Have you lost your cover? Managing environmental risks

Some significant changes have been made to the JCT forms of contract this year.  They are known as the 2009 revisions.

One of the notable changes should be of concern to employers and funders.  It relates to the type and level of insurance cover which will usually be on offer from a contractor to cover environmental risks.  It is likely to affect the balance of commercial risk allocation between developers and contractors in respect of environmental risks.

There is now a default position under the standard contracts where there will be no duty on a contractor to maintain asbestos, pollution and contamination cover unless an amount of cover is stipulated in the Contract Particulars.  Further, even if the contract does expressly stipulate the level of cover required, the default position is that this will be an annual aggregate level of cover only rather than on an each and every claim basis.

The JCT’s Guide seeks to justify these changes by referring to changes in the insurance market.  The insurance market may well have changed and will continue to do so, but the JCT’s new changes will have the effect of reducing the default level of cover maintained by the contractor.  Further, the changes make it harder for an employer to obtain a higher standard of cover (even if that cover is available on the insurance markets, albeit at a higher price).  Insurers and contractors will be able to argue that the employer’s request is bespoke and not in keeping with the “market practice” of Revision 2 2009.  Most employers and funders welcomed the introduction of meaningful professional indemnity insurance provisions in the original 2005 edition of the JCT Standard Building Contract.  In contrast, these changes are likely to prove unpopular with employers and funders.  It may become steadily more difficult for employers to ensure the contractor maintains adequate cover without having to pay an increased price.

Arguably the JCT should have introduced a default position for fungal mould cover.  It is the only entry in the Contract Particulars for the relevant insurance clause that requires the parties to make a selection, with no default option.  The JCT’s Guide states that fungal mould is not normally subject to a separate cover limit, so the logical default position would be that fungal mould claims were covered.

In addition, the JCT may not have used the most appropriate words to refer to “mould claims”.

Some insurers refer to “toxic mould” in policies.  The purpose of that exclusion, based on insurance practice in the US, has been partly to exclude the possibility of the insurer being liable for a claim that a toxic mould has caused personal injury (or would or could cause personal injury) to users of the building, because of its alleged toxicity.  If a policy excludes all claims for “fungal mould” there is a risk that the policy will not respond in circumstances where it arguably should (for example, where the Contractor’s negligent design of a bathroom with poor ventilation means that harmless, but unsightly, mould needs to be eliminated).  In some circumstances, the employer may be able to frame its claim in terms of, for example, a breach of building regulations: failing to provide adequate ventilation.  (The JCT has limited the Contractor’s default insurance obligations, but not excluded the contractor’s liability for mould, whether toxic or otherwise.)