Rejection of Construction Claims

Knowledge

Insurance Law - Rejection of Claims...The Design Standard

Construction claims, the formulation of Insurance claims and the rejection thereof by Insurers have become one of the oldest battles in the Engineering and Construction industry.  This conflict has, to some extent, been the result of the difference between the risks being insured against in terms of Insurance contracts on the one hand, and the actual risks in Construction on the other.  What may be expected by Engineers and Contractors from Insurers when a claim is made and to what extent should the duties under the Construction contract be taken into consideration by their Insurers?

These issues were recently addressed by the Supreme Court of Appeal in the case of Mutual & Federal Limited vs. Rumdel Construction (Pty) Ltd.  The Court delivered a unanimous full bench decision in matter.

BACKGROUND

The background facts of the case are briefly as follows:

  • During the week of 21 to 28 February 1997 tropical cyclone Lizette struck in the Nampula Province in Mozambique.  The cyclone severely damaged various roads that Rumdel Construction had constructed and was about to hand over to its employer, the Mozambique Directorate of National Roads and Bridges.
  • Damage caused by the storm led to an insurance claim by the contractor which Mutual & Federal rejected.
  • The Insurer was unsuccessful in the High Court and was ordered to pay R2,500,000 in addition to what ever value added tax might have been paid by the contractor.
  • The Insurer then turned to the Supreme Court of Appeal and filed an appeal against this judgment.

THE CONTRACTOR’s ARGUMENT

The Contractor claimed under the Insurance policy for the repair cost of 101,88 kilometres of road that had sustained storm damage.  It argued that Insurers were obliged to indemnify both the contractor and the employer in respect of fortuitous physical destruction of or damage to the works that had to be undertaken by the contractor.  The Policy wording stated, inter alia, that:

“The company hereby agrees … that if … any part of the property Insured shall be lost destroyed or damaged as referred to in Part 1 hereof … the company will indemnify the Insured as provided herein after.”

Part 1 describes the indemnity:

“The company will … indemnify the Insured in respect of fortuitous physical loss or destruction of the property insured … whilst at the situation of the contract.”

The property insured was described in the schedule to the Insurance contract as:

“… opening of rural gravel roads and rehabilitation and construction of bridges in Nampula Province”.

THE INSURER’s ARGUMENT

The Insurer based its defence on two arguments, the first of which relates to a contractual interpretation.  The second argument was that the word “design” was used in the policy to indicate that the roads had to be fit for their intended purpose.

To further this rationale, the Insurer’s expert on road construction testified that various aspects of the design and construction of the road were “not fit for purpose”.  It was explained that various engineering principles were not incorporated into the design.  Flood returns had for instance to be calculated and incorporated into the design.  It was argued that, only if the design had incorporated the fundamental engineering principles, would the design not have been defective.

The evidence was presented on the basis that the Insurer’s obligation to indemnify the contractor was subject to the special exceptions contained in the insurance policy:

“The indemnity expressed in this part shall not apply or include:

4.  Loss destruction or damage to:-

…acts of the Insured or his competent or authorized agent or representative which are contrary to the recognized rules of engineering or to any legislation or regulations issued by an authority…

5. …defective design.”

THE COURT’s APPROACH

As the Insurer’s argument focussed on the suitability of the roads for their intended purpose, the court assessed the intended purpose of the roads as defined in the Construction contract.

It was clear that the employer required completion of the project for the emergency opening of roads in the particular Province.  It was intended that, what remained of the road links in the Province after the Civil War, should be rehabilitated.

The court also found that it was agreed between the parties that the essential characteristics of the roads were low cost, high risk, high maintenance, low volume and all weather roads.  The main purpose of the roads was “to get the people out of the mud”.  The roads were accordingly built to a design philosophy of “as low as you can go for a public road”.  The roads were also meant to be degraded by the weather and repaired and maintained on a regular basis.

Having established the purpose of the roads, the court re-visited the Insurer’s argument in relation to the design of the roads.  It was found that, in effect, the Insurer’s argument before the court was that, if the contractor hoped to be entitled to an indemnity under the policy, it was not good enough for it to construct, the works to the requirements and satisfaction of the employer.  It had to construct the works to the satisfaction of the Insurer.  There was no acceptable evidence before the court that the roads were in fact poorly designed.

There was also no suggestion that the Insurer did not know the nature of the unsophisticated contract works it was insuring.

The court would not allow the Insurer to, ex post facto and as a prerequisite to accepting liability, demand that the roads should have been of ‘n higher quality than the employer was prepared to pay for.  The contention by the Insurer that the design of the contract works was defective accordingly failed.  The Insurer was ordered to pay the Contractor’s claim.

CONCLUSION

Engineers and Contractors must ensure that their Insurers are made aware of the nature of the Construction contract (including the standard of design required in terms thereof) for which insurance is required.  Insurers must be placed in a position where it can assess the nature of the works and risks it is insuring.

Insurers should similarly have due regard to the standard of design required in terms of the particular Construction contract.  Insurers should also take these aspects into consideration when assessing claims under the Insurance contract.

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Hendrik Markram

 

 

 

 


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