Material provided by Underwriting Agencies of Australia
Road construction insurance can differ considerably from other forms of earthmoving and civil works. This article discusses why and touches on some of the risk, and risk mitigation, nuances.
Completely new road construction is more straightforward than insurance for road maintenance or resurfacing contracts for existing roads. Here is why.
New road construction insurance is based upon the contract value of the road from start to finish. That value becomes the basis for the policy sum insured. That is to say, all components of the road including preparation, drainage, strengthening, compaction and any other infrastructure work required, are insured because the insurer is receiving premium based upon the value of all of those components. However, road resurfacing, or maintenance, has a contract value (and sum insured) that only encompasses the new work. Therefore, only the new work would be insured by that sum insured. The preparation, compaction, base-layers, drainage, etc of the existing road is not included within the contract value, or within the sum insured, and would not be automatically insured. Why does that matter?
For some simple road maintenance contracts, this may not be a huge risk. However, when floods, washouts, landslips and other natural perils are a risk to the contract work and/or the existing road, omitting to consider insuring the value of replacing the existing road (at least to some extent), upon which the new work is based and relies, can be financially compromising for a contractor.
AS 2124 – 1992 (for example), at clause 17.1, requires a contractor to indemnify the principal for loss or damage to property of the principal, including existing property in or upon which the contract work is being carried out if such loss or damage arises out of, or is as a consequence of ,work carried out by the contractor. Surface seal removed by a profiler (for example) increases the exposure that the existing road structure has to weather damage. That increased exposure has “arisen out of, or as a consequence of” removing the surface seal layer. Such damage could require the contractor to indemnify the principal for remediation under AS2124 – if the contract was not amended to reflect otherwise.
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A savvy contractor may reduce its exposure to the effects of natural perils on its contract work by negotiating the terms of its contract to leave the natural peril risk with the entity who is normally responsible for the road and that risk. Some councils (in flood-prone regions) will carry this entire risk themselves – because they normally would. If that is not negotiable/achievable within the terms of the contract, then try to restrict the length of road exposed at any one time under the contract. For example; as soon as a length of road resurfacing or remediation has been completed, and traffic is using it, clearly have the terms of the contract transfer the risk of that completed road section to the entity normally responsible for the road. If a contractor can “cap” its exposure in these ways, the reduction in risk can result in a lower tender/contract price because some usual contingency allowances may be able to be reduced.
When roads are put in to use (temporarily or permanently), that can trigger some interesting aspects in unamended contracts. For example, AS2124 (clause 16.3 (e)) excepts risk for the contractor when the principal puts the contract works in to use. Furthermore, practical completion triggers when the works are complete except for minor omissions/defects which do not prevent the contract works from being used for their intended purpose. In an unamended contract, when vehicles are using the road that has been, or is being, worked upon, these are potentially valid contractual grounds for a contractor to avoid risk. In practice, these parts of AS2124 may be overlooked, but experience shows that clearly expressed contractual obligations can avoid unexpected consequences when loss or damage occurs or legal liability is incurred.
The most costly remediation work, often uninsured for reasons specified above and/or where the contract simply requires the contractor to be responsible for repairing all damage, are those requiring infrastructure improvements or remediation when damage occurs before the contractor can commence remediating damage to its own contract works. For example, a washout or landslip might require construction of a new culvert or strengthening/retention of a section of the road before the maintenance or resurfacing work (the subject of the contract) can be completed. Such work is expensive, and sometimes the risk has not been considered in the tender or in the contract terms. If the road’s owner drives a hard bargain through its contract terms, a contractor might have to pay to reinstate the infrastructure even though the action of a natural peril effectively caused the damage.
In conclusion, to properly manage your risk, a roading contractor should:
- Always consider who, under contract, is responsible for the cost of reinstating the existing road infrastructure should damage occur to it during the contract period.
- If that is you, always consider the value of the existing road asset.
- Amend the terms of the contract to accurately reflect your understanding of the apportionment of risk.
- Always try to hand over in the smallest completed section of road work possible/allowable under contract in order to disconnect your financial exposure to the risk in that completed section.
- Insure the existing road asset if needs be.
Important note – the information provided here is general advice only and has been prepared without taking in account your objectives, financial situation or needs by MECON Insurance Pty Ltd (ABN 29 059 310 904; AFSL 253106).