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Time to act: Addressing construction insurance considerations for state schools

Local authorities, academy schools, and multi-academy trusts face potential contractual risks when organising construction insurance for building works, which are often critical to their estates.

Local authorities, academy schools, and multi-academy trusts face potential contractual risks when organising construction insurance for building works, which are often critical to their estates. Failure to insure planned works adequately or to understand the limitations of their risk protection arrangement (RPA) policies may result in significant financial exposure due to coverage shortfalls. Awareness of these issues is often inconsistent, making it essential for stakeholders to fully understand the implications.

The RPA provides English state schools with government-backed financial indemnity, covering losses during refurbishments, including damage to existing buildings and new contract works. However, Marsh Risk’s construction and public sector insurance specialists have identified knowledge gaps among practitioners who engage infrequently with construction or insurance matters, particularly regarding the RPA’s limitations.

Key challenges

There is an increasing volume of contract works across state schools, including local authority-maintained schools (both private finance initiative [PFI] and local education authority [LEA]-funded); academy trusts; and faith schools.

Deferred maintenance due to funding constraints has compounded the need for repairs. This is further intensified by remediation works related to reinforced autoclaved aerated concrete (RAAC) and contractually mandated repairs during PFI handback periods.

Additionally, local authorities seeking to access government grants for net zero upgrades, such as those previously available through the Public Sector Decarbonisation Scheme (PSDS) and the Low Carbon Skills Fund (LCSF), must carefully manage these projects from a contractual and insurance perspective. Coverage limitations may result in substantial costs if not adequately addressed.

Complexities in contractual arrangements

The contractual environment for state school construction projects can be complex. Funding is often provided by the Department for Education to the LEA, which holds responsibility for increasing school places. However, in some cases, involving academy trusts and PFI schools, the LEA may not retain reinstatement responsibility. This complicates the identification of the employer on construction contracts and may necessitate tripartite agreements.

Furthermore, the traditional insurance structures anticipated by construction contracts might not be present, particularly where facilities are covered under government indemnity schemes, such as the RPA, rather than commercial insurance.

Understanding the RPA and its limitations

The RPA serves as an alternative to commercial insurance for the education sector, with the government underwriting losses instead of commercial insurers. It covers risks typically included in standard school insurance policies and is priced per pupil or placement, irrespective of claims history. However, the RPA has specific limitations in relation to construction contracts:

Contract works: Coverage is limited to £250,000 for loss or damage. For refurbishment projects exceeding this threshold, commercial insurance should be considered to cover the full amount.
Existing structures and contents: Coverage for reinstatement value applies when works are valued below £250,000. No coverage is offered for existing structures and contents if the works exceed this limit.
Existing structures coverage: Insurance for existing structures during construction is generally not widely included in construction policies and, when available, is typically limited to 50% to 200% of the contract value. This range can be insufficient for projects slightly above the RPA threshold.

Contract negotiation considerations

Within the RPA framework, challenges exist regarding joint names cover and subrogation rights, as contractors seek protection. This can place schools at a disadvantage during contract negotiations, with some accepting terms that include liability for damages or opting to forgo work altogether.

Third-party liability (TPL) cover

TPL cover can be obtained for the full rebuild value if the underwriter classifies the existing structure as third-party property. However, this approach can be costly, potentially requiring schools to purchase TPL cover for amounts significantly exceeding the contract works value.

PFI handback risks

At the conclusion of PFI contracts, buildings that do not meet agreed standards increase the risk of disputes. This issue is particularly relevant for large academy trusts insured under the RPA, further complicating the scheme's challenges.

Next steps

Given that the RPA is designed primarily for routine, low-value repairs and maintenance, it is generally not suited for high-value, critical construction works. Early engagement with insurance brokers experienced in both public sector and construction insurance is essential. Collaboration between construction, real estate, and public sector insurance brokers can establish appropriate coverage and support throughout project handover processes.

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