Griffiths & Armour offer "Bild", operated with General Accident and Commercial Union, which also involves automatic waiving of subrogation rights, except of suppliers. To achieve waiving ofsubrogation, the projects must have engineers who are members ofthe Association of Consulting Engineers working on them.
100 For example "Bild" involves a compulsory technical audit before cover is arranged. (Source: article by Mr Philip Robinson of Griffiths and Armour, "Latent Defects and Existing Buildings", Financial Times "World Policy Guide", March 1994.)
101 However, the CIPS final report does recommend compulso ry decennial insurance for civil engineering work, but not if the works are in the public sector.
102 British latent defect insurance tends to have an excess provision.