Saudi Arabia is undergoing one of the world’s largest construction programmes across numerous large-scale residential and commercial developments. As these developments bring together multiple contractors, specialist subcontractors and sophisticated insurance programmes, insurers are increasingly dealing with claims where determining liability can be just as complex as assessing the physical damage itself.
This case illustrates how a fire developed into a technically complex claim involving multiple insured parties, defective workmanship and the application of specialist Contractors’ All Risks (CAR) policy wordings.
Complex projects create complex claims
Large construction projects rarely involve a single contractor or straightforward contractual relationship. Principal employers, main contractors and numerous specialist subcontractors typically operate under interconnected contractual arrangements, often insured under a single Contractors’ All Risks policy.
That complexity was evident following a fire during the construction of a high-rise residential tower forming part of a major mixed-use development in Saudi Arabia. The reinforced concrete superstructure was being cast in situ using formwork when the incident occurred.
The CAR policy had been arranged on a joint names basis, covering the interests of the principal, main contractor and subcontractors. McLarens Middle East was appointed immediately to investigate the circumstances of the fire, advise insurers on claims procedures and support loss mitigation.
Although the physical damage itself was relatively contained, the claim became an exercise in determining liability, policy response and recoverable damage
Establishing the cause
Investigations established that the structural concrete works had been subcontracted and that the fire originated during hot works on the fifth-floor concrete slab before spreading to the surrounding formwork.
Forensic investigations identified several deficiencies in the execution of those hot works, with multiple requirements of the policy’s Hot Works Condition having been breached by the responsible subcontractor.
Ordinarily, breaches of this nature could entitle insurers to decline cover. However, on projects involving multiple insured parties, the policy wording was important.
The importance of the Multiple Insureds Clause
The policy incorporated a Multiple Insureds Clause. This meant that although the subcontractor responsible for the hot works had breached the policy condition, the clause protected the interests of the innocent co-insureds. Insurers were therefore able to deny the benefit of the policy to the responsible subcontractor while continuing to indemnify the principal and main contractor.
The insurers also retained the right to pursue a subrogated recovery against the subcontractor responsible for the breach.
Defective workmanship or fire damage?
Establishing the cause of the fire represented only part of the investigation.
The Main Contractor appointed a structural engineering expert, while McLarens instructed an independent specialist to assess the damage. Both concluded that sections of the concrete had not fully cured before the fire occurred, although they differed on the extent of remedial work required.
Following detailed technical discussions, it was agreed that the concrete columns had been installed incorrectly and would have required strengthening regardless of the fire. By contrast, the concrete slab had been properly constructed and its damage resulted solely from the fire.
Applying the LEG 2 clause
The policy incorporated a LEG 2 (developed by the London Engineering Group) defects exclusion, requiring consideration of which costs related to defective workmanship and which resulted directly from the insured peril.
Working closely with insurers, brokers, technical experts and the insured, McLarens negotiated an agreement whereby insurers indemnified the cost of repairing the fire-damaged slab and the resulting fire damage to the affected columns, less the cost of strengthening works that would have been required even if the fire had not occurred.
The settlement reflected the principle underpinning the LEG 2 wording: insurers indemnify resultant damage caused by an insured event, but not the cost of rectifying pre-existing defects.
Lessons for insurers
In projects of this nature, claims focus heavily on contractual relationships and policy interpretation.
Multiple insured parties, layered contractual arrangements, specialist policy wordings and complex engineering issues all have the potential to influence the outcome of a claim. Early forensic investigation, independent technical expertise and careful application of policy terms are therefore essential.
In this case, close collaboration between insurers, brokers, technical experts and the insured enabled liability, coverage and quantum to be considered in parallel. The result was an outcome that accurately indemnified the innocent insured parties while preserving insurers’ recovery rights against the responsible subcontractor.
