How to protect your demolition contract with the right limits and insurance

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Four core components of a contract

Whether you’re the contractor doing the tearing down, the client footing the bill, or the plant supplier caught in the middle, a demolition or recycling contract is a tool to help you do business.

You should use it to record what you are doing or paying, so that both companies understand what is involved in your joint endeavour.

Even though most contracts contain many thousands of words, the essence of a contract is four core components:

1. What services or works you are providing (and when),
2. How much you’ll be paid (and when),
3. What services or works you are not providing, and
4. What happens when things don’t go according to plan.

The third item is just the flip side of item 1. In my last piece, we discussed that having a crystal-clear scope of work is critical to ensuring the project starts without any misunderstandings or incorrect assumptions.

It acts an exclusion clause by defining the works which the contractor is not responsible for.

Clauses relating to the project not going according to plan (item 4), may exclude or limit recoverable losses or pass those losses to a third party.

Some common examples are caps on liability, delay damages, consequential loss exclusions, and insurance provisions. These are defensive clauses.

These clauses don’t manage the project — they manage the fallout. They act as partial or complete defences to claims for breach of contract, by narrowing what damages can be recovered.

Know what is and isn’t covered in your insurance

If you’re involved in a demolition or recycling project, the worst thing you can do is to assume that the risks are ‘covered’ by the terms of the contract or your own insurance.

This ignores the unique nature of every project but the standard content of contracts – those contractual liability caps or exclusions and your insurance limits, exclusions and carve-outs are often mismatched, unclear or unrealistic.

A demolition project in Sydney involved supporting neighbouring properties during excavation. The contractor had, under local laws, a non-delegable duty of care.

Its liability exceeded its insurance cover, and - it later transpired – was uninsurable in any event. A ‘standard’ approach does not fit when you are dealing with unique projects and risks.

Whilst standard contracts can provide a benchmark for what is common in your local market and jurisdiction, any limits/caps on or exclusions of liability should reflect identified risks.

Standard contracts might include space for you to agree and insert an arbitrary number or percentage of the contract value, but this does not reflect your project-specific risk identification and analysis.

Contractors and clients alike need to interrogate whether the contract terms align with their risk analysis, thinking about which incidents are most likely (or most expensive).

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Liability caps and limits

Sometimes I feel like a broken record, but if you are a contractor or supplier, your contract should be limiting your liability.

After all, you only have one opportunity to make a profit from this project and unlimited liability could bankrupt your company.

However, many clients are concerned that they might be left with losses they cannot recover – so they demand high limits which do not reflect the insurances you can obtain or the rewards they are offering.

There is no simple rule for how to agree a cap or limit on your liability. If the losses under discussion are insurable then the cap should reflect (and never exceed) your insurance cover.

Of course, as contracts can permit claims for years after the project was completed you also need to consider what insurance cover you may be able to obtain during that liability period. Anyone got a crystal ball?

You must not make the mistake of assuming that merely because the contract requires you to have a specific type of insurance that the contract also limits your liability… insurance is merely an asset against which a party can bring a claim.

Claims can far exceed both the original contract price and any insurance cover you have – whether the claimant will get paid is unknown but that doesn’t protect your company from having to defend their claim.

What does “consequential loss” even mean?

It is increasingly common for contracts to exclude liability for consequential loss. This is a normal word, given a precise legal meaning.

It is a term which is notoriously misunderstood and interpreted differently in each jurisdiction.

For example, under English law ‘consequential loss’ is a specific category of recoverable losses, also referred to as indirect losses.

On the other side of the globe, Australian courts interpret it more broadly, sometimes including foreseeable direct losses.

It is often excluded as a separate head of loss as the parties are worried that these losses, which can include lost profits, are one of the largest heads of claim.

But lost profits can also be direct losses and may not actually be covered by an exclusion of consequential loss. My advice to clients is to aim for simplicity and clarity:

1. A cap on all liability can cover all heads of loss, subject to any which local laws require to be unlimited,
2. Instead of hiding behind buzzwords, spell out precisely what is excluded e.g. ‘loss of profit,’ or ‘loss of salvage value’,
3. If you want to exclude all claims for loss of profit (then assuming that is not the only potential head of loss) then your contract needs to expressly state that neither direct nor indirect lost profits are recoverable.

Insurance: The clause doesn’t cover it just because you wrote it

There’s often a huge gap between what the contract says is insured, and what the actual policy covers. Many contractors don’t realise this until after an incident.

This column has already mentioned the cautionary tale of Hilco Redevelopment Partners’ dust plume incident (Chicago, 2020).

While dust suppression was contractually required and likely insured for public liability, the reputational and public health fallout sparked investigations and political pressure – arguably beyond what standard public liability policies were ever designed to cover, and certainly outside the scope of any typical contractor’s professional indemnity insurance.

It is critical that you check your contractual terms against your insurance policy’s wording. If in doubt, get your broker to check there are no gaps.

If you want others to carry insurance so they have an asset against which you can bring a claim, don’t rely on generic ‘you will insure against X’ clauses — be specific about what’s insured, what’s not, and who carries the risk of any gaps.

Turn the fine print into a shield, not a sword

Using exclusions, limits and insurance is about empowering better risk management through clarity, every clause is a choice about what happens when things go wrong. Don’t eliminate risk — choose how to respond to it.

About the author

Based in the UK, Sarah Fox is a contract expert with over 30 years’ experience in the construction and engineering sectors.

A former lawyer, she works with both UK and international clients and is an associate lecturer at the University of Salford.

Sarah specialises in creating concise, user-friendly contracts that promote clarity and reduce disputes. She is also the author of several books on construction law, including the ground-breaking industry title Small Works Contracts in Just 500 Words.