Understanding Common Construction Exclusions: Lessons for brokers and policyholders

At our recent London Symposium Daniel Robin, Deputy Managing Partner at Fenchurch Law hosted a session on the principles and importance of interpreting policy exclusions, both within construction, and across the insurance industry.

The session focused on four key areas: contractual liability exclusions, cladding and fire safety exclusions, exclusions relating to liquidated damages, and finally whether Section 11 Insurance Act can apply to Exclusions. It is often said that a policy is only as good as its exclusions, and a good proportion of coverage disputes turn on the correct interpretation of its exclusions. An understanding of these exclusions is essential for brokers to help their clients navigate and mitigate these risks to avoid being left uncovered.

1. Contractual liability exclusions managing assumed risks

Contractual liability exclusions are one of the most common exclusions in liability insurance. These clauses prevent insurers from covering risks that arise because the policyholder has assumed ‘obligations by contract’ through indemnities, guarantees, or warranties given to third parties.

Daniel clarified: “Insurers don’t generally want to be on the hook for liabilities that wouldn’t exist under common law or statute, or for promises that go beyond what’s legally required.”

When an insured professional takes on a larger liability than legally required, like guaranteeing an outcome, which is a larger promise than simply the duty to exercise reasonable skill and care, that liability may fall outside insurance cover.

Often claimants will go down the path of least resistance and pursue strict liability contractual breaches, which will leave policyholders having to prove that they would still have been liable under common law, usually for a breach of reasonable skill and care. However, building regulations or planning requirements can be amended retrospectively, sometimes making previous designs non-compliant, which could fall foul of a strict liability contractual provision, but not a breach of a reasonable skill and care.

To protect clients, brokers should scrutinise client contracts for any indemnities, guarantees, or warranties that extend liability beyond common law, and ensure the policy either aligns with those obligations, or that clients understand the potential uninsured exposures, or that the appropriate extensions to cover are purchased.

2. Cladding and fire safety exclusions

Cladding and fire safety exclusions are potentially the most topical and complex exclusions facing construction professionals. “One exclusion that is very common; insurers limit their liability for anything arising out of or connected to combustibility or fire protection.”

Fire safety exclusions are standard in many professional indemnity and construction all-risk policies, and they often appear deceptively simple. However, their breadth can leave significant coverage gaps.

Ultimately, interpretation can hinge on small wording distinctions. In an example, Daniel suggested that the exclusion might not apply where the issue concerned a lack of design detail rather than the choice of combustible material. The key was whether the clause referred to the form of materials used or the design or omission itself.

Daniel cautioned: “It’s a fine line, but the burden will always be on the insurer to prove that an exclusion applies. Still, brokers and insureds must be alert to the fact that even design omissions may fall foul of broadly drafted fire safety exclusions.”

Other types of cladding provisions, that limit the scope of cover but do not outright exclude it, can also raise challenges; where exclusions limit indemnity to the “cost of rectifying defective work,” policyholders may find that consequential losses or replacement costs are uninsured.

Brokers must therefore review policy wordings in line with regulatory developments to make clients aware of any gaps in coverage due to evolving building standards or retrospective safety amendments, and ensure that their policyholders are aware of what cover is in place.

3. Exclusions relating to damages: liquidated and consequential losses

Furthermore, insurance does not automatically follow the contract, particularly when contracts allocate risk through liquidated damages.

Liquidated damages clauses are a common feature of construction contracts, predefining the amount payable in the event of delay or breach, reflecting an agreed estimate of loss. However, insurers typically exclude these liabilities, viewing them as ‘punitive’ or ‘beyond the scope’ of compensatory loss.

“Insurers exclude them because they don’t allow for an assessment of actual loss and can operate more like penalties even though in reality they can limit the policyholders exposure that they would have in any event under other contractual provisions.”

Exclusion clauses still remain even when liquidated damages are a genuine pre-estimate of loss, meaning that policy coverage generally extends only to direct, compensatory loss, not to sums agreed pre contract.

The knowledge that delay or contractual penalty exposures are unlikely to be insured, even if they seem commercially reasonable, is essential to clients, and brokers should therefore always draft limitation of liability clauses that cover liquidated damage risks too.

4. Section 11 Insurance Act and exclusions

Daniel finally discussed an increasingly important area of insurance law: how S.11 Insurance Act 2015 interacts with policy exclusions and warranties.

Section 11 of the Act clarifies that an insurer cannot rely on a breach of warranty or condition precedent if the breach did not actually increase the risk of the loss that occurred. It is not yet tested in Court if this principle could also apply to exclusions, as it may “catch other types of contractual provisions such as conditions precedent or similar rules.” However, the wording of the Act, and the guidance notes suggest that it can apply to exclusions that impose an obligation on the policyholder as a pre-requisite to cover.

Brokers should therefore challenge insurers who decline claims by considering section 11; if the decline is purely technical and unrelated to the loss event, policyholders may still be entitled to claim cover.

Key lessons for brokers

Exclusion clauses are more than technicalities, they define the boundaries of insurance protection. For brokers, several practical lessons emerged: primarily, brokers must scrutinise contractual obligations and identify warranties, indemnities, or guarantees that extend liability beyond ‘duty of care’. It is also important to monitor regulatory shifts, and educate clients on the difference between compensatory damages (insurable) and liquidated or penalty-based damages (typically excluded).

Good communication is essential, not just with your client, but with experts from every industry involved. Effective dialogue between legal, technical, and insurance teams while forming a contract is one of the easiest ways to ensure risk cover is coherent and insurable. The interpretation of an exclusion depends not only on precise wording but also on how contracts are drafted, executed, and aligned with the policyholder’s duties.

Mastering these subtleties and leaning on the expertise of other teams is central to a broker’s role as an adviser. A proactive, detail-oriented approach, combining legal awareness with practical foresight, enables brokers to anticipate exclusions, bridge gaps, and ultimately keep their clients covered.

Daniel Robin is a Partner at Fenchurch Law.