Contractor's all risks insurance: what it really covers when the contractor fails during the works

A site at a standstill, a general contractor placed in compulsory liquidation, a structure made weathertight but not yet accepted: it is at this precise moment that the project owner (maître d'ouvrage) discovers what its contractor's all risks policy really covers, and what it will never cover. There is frequent confusion between contractor's all risks insurance (assurance tous risques chantier, TRC), structural damage insurance (dommages-ouvrage) and ten-year liability insurance (garantie décennale), three contracts with distinct logics which are not triggered at the same time, for the same defects or for the benefit of the same persons. For an investor or a developer, the stakes are not theoretical: they determine who finances the making good, who bears the additional cost of re-awarding the work packages and how soon the asset can be used again. This guide deals with how the three policies fit together around the act of acceptance (réception), then with the scenario of the liquidation of the contractor during the works, distinguishing what the TRC pays for from what it leaves entirely to the project owner.

Three policies, three logics: property insurance, pre-financing, liability

The first mistake is to think in terms of “cover for the site” as if it were a single block. The three contracts respond to different legal mechanisms.

Contractor's all risks insurance is a property insurance, optional, which covers the work under construction against accidental material damage, without any prior inquiry into liability. It operates on an “all risks except” basis: any sudden and accidental material damage is covered, apart from what the policy expressly excludes. Its term covers the works period, from the start of the site to acceptance, sometimes extended by a maintenance cover.

Structural damage insurance (dommages-ouvrage), governed by Article L. 242-1 of the French Insurance Code, is a pre-financing insurance. Taken out by the project owner before the site opens, it guarantees, irrespective of any inquiry into liability, payment for the repair of defects of a ten-year nature. The insurer pays first, then exercises its subrogated right of recourse against the liable builders and their insurers.

Ten-year liability insurance is a liability insurance taken out by each builder under Article L. 241-1 of the French Insurance Code, covering the presumption of liability under Articles 1792 et seq. of the French Civil Code. It applies only after acceptance, for damage that impairs the structural soundness of the work or renders it unfit for its purpose.

The dividing line is therefore one of time before it is one of subject matter: acceptance, a legal act defined by Article 1792-6 of the French Civil Code, shifts the risk from one regime to the other.

Who pays for what: from collapse during the works to post-acceptance defects

Before acceptance: the TRC in the front line

As long as the work has not been accepted, the contractor bears custody of it and the risks. Ordinary contractual liability applies, with the obligation to deliver a conforming work. A partial floor collapse, a subsidence of an excavation, a fire in the site accommodation, a theft of delivered materials, damage caused by a storm: these events fall under the TRC, which pays for making good without waiting for responsibility to be established as between the contractor, the engineering firm and the project manager (maître d'œuvre).

That is precisely where the economic value of the TRC lies. It removes the time of an adversarial expert investigation into responsibility, which is measured in months or even years, leaving only the expert investigation into the amount of the damage. For a developer bound by a sales timetable and a financing plan tied to a delivery date, this cash advance is often worth more than the premium saving.

The TRC is generally accompanied by a cross liability cover, which covers damage caused to third parties and between participants, and by extensions for existing structures where the project is a refurbishment. This last point deserves particular attention in distressed real estate: damage to existing structures not fully incorporated into the new work falls outside compulsory construction insurance as a matter of principle, and only a properly negotiated TRC extension covers it.

Acceptance, the pivotal act

Acceptance is the act by which the project owner declares that it accepts the work, with or without reservations. It is either consensual or, failing that, judicial. It starts three clocks at once: the one-year guarantee of completion (garantie de parfait achèvement) (Article 1792-6 of the French Civil Code), the two-year guarantee of proper functioning for severable equipment (Article 1792-3), and the ten-year guarantee (Article 1792). Correspondingly, it brings the TRC cover period to an end.

