A presentation on changes to UK insurance law, construction bonds and guarantees

1. Construction Law Conference 2015:
Insurance, Bonds and Guarantees 5 February 2015
Francis Ho, Head of Construction
francis.ho@olswang.com | +44 20 7067 3505 | @fkyh

2. Insurance in 2015
• BIM and professional indemnity insurance
• Level 2 and Level 3
• Role of Information Manager in design
• Cyber liability
• Integrated Project Insurance
• Not yet making waves
• Parkwood Leisure v Laing O’Rourke Wales & West and Hurley Palmer Flatt v
Barclays Bank
• Third Party (Rights Against Insurers) Act 2010 and Insurance Bill
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3. Third Party (Rights Against
Insurers) Act 2010
• Coming into force delayed repeatedly but may follow passing of Insurance Bill this
year
• Replaces Third Party (Rights Against Insurers) Act 1930:
• Insolvency
• Allows third party to claim against an insured’s liability insurance
• Transfers insured’s rights to third party
• Disclosure of policy information by insolvency practitioners
• Covers all insurance, including PI, employer’s liability and public liability
• Likely to increase claims by third parties against insurers
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4. Third Party (Rights Against
Insurers) Act 2010
• No longer mandatory to sue/arbitrate insured to obtain judgment/settlement (i.e.
no need to restore dissolved companies to register)
• Covers wider range of insolvency situations for individuals, partnerships and
corporations
• Exceptions to insurer defences:
• Non-notification or non-performance by insured
• “Pay first” clauses do not generally apply
• Third party can obtain information about policy from anyone able to provide it.
Information must be provided within 28 days
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5. Insurance Bill
• Insurance historically underpinned by common law and Marine Liability Act 1906
• Governs business insurance; being fast-tracked through Parliament. May be
passed in March 2015
• “Fair presentation of risk” in a way that would be “reasonably clear and accessible
to a prudent insurer” (clause 3)
• Remedies for breach of clause 3 will be “proportionate” and depend on what
insurer would have done differently but if breach was reckless or deliberate,
insurer can avoid contract and keep premium
• Prohibits “basis of contract” clauses (clause 9)
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6. “Fair presentation of risk”
(clause 3)
• Disclosure in a manner which would be reasonably clear and accessible to a
prudent insurer
• Every material representation as to a matter of fact is substantially correct, and
every material representation as to a matter of expectation or belief is made in
good faith
Alternatively …
• Disclosure of every material circumstance which the insured knows or ought to
know or disclosure which gives insurer sufficient information to put a prudent
insurer on notice that it needs to make further enquiries
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7. Insured’s knowledge (clause 4)
• Individual will also know what those procuring the insurance policy know
• For insureds which are not individuals, same as above but insured also deemed
to know what senior management knows
• However, insured’s agent no longer under separate obligation to disclose
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8. “Basis of contract” clauses
(clause 9)
• Already prohibited in consumer insurance contracts (Consumer Insurance
(Disclosures and Representations) Act 2012)
• Convert statements made in proposal forms or policy documents to warranties
• Allow insurers to avoid liability for claims if there are incorrect statements
(Genesis Housing Association v Liberty Syndicate Management)
• Breach of warranty no longer discharges insurer’s liability from time of breach but
suspends it until remedied (clause 10)
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9. Bonds – Recent trends
• More demand for performance bonds than pre-recession
• A “harder” insurance market?
• Performance bonds more likely to expire at practical completion
• ABI model form of guarantee bond remains the general choice
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10. Common types of bonds
• Construction bonds:
• Performance bonds
• Advance payment bonds
• Retention bonds
• Off-site materials bonds
• Bid bonds
• s.38 and s. 104 bonds
• Conditional or on demand?
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11. Conditional and on demand
bonds in the UK market
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Usually conditional Usually on demand
Performance bond (real
estate developments)
Retention bond
Advance payment bond
Bid bond
Off-site materials bond
Performance bond
(complex engineering
projects)

12. How to prevent a call:
Conditional bonds
• Surety puts Employer to proof
• Surety’s liabilities same as Contractors so it may be released for:
• Forbearance given by Employer to Contractor
• Material alteration of Construction Contract without Surety’s consent
• Employers should consider “indulgence” clause
• Expiry date or event relating to bond occurs
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13. How to prevent a call: On
demand bonds
• Very difficult, even if Contractor can dispute any allegation of breach
• Fraud
• Illegality (usually effective, depending on governing law of country of enforcement)
• Unconscionability (Singapore)
• Court order/injunction to either (i) restrain Employer from making call or (ii) Surety from
making payment upon receipt of Employer’s notice
• Courts reluctant to intervene in contract relations between parties
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14. Drafting and commercial
considerations for Employers
• Is insolvency a breach of contract (cf. ABI form)?
• Is bond assignable if underlying contract is assigned (or novated)?
• Does Surety have satisfactory financial covenant?
• Is Surety based in Employer’s home country?
• If bond is to be on demand, is this sufficiently clear in drafting?
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15. Drafting and commercial
considerations for Contractors
• What is the cost and has it been priced for?
• If Employer’s main concern is insolvency, will conditional bond suffice?
• Unfair calling insurance and Uniform Rules for Demand Guarantees for on
demand bonds
• Clause in Construction Contract to allow Contractor to recover overpayment
under on demand bond
• Longstop date?
• Risk of “pay or extend” with on demand bondswww.constructiveblog.com Construction Law Conference 2015

16. Parent company guarantees
• What’s the difference between a parent company guarantee and a performance
bond?
• Should Employer seek both?
• “Substituted performance” clauses – sometimes seen
• Payment guarantees from Employers still unusual in UK market. Escrow
arrangements relatively common
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17. Guarantees – Drafting
considerations
• Draft as a deed to avoid questions of consideration and for limitation period
reasons
• Liability limited to that of subsidiary under underlying contract
• Is bond assignable if underlying contract is assigned (or novated)?
• Should be drafted as an indemnity (primary obligation) as well as a guarantee
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