The law does not apply to New Caledonia and French Polynesian Islands (overseas territories) where a specific legislation is in force.

Transcription

1 CONSTRUCTION INSURANCE IN FRANCE IN A FEW PAGES A. Compulsory insurance of decennial character: a. Fundamental texts An important part of the construction insurance, that is to say the insurance of the damages to the works of decennial character, is regulated by the "SPINETTA Law" of 4 January 1978 and has been so since the 1 st January 1979 when it came into force. The general framework is outlined by a set of specific rules, which to some extent can be seen as a deviation from the general law, originating from legislative and regulatory public texts, progressively inserted into the French Insurance Code by order of appearance. The SPINETTA Law applies to all constructions in France, including overseas departments Guadeloupe and Martinique, the Réunion Island and French Guyana. The law does not apply to New Caledonia and French Polynesian Islands (overseas territories) where a specific legislation is in force. It is useful to note that the SPINETTA Law initially deals with issues of liability, prior to the rest of its articles. This Law stipulates that all participants in the act of construction are liable and it is up to them to prove otherwise. There are two different categories of damages: - Those jeopardizing stability of the construction, - Those affecting one of the constituent or complementing elements integrated within the structure, which in turn makes the construction unfit for its intended use (1). The scope of this liability also contains the damage affecting the solidity of the complementing elements (2). When the latter are a fully integrated part of the works, concerning their viability, foundations, framework, roofing and ceiling. Taken a certain number of conditions into account, the liability can incur during a 10-year period from the date of the final handover of the works (4). (1) Art of the French Civil Code (2) Art of the French Civil Code (3) C. civ (4) Art of the French Civil Code b. Mandatory insurance The insurance of the various risks and liabilities of a common law character that can stem from the act of construction is always optional, except for architects, who, since 1940, are obliged to underwrite an insurance cover for the different liabilities they are subject to within the framework of their professional activities. On the other hand, a property insurance (1) and the decennial liability (2) are both mandatory in the construction field, whether or not the construction takes place within a new building project or it is carried out on an existing building, and except in some specific situations. This Law contains a list of construction works that are not subject to this obligation (Art. L of the French Insurance Code).

2 The 1978 legislation laid down a new insurance system in order to fill in the gaps of the former system, which is optional for most part. The compulsory scheme enacted in 1978, said to be "double-edged" is ruled by a dual principle: insurance against damages to the works (3) and insurance of decennial liability (4). In the first case, the insurance against damages to the works (DO) is subscribed to by the employer, which in time will come to the benefit of the future owners of the works, being either himself or a third person. The aim is to ensure enough guarantees to be able to finance repair of any possible damages without having to seek recourse to the chief responsible for the damage, thus eliminating possibility of any delays. Secondly, the property insurer aims his recourse action against those responsible for the damages inflicted on the works and their liability insurers, who, theoretically, are bound to assure definitely the total burden of the losses. These different guarantees can either be held separate in distinct policies or be united into one single policy named "PUC" (combined builders' policy). The latter is applied to the benefit of each participant in the act of construction at the specified work-site. Nowadays, this form of insurance is becoming less commonly practised. This could be explained by the general tendency of precaution detected since the beginning of the year It is however likely that the indisputable advantages of this kind of insurance, together with the high demand expressed by the French employers and the perfect capacity of the product to adapt itself to genuine need in this field, which is increasingly demonstrated in Europe, eventually, might convince the insurers to revise their standing point. As much as regards property insurance as liability insurance, the guarantees have to be at least equivalent to those included in the standard clauses elaborated by the regulating authority (5). The latter accurately defines the terms and conditions of the survey and the payment of the claim to the benefit of the damaged party. (1) Art. L and L of the French Insurance Code (2) Art. L and of the French Insurance Code (3) Art. L and L of the French Insurance Code (4) Art. L and L of the French Insurance Code (5) Art. L of the French Insurance Code c. Exemptions Those exempted from the mandatory insurance include the French state and other authorities ruled by the public law as well as the legal entities depending on private law, as soon as the latter carry out an activity of which the scale reaches beyond the limits outlined by Art and envisaged for inclusion in to Art. R of the French Insurance Code. It is considered to cover an important risk in the application of the Art. L , if/when the subscriber fulfils at least two of the three following conditions: 1. The total of its latest end-of-year balance sheet exceeds 6.2 million European units of account, 2. The amount of the turnover of its last operating year exceeds 12.8 million European units of account.

