Strict Liability in Construction and Insurance

Ben Cowling and Diana Hudson of Clyde & Co (an insurance coverage law firm based in London) have an interesting article on "decennial liability" for construction in Saudi Arabia.

What is decennial liability?

The roots of decennial liability lie in the French Civil Code and Egypt.  It has been widely adopted in Middle East civil code jurisdictions, including the UAE, Qatar, Kuwait and Jordan. 

Decennial liability is a strict liability applied to construction projects whereby the contractor and/or the design consultant will be held liable (in the absence of any evidence of breach of contract or negligence), to compensate an owner or employer in the event of defective works in built structures. The liability typically lasts for ten years after project completion.

Under Saudi law, the concept seems to be limited to the full or partial collapse of structures.  That idea, I've noted, dates back to the Hamurabi Code (~1,772 BCE).   Here is the relevant provision  from the Saudi government procurement code, Article 76: 

"A contractor shall provide a ten year warranty against partial or full collapse of what he constructs starting from the date of final handover to the Government Authority, if such collapse is due to a construction defect, unless the two contracting parties agree on a shorter period."

In the U.S., of course, we are moving towards strict liability models in areas like residential construction.  See e.g. CA Code of Civil Procedure Section 895, et. seq.  On the other end of the spectrum, in large power plant projects, contracts often limit an EPC contractor's liability to a one or two year warranty period, and (thereafter) the parties agree to look exclusively to insurance to cover the risk posed by latent construction defects.  It's still a no-fault system, but in this case the owner takes the risk and must take steps to assure that adequate insurance policies are in place.

The problem also arises in the context of integrated project delivery.  The idea of IPD is to complete a project for a target price, with the increased costs of construction shared on a no-fault basis--with money coming either from risk pools containing a portion of the profit of project participants, or from the party who agrees to accept the ultimate risk.  A problem to be thought through on such contracts is how to treat construction defects that arise after the risk pool funds have been distributed.  Are the architect and contractors released from further liability, or are they on the hook for latent defects.

One limitation for allocating risk of latent construction defects is that insurance products are still geared to a fault-based approach to contracting.  With that in mind, here's what Cowling and Hudson have to say about insurance in light of strict decennial liability in the Middle East.

Decennial insurance 

The obligation to maintain specific insurance against decennial liability is found in certain civil law countries, most notably France which introduced the requirement for the absolute obligation on the part of the contractor, the building designer and the building owner to insure themselves against decennial liability. Decennial liability insurance is not obligatory in much of the Middle East including Saudi Arabia. 

As a rule, decennial liability falls outside the scope of the standard cover provided by Contractors' All Risks (CAR) and Professional Indemnity (PI) insurance.  This is because CAR policies typically cover physical loss or damage to the works being executed, and will typically exclude liability for repair or replacement of property which is defective in design, specification, materials or workmanship. General PI is designed to protect a designers or consultants (and sometimes contractors) against third party claims in negligence. It does not generally extend to the presumption of (i.e. strict) liability imposed by decennial liability.  Furthermore, the indemnity limits of PI insurance rarely adequately cover a scenario such as a building collapse. As such, decennial liability is generally uninsured unless particular cover has been obtained. 

More recently, professional liability insurers have begun offering 10 year Extended Reporting Period (ERP) extensions to professional liability policies that, subject to the wording of the policy, may provide additional coverage for decennial liability claims by third parties. However, typical PI cover based on a "negligent act, error or omission" style wording would probably not cover decennial liabilities, whereas a broader civil liability type wording might do so.
In Saudi Arabia (and the Middle East generally) insurance coverage available for inherent defects and decennial liability is generally limited and, where available, would be expensive as a result of the need for insurers' heavy involvement in monitoring the design and construction process. That said, parties would be wise to balance the costs of obtaining such insurance against the long term risk which could be considerable. 

Conclusion

As we move away from fault based allocation of risk for construction defects attorneys need to become better versed in insurance matters.