Case law also admits tacit acceptance, which may result from taking possession of the work coupled with payment of the balance of the price. This judge-made construction cuts both ways for an investor: it can start the statutory guarantees running without any minutes of acceptance, but it also cleanses apparent defects that were not reserved. The forms of acceptance and its effects on the applicable liability regime are set out in our article on acceptance of works.

After acceptance: structural damage insurance, then ten-year liability

A defect appearing after acceptance, of a ten-year nature, falls under the structural damage insurance. The insurer has sixty days from the claim notification to give its position on whether the cover applies in principle, then ninety days to make an offer of compensation. If these time limits are exceeded, or if the offer is manifestly insufficient, the insured may incur the expenditure needed for the repair, and the compensation due is then increased by operation of law by interest at twice the statutory rate. The compulsory cover may not include any excess enforceable against the project owner. On the claim notification and the consequences of the insurer's silence, see our analysis of calling on the structural damage insurance.

The structural damage insurer then turns against the builders and their ten-year insurers. For the project owner, this recourse is of no concern: it has been pre-financed. That is the whole difference from the direct action against the builder's insurer under Article L. 124-3 of the French Insurance Code, which requires the insured's liability to be established first.

What the TRC does not cover

TRC disputes concentrate on the exclusions, whose scope is systematically underestimated when the insurance programme is negotiated.

• The cost of remedying defects and work badly executed in themselves: the policy covers the accidental material consequences of a defect, not the redoing of the defective work, which is the contractor's responsibility.
• Failures to comply with the contract documents, planning rules or applicable standards.
• Delays in delivery, late-delivery penalties, additional financing costs and lost rent, which are consequential losses and not material damage.
• The consequences of wear and tear, lack of maintenance, progressive corrosion, slow-acting phenomena as opposed to the sudden nature of the insured event.
• Theft without forced entry or trace of intrusion, and more generally unexplained disappearances, for which policies impose security and fencing measures whose non-observance founds a denial of cover.
• The additional cost of completion following the financial failure of a contractor, a point developed below.

Conditions as to duration are added to these. Almost all TRC policies are taken out for a fixed term, set by the contractual programme. A site that runs beyond that term without an extension endorsement is no longer covered. In the same way, policies generally provide for suspension or termination of cover where the site is interrupted for longer than a contractually fixed period, unless the insurer is notified and expressly agrees to maintain cover. These two clauses become decisive in the scenario of insolvency proceedings.

Liquidation of the contractor during the works: the legal sequence

The opening judgment does not terminate the works contract

The first counter-intuitive rule: the opening of insolvency proceedings does not bring the works contract to an end and the project owner cannot rely on it to terminate. Article L. 622-13 of the French Commercial Code, applicable to compulsory liquidation by cross-reference, deprives of effect any automatic termination clause based on the opening of the proceedings.

“Notwithstanding any statutory provision or contractual clause, no indivisibility, termination or rescission of a contract in progress may result solely from the opening of safeguard proceedings.” (Article L. 622-13, I, of the French Commercial Code)

A project owner that gives notice of termination on that sole basis exposes itself to a liability action by the liquidator and, indirectly, weakens its later recourse to its insurances. Termination must rest on a separate contractual breach, established and documented: abandonment of the site, failure to keep to the contractual programme, refusal to perform after a formal notice.

Formal notice to the liquidator and termination by operation of law

The liquidator has the option to continue the contract in progress. A project owner wishing to end the uncertainty must serve formal notice on it to take a position. Article L. 641-11-1 of the French Commercial Code governs this procedure: the contract is terminated by operation of law if the liquidator, having been served with formal notice, does not reply within one month.

This formal notice is not a formality. It has three simultaneous effects: it fixes the termination date, it opens the right to entrust the remaining works to a replacement contractor without risk of challenge, and it is the precondition for calling on the structural damage insurance early, before acceptance.

