Product liability insurance for the construction industry
Produced in partnership with Jonathan Spencer and Russell Cowie of Simmons & Simmons
Product liability insurance for the construction industry

The following Construction practice note produced in partnership with Jonathan Spencer and Russell Cowie of Simmons & Simmons provides comprehensive and up to date legal information covering:

  • Product liability insurance for the construction industry
  • What is product liability insurance and who needs it?
  • What is covered?
  • What is not covered?
  • Recall and repair/replacement costs of the defective product
  • Pure economic loss
  • Fines, penalties, liquidated damages and other enhanced damages
  • Loss arising from professional advice and/or design
  • Losses caused by products simply in the insured’s custody
  • Contractual liability

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marks the end of the Brexit transition/implementation period entered into following the UK’s withdrawal from the EU. At this point in time (referred to in UK law as ‘IP completion day’), key transitional arrangements come to an end and significant changes begin to take effect across the UK’s legal regime. This document contains guidance on subjects impacted by these changes. Before continuing your research, see Practice Note: What does IP completion day mean for Construction?

This Practice Note looks at product liability insurance from the perspective of those engaged in the construction industry. Product liability insurance is applicable to other industries, but those are outside of the scope of this Practice Note (see Q&A: What is Products Liability Insurance?).

What is product liability insurance and who needs it?

Product liability insurance is a type of cover which, in the context of the construction industry, will protect an insured against liability for death/bodily injury (other than to employees) or property damage, resulting from defects in products used in a construction project.

Businesses which manufacture and/or supply products to be incorporated into a building structure may be at risk of legal action should defects in those products result in damage or injury to the structure in question.

For example:

  1. a supplier might be sued if concrete that it provided to a contractor

  • for the foundations of a building was found to be defective and led to the structure of the building collapsing. If someone was to be injured or killed when the building collapsed, the concrete manufacturer might face a civil claim, or even criminal charges, or

    1. a manufacturer of reinforced steel could face an action in damages if steel girders were of insufficient strength to support a roof structure (as a result of a defect in the product), requiring expensive remedial work to that roof

  • Key points to note include:

    1. product liability cover will generally only be triggered in circumstances where an actual defect in the physical product itself is present. Simply using a product whose specifications do not meet the requirements of the particular task or circumstances in which it is used will not fall within the scope of this type of cover

    2. this type of cover has been developed by insurers to cover products specific to the construction industry. Such cover is not restricted to manufacturers, and may also be taken out by contractors who unknowingly install defective products purchased from other suppliers

    3. claims under the Consumer Protection Act 1987 are capable of being brought against any party that holds itself out as being the ‘producer’ of the product. This can include, for example, importers into EU Member States; and

    4. although standalone policies do exist, it is more usual for product liability cover to be sold as part of a larger policy which also includes public liability cover (or, indeed, under a combined commercial policy)

    It is not a legal requirement that a company holds product liability insurance, however employers/contractors are likely to require that certain sub-contractors hold this cover, particularly in relation to lifts and other mechanical and electrical installations. For the purpose of this Practice Note, references to product liability policies will include product liability sections under combined commercial policies.

    What is covered?

    Product liability policies are generally prescriptive as to the type of loss covered. The wording below is an example of a typical insuring clause in a policy of this type:

    ‘The insurer agrees to indemnify the insured by the terms of this policy against legal liability to pay damages as a result of death, bodily injury, or damage that occurs during the period of insurance and arising out of or from or in connection with the insured’s products.’

    As will be apparent from this wording (and subject to the extensions discussed below), cover will be limited to the insured’s legal liability to third parties arising from:

    1. death or bodily injury, which are self-explanatory, or

    2. damage to property

    Damage will not generally be a defined term in the policy, and what constitutes actual or material damage for the purposes of policy interpretation can be a contentious issue between insurers and their insureds. A physical change to the insured property is usually required. Contamination may, in certain circumstances, be classed as physical damage (Hunter v Canary Wharf Limited, Blue Circle Industries v Ministry of Defence).

    The mixing of different products and whether this constitutes damage is an issue of particular importance in the context of construction. Generally speaking, the courts’ approach appears to be that physical damage will only be sustained where there has been a physical change or alteration in the state of something, as a result of its combination with or incorporation into a defective product. The policy may provide cover for damage caused by one part to another (Mitsubishi Electric UK Limited v. Royal London Insurance (UK) Limited).

    There must also be a legal liability on the part of the insured to pay damages, before the indemnity will apply. This does not, for example, require a final determination by a court or arbitration award against the insured, but the liability must be genuinely owed by the insured. As such, an insured’s entering into a formal settlement agreement will be enough to satisfy this requirement, provided such action was taken with the consent of insurers.

    What is not covered?

    Standard product liability policies will generally exclude (among other things):

    1. recall and repair/replacement costs of the defective product

    2. pure economic loss

    3. fines, penalties, liquidated damages (also known as LDs/LADs) and other enhanced damages

    4. losses arising from professional advice and/or design

    5. contractual liability

    It’s also unusual for product liability policies to cover legal representation or defence costs, as standard (although this is common with combined commercial policies). Given the potential scale of claims and the possibility of sizeable legal fees in defending them, this type of cover is otherwise available as an extension.

    Recall and repair/replacement costs of the defective product

    The costs of recalling defective products include:

    1. advertising the recall

    2. collection and transport of the defective products

    3. storage of defective products awaiting repair, and

    4. destruction of products which cannot be repaired

    These costs are potentially significant and will usually be excluded under the terms of the policy, although again, such cover may be available by way

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