Construction Liability and Risk Management
Understanding construction liabilities and implementing proactive risk management strategies is crucial
Construction Risks and Liabilities
Construction projects are typically complex and come with a range of risks and liabilities, including financial, legal, safety, and contractual risks. Failure to manage these liabilities effectively can result in legal disputes, financial losses, or even insolvency of the construction companies involved.
Understanding construction liabilities and implementing proactive risk management strategies is crucial for contractors, developers, and stakeholders. This article explores the key aspects of construction liabilities and provides best practices for managing them.
Construction liability
All companies involved with building and engineering projects must carefully consider their liabilities because of the high-risk nature of the industry. Construction liabilities refer to the legal and financial responsibilities that contractors, developers, and other stakeholders assume through the construction project. These liabilities can arise due to a variety of construction risks such as injuries, property damage, contract breaches, defective workmanship, design errors, negligence, regulatory violations, or unforeseen project disruptions.
1) Contractual liability
Contractual liabilities arise from the agreements made between contractors, subcontractors, suppliers, architect, engineers, and clients. If a party fails to fulfil its obligations as outlined in the contract, it may be held liable for damages. Contractual disputes often result from delays, scope changes, design errors, defects, or breach of payment terms.
How to manage contractual liabilities:
- Clearly defined contract terms, roles, and responsibilities
- Limit liability and exclude consequential
- Contractual warranties
- Ensuring sub-contractors purchase adequate construction insurance
- Dispute resolution clauses
- Ensure contracts legally compliant and meet industry standards
- Legal opinion of contracts prior to signing
Contracts will vary depending upon the size, type of work, and the client. It’s common to use standard contracts such as:
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Joint Contracts Tribunal (JCT),
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New Engineering Contract (NEC)
It’s important to appreciate that contract enforceability can depend upon a variety of legal considerations. Reasonableness of a contractual term, degree of negligence attributed to the liable party, burden of proof, ambiguity, can all mean that contractual provisions are not enforceable.
Construction insurance plays an important role in managing construction contract liabilities. Common types include:
- Public liability insurance
- Professional indemnity insurance
- Employer’s liability insurance
- Contractors all-risk insurance
2) Legal and regulatory risks
Construction companies must comply with various laws and regulations. Health and safety is an obvious area for concern given the higher risks associated with maintaining a safe work environment on construction sites. However, there are a raft of other UK laws and regulations that must be followed, including but are not limited to:
- Building Regulations 2010
- Health and Safety at Work Act 1974
- Construction Design and Management (CDM) Regulations 2015
- Control of Substances Hazardous to Health Regulations (COSHH)
- Personal Protective Equipment at Work Regulations
- Lifting Operations and Lifting Equipment Regulations (LOLER)
- Work at Height Regulations 2005
- Corporate Manslaughter and Corporate Homicide Act 2007
- General Data Protection Regulation
Failure to adhere to these laws and regulations can mean can lead to regulatory investigations, enforcement notices, fines, criminal prosecutions, civil actions, and reputational damage. Director's personal liability means that individuals can be held accountable for their actions on behalf of a limited company.
How to manage legal and regulatory liabilities:
- Stay updated with construction laws and industry regulations
- Obtain necessary approvals before starting projects
- Arrange the necessary construction insurance
- Conduct regular compliance audits
- Consult with legal experts to ensure regulatory adherence
Insurance plays an important role in managing construction legal and regulatory liabilities. Common types include:
3) Professional liability
Professional liabilities can arise from a wide range if situations even if you weren’t directly responsible for the act, error or omission that causes the financial loss. Construction professional liabilities typically arise from design errors, alterations, failure to supervise, miscalculations, incorrect specification, unsuitability of materials, negligence, or a breach of professional duty.
How to manage professional liabilities:
- Ensure designs are approved by qualified professionals
- Ensure qualified professional have professional indemnity insurance
- Use quality control measures to prevent construction defects
- Implement continuous training programs for professionals and project managers
- Arrange your own construction professional indemnity insurance
Historically, contractors weren’t typically required to purchased professional indemnity (PI) insurance on the basis they have no design liability and that professionals such as architects, surveyors, or engineers have cover in force. However, contractors are increasingly taking on the role of project management and sub-contracting design and engineering work, which means they can be held vicarious liable. Alternatively, they have in-house design teams or take responsibility for alterations to the original design.
Additionally, the availability of insurance products designed for contractors which generate a limited amount (10-15%) of turnover from design, specification or project management activities have become more cost-effective. For example, a contractor can purchase £1 million PI for £1,500. When considering your exposure to design and construction liabilities, you should consider if there is a problem who is the client’s point of contact? Unfortunately, construction disputes will typically name multiple parties, each requiring their own legal defence.
Professional liabilities in the construction sector can be a cause for concern given the potential size of the projects. If structural remediation is required, the potential liability can exceed the total cost of the project. You may only be responsible for part of the project, however the potential liabilities for rectifying the work could be far reaching.
4) Health and safety risks
Construction sites are inherently dangerous environments for employees, contractors, site visitors, and members of the public. Failure to manage these risks effectively can lead to injuries, fatalities, legal action, and financial liabilities. Whereas, failure to meet health and safety regulations can result in criminal prosecution, civil claims, regulator fines and reputational damage.
