Mandatory liability insurance in construction: a challenge for both the construction and insurance sectors

Mandatory ten-year liability insurance for various parties in the construction industry will pose a challenge for the entire sector. Architects, contractors, engineering firms, promoters and property developers will all soon be confronted with a totally new reality. The consequences are far-reaching for the insurance sector, too. Here you will find an overview of the many changes that are around the corner.

The preliminary draft bill regarding mandatory ten-year civil liability insurance for contractors, architects and other service providers in the construction sector was adopted by the Council of Ministers at the end of 2016. The objective of this preliminary draft was to address the problem of discrimination between the various construction partners identified by the Constitutional Court in its ruling of 12 July 2007. In practice, the government wants not only architects, but also contractors and engineering firms to be subject to an obligation to take out insurance to cover their ten-year civil liability for the robustness, stability and watertightness of the shell of new real estate properties.

The first preliminary draft bill was met with a great deal of opposition. The most frequently raised criticism was that the obligation only applies to housing construction, and is limited to the ten-year liability for robustness, stability and watertightness. As such, the obligation does not apply in the case of other claims such as slight hidden defects and problems during the construction phase, which are estimated to account for 80% of all claims. The Council of Ministers then drew up a second draft bill and presented it to the Council of State for its opinion. However, this text has not yet been made public, so we will have to wait and see whether the Council of Ministers has taken on board the criticism or not.

Based on what we already know, we can make an initial estimate of the likely consequences of the mandatory civil liability insurance. These will have a major impact on both the construction sector and the insurance sector.

Consequences for the construction sector: major shift of responsibilities

The mandatory liability insurance will affect all parties in construction, from architects, contractors and promoters to engineering firms and property developers.

Today, architects are the only individuals who are legally required to take out insurance for their entire ten-year civil liability (so covering claims in relation to both stability problems and slight hidden defects for which they are at fault).

Laura Roelant, Construction Insurance Expert at Vanbreda: “In practice, this means that a large number of claims are made against the only party with mandatory insurance, namely the architect, who is deemed jointly and severally liable*. Under the new legislation, which will hopefully be clarified very soon, the other parties in the construction sector will also be subject to an obligation to take out insurance to cover their ten-year civil liability. That means contractors and engineering firms, too. Unfortunately, the proposal is limited to claims in connection with stability problems and housing construction. Under the initial preliminary draft, the architect’s legal insurance obligation would also be restricted to their ten-year liability with respect to the robustness, stability and watertightness of the construction, which runs counter to their own professional conduct obligations. The architect would no longer be required by law to take out insurance for other claims, such as slight hidden defects and problems during the construction phase. In other words, nobody in the construction sector would be required by law to take out insurance for the most frequent claims in the construction sector. So the question is: does the preliminary draft not therefore fail to meet its objective of better protecting the principal?”

Consequences for the insurance sector: administration, new parties, expensive inspections

The construction sector is not the only one which will have to make thorough preparations for the arrival of the new mandatory insurance. The insurance sector is also facing a number of considerable challenges.

Eli Hemelaer, Assistant Manager and Construction Expert at Vanbreda: “Insurers estimate that mandatory insurance for contractors, engineering firms and other parties in the construction sector will result in a volume of 60,000 policies per year. Providing all of these new mandatory policies will be a major administrative challenge. We will have to look at digital solutions for dealing with this massive influx of new policies.”

According to Eli Hemelaer, the introduction of the new insurance is also being watched closely from abroad. This is the case in France, in particular, where this type of insurance has been mandatory for some time now. A number of very experienced construction insurance companies there are now eager to snap up their share of the estimated 60 million euros in extra premium volume.

Finally, there is the issue of inspections in connection with the ten-year liability insurance. At present, insurers only provide cover on the condition that an inspection is performed at the construction site by recognised inspection bodies such as SECO, Socotec and AIB Vincotte. Eli Hemelaer: “We know that these organisations will see a substantial increase in their workload if insurers have to commission an inspection for every insurance policy. The cost of this will be yet another financial burden for property developers. However, a number of insurers are already working on reducing the cost of inspections to 0.02% or even 0.01% of the total construction cost.

Be prepared and ask for advice in time

Vanbreda Risk & Benefits is the Belgian market leader in construction insurance. We keep a close eye on changes in legislation in the construction sector, and advise construction companies on a daily basis about how they can continue doing business safely.

If you have any questions about the new mandatory liability insurance, Laura Roelant (laura.roelant@vanbreda.be) or Eli Hemelaer (eli.hemelaer@vanbreda.be) will be happy to help.

* If a defect in a building is the result of an error on the part of the architect and an error on the part of the contractor in performing the works, the architect and the contractor can be held jointly and severally liable. This means that they will each be liable to pay compensation for the entire claim if both errors necessarily led to the same, entire claim.

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