Development of insurance clauses in standard forms of contract

As distinct from engineering insurance, which began in England with the industrial revolution around the middle of the nineteenth century, the necessity to insure various aspects of a construction project during its period of construction was recognised when the standard forms of contract were developed. The earliest contractors’ all risks insurance requirement appeared in individual civil engineering contracts as early as 1929 for the construction of the Lambeth Bridge over the Thames in London. In Germany, this type of insurance was introduced in 1934 using terms and conditions derived from erection all risks insurance developed for erection and testing of industrial facilities, which had been launched in 1924.20 A standard form used in 1935 by the Electricity Supply Board of Ireland reads as follows:21

 Clause 26-Insurance

The Contractor shall insure with a Company previously approved by the Board in writing such plant and materials as may for the time being be upon the site and shall keep them insured against destruction or damage for the whole value of such plant and materials until the completion of the works. And he shall, from time to time, when so required by the Engineer, produce the policy and the receipts for the premium for inspection. All monies received under such policies shall be applied in or towards the reconstruction or replacement of the plant and materials destroyed or damaged, but this provision shall not affect the Contractor’s liabilities under the Contract. The insurance requirement as set out in the aforementioned clause is limited to material and plant and it is not clear whether it was intended that the insurance should cease upon incorporation of the material in the works. After the Second World War, the responsibilities and liabilities of the contracting parties in construction contracts increased in extent and in value. Clients, who in many cases were banks and financial institutions, found it imperative to cover their liabilities through insurance. Hence, the 1st edition of the ICE form of contract, issued in 1945, highlighted the importance of insurance by incorporating clauses which remained in force until 1973 when the 5th edition was issued incorporating a revision of the insurance clauses.22 This revision of the clauses took place to allow for the developments which had occurred in the insurance markets of the world during the intervening period since 1945 and to cater for the technological advancement and the appearance of new construction materials and methods which emerged during this period. These developments created two effects: the first was that the new materials, methods and technology created new sets of risks and remedies which had to be recognised and allocated to one or more of the contracting parties; the second was that the insurers, on their part, varied their insurance policies in accordance with these developments, thus creating a significant difference between the requirements of the conditions of contract and what the insurance market was prepared to insure.