3 3. The number of its employees over the last operating year exceeds 250 on average. However, it must be outlined that if the French state is exempted from the mandatory insurances covering properties and liabilities since the law came into force, it is on the sole condition that the act of construction is carried out on its own account (1). The two remaining categories exempted from the mandatory insurance have only been benefiting from this exemption since 1 July 1990, - the date on which the law n of the 31 December 1989 came into force (2) and only if it concerns the insurance of the damages to the works (DO) and on the condition that the act of construction is carried out on their own behalf and for another final use than housing (3). It should also be noted that the scale of exemption provided for by the law of 1989 finds itself narrowed to entities depending on public law other than the French state. Indeed, as regards buildings only partly allocated to housing, a circular from the Ministry of Equipment, the Treasury and the Home Office dated 11 July 1990 outlines that the latter must be covered by an insurance of the damages to the works policy (DO). d. Control At the same time, the authorities have taken measures in order to enforce the rule of law. First of all, it has been emphasized that the persons bound to subscribe to mandatory insurance for the damages to the works and liability generally must be able to prove that they have fulfilled these requirements (4). Secondly, it has been outlined that the justifications of subscription to mandatory insurance must be brought, the day the working site is established, to notice of the competent authority, thereby receiving the declaration of commencement (5). Also, all authors of any official documentation are obliged to mention the existence or absence of an insurance in the written text or to enclose it in the appendix, covering the action that intervenes prior to the expiry of the 10 years' period following the handover and resulting in a transfer of property or tenure of the property - except from rental leases (6). Finally, the legislator has established specific clauses in the particular area of individual isolated construction (7). On the one hand the construction contracts, with or without a supply of groundplans, should bear the mention of the reference of the insurance policy covering the damages to the works, subscribed to by the employer; on the other hand, a contract with the supply of ground-plans can be conducted, on the suspending condition that a DO policy has to be obtained. e. Sanctions Apart from civil consequences in the case where a non-subscription would result in prejudice, the legislator has set up a totally deterrent sanction: a six month prison sentence and / or a fine of (8), but with limited application, both concerning individuals liable to the sanction and the time frame during which the sanction can be applied. The individual who builds housing which he or his spouse, ascendants, descendants or those of his spouse is to occupy, though he is liable for the mandatory insurances, cannot be sanctioned by the penal law in case of non-respect of this liability.

4 Also the non-respect of mandatory insurance is an instantaneous infraction prescribed for a period of 3 years. (1) Art. L of the French Insurance Code (2) D (3) Art. L , line 2 of the French Insurance Code (4) Art. L , line 1 of the French Insurance Code (5) Art. R of the French Insurance Code (6) Art. L , line 2 of the French Insurance Code (7) Art. L. n of 19 December 1990, relating to the contract of the construction of individual homes, D rect. 485 (8) Art. L of the French Insurance Code f. Duty to insure Mutually, the legislator also requires insurers to assure. This measure, at first sight clear and harmless, though has a measurable scope as regards the construction field, and particularly in R&D. The insurer, -whose statutes do not preclude cover of the risk in question by reason of its nature (1) -cannot refuse to insure a risk compelled to a mandatory insurance policy, even though the risks does fit into the usual accepted framework of risks covered, except, naturally, if the execution of the event and its period of action are completely certain. Nor can the insurer refuse to insure in the case where the insured's demand occurs after the registration of the commencement of the working site or, by extrapolation, at the handover of the works, as soon as the sole fact of an engagement of works do not make the occurrence of damages certain nor the evaluation of hazards impossible. Finally, the insurer cannot ignore an insurance request nor offer a meaninglessly high tariff compared to the risk so that the client cannot fulfil his mandatory need to insure. In both cases the insurer demonstrates an attitude narrowly close to that of denial of insurance, which entitles the insured to seize the Central Rating Office. The period of non-reply of an insurer, from upon which a client is entitled to seize the Central Rating Office, is 45 days (2). B. Insurances concerning liabilities within the framework of the common law: Overview of the different contract options - Individual or syndicate policies Insurances covering civil liabilities falling under the common law are most frequently subscribed individually and cover all professional activities executed by each participant in the act of construction. These are individual policies (also called open or floating policies) with an implicit annual renewal. - Policies covering the liabilities falling under common law and blanket policies covering the different liabilities.

