Insurance in the construction sector: a Spanish perspective
The construction sector in Spain seems to have recovered well following the most difficult period of the economic crisis. The recovery of activity is good news for the insurance market, as it is providing new opportunities for underwriting latent defects, professional indemnity, and construction risks.
Latent defect risks
Since May 2000, it has been compulsory under Spanish regulations, for developers of residential buildings to have in place latent defect cover or surety insurance. Such policies must provide cover (for ten years) for loss resulting from property damage caused to the building by faults or defects originating in or affecting the foundations, supports, beams, framework, load-bearing walls, or other structural elements that directly jeopardise the building’s mechanical resistance and stability.
Further, the Spanish Building Act 1999 sets out two other guarantees for property owners for non-structural damage (currently not compulsory). Those two guaranties consist of a property damage or surety insurance policy to guarantee:
- For a period of one year - compensation for property damage due to execution faults or defects which affect the finished works or elements of it.
- For a period of three years - compensation for property damage due to faults or defects in constructive elements or services which result in the non-compliance of the habitability requirements such as humidity, cracks, and other non structural damages.
Whilst these two guarantees are not compulsory, some Spanish insurers offer cover for the second guarantee listed above.
General mandatory legal requirements of a latent defect policy in Spain include:
- As a general rule, the developer will be the policyholder. The law provides that the developer and the subsequent buyers of the property or any part thereof are insured.
- The premium must be paid when the works are handed over.
- The minimum amount of insured capital shall be 100% of the final cost of the material execution of the works, including professional fees.
- The insurer has the choice between paying a cash indemnity for the amount required to remedy the damage or actually repairing the damage by appointing contractors of its own choice.
- In the event that the insurance contract provides for a deductible, that deductible may not exceed one percent of the insured capital for each registered building unit.
Professional indemnity risks
Under the Act, technical professions such as architects, engineers and quantity surveyors (known as Aparejadores) are subject to the scope of professional liability, without prejudice to their contractual responsibilities. In general terms, and regarding construction processes, these professionals are subject to the following regime of liability towards the owners and third party buyers of the building:
- A 10-year period for property damage caused to the building by faults or defects as set out within the latent defects risks referred to above.
- A three-year period for property damage caused to the building by faults or defects in the constructive elements or services that result in the building failing to meet habitability requirements.
- Each will be individually liable for their own acts or omissions and for those of the persons for whom he is legally responsible according to law. Should it not be possible to establish the cause of the damage on an individual basis, a joint and several liability regime applies.
- Those signing the Final Certificate shall be liable for its veracity and accuracy.
- An individual who agrees to direct a building project but without designing the project, shall assume the liability derived from any omission, deficiencies or imperfections in the project, without prejudice to his right to recover against the actual designer.
- Where a project is jointly managed by more than one professional, joint liability will apply regardless of the distribution of their responsibilities.
- Those who intervene in the building process, shall not be held liable if it can be established that the damages were caused by an unforeseen event, ‘act of God’, third party acts or by the very person or entity suffering the damage.
Generally, coverage for these risks is provided under annually renewable professional indemnity policies, by way of a claims made or occurrence format, although the latter format is less common. Nevertheless, other formats are appearing in the Spanish market, such as Single Project Professional Indemnity.
Contractors’ all risks
Coverage for construction projects depends on the wide scope of different activities where the insureds are involved, with preference being for the single project format.
Matters that should be taken into consideration for these risks include:
- Under Spanish law, regulations within the Insurance Contract Act 1980 (ICA) apply on a compulsory basis to all insurance contracts unless the risk is considered to be a large risk. The ICA also applies to risks located within the Spanish territory and the policyholder has their usual registered address in Spain, or when the contract is entered into in compliance with an insurance obligation imposed by Spanish law. For large risks, the parties shall be free to agree the terms and conditions of the insurance contract including applicable law and jurisdiction.
- The general aim of the ICA is to provide protection to the insured and firmly specifies how the clauses and exclusions of a policy are to be interpreted. Contractual clauses that are more beneficial for the insured than the terms of the ICA, will be deemed valid.
- Regarding the specific coverage of Employers’ Liability, in 2015 the guidelines used by the courts to assess the amount of damages for injuries or death were modified and as a result, claim reserve figures had to be significantly increased.
After many years of inactivity in the Spanish construction sector, it is now generally accepted that the country’s economic recovery has led to a resurgence in construction activity. This recovery entails a need for robust insurance cover, including cover deemed as compulsory. Furthermore, large Spanish companies increased their international activity as a result of the economic crisis, presenting opportunities for insurers to underwrite international risks for Spanish companies.