Proof of debt and the fate of sums paid

Works paid for but not executed, advance payments made beyond actual progress, late-delivery penalties and the additional cost of completion are claims arising before the opening judgment or from the termination, which must be filed in the insolvency (déclaration de créance). The time limit is two months from publication of the opening judgment in the BODACC (French official gazette of civil and commercial announcements), extended to four months for creditors domiciled outside metropolitan France. After that time limit, the claim cannot be enforced against the proceedings, subject to relief from forfeiture under Article L. 622-26 of the French Commercial Code.

In practice, the recovery rate in the liquidation of a building contractor is low. Filing the claim is a compulsory protective step, not a recovery strategy. The economics of the file are decided elsewhere: in the guarantees taken out beforehand and in the speed with which the site is restarted.

The specific risk of unpaid subcontractors

Law No. 75-1334 of 31 December 1975 on subcontracting gives the subcontractor a direct action for payment against the project owner, where the main contractor fails, after the main contractor has been served with an unsuccessful formal notice. A project owner that has paid in full the works statement to the general contractor, itself now in liquidation, may thus be compelled to pay the approved subcontractors a second time, up to what it still owes. The exposure is aggravated where the project owner knew of the subcontractor's presence on site without requiring its approval and acceptance of its payment terms. In a private contract, the absence of a joint and several personal guarantee or of a delegation of payment is penalised by the nullity of the subcontract, which does not benefit the main contractor.

What the TRC pays for, and what it leaves to the project owner

A stopped site is a site at risk

The failure of a contractor is not, in itself, a TRC claim event. It does, however, create the material conditions for one: an uncovered structure exposed to the weather, unshored excavations, temporary propping kept beyond its period of use, materials and equipment stored without security, utility networks not protected from frost. The material damage that results remains covered, on two conditions.

The first concerns notification of the interruption. Policies require the insurer to be informed if the site stops and make continued cover subject to its agreement. A project owner that lets several months of stoppage run without regularising an endorsement places itself without cover at the very moment the risk is highest.

The second concerns protective measures. The policy places on the insured the obligation to take the necessary safeguarding measures: temporary weatherproofing, fencing, security, draining of networks, sheeting, shoring up. Their cost is frequently covered as salvage costs where it is aimed at limiting insured damage, but failure to take them founds a reduction of the indemnity or a forfeiture of cover.

The additional cost of completion is not material damage

This is the most poorly understood point of contractor's all risks insurance. The price difference between the original contract and the contract placed with the replacement contractor, the cost of redoing unfinished work, the costs of a new tender process, additional project management fees, additional interest during construction and lost rent are not accidental material damage. They do not fall under the TRC. They are a financial risk, which property insurance is not designed to cover.

This financial risk calls for other instruments, taken out before the works start:

• the financial completion guarantee in a sale off plan (vente en l'état futur d'achèvement), governed by Articles L. 261-10-1 and R. 261-21 of the French Construction and Housing Code, now exclusively extrinsic (issued by a third party);
• the guarantee of delivery at an agreed price and time in the individual house construction contract, provided for in Articles L. 231-6 et seq. of the same code, which obliges the guarantor to have the work completed;
• the performance bond or completion bond taken out by the contractor for the benefit of the project owner, a contractual tool with no statutory regime but the only mechanism genuinely available on a conventional private works contract;
• division into work packages and split contracts, which limit exposure to the failure of a single participant.

Early recourse to structural damage insurance before acceptance

Structural damage insurance is not, contrary to a widespread belief, strictly confined to the period after acceptance. The standard clauses annexed to Article A. 243-1 of the French Insurance Code expressly provide for it to be called on before acceptance where two cumulative conditions are met: an unsuccessful formal notice to the contractor, and termination of the contract for work for the contractor's failure to perform its obligations.

This entry point is decisive in the liquidation scenario. It assumes, however, that the defects found are of a ten-year nature, that is, that they impair the structural soundness of the work or render it unfit for its purpose. A work that is simply unfinished does not give rise to cover: incompletion is not a defect. A work affected by an established structural defect, on the other hand, falls within the cover, and the structural damage insurer will pre-finance the repair before exercising its recourse against the ten-year insurer of the liquidated contractor.