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Construction contracts

The simplest definition of a contract is ‘A promise enforceable by law’. A slightly more elaborate definition is ‘An agreement between two or more parties in which each party binds himself to do or forbear to do some act and each acquires the right to what the other promises’. Under common law, however, the promise has to be accompanied by ‘consideration’ which, in simple terms, means financial reward but it could also be any legally acceptable act agreed upon. Since it is between one party and at least one other and since the contract is made with the mutual agreement of the parties, it is necessary to have ‘an offer’ and ‘an acceptance’. If the contract or the promise is not performed, the remedy can be either the specific or actual performance of what was actually promised, or a financial compensation of one sort or another.12 The enforcement of a contract is one of the most important sections of the legal system.
In any democratic society, the freedom of the individual to contract has been deemed the supreme facet of freedom since the beginning of social intercourse. The extensive growth of commercial activities in the nineteenth and twentieth centuries produced some abuse of this freedom, necessitating intervention by the State in the form of legislation to prevent monopoly and its harmful effects on society. This intervention, however, has not always been by way of legislation. In some cases, it has been initiated by specific groups of people interested in preserving the concept of fair play in a certain commercial activity. Others have done the
same to prevent one-sided agreement in which the strong might impose their will on the weak. The result was the Standard Form of Contract consisting of a standardised set of conditions presented in an already printed form best suited to the particular use for which it was envisaged. In construction contracts, where the obligations and responsibilities of the contracting parties can be extremely complex but to a large extent remain unchanged from one project to another, the Standard Form was developed by the relevant professional institutions in order to help make the contracts fair, just and equitable. This development was extremely suitable for the tendering system usually adopted in construction contracts as it ensured a common basis for the comparison and evaluation of tenders.
In Europe, and more particularly in the United Kingdom and in Ireland, such forms were produced as early as the nineteenth century. The RIBA Form, which is used for building work contracts, was issued under the aegis of the Royal Institute of British Architects some time towards the end of the nineteenth century and that was followed by the RIAI Articles of Agreement and Schedule of Conditions of Building Contract, issued by the Royal Institute of the Architects of Ireland. In civil engineering works, the ICE form was first issued by the Institution of Civil Engineers in the United Kingdom in 1945. In civil engineering, various forms which were in use in the English language prior to the Second World War by different employers were fused, in England, into an agreed standard document. This was achieved in December 1945 by the Institution of Civil Engineers and the Federation of Civil Engineering Contractors. The document thereafter was known as the ICE Conditions of Contract. In January 1950, it was revised and issued with the added agreement of the Association of Consulting Engineers, UK. Five further revisions were made, the last of these in September 1999: the
document which is in use at present is the seventh edition. To the credit of those responsible for drafting the ICE document, many professional institutions all over the world based their conditions of contract on its text and made only minor amendments to accommodate differences in matters of law and nomenclature. Amongst
these forms are two which will be referred to later in detail due to the relevance of their insurance clauses. These are the IEI Form and FIDIC’s Red Book. The first is issued jointly by the Institution of Engineers of Ireland, the Association of Consulting Engineers of Ireland and the Civil Engineering Contractors Association and is in its 4th edition since 1995. The second document, dating back to 1987, is also in its 4th edition and is prepared by the International Federation of Consulting Engineers (FIDIC). Revisions were implemented in the ICE, IEI and FIDIC Conditions of Contract as a result of demand from one or more of the constituent organisations or from the construction industry. This demand was in response either to a need or to a legal decision given by a court of law in deciding a case based on one of the conditions of the document in question.
Originally, these documents were drafted in precise, legal language, which would be expected to remain unequivocal even when subjected to detailed and hostile scrutiny by astute legal minds. However, as revisions were incorporated, the language became more and more complicated and inscrutable. In certain cases, the number of words in each sentence grew to a level beyond the understanding of the average reader. As can be seen from Figure 1.2, drawn for the 3rd edition of FIDIC’s Red Book, Conditions of Contract (International) for Works of Civil Engineering Construction, published in 1977, the number of words was at a level in excess of what a reasonably intelligent person is expected to readily

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Interaction between insurance and law

Insurance developed and spread as a result of society’s needs and demands. Thus, as mentioned above, marine insurance was followed by life insurance and shortly afterwards in the seventeenth century by fire insurance. Since then, human progress has been marked by developments in the insurance field and a variety of branches in the following classes of insurance sprang up, each forming a subject of its own: property insurance, machinery, loss of profits, engineering, motor, liability, aviation, credit, electronic equipment, off-shore structures and, most recently, space equipment. Each of these branches of insurance represents a milestone in the history of mankind.
However, the fact that insurance was itself available has influenced developments in other facets of society, forming dialogue between insurance and, for example, law or finance. This can be seen very clearly in the development of the law of negligence. The following extract, concluding a chapter on negligence, from The Discipline of Law by the great jurist and writer of the twentieth century Lord Denning, illustrates this point:11
During this discussion I have tried to show you how much the law of negligence has been extended; especially in regard to the negligence of professional men. This extension would have been intolerable for all concerned—had it not been for insurance. The only way in which professional men can safeguard themselves—against ruinous liability—is by insurance…. The policy behind it all is that, when severe loss is suffered by any one singly, it should be borne, not by him alone, but be spread throughout the community at large. Nevertheless, the moral element does come in. The sufferer will not recover any damages from anyone except when it is that person’s fault. It is only by retaining that moral element that society can be kept solvent. It is doubtful if developments in the laws of contract and negligence would have occurred in this complicated and intensely commercial world of ours without the help of insurance, which has truly shaped some of the relationships in society. In contrast, it is important to note that there is the view that insurance against tortious
liability should be considered unacceptable because it permits the individual to escape from the financial responsibility of negligent acts.

