Insurance for planning and execution projects
Dec 29, 2022
A contracting company that also does planning and supervision: the limitations of the contracting policy, the recommendation for structural separation between planning and execution, and more
By: Miri Lebaher
The construction industry in Israel is made up of various types of players offering a variety of services. Within this setting, there are a number of companies operating in Israel that offer both planning and supervision, as well as contracting, under one roof (literally).
These companies, which define themselves in their branding and title as companies that deal with planning and execution, frequently face a difficult challenge at the insurance level. This is because certain site damages covered under the contractor's policy are caused by poor planning.
A construction insurance policy sold to an operating contractor generally includes coverage for physical damage caused to the project as a result of poor planning. For example, poor planning that caused sudden collapse of piles, collapse of a structure, etc. However, the insurance company does not insure the planner with the policy, but the operating contractor. In other words, it will provide coverage for damage caused to the contractor, but in most cases will file a claim against the negligent planner.
When the planner and the executor are the same, an insurance-financial problem arises from the insurance company's perspective, as the situation makes the possibility of the right of substitution and the right to sue against the planner unnecessary.
A contracting company that also does planning and supervision: the limitations of the contracting policy, the recommendation for structural separation between planning and execution, and more
By: Miri Lebaher
The construction industry in Israel is made up of various types of players offering a variety of services. Within this setting, there are a number of companies operating in Israel that offer both planning and supervision, as well as contracting, under one roof (literally).
These companies, which define themselves in their branding and title as companies that deal with planning and execution, frequently face a difficult challenge at the insurance level. This is because certain site damages covered under the contractor's policy are caused by poor planning.
A construction insurance policy sold to an operating contractor generally includes coverage for physical damage caused to the project as a result of poor planning. For example, poor planning that caused sudden collapse of piles, collapse of a structure, etc. However, the insurance company does not insure the planner with the policy, but the operating contractor. In other words, it will provide coverage for damage caused to the contractor, but in most cases will file a claim against the negligent planner.
When the planner and the executor are the same, an insurance-financial problem arises from the insurance company's perspective, as the situation makes the possibility of the right of substitution and the right to sue against the planner unnecessary.
A (very) short lesson in insurance
The insurance industry operates in such a way that an insured receives compensation from an insurance company for damages incurred instead of suing the tortfeasor directly. In these cases, when there is a tortfeasor who may be responsible for the damage, the right to sue the third party passes to the insurance company.
The source of this right is found in Section 62(a) of the Insurance Contract Law, which states - " If the insured also had a right to compensation or indemnity against a third person due to the insured event, not by virtue of an insurance contract, this right passes to the insurer " (emphasis not in the original).
However, the above section also has additional sections that qualify the right of substitution. Section 62(b) states that the insurance company cannot use the right of substitution if this would harm the insured's right to sue the third party in excess of the benefits he received. Section 62(d) also states that the right of substitution will not apply in cases where the insured would not have claimed compensation or indemnity from the third party because of an employer-employee relationship or family relationship.
The Supreme Court, in a recent ruling, addressed the complexity of the right of subrogation in the event of a relationship between the insured and the third party. The example given in the above ruling is taken from the world of auto insurance, but we can apply it to the construction insurance industry.
" An uninsured car driven by Reuven's son negligently damaged Reuven's car. If we suggest that Reuven sue his son or indemnify him for the damage, Reuven will probably reject the offer and even think it is ridiculous, because his son is his son and in any case the family fund is one and there is no point in transferring money from the left pocket to the right pocket " (RAA 4179/20).
Let's return to our subject. The insurance company's right of subrogation under Section 62 of the law is in a kind of conflict when the insured (Reuven) and the planner (Reuven's son) are the same entity. That is, a situation in which it is clear that the insured will not sue himself. The insurance company will usually not allow the policy to include in this situation an extension of coverage against damages resulting from poor planning, and the policy will be void.
The insurance industry operates in such a way that an insured receives compensation from an insurance company for damages incurred instead of suing the tortfeasor directly. In these cases, when there is a tortfeasor who may be responsible for the damage, the right to sue the third party passes to the insurance company.
The source of this right is found in Section 62(a) of the Insurance Contract Law, which states - " If the insured also had a right to compensation or indemnity against a third person due to the insured event, not by virtue of an insurance contract, this right passes to the insurer " (emphasis not in the original).
However, the above section also has additional sections that qualify the right of substitution. Section 62(b) states that the insurance company cannot use the right of substitution if this would harm the insured's right to sue the third party in excess of the benefits he received. Section 62(d) also states that the right of substitution will not apply in cases where the insured would not have claimed compensation or indemnity from the third party because of an employer-employee relationship or family relationship.
The Supreme Court, in a recent ruling, addressed the complexity of the right of subrogation in the event of a relationship between the insured and the third party. The example given in the above ruling is taken from the world of auto insurance, but we can apply it to the construction insurance industry.
" An uninsured car driven by Reuven's son negligently damaged Reuven's car. If we suggest that Reuven sue his son or indemnify him for the damage, Reuven will probably reject the offer and even think it is ridiculous, because his son is his son and in any case the family fund is one and there is no point in transferring money from the left pocket to the right pocket " (RAA 4179/20).
Let's return to our subject. The insurance company's right of subrogation under Section 62 of the law is in a kind of conflict when the insured (Reuven) and the planner (Reuven's son) are the same entity. That is, a situation in which it is clear that the insured will not sue himself. The insurance company will usually not allow the policy to include in this situation an extension of coverage against damages resulting from poor planning, and the policy will be void.
What do we do? Separation of powers
Having briefly defined the challenge, we will turn to outlining possible solutions based on our experience as an insurance agency with over 30 years of experience in construction insurance. We will emphasize right away that the two solutions we will present below are based on the principle of " separation of powers" at the level of legal personality between the planner and the operator.
The first option is to split the planning department in the executing company into a unit with a separate legal personality. A subsidiary that is independently incorporated and that can separately purchase professional liability insurance for planners. This solution allows the planning department to receive insurance coverage under a professional liability policy against a subrogation claim filed following poor planning that caused physical damage during execution.
Another option could be to outsource the planning. For example, submitting a bid for a BOT project tender that includes both execution and planning, but transferring the actual planning to an external planning company. Of course, the planning company should be required to sign a proper insurance supplement as well as signed certificates of insurance for professional liability. This way, if there is a planning failure, the insurance company can exercise its right of recourse against the external planning company.
Having briefly defined the challenge, we will turn to outlining possible solutions based on our experience as an insurance agency with over 30 years of experience in construction insurance. We will emphasize right away that the two solutions we will present below are based on the principle of " separation of powers" at the level of legal personality between the planner and the operator.
The first option is to split the planning department in the executing company into a unit with a separate legal personality. A subsidiary that is independently incorporated and that can separately purchase professional liability insurance for planners. This solution allows the planning department to receive insurance coverage under a professional liability policy against a subrogation claim filed following poor planning that caused physical damage during execution.
Another option could be to outsource the planning. For example, submitting a bid for a BOT project tender that includes both execution and planning, but transferring the actual planning to an external planning company. Of course, the planning company should be required to sign a proper insurance supplement as well as signed certificates of insurance for professional liability. This way, if there is a planning failure, the insurance company can exercise its right of recourse against the external planning company.
מסמכים