How to manage health and safety liabilities:
- Implement strict adherence to health and safety controls
- Conduct regular health and safety training
- Provide personal protective equipment (PPE) and enforce its use
- Conduct periodic safety inspections and hazard assessments
- Create a company culture that prioritises health and safety
- Understand your requirements to report incidents under RIDDOR
Health and safety risk assessments will need to consider the higher hazard posed by:
a) Falls from height
Falls from height are the leading cause of fatalities in construction. Common causes include unsafe scaffolding or ladders, lack of edge protection on roofs, unsecured openings in flooring, failure to use harnesses or fall arrest systems.
b) Slips, trips, and falls
Uneven surfaces, trailing cables, poor lighting, and wet conditions can lead to serious injuries on building site. Keeping walkways clear of debris, ensuring proper drainage, providing adequate site lighting, and appropriate signage can assist to mitigate risks.
c) Machinery and vehicles
Building sites can involve heavy machinery such as cranes, diggers, forklifts. Collisions or crush injuries can cause significant harm. Companies should make sure sufficient operator training is provided, there is clear safety procedures, and routine maintenance is undertaken.
d) Falling objects
Tools, debris, and materials falling from height can pose a significant risk to employees, subcontractors, or members of the public. Ensuring hard hats, securing materials properly at height, and using toe boards and debris netting can mitigate risks.
e) Electrical hazards
Exposure to live wires, faulty equipment, and mains power can lead to electrocution or fire hazards. Ensure qualified electricians are utilised and they have the relevant insurance protections in place.
f) Fire and explosion
Flammable materials or hot works, such blow troches, soldering irons, angle grinders, welding or cutting equipment that creates heat or sparks increases the risk of fire. Safety procedures, hot works stations, fire extinguishers, and emergency response plans should be in place.
g) Hazardous substances
Construction workers can be exposed to asbestos, silica dust, solvents, and chemicals, which can lead to long-term illnesses like lung disease and cancer. Appropriate risk assessments, dust suppression, proper ventilation, in addition to personal protective equipment (PPE) should be applied.
h) Manual handling
Lifting heavy materials incorrectly can cause injuries, while some manual tasks can cause repetitive strain injuries. Risk assessments, adequate training on proper lifting techniques, and mechanical lifting aids can help mitigate risks.
Health and Safety Executive (HSE) Construction Guidance
What is the Health and Safety Executive?
Third-party liability
Anyone that undertakes a construction project owes a legal liability to third parties for injury, death, property damage, pollution, nuisance, trespass, and obstruction. Third parties can include a wide range of legal entities and individuals, including bona-fide subcontractors, suppliers, neighbouring properties, pedestrians, site visitors, and local councils. Claims for damages or injunctive relief can arise from allegations made by third parties, which can cause delays, disruptions, and financial losses.
How to manage third-party liabilities:
- Implement site security and access restrictions
- Conduct community engagement to inform nearby residents
- Use protective barriers and warning signs
- Safety meetings to address potential hazzards on site
- Personal Protective Equipment (PPE) for anyone on site
- Incident reporting process for all accidents, near misses or unsafe conditions
- Arrange adequate public liability insurance
It’s important highlight the limitations of public liability insurance – which will cover damage to third-party property, but only if the contractor is negligent - be it poor workmanship, defective materials or faulty equipment. If the contractor is not a fault and there has been damage to a neighbouring property, the employer could be held legally liable.
Non-negligence cover can mitigate the risk and protect the employer against legal liabilities that arise from property damage when the contractor is not neglient. Under the JCT Standard Form, there are various requirements for construction insurance on the part of either the employer or the contractor. JCT Clause 6.5.1 requires insurance to be arranged in respect:
- Collapse
- Subsidence
- Heave
- Vibration
- Weakening or removal of support
- Lowering of groundwater
Employee liability
Employee liabilities can arise from injuries or disease that occurred whilst in your employment. Whereas employment related liabilities can arise from discrimination, harassment, invasion of privacy, negligent reference, negligent evaluation, refusal to promote, sexual harassment, unfair dismissal, wrongful demotion, wrongful dismissal, or wrongful infliction of emotional distress.
How to manage employee liabilities:
- Appropriate risk assessment
- Comprehensive safety training and education
- Correct PPE for specific hazards
- Site safety inspections, monitoring and enforcement
- Contingency planning
- Create a culture of risk aversion with employee engagement
- Arrange employers’ liability insurance
How to manage employment liabilities:
- Ensure compliance with employment laws
- Establish a grievance resolution process for workers
- Provide adequate training and equal opportunities
- Seek HR advice before terminating an employee’s contract
- Arrange employment practices liability insurance
Pollution liability
Construction activities can have significant environmental impacts, including pollution, contamination, and habitat destruction. Failure to comply with environmental regulations can result in fines, civil actions, and reputational damage. These liabilities can arise from the risk of environmental damage, bodily injury, property damage and cleanup costs.
How to manage environmental liabilities:
- Adhere to environmental laws
- Conduct environmental impact assessments
- Implement waste management and recycling programs
- Use sustainable building materials and eco-friendly construction methods
- Purchase pollution liability insurance
Written by Simon Taylor
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.