News & Events

Retentions: the law and cover under a credit insurance policy with Tokio Marine HCC

Friday, February 28, 2020

Retentions exposure and the subsequent loss incurred when a contractor’s client fails is rarely the key reason companies decide to buy credit insurance protection, despite the figures involved often totalling far more than the small percentage attaching to a specific contract. 

Tokio Marine HCC is the leading construction-specialist credit underwriter in the UK, with policy parameters offering comprehensive cover to support and protect contractors’ exposures across all their disciplines, including pre-delivery work with bespoke materials through to final account balances and retentions. If you would like to discuss any aspect of our Constructor Policy or require more information on the support that we can provide, our contact details can be found at the bottom of this page. 

In this blog, we detail some good practices in relation to retentions, outline the formal legal position for reference and share our 4-step retentions checklist. 

Changes to the Construction Act 1996 (section 110(1A)) came into force in 2011 and one of the changes involve how retention monies are dealt with. Along with the Construction Act comes the Scheme for Construction Contracts which provides the contractual position where the underlying contract is non-compliant with the Act.

The traditional position in most Sub-Contracts entered into before 1 October 2011 was:

  • release half of the retention after completion of the Sub-Contract Works or the main contract Works; and
  • release the balance of retention after the Certificate of Making Good Defects (or similar) has been given under the main contract.

The changes to the Construction Act altered this position. The rules now say that any construction contract entered into after 1 October 2011 must not link the release of retention to an act or event occurring in an upstream contract. This means that retention must be triggered for release by an act or event occurring under that contract, for example, the expiry of defects liability period in the Sub-Contract or on a predetermined date which is specified in the Sub-Contract.

Any contracts entered into after 1 October 2011 that continue to link the release of retention to an upstream contract are not compliant with the Act. In these cases, the release of retention will be governed by the Scheme for Construction Contracts.

When a claim is submitted to us in respect of an unpaid retention, we will first look at the contract to see when the retention is due. Although the changes in the Act have been in place for a number of years, we still see that many contracts do not comply with the Act. We also find that many of our clients do not chase for release of retentions until completion (or end of the maintenance period) of the main contract, which is often far later than the retentions were actually due. (Companies can, of course, choose not to collect retentions for commercial reasons, but you may find that cover is lost under a policy if they are not collected when they fall due.)

When the contract is not compliant with the Insurance Act, the position on retentions is less clear and requires some interpretation of the Scheme for Construction Contracts. This can slow down claim settlements, so we strongly recommend that clients ensure their contracts comply with the Act. The most straightforward situations are those where the contract states a clear date for the release of the retention rather than relying on other documentation.

Retentions cover under our Constructor policy is only available on an “all or nothing” basis. We either insure all of them (and tell us this is what you want to do) or none of them. Unfortunately, we cannot permit clients to select to cover only certain retentions, and an approved credit limit from us will be needed. 

The retentions covered in the event of a claim for a standard one-year policy are those that fall due:

  • during the policy period in which a credit limit was held for the insolvent contractor
  • in the 12 months following the end of the policy period as long as the policy was renewed with us (if the policy isn’t renewed then cover remains for retentions falling due in the policy period even if the event occurs a little afterwards).

At each renewal, a credit limit must be obtained or maintained for all contractors where there are outstanding retentions, even if all the contract works for some of those contractors have been completed. This is to ensure that cover remains during the new policy period (and the 12 months run off where a one-year policy renews) thereby maximising cover in the event that we have to withdraw a credit limit.

For two-year policies, we add an additional endorsement to ensure the cover for retention is the same as if two separate one-year policies had been taken out.

Retentions usually represent between 1.5% and 5% of the contract sum. Whilst these sums may seem small, in the event of an insolvency with retentions outstanding on multiple contracts it can soon add up to a far greater proportion of the total loss. Unlike some of our competitors, we do not cap the amount of retentions a client can claim other than by the credit limit held for the contractor. Our recent claims experience shows that for several of the more recent construction insolvencies such as Dawnus, Shaylor, Carillion and Clugston, a significant part of the total claims we paid is for retentions.

If any assistance in collecting retentions is sought, our debt collection partner, Nelsons, provides a retentions collection service. They will chase the retentions when they fall due and a fee is only payable (a proportion of the amount collected) if Nelsons is successful in collecting.

To summarise:

  • Make sure the contract is clear when retention falls due and that it is reliant on something in the client’s contract and not an upstream contract for release
  • Where the contract does not comply with the Act, the Scheme for Construction Contracts will apply
  • Ensure your credit control team knows when the retentions fall due so they can chase them at the appropriate time
  • Obtain a credit limit from us for all contractors where there are retentions outstanding, providing protection for up to 2 years with that credit limit.

If you require further information on cover under our policy or the Construction Act, please visit our page here or contact one of our Credit specialist underwriters.

Written by Jane Hull, Underwriting Director - Credit