Insurances & Guarantees - Clause 8, 10 & 11 of the JBCC

Oostewald van Niekerk
30th Jul, 2021

What is the type of Insurances that is directly affecting any construction project?

• Contract Works Insurance
• Public Liability
• Special Insurances (Geotechnical & Lateral Support)
• Workman’s Compensation
• SASRIA (Riot & Strikes)
• Professional Indemnity

The purpose of these insurances is to mitigate RISK

What does the JBCC Edition 6.2 of May 2018 Say about Insurances & Securities?

CLAUSE 8.0 has reference on WORKS RISK:

Clause 8.1 “The contractor shall take full responsibility for the works from the date on which possession of the site is given to the contractor and up to the date of issue of the certificate of practical completion or deemed achievement of practical completion for the works as a whole, or a section thereof.  Thereafter responsibility for the works as a whole, or a section thereof, shall pass to the employer.

The contractor needs to be covered by insurance to make good physical loss and repair damage to the works caused by any occurrence between site handover and practical completion.

Clause 8.3 gives us a non-exhaustive list of loss or damages that the contractor is liable for:

8.3.1 The cost of making good such physical loss and repairing damages to the works including clearing away and removing all debris and any other costs to reinstate the works

8.3.2 The new replacement value of free issue

8.3.3 The cost of additional professional services

Clause 8.4 make specific reference to the Contract Works Insurance and state that the contractor’s liability cannot exceed the amount of the contract works insurance

Clause 8.5 refers to circumstances where the contractor will not be liable for the cost of making good los and repairing damages, chief among them is:

8.5.7 Force Majeure

INSURANCES

CLAUSE 10 has reference on INSURANCES:

The most important aspect of insurances is stated in clause 10.1 in that the “insurances will be kept in force in the joint names of the parties from the date of possession of the site until the issue of the certificate of practical completion with an extension to cover the contractor’s obligations after the date of practical completion.”

Upon practical completion the Contracts Works RISK shifts from the contractor to the client. And the client will ensure the building under his ‘All Risk Insurance’ or his ‘Building Insurance’.  This does not mean that the contractor is now magically released from his Patent & Latent Defects liability period. And the contractor will still be liable to rectify Patent & Latent Defects at his cost.

What does Contract Works Insurance Cover?

Clause 10.1.1 “Contract works insurance shall make provision for direct contractors, free issue materials and goods, professional fees, temporary works, clearing away and removing of all debris and any other costs to reinstate the works and where required, damage to employer owned surrounding property where not covered under the removal of lateral support insurance.”

Clause 10.1.2 “Supplementary insurance for the works against loss or damage caused by civil commotion, riot, strike, labour disturbance and lockout to the extent not insured under the contract works insurance.”

Clause 10.1.3 “Public liability insurance providing indemnity in respect of accidental death or injury to any person and accidental loss of or physical damage to tangible property, to remain in force until the date of final completion.”

Clause 10.1.4 “Removal of lateral support insurance where the employer considers that the execution of the works could cause the removal of or weakening of or interference with the support of land or property adjacent to or within the site (also including employer owned surrounding property) and the consequences thereof. The employer shall appoint an agent to design and monitor appropriate support structures for use in executions and/or in existing property that form part of the works and/or the site.”

The following questions needs to be answered in the Contract data (JBCC Edition6.2 of May 2018) Section B6.0 Insurances

• Who is responsible for the insurances?
• What insurances are required?
• What are the values of the insurances?

Who is Responsible for insurances?

Generally, the Contractor is the party responsible for taking out all the insurances, however the JBCC assist us in clause 10.2 as to when the employer must take out insurances:

Clause 10.2 “Where practical completion in sections is required, or where the works is for alterations and additions, the employer shall effect and keep in force contract works insurance, supplementary insurance, public liability insurance, and where applicable, removal of lateral support insurance and other insurances in the joint names of the parties until the date of final completion.”

This also means that when we are working in a live tenant environment, the employer will be responsible for insurances. Because works in live tenant environments is generally alterations and additions.

Clause 10.3 is very clear in stating that “The party  responsible for effecting insurances shall provide proof of the insurances effected to the other party before the commencement of the construction period and, where required, provide proof of extension or renewal of such insurances before their expiry.  Upon request the party responsible for effecting insurances shall provide the other party with the entire policy wording of such insurances.”

Why is the employer responsible for insurances with Alteration and additions works?

• Clause 9.2.7 The employer indemnifies and holds the contractor harmless from all claims (including legal fees) arising from: “Physical loss or damage to an existing structure and the contents thereof where this agreement (JBCC) is for alterations or additions to an existing structure. Should such an event occur the contractor shall forthwith give notice to the principal agent.
• The client has existing insurances over the building
• The contractor is not responsible for areas or sections of the building that he is not altering or working on.
  • For example, if we are not demolishing the structure, the contractor cannot be held responsible for that structure or walls etc.