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Interaction Between Construction, Insurance and Law Part 2

rules pertaining to remuneration and failures.2 Five of these rules specified the standard required to be achieved in a building contract and prescribed penalties for those who had the misfortune not to comply with it. They were:
229 If a builder builds a house for a man and does not make its construction firm and the house which he has built collapses and causes the death of the owner of the house that builder shall be put to death.
230 If it causes the death of the son of the owner of the house they shall put to death a son of that builder.
231 If it causes the death of a slave of the owner of the house he shall give to the owner of the house a slave of equal value.
232 If it destroys property, he shall restore whatever it destroyed, and because he did not make the house which he built firm and it collapsed, he shall rebuild the house which collapsed at his own expense.
233 If a builder builds a house for a man and does not make its construction meet the requirements and a wall falls in, that builder shall strengthen the wall at his own expense.

Figure 1.1 shows rules 230 and 231, two of the five rules mentioned above, written in the original cuneiform script. The severe penalty imposed by these rules ensured that building work achieved the required standards of construction and safety and helped to ensure that houses were free from the defects resulting from bad design, materials or workmanship. The assurance that this would be so was based on the principle of ‘an eye for an eye’ in accordance with the law of that time, a principle that still exists today in some legal systems. However, there was little provision for restitution and a lot more retaliation in the rough justice of that era.
Although the current concept of construction insurance was unknown then, the notion of ‘risk, responsibility, liability and indemnity’3 was embodied in the spirit of those rules. It could therefore be said that the first systematic risk management process for the problem of defects in construction was devised at that time and although it was simple in its concept, it was nevertheless to the point.4 It is interesting, however, to note that the general principle of insurance of loss-sharing must have been realised even at that early stage of the development of social needs. Under section 1 of Hammurabi’s Code, which dealt with property law, the principle was embodied in the following text of rule 23:5

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Interaction Between Construction, Insurance and Law

As man organised himself in settlements around the world, law and order became a necessity to achieve a proper balance between the freedom of choice of the individual and the control of this freedom for the protection of others. Hence, order and ultimately law prevailed and must endure if people are to be enabled to interact within a society devoid of conflict, struggle and friction.
It is significant to the engineer that this idea of the need for law is referred to by some as social engineering, thus expanding the horizon of engineering from a restrictive scene, involving applied science, to a much wider sphere encompassing the analysis and design of the society in which one wishes to live. This reference also brings science, with its powerful means of analysis, design and solution, to bear upon the concept of law. While the concept of identifying law with a scientific process and applying scientific principles to the analysis of social and legal problems owes a lot to the French philosopher Comte (who in 1837 invented the term ‘sociology’ for such social studies), the genesis of sociology can be traced to the earliest records of human thought in the ancient civilisations of Assyria, Babylon, China, Egypt, India and Persia. In most of these civilisations, as the concept of law became acceptable, it was found necessary to ensure that laws, when enacted, were not only enforceable but also enforced. The idea of a supreme power behind that concept was born and the law was attributed to the gods. Thus in Mesopotamia around 2000 BC it was believed that there existed three gods: Anu, the god of sky who issued decrees which commanded obedience as they emanated from supreme divinity; Enlil, the god of earth who executed the sentence of the gods on those who did not obey; and Ea, the god of water and wisdom. The law in Mesopotamia was therefore believed to have been handed down from the gods and was codified for the use of ordinary people as early as the year 2100 BC, by the Sumerian King Ur Nammu of Ur. The most famous of that era is Hammurabi’s Code of 1760 BC.

Hammurabi was the sixth and best-known king of Babylon’s first dynasty and his code is of special interest here because it contains the earliest available recorded rules of codified construction law. In all, there were 282 rules found inscribed on an imposing stone stele in cuneiform script.1 The rules were divided into three sections: property law, family law and laws relating to retaliation and restitution. Part of the latter section, entitled ‘On the Construction of Houses and of Ships’, dealt with construction law and contained thirteen....

To Be Continued....

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