This is because liquidation does not extinguish the ten-year liability insurance. The compulsory liability insurance covers sites opened during the period of validity of the contract, whatever the date on which the claim is made. The insurance certificate obtained when the contract was signed, and the date of the statutory declaration of commencement of works, therefore determine whether recourse survives long after the contractor has disappeared. Keeping them on file is not an administrative formality: it is the condition of later recovery.

Retention money and Article 1799-1 of the Civil Code: two mechanisms, two beneficiaries

The expression “retention money Article 1799-1” is in wide circulation. It rests on a confusion that needs to be cleared up, because it leads project owners to believe they have a protection that they do not have.

Retention money (retenue de garantie) is governed by Law No. 71-584 of 16 July 1971. It allows the project owner to retain 5% of the amount of the works, as security for performance of the work to remedy reservations. The sums retained are deposited with a depositary accepted by both parties. They are released at the end of the one-year period following acceptance, unless a reasoned objection is notified to the depositary before that date. The contractor may substitute for it a joint and several personal guarantee issued by an approved institution.

Article 1799-1 of the French Civil Code works in the opposite direction. Resulting from Law No. 94-475 of 10 June 1994, it obliges a project owner that enters into a private works contract to guarantee payment of the sums due to the contractor. Where financing is provided by a specific loan, the lending institution pays the contractor directly; in other cases, the project owner must provide a joint and several guarantee (cautionnement). The text protects the contractor against the project owner's insolvency, not the other way round. A contractor that is not secured may suspend performance of the works after a formal notice that has had no effect.

The operational consequence is direct. In the event of liquidation of the contractor during the works, retention money is the only self-protection lever immediately available, up to 5% and provided it has actually been withheld and deposited. Article 1799-1 will be of no help: on the contrary, it will be invoked by the liquidator if the project owner has not provided the payment guarantee that was due. It is therefore prudent to check, from the contracting stage, that the retention money has not been replaced by a guarantee issued by a guarantor that is itself fragile, and that the guarantee provided under Article 1799-1 does not cover works that have not been executed. The use of this lever to obtain the lifting of reservations, and what remains of it if the contractor fails, is dealt with separately in our article on retention money.

The project owner's decision timetable

Value is decided in the first six to eight weeks. The recommended chronology is as follows.

• Have a record of the state of the site drawn up immediately by a commissaire de justice (bailiff), recording actual progress, the supplies present and the apparent defects.
• Notify the TRC insurer that the site has stopped and request an endorsement maintaining cover, documenting the protective measures taken.
• Serve formal notice on the liquidator to take a position on continuing the contract, citing Article L. 641-11-1 of the French Commercial Code, so as to start the one-month period running.
• Apply to the summary proceedings judge (juge des référés) for an expert investigation under Article 145 of the French Code of Civil Procedure, joining the liquidator, the project manager, the insurers and, where applicable, the subcontractors, in order to fix the technical state of the work before any resumption.
• File the claim in the insolvency within two months of publication in the BODACC, making a provision for the additional cost of completion not yet quantified.
• Gather the ten-year insurance certificates and the declarations of commencement of works for all participants.
• If the work is in a condition to be accepted, proceed to acceptance, consensual with the liquidator or judicial under Article 1792-6 of the French Civil Code, in order to trigger the statutory guarantees.
• Notify the claim to the structural damage insurer as soon as termination is final, where the defects found are of a ten-year nature.

The interplay between the judicial expert investigation and the resumption of works is the most delicate point of balance. Resuming too quickly destroys the evidence; waiting for the expert's final report immobilises the asset. The solution generally lies in obtaining the expert's authorisation for protective works from the first meeting, together with a protocol for preserving the elements in dispute.

