Expo 2020 will be hosted in Dubai at the end of the year for 173 days, which brings much excitement and potential world trade and business opportunities to the region. While the Emirates of Dubai has developed exponentially over the last several years, (both in terms of trade and commerce, and the construction of new buildings, both residential and commercial) it has, to some extent exploded with a race to finish many of the construction projects before the end 2020 in anticipation of Expo 2020.
With a need to finish many of the construction projects before the end of the year, this may present risks to owners and indeed developers and construction firms. Construction projects invariably are covered by “Contractors All Risk” (CAR), “Erection All Risks” (EAR) or Professional Indemnity policies of insurance with limitation around liability for claims (usually a warranty period of 12-24 months after handover known as “contractor’s defects liability period”), once the project is handed over or put into service. Building defects may arise some years down the line, which could be very costly for owners. Often these risks are overlooked when there is in fact the option of insurance coverage to mitigate risks with building defects post project completion.
What then is “Decennial Liability”? Decennial liability is a form of strict liability to cover the ten-year period following completion of a building project imposed on those who have the obligations for the design and construction of buildings, including architects, engineers, and contractors. The obligations may also extend to other parties involved with the project.
Decennial liability is a legal concept found more in civil law jurisdiction. It originates from the Napoleonic Civil Code of France in 1804 and under the French Civil Code is known as ‘responsabilite decennale’ or ‘assurance decennale’. This French legal concept is to protect building owners from latent defects of structural issues who do necessarily have the expertise of architects, engineers, and contractors, when a building is handed over on completion of the project. In France, Decennial liability insurance is mandatory for all building contracts as a matter of public policy. Many of the common law jurisdictions do not have the concept of Decennial liability. By way of illustration, the United Kingdom insurance market tends to offer building defect insurance or inherent defect insurance, known as “LDI”. This insurance covers defects in design, workmanship, and materials and is provided on a no-fault basis, i.e. third parties don’t need to prove negligence or liability of any party.
Decennial liability is also common in several Middle East jurisdictions given that they tend to follow a civil law system. The Strict liability obligations of Decennial responsibilities can be found in the various civil codes and laws of United Arab Emirates, Qatar, Jordan, Iraq, Egypt, Saudi Arabia.
The no fault concept of decennial liability can be contrasted with the position in many common law jurisdictions where liability will only apply to architects and contractors under a professional indemnity policy if they have failed to perform their professional obligations in accordance with their professional standards.
In the United Arab Emirates, the UAE Civil Code Articles 880 to 883 sets out the details of the respective parties’ obligations. Essentially, contractors, architects, engineers shall be jointly financially liable to the employer for a period of ten years (this period cannot be contracted out of) from hand over of the work, if the building suffers: (i) total, or (ii) partial collapse, or (iii) there is a defect that threatens the stability and safety of the building.
It is not possible for the parties to contract out of their decennial liability obligations, which is made clear in Article 882 and therefore constitutes a strict liability offence. Defences are extremely limited insofar as reliance can only be placed on actions outside the control of the parties such as a “force majeure” event. There are strict periods of limitation to file claims for decennial liability. Generally, there is a three-year limitation period for filing claims. The period commences from discovery of the defect or full or partial collapse of the building. Therefore, strictly speaking, with a ten-year period under Article 880(1), the entire period where a claim can be filed is thirteen years from hand over of the project.
Clearly, losses arising from a partial or total collapse or defects that threaten the stability and safety of buildings can be extremely large. Yet, despite this major risk and concern, many construction projects in the Middle East do not in fact insure against these risks or perhaps assume that they have the right insurance coverage in place through other policies of insurance, such as professional indemnity policies. Often, BSA see many such cases, where a coverage review is completed for (re)insurers (occasionally insureds), where proper coverage is missing, and such policies will not respond to a loss and claim in this regard.
What to look out for and are you covered?
Should contractors take out Decennial Liability insurance cover? Decennial liability insurance is well developed in other markets and although available in the Middle East, it is rarely considered based on a misunderstanding of existing insurance coverage. By way of example, Professional indemnity policies invariably provide coverage for fault-based acts/omissions and negligence. As such, if decennial liability is found, a policy of this type is unlikely to be triggered or respond to a claim.
Likewise, Contractors All Risk and Erection All Risks are unlikely to provide sufficient cover for decennial liability. These coverages typically include exclusions for defects, which tend to operate to exclude some or all liability for loss or damage arising out of defects in design and/or workmanship. Properties All Risk insurance is unlikely to provide cover for decennial liability based on standard exclusions around construction and building defects. Owner’s Protective Professional Indemnity Insurance (“OPPI”), is another option for owners of buildings. This coverage protects owners of buildings for defects should the underlying professional liability policy not respond. Generally, this cover does not apply to contractors’ decennial liability, but protects the owner(s) in respect of defects in the construction. However, it is key that the coverage and wordings are reviewed by professionals to confirm that this type of policy would respond.
Therefore, it is recommended that either a tailored Decennial liability insurance coverage or an endorsement to existing Contractors All Risk, Erection All Risks and Professional Indemnity is taken out. With the right coverage wordings, this will offer protection to contractors and other interested parties such as beneficiaries and building owners through subrogated claims. It is important to note, within all of these mentioned coverages, a legal or civil liability trigger should be within the terms of the policy as opposed to a negligence trigger in the context of decennial liability loss.
It is likely that the United Arab Emirates may mandate decennial liability insurance in the future, so it is extremely important that architects, engineers, and contractors look to complete a full review of their existing coverage with expert help given the enormity of the potential losses involved and the race to Expo 2020.
Another possible alternative with respect to design professionals is Owner’s Protective Professional Indemnity Insurance (“OPPI”), which protects the owner in the event that the underlying professional liability policy is deficient in coverage. Of course, the policy wording would have to be carefully reviewed to ensure that the policy would respond in the event of strict liability that is not covered by the underlying design professional’s policy.
Authored by Partner and Head of Insurance/Reinsurance, Simon Isgar