Why is the employer responsible for insurances when sectional completion is a requirement?

• The client will occupy the building as the sections are completed and thus turning the site in to a live environment.
  • it is then unrealistic/unfair to expect the contractor to accept responsibility for the works etc.

SECTION B6.0 Insurances in the Contract Data

What insurances are required?

Generally, we require the following:

• Contract Works Insurance
• Public Liability Insurance
• Supplementary insurances are a general insurance that all contractors should have, should a contractor not have this insurance the cost of standing time, making good loss and damages and lock outs will be for the contractors account.
• Removal of lateral support insurance will be project specific if there is adjoining structures to the works.
• Other insurances are not a requirement; however, I would recommend the following:
  • If there is Design Responsibility on the contractor other than the responsibility in Clause 7.0 of the JBCC, I would insist on Professional Indemnity Insurance.
  • Considering the Covid19 pandemic, I would recommend business interruption insurance to cover the contractor for hard lock down situations, and social distancing requirements.

What are the values of the insurances required?

Note the difference in the table between the employer and the contractor requirements for contract works insurances.

• Contract works insurance – I prefer the insurance to be the Contract sum + 10%. The JBCC require contract works insurance to be equal to the contract sum, + value Direct Contractors + the value of Free issue material (if applicable to the project) + Escalation, + professional fees and reinstatement costs (if not included elsewhere)
   
  10. Clause 10.5 “The employer may, at his expense, require the cover of the contract works insurance to be increased. The party responsible for effecting insurances shall provide written proof of such adjustment.”
• Supplementary Insurance – my suggestion is that this type of insurance is equal to the value of one weeks standing time (Time related P&G)
• Public Liability Insurance – The question here is what is the value of a human life? Riaan Pretorius (AGORA’s preferred health and safety consultant) recommends that the contractor is covered for R 10 million. It should be noted that R 5 million is also acceptable for projects smaller than R30mil (contract sum). It you work on a live site or life tenant environment (for example the Vodacom Bumble Bee project) it is recommended to have a much higher Public Liability Insurance on VBB the contractor was requested to have R25million PL Insurance.
• Removal of Lateral Support – the employer must appoint an agent, and this agent must advice on the value of this insurance, if and when it is required.
• Other Insurances – project specific, but I would recommend the following:
  10. Business interruption – the value of 3 months P&G
  11. Professional Indemnity insurance – 3 x the fee value of the design fee

Very important to note is clause 10.7 “Where this agreement (JBCC) is terminated and the contractor is not required to make good the physical loss or repair damage to the works, the right to the proceeds of an insurance claim shall vest solely in the employer.  The party responsible for the insurances shall give notice to the insurer to clarify the status of the insurance cover and/or further insurance obligations applicable to the works, public liability insurance, supplementary insurance and removal of lateral support insurance.”

Why? – the employer will have to appoint a new contractor to make good the physical loss or repair damages to the works.

CLAUSE 11 SECURITIES SECTION D1.0 OF THE CONTRACT DATA

The contractor can decide between:

• Option A – Variable Construction Guarantee
• Option B – Fixed Construction Guarantee.

What is the Difference between the 2 Guarantees?

Variable Construction Guarantee

• Issued by a financial institution.
• To the value of 10% of the Contract sum
• The value reduces to 6% of the contract sum if 50% of the contract sum has been certified in the payment certificate.
• The value reduces to 4% when practical completion is certified.
• It reduces to 2% upon issuing of the upon issuing of the Final Completion Certificate
• Lapses upon full and final settlement of the Final Account and payment has been made to the contractor.

Fixed Construction Guarantee

• Issued by a financial institution
• To the value of 5% of the Contract sum coupled with a 5% retention on each payment certificate
• Lapses on practical completion.

What happens when the contractor does not select a Construction Guarantee or fails to provide a guarantee?

• Clause 11.4 comes into effect:
  • Retention “Withhold an amount of each interim payment certificate up to 10% of the contract sum is reached. The amount withheld shall be reduced at practical completion to 2.5% of the contract sum and again reduced to 0% of the contract sum upon final payment certificate”.

Advance payment guarantee

• When advance payments/deposit is required
• Recoupment period needs to be agreed upon
• Recoupment occurs in the recovery statement
• The contractor elects in the Contract data how big of an advance payment he requires.

Payment guarantee

• The contractor should indicate in the contract data if he requires a payment guarantee.
• The contractor must also indicate how big of a payment guarantee he requires.
• The contractor shall waive his lien or right of continuing possession of the works on receipt of a guarantee for payment.

The original security forms must be returned to the other party within 10 working days after the expiry date.

What is the purpose of Insurances and Guarantees?

To de-Risk the project.  It minimizes the risk on the employer, its agents and the contractor.

The parties also Indemnifies each other against certain occurrences.

 

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