Conclusion

The TRC is not insurance against contractor failure, and no wording of a policy will turn it into a completion guarantee. It protects the work against material accident during the works, nothing more. When the contractor collapses financially, the project owner alone bears the additional cost of re-awarding, unless it has a completion guarantee, a performance bond or a properly deposited retention. The structural damage insurance, for its part, offers a little-known entry point before acceptance, but only after formal notice and effective termination of the contract, and only for defects of a ten-year nature.

Two decisions are needed before any project. First, have the insurance programme audited, read together with the financial guarantees in the contract, so as to identify the grey area between material damage and financial additional cost: it is in this area that the real exposure is concentrated. Second, at the first sign of deterioration in the position of a contractor on the project, put the record of the site and the formal notice to the liquidator in hand without waiting, because the date of termination of the contract governs access to the structural damage insurance before acceptance and that one-month period cannot be made up.

Frequently asked questions

Does the TRC cover the additional cost of replacing a contractor in liquidation? No. The TRC is a property insurance that compensates accidental material damage suffered by the work during the works. The price difference between the original contract and the replacement contract, the costs of a new tender process and additional fees are a financial loss, excluded as a matter of principle. Only a financial completion guarantee, a delivery guarantee in an individual house construction contract or a contractually negotiated completion bond covers this risk.

Can the structural damage insurance be called on before acceptance of the work? Yes, in one specific case. The standard clauses annexed to Article A. 243-1 of the French Insurance Code allow the cover to be called on before acceptance where the contract for work has been terminated for the contractor's failure to perform its obligations, after an unsuccessful formal notice. The defects must be of a ten-year nature, that is, they must impair the structural soundness of the work or render it unfit for its purpose. Mere incompletion does not give rise to cover.

Can the contract be terminated as soon as the insolvency proceedings are opened? No. Article L. 622-13 of the French Commercial Code deprives of effect any termination clause based solely on the opening of the proceedings. The project owner must serve formal notice on the administrator or the liquidator to take a position on continuing the contract; in compulsory liquidation, failure to reply within one month results in termination by operation of law under Article L. 641-11-1. A premature termination exposes the owner to a liability action and weakens later recourse to the insurances.

Does the contractor's ten-year liability insurance survive its liquidation? Yes, subject to conditions. The compulsory ten-year liability insurance covers sites opened during the period of validity of the contract, irrespective of the date of the claim. The disappearance of the contractor therefore does not extinguish the recourse against its insurer, exercised by direct action under Article L. 124-3 of the French Insurance Code or by subrogation of the structural damage insurer. It is still necessary for the work to have been accepted and to hold the insurance certificate and the date of the declaration of commencement of works.

Are retention money and Article 1799-1 of the Civil Code the same mechanism? No, and the confusion is harmful. Retention money, resulting from Law No. 71-584 of 16 July 1971, allows the project owner to retain 5% of the amount of the works for one year after acceptance, as security for the lifting of reservations. Article 1799-1 of the French Civil Code, by contrast, requires the project owner to guarantee payment of the contractor, by direct payment from the lending institution or by a joint and several guarantee. The first protects the project owner, the second the contractor.

Is a site interrupted for several months still covered by the TRC? Not automatically. TRC policies are taken out for a fixed term set by the contractual programme and generally provide for suspension or termination of cover beyond an interruption period fixed in the contract. Maintaining cover requires notifying the insurer of the stoppage, an extension endorsement and effective implementation of the protective measures imposed by the policy. Failing that, the project owner is left without cover at the moment when the risk of theft, bad weather and deterioration is at its highest.

Can the project owner be compelled to pay subcontractors twice? It is a real risk. Law No. 75-1334 of 31 December 1975 gives the subcontractor a direct action against the project owner where the main contractor fails, up to what the project owner still owes under the contract. The exposure is aggravated where the subcontractor's presence on site was known without having been regularised by an approval and an acceptance of its payment terms. Checking the guarantees or delegations of payment required in a private contract is the only effective protection.