Construction insurance is complex, and some clauses are poorly understood. Coverage under Maintenance clauses is one such example, where different interpretations of what is – and, perhaps more importantly, what isn’t – covered abound. What is the difference between Extended Maintenance and Guarantee Maintenance? What about the LEG defect exclusions – how do they interact with the different levels of Maintenance coverage?
A brief recapitulation of the genesis of these clauses will help us understand how these clauses operate. As construction contracts formalised over the 1950s and ‘60s, contractors took on more responsibility for their work once completed. First came contractual obligations to make good loss or damage due to calibration or adjustment activities performed after handover. These contractual liabilities were typically time-barred to six or 12 months. Since most construction insurance was, at that time, taken out by contractors, rather than owners (as is the case now), insurance policies evolved to assume these risks. The insurance market adapted to the needs of its clients, and soon, this coverage became commonplace (visits maintenance).
Owners continued to push risk onto contractors. The next stage was to add contractual obligations to remedy defects – not just loss and damage arising during visits required by contract post-handover. And this ‘extended’ form of maintenance covered loss or damage due to defective materials, not just defective workmanship. Both were considered ‘on-site’ defects, and insurers continued to reject coverage for manufacturing guarantee or warranty risks. Policies also excluded costs incurred to rectify the defect itself.
The allocation of risk between contractors, manufacturers, owners and insurers continued to evolve. In the past, owners were not party to supply contracts because these were taken out by contractors. This meant they required contractors to recover from suppliers for loss or damage arising out of manufacturing defects. Insurers continued to argue that, as they were not involved in any quality control during manufacture, they could not assume any manufacturing defect risk. This meant that while insurers became increasingly comfortable assuming on-site defect risks, off-site defect risks continued to be excluded. Manufacturers, though, argued that they were increasingly unable to assume the risks of resultant damage to other, non-defective components from their defective ones. Insurers therefore offered to broaden coverage to assume these risks, with some even covering the defective part itself. This was known as Guarantee Maintenance.
Over time, the different levels of maintenance cover become more formalised – but differences remain from wording to wording, due to the bespoke nature of policies created for complex construction projects. For example, some extended maintenance clauses only cover defective workmanship and materials, while others add design defects to its scope.
Today, there are three types of maintenance coverage in construction insurance:
- Visits Maintenance: the narrowest of the three, this covers contractors and/or suppliers while they visit the site to remedy defects and/or perform work to comply with contractual obligations after handover. It does not cover the cost of remedying defects; it simply provides coverage for contractors/suppliers while they fix them (or get the works up to compliance with acceptance or handover certificates). If they cause damage during these remedial works, then such damage would be covered under the terms and conditions of the construction phase.
- Extended Maintenance: this covers Visits Maintenance, and on-site defects introduced the project during the construction phase. As mentioned above, different versions of coverage exist. At minimum, Extended Maintenance covers the cost of remedying defective workmanship and materials, but may also cover defective design, plan and specification too. It is usually thought of as dovetailing with coverage under LEG 2; that ‘resultant’ damage from defects is covered, but not the defective part itself.1
- Guarantee Maintenance: this covers both of the above, and off-site defects, potentially from causes that predate the inception of the insurance policy. This might be desirable where the policy incepts after the ordering of key components has already been made, before Financial Close; if there is Guarantee Maintenance, such components could benefit from defects coverage for the duration of the Maintenance Period regardless of when the defect was introduced into the project. It is therefore sometimes viewed as a backstop to warranty cover, and indeed, as a form of post-handover LEG 3 coverage.
In renewable energy, Extended Maintenance combined with Visits Maintenance is the norm. Today, we typically see maintenance periods of either 12 or 24 months, but longer periods are sometimes available. During the soft market, however, Guarantee Maintenance was available in some particularly competitive lines of business, especially offshore wind. Manufacturers had comprehensive warranties (the liabilities of which were also often (re)insured) that gave underwriters sufficient comfort to offer Guarantee Maintenance. But the willingness of (re)insurers to offer this coverage has reduced dramatically in recent years. Increased claim activity is the stated reason, but at root, arguably the unyielding pressure to reduce the levelized cost of renewable energy (to make it cost-competitive with energy generated from burning fossil fuels) led to corners being cut, defective components finding their way into projects, and damage occurring therefrom. This also coincided with the supply chain crisis, inflation, lower returns for manufacturers, and increasing cost of capital. All these factors combined to generate large warranty-style insurance claims that may well be covered under Guarantee Maintenance clauses. Instead of being a ‘backstop’, some underwriters argue Guarantee Maintenance is instead the first port of call for suppliers now unwilling (or unable?) to stand behind their contractual liabilities.
The risk ‘nexus’ between contractors, suppliers, owners and insurers is allocated and transferred via contract (including, but not limited to, insurance policies), law, commercial practice and indeed, commercial imperatives. Maintenance clauses have evolved to meet the needs of insurance buyers, to transfer defect risks from owners and contractors to the insurance market. At the moment, (re)insurers seem unwilling to take on much defect risk from suppliers – but that might change. With price adequacy seemingly restored – albeit, with persistent grumbling from underwriters that even more increases are still needed – coverage is the key differentiator. As it has in the past, the insurance market serving the construction sector may yet evolve once again to cover previously undesirable risks.
- This is an over-simplification: to circumvent having to define the defective part, which can be tricky, LEG 2 operates as a time-bar, where all costs incurred after the defect became damage are covered, and all costs that would have incurred had you been able to remedy the defect before it became damage are excluded.