Explainer: Understanding Saudi Arabia’s new decennial liability law

Can you elaborate on Saudi Arabia’s new decennial liability law?

Decennial liability is a strict liability imposed on contractors and/or design consultants whereby they are held liable to compensate an owner or employer of a construction project in the event of defective design, workmanship, and/or material in built structures. The liability lasts for 10 years after project completion.

Decennial liability insurance (also known as Inherent Defects insurance) protects construction contractors and design consultants against any compensation claims brought against them for a corresponding 10 year period. The policy differs to other legal liability policies which cover similar risks, in that a decennial liability policy does not require proof of liability to be established – evidence of the existence of a defect and/or damage to the building alone is sufficient for the policy to respond. The sum insured under decennial liability is equal to the full contract value at completion generally.

The new law was introduced and tabled for discussion by the Ministry of Municipality & Rural Affairs initially in June 2018. Since then the Cabinet has approved making the purchase of insurance mandatory for all construction projects within the private sector.

What impact will it have on the construction ecosystem?

Changes with legislation take time to be implemented and it is likely that many construction companies will be unaware of this new mandatory law. Costs in general will increase as the requirement to purchase additional insurance becomes mandatory for all projects. Contractors should expect further added costs as technical surveys by separate specialists will be required by the decennial liability insurer at various intervals during the life of the construction period, in order to assure quality standards are met.

We believe contractors already look at systems globally and implement stringent construction practices and use high-grade materials in order to ensure that the highest standards of construction are achieved and provide the promised longevity of the construction. With the introduction of compulsory Decennial liability insurance, insurers involve independent design and construction consultants to review the design at an early stage and inspect the works during the construction period. This by itself will hold the construction industry to high standards at all phases of the project and will give more comfort that defects are less likely to appear in the future.

However, although the law will incur extra costs for contractors and designers in the long term, it will protect them from facing huge claims for inherent defects in the work and or third party liability claim, which can go up to hundreds of millions of dollars depending on the size and type of project.

Are there any differences between risks arising from decennial liability in Saudi, compared to other regional markets such as the UAE?

The risks contractors face are the same as there are not major significant difference between the type of projects and all contractors are exposed to construction inherent defects,  which  to a large extent remains un-insured and exposes the balance sheet of the contractors. Within the GCC we have seen an increased demand by financers and principals for professional liability insurance, however this insurance falls short of the full benefits of a decennial liability insurance. Now that Saudi Arabia has made it compulsory to insure decennial liability, we expect other GCC countries to follow suit soon.

With Saudi’s construction sector set to boom in line with Vision 2030, is the introduction of the law timed right?

Decennial liability will complement existing regulations and with the potential investments of $425bn set to enter Saudi’s economy, it is clear that the law has come at a time where the kingdom aims to set a standard for the construction industry.

Lastly, what is your advice to contractors and designers working in the kingdom with regards to the new regulation?

Ace Brokers recommends that contractors and designers adopt the decennial liability regulations within their operations at the earliest. Arranging decennial liability insurance is usually done at the design phase of a project (even though it does not actually commence until the project is handed over and the defects liability period commences.) It will become difficult to purchase cover once the project has reached an advanced stage. By immediately becoming compliant, this will allow contractors to avoid difficult situations at a later stage.

Contractors should also look at using insurance brokers and consultants to identify weaknesses in the project that may be susceptible to the legislation.