We are the project manager on a project where an NEC3 Engineering and Construction Contract (ECC) is being negotiated with the proposed contractor. The contractor proposes to include secondary option X18 and to limit its total liability to about half of the construction cost for part X18.4. Our concern is that the lower X18.4 limit would impact on the insurance requirements under the first item in the insurance table to cover the loss of or damage to the works. As an example, should the substantially complete building burn down, would the contractor’s insurance now be limited to the value of the X18.4 clause?
The insurance table in clause 84.2 includes the minimum amount of insurance that the contractor has to take out. The contractor can, and often will, take out more – in this case the insurance minimum should be at least the build cost. It is important however to understand that the contractor remains liable, with or without insurance, subject to any limits in X18.
Also, the insurance company only has to pay out what the contractor is actually liable for because the insurance company is in effect standing in the contractor’s shoes. Therefore, if the contract limits the contractor’s liability to only half the construction cost, that is all the insurance company will have to pay even if the actual insurance cover is greater.
Before making any decisions, we would strongly recommend that you and your client get professional legal and insurance advice.