5 Insuring common law liabilities and decennial liabilities by the means of two distinct contracts is due to the fact that a majority of insurers have a different understanding and experience within different professional departments, of the insurance of each separate liability, and that without any technical reason for explanation. However, over the last few years, an increasing tendency towards consolidation of the two liabilities has been noted. This is certainly the case with the architects, and has been so for some time, consequential to their obligation to insure all of their professional liabilities. From now on, it is also increasingly used by other producers of the building, manufacturers of construction materials and even building contractors. On the other hand, such consolidation is only rarely used by promoters and employers. Indeed, the latter most often choose a distinct insurance policy according to each operation. In relation to the decennial liabilities, this can be done throughout a contract subscribed simultaneously to the "DO-policy" and by the same insurer (a policy also named " CNR" "Non builder constructors insurance" either by means of an integrated part of the "PUC" (combined builders' policy) which consolidates different mandatory insurances : " DO-insurance " and decennial liability insurance of all the different actors of the building project and which possibly could include optional, additional and / or complementary guarantees. The unquestioned advantages of consolidation of guarantees are having one single business partner and, of course, the simplification of matters. (1) Art. L of the French Insurance Code (2) Art. R of the French Insurance Code Delimitations of guarantees Regardless of the type of contract selected, the aim of the guarantee is always, like all kind of insurances, defined to the type and sum within a certain period of time and room ( except for certain contracts of which the terms and conditions are enforced by law). - Delimitations of sums - Upper limits of guarantees Delimitation of the amount is determined by upper limits of guarantees, i.e for each claim which could occur in the period of one year. Beyond these limits the underwriter is no longer committed. These limits most often vary in relation to the granted guarantees in one single policy and whether a claim occurs during or after the construction work. - Deductible On the other hand, the damages are limited by a deductible. So, the underwriter takes responsibility of a claim except for the amount of the agreed deductible.

6 The deductibles are always used in this kind of policy but only concerning material and immaterial damage. - Delimitation of time Finally, the responsibility of the insurer is limited to a given time-period because the insurance contract has a starting point (inception date) and a final point (cancellation). -Inception date and resumption of the past. The insurer can only be committed to the claims occurring during the policy's period of validity caused by factors within this same period. However, in the construction field's professional liability insurances of common law, it is much more usual that the contracts have so called resumption of the past clauses which are most often granted by the insurance companies. If so is the case, the underwriter accepts responsibility of claims occurring prior to inception date of the policy even if they are caused by former generating facts. When a contract is subscribed to it is given that the insured does not know of anything in the past which could provoke a claim or know of any existing claims. The wording of this is very vague and therefore hazardous for the insurer. - Termination of the contracts' outcome and upholding of guarantees after cancellation. Contractual upholding of guarantees: Subsequent guarantee Moreover, it is contractually decided that these contracts (which are managed by a technical distribution, i.e to settle a registered claim with the premium corresponding to the year that the claim was registered) are renewed from year to year by tacit agreement to renew. This is not the case when one party cancel the policy and especially around the time of the expiry date. Within this framework the commitment of the underwriter ends in principle the day of cancellation but not when there are special clauses which aim to uphold the guarantees; the so called subsequent guarantees mostly limited to a few years and never exceed a period of ten years. Commonly, these policies are subscribed to by property developers and employers. It provides them with the certainty of an existing guarantee and offers them the control of the quality of the insurance and thus of the protection of their property regardless of the solvency of the building contractor who stands as a guarantor. Should that be of relevance, it is preferable to subscribe to a guarantee covering all of the different participants of the act of construction. Recourse from the insurer against the building contractor, or against another participant in charge, after the claim has been settled with the employer, can result in harsh financial consequences, notably as a result of the termination of business of the insolvent guarantor, during the execution of the building project. To summarize, it is about guaranteeing the property on one side and come across the business failure of a building contractor before handover on the other, or put in a nutshell, about making the guarantors solvent right until the final delivery and handover of the works. In order to reduce the overall insurance costs, though without changing the prevailing aim, this above mentioned option can be tailored, in order to leave the insurer of the building site the possibility to execute recourse against the participants to the limit of the personal guarantees which they might have by their individual insurance companies. The two insurance policies that alternatively can suit such property protection while under

