By Megha Merani
Construction companies are currently not required to acquire insurance for any potential decennial liability claims
A new law requiring contractors, consultants and architects to buy mandatory decennial liability insurance is expected to come into effect next year, a construction lawyer aware of the matter has said.
Under article 880 of UAE law, all projects, structures and facilities, built in the UAE, have a mandatory decennial liability provision, which requires the main contractor, architect and designer to be liable for a period of 10 years, for any damage that might cause a building to collapse or be defective to an extent where it is no longer usable.
Currently, construction companies are not required to acquire insurance for any potential decennial liability claims, with many foregoing coverage to avoid the additional cost.
“What’s going to change is that insurance for decennial liability is going to become mandatory,” Fernando Ortega, partner at Bin Nakhira & Partners, told Arabian Business in an interview.
“The main contractor, architect and designer are now going to have to carry decennial liability insurance on whatever (projects) they’re involved with, which may cause (their) premiums to go up.”
If implemented, the proposed legislation could come into effect in 2019 and “significantly” drive up project costs for developers.
“The price tag of the project is more than likely going to add the extra cost of this insurance so it’s going to have to be priced into the bid, possibly making it more expensive for the developers,” Ortega said.
However, he said, the cost of potential claims far outweigh the expense of insurance.
“If you don't have insurance and you're liable, it can even cost billions, depending on the project,” he said, adding that he has seen cases in the UAE where contractors have attempted to argue against construction defects.
Severe defects include cases where a building “collapses” or the “structure is defective”, rendering it uninhabitable or not able to serve its function anymore, Ortega explained.
“It’s not just collapse - it's any kind of defect that makes it not usable anymore. The way the law is written at the moment, an employer can, for example, automatically say ‘well I built this building to be a hotel and I expect to be making this amount of money for the next 20 years’. To some extent, the hotel owner can actually claim that as part of the damage, as loss of profit.”
Ortega added that some insurance companies he knew of in the UAE have already begun to introduce decennial liability products into their coverage offerings.