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NEC3 ECC: Cost of Insurance Policy which is non compliant to the contract is disallowed?

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NEC3 Option D: under amended SoCC  7 Bonds & Insurance, includes cost of procuring all risk Insurance. During cost verification it was found out that the insurance policy was not compliant to the contract such as;
1. The parties insured as per contract it should be in the joint name of the Contractor and Employer. The name insured in the policy provided was the other company of the Contractor.
2. The works insured was not the works in the contract. as per contract the works is to build a road, the policy covers building, tunnel, etc, but no mention of road.
In effect after 2 years the project was not covered by the insurance. When the client notify the findings the Contractor provided amended policy correcting the non compliant provision. is it correct to disallow the cost since the insurance does not cover the works for 2 years?
asked Jan 13, 2017 in NEC3 SOCC/SSOCC by acc (510 points)  
recategorized Jan 13, 2017 by Glenn Hide

1 Answer

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In the unamended contract the cost of insurance is not part of Defined Cost so a contractor would usually recover this through the Fee.

It's difficult to comment on what an amended contract does / does not say without sight of the contract and without understanding what else has been amended that may impact on if this should be Disallowed Cost or not.

Most all risks policies cover more than just damage to the works and includes third party injury, death and damage to property. Therefore you need to be careful in wanting to disallow the entire cost of the policy as they have provided some of the cover required. Clause 83.1 is an indemnity clause that protects the Employer, and clause 85.4 provides further clarification. So even if the policy was inadequate in the event of a claim, the Contractor would have been liable to the Employer for loss of / wear / damage to the works before take over (see clause 80.1). Also, presumably if the works had been insured correctly the premium paid by the Employer would have been higher from the start?

On checking the definition of Disallowed Cost at clause 11.2(25) it's hard to find a reason to disallow the cost, however you need to check your Z clauses over with a fine tooth  comb to be certain.
answered Jan 16, 2017 by Neil Earnshaw (7,640 points)