7 construction are respectively the "Comprehensive insurance" limited to certain events under construction and the "Contractors All Risk" policy. b. The Comprehensive insurance policy before handover Inception date, nature and scope of the coverage The inception of the comprehensive insurance policy should preferably be from the beginning of the working site in order to cover any risks of fire, explosion, terrorist acts, vandalism, and it should be anticipated to extend the policy automatically as soon as the " flood proofing / roof completion" is reached, thus covering the risks of damages caused by water. This policy covers the events restrictively enumerated in the contract, up to the value of a new reconstruction of the building at the date of the claim and without the excess. But it cannot cover all the risks that might occur during the construction of the works and has besides, no aim whatsoever of fulfilling a need to make a building contractor solvent before final handover of the works. Expiry of the guarantee Theoretically, the guarantee expires on the day the work is handed over -or, at the first occupation, if it is prior to the handover- thus transferring the risk. However, it is usual that this kind of contract is handed over to the owner, who is the new keeper of the premises, subsequently transforming it into an all-inclusive All Risk Policy. Specific terms and conditions applying to owners of important properties Indeed, employers of important properties who keep the work, frequently use this policy option that, on the one hand, covers roughly the entire property under construction and on the other hand the property at its running level. This contract is not compelled to any declaration throughout the year. To regularize the situation, it requires only a single annual operation based on the declaration of the insured surfaces. Apart from the clear advantage of a simplified management, this insurance system also finds its genuine justification in a concern of security. This, in order to avoid omissions of declarations of new risks occurring throughout the year and also to obtain a greater margin of toleration in case of error when the elements of the risk are to be declared (size etc.) from the insurer's part, but it can also be explained by a concern of a guaranteed quality and savings taken the globalisation of the guarantees into consideration. Specific context relating to show flats and points of sale. Except the guarantees protecting the works under construction, some contracts, best described as comprehensive insurance contracts are often subscribed to when it comes to show flats and points of sale. In that given case, the guaranties cover both the container as well as the content. Contractors' All Risk policy (TRC Policy ) Fundamental guarantees 1 Subscriber and insured In opposition to the Comprehensive Insurance before final acceptance of the works, the All Risk site Policy is most frequently subscribed to by promoters or employers to the benefit of all of the participants of the building project and this with or without recourse possibility against any personal policy held by a participant.

8 2 Formulation and scope of the guarantee a- Scope of the guarantee in kind Basic guarantees These guarantees are granted according to the "rule of exemption", thereby only the occurring exemptions can narrow the scope of the given guarantee. Though every event likely to damage the works can be covered by way of this contract (fire, explosion, water leakage, collapse, hazardous or natural disasters, terrorist attacks, vandalism, faulty design or execution, unfortunate operations or falling worksite craft, theft, ), only, most frequently the event has to occur by accident and thus be sudden, brutal and inflict a material damage to the construction. Any gradual or repeating event, as well as a faulty construction or a non-conformity inflicting no property damage will not, generally, be taken into account. Possible extensions of the guarantee However,, recently it has become possible to widen the basic guarantee to also include the faults not inflicting any property disorder, guarantee called "fault without disorder", but it only applies to the benefit of employers and, more importantly, to building contractors. For example: - a parking ramp which does not enable a car of normal size to enter the garage (lower ground floor) - steps in a building that are too narrow to transport furniture up to higher floors - a building comprising shops on the ground floor which after completion demanded that two steps were built to make up for the gap between the building and the public road. b- Scope of the guarantee in terms of covered items Moreover, as the guarantees of this policy, very wide in kind, can among other things cover both the work itself and the temporary site installations, camps, vegetation as well as the damages caused by new works done on, under or within the existing building or on the mobile goods, so called "entrusted items" contained within the existing building. Besides, the guarantee of the "All Risk Site" is particularly well adapted to work carried out on existing constructions because it covers all of the various parts of the operation and the different intervening actors. What more is, it covers the most dangerous period of time which is that of the very construction and the few months following the handover. c- Scope of the guarantee in terms of amount Guarantee limitation The amount of the guarantee is an all-in amount that can run out with the first risk. Generally speaking, it is equivalent to the value of the works and technical fees combined. However, it can very well be attributed a minor amount. In that case, the reimbursement of the claim is thereby only limited to the maximum amount outlined, and that with no application of a proportional rule whatsoever.

9 Franchise The All risk site Policy always includes franchises which amount can vary depending on the financial capacities and subsequently on the capacity of self insurance of the different contributors to the works. The insurer will or will not pre-finance the franchise to the benefit of the employer with a possible recourse against the guarantors. Furthermore, it can be included in the budget, that those franchises will be supported by the one(s) responsible for the damages and, if there no such responsible person is, it will be parted proportionally to the value of the parcels concerned by the claim or attributed in relation to the operation as a whole.