Insurance for loss of future profits in the construction industry
May 23, 2019
Article by Itzick Simon
Two central points underlie tort law in Israel. One is that the injured party is entitled to compensation for the wrong done due to the injury, and the second is that
compensation is intended to "restore the situation to its former state."
The Torts Ordinance, which is the basis for claims of this type, defines the concept of "damage" in Section 2 as follows: "loss of life, loss of property , comfort, physical well-being or good name, or deprivation thereof, and any loss or deprivation analogous to these" (emphasis added).
That is, according to the theory of torts, the concept of "property" includes both the benefits derived from the property in the present, and the future elements of enjoyment that could have grown from it (see, for example, A.A. 9474/03). Indeed, claims for tortious events sometimes include a claim for compensation for the head of damage of "loss of future profits." A common issue in the construction industry, often related to the delay in the delivery of a commercial-business project. Before we explain the matter, we will emphasize right now that financial-pecuniary damage caused by loss of future profits is not included by default in the three main chapters of a contractor's insurance policy (which are: property insurance, employers' liability insurance, and third-party insurance) and, if at all, must be purchased as a fourth chapter in the contractor's policy and/or through another insurance solution separate from the contractor's policy.
Article by Itzick Simon
Two central points underlie tort law in Israel. One is that the injured party is entitled to compensation for the wrong done due to the injury, and the second is that compensation is intended to "restore the situation to its former state."
The Torts Ordinance, which is the basis for claims of this type, defines the concept of "damage" in Section 2 as follows: "loss of life, loss of property , comfort, physical well-being or good name, or deprivation thereof, and any loss or deprivation analogous to these" (emphasis added).
That is, according to the theory of torts, the concept of "property" includes both the benefits derived from the property in the present, and the future elements of enjoyment that could have grown from it (see, for example, A.A. 9474/03). Indeed, claims for tortious events sometimes include a claim for compensation for the head of damage of "loss of future profits." A common issue in the construction industry, often related to the delay in the delivery of a commercial-business project.
Before we explain the matter, we will emphasize right now that financial-pecuniary damage caused by loss of future profits is not included by default in the three main chapters of a contractor's insurance policy (which are: property insurance, employers' liability insurance, and third-party insurance) and, if at all, must be purchased as a fourth chapter in the contractor's policy and/or through another insurance solution separate from the contractor's policy.
When does loss of future profits occur in the construction industry?
What does the policy state and how do you deal with it?
Insurance for loss of future profits is rare in our region. Few people want to purchase it, and few insurance companies are willing to sell it. However, events in which future profits are lost are not uncommon in our regions. Delays in delivery are unfortunately common and are the result of planning-execution gaps, unexpected delays, damage to the project as a result of accidental events, etc. To the extent that the delay in delivery was the result of unexpected physical damage to the site, which is covered by the contractor's policy, which was caused by negligence in an act or omission on the part of the contractor, then the contractor's policy will not provide (in its basic structure) the appropriate response, but in such circumstances and with appropriate extensions, the contractor's professional liability insurance policy may provide an insurance solution.
Our recommendation is, of course, to examine and verify the necessity of a specific extension, whereby the contractor's policy will also include insurance coverage for loss of profits due to damages caused by unexpected damage, and in the absence of such a possibility, to verify the existence of an appropriate extension in the professional liability insurance policy.
Please note that this is not a trivial matter, especially in large-budget projects. Insurance companies in Israel are not always "willing" to expand the contractor's policy to include future loss of profits insurance, and often the procedure is directly with the reinsurers abroad (who set different conditions for the possibility of purchasing the extension). In order to ensure that the extension is purchased and provides the insurance protection expected from it, it is advisable and appropriate to carry out the move with the support of an insurance agency that specializes in these issues specifically.
Insurance for loss of future profits is rare in our region. Few people want to purchase it, and few insurance companies are willing to sell it. However, events in which future profits are lost are not uncommon in our regions. Delays in delivery are unfortunately common and are the result of planning-execution gaps, unexpected delays, damage to the project as a result of accidental events, etc. To the extent that the delay in delivery was the result of unexpected physical damage to the site, which is covered by the contractor's policy, which was caused by negligence in an act or omission on the part of the contractor, then the contractor's policy will not provide (in its basic structure) the appropriate response, but in such circumstances and with appropriate extensions, the contractor's professional liability insurance policy may provide an insurance solution.
Our recommendation is, of course, to examine and verify the necessity of a specific extension, whereby the contractor's policy will also include insurance coverage for loss of profits due to damages caused by unexpected damage, and in the absence of such a possibility, to verify the existence of an appropriate extension in the professional liability insurance policy. Please note that this is not a trivial matter, especially in large-budget projects. Insurance companies in Israel are not always "willing" to expand the contractor's policy to include future loss of profits insurance, and often the procedure is directly with the reinsurers abroad (who set different conditions for the possibility of purchasing the extension). In order to ensure that the extension is purchased and provides the insurance protection expected from it, it is advisable and appropriate to carry out the move with the support of an insurance agency that specializes in these issues specifically.
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