Contract Insurances – A Glance

Contract Insurances – A Glance

Introduction:

Construction contractors are prone to risk and uncertainties. Considering the complexity of a construction contract, it is important to identify the risk and a tool to manage the risk and safeguard the parties from loss and damages.  That tool, to cover the risk of a construction contract is “Insurance”. So, Contract Insurance is a method to manage the risks in a construction contract.

Risk – An overview:

Risks are inherent in the construction contract. Any Loss, damages, injury, or liability arising in the construction contract requires protection. Those risks could be:

• Construction Risks:  injury to a person or vehicle, damages to a property
• Technical Risk:   Inadequate design, Faulty design, wrongful advice
• Environmental Risk: Natural disaster, pollution, weather

Type of Insurances:

• Contractor All Risk Insurance (CAR):      

An insurance policy which covers loss or damage to the contract works. The policy provides cover against two primary risk- (1) Property damage and (2) Third-Party injury.  Property damage may include improper construction of the structure or damage caused to the permanent works. The appointed Sub-contractors working at the site, are covered under third-party injury.

Type of losses to contract works, under CAR Insurance typically includes following items:

• Flood, storm, Earthquake
• Lightning
• Fire and explosion
• Losses from riots, strikes or civil commotion
• Collapse of structure

The policy, however, can be expanded to include the following items:

• Cost associated with clearing and removal of debris
• Rectification of Defects
• Professional fees
• Damage to surrounding property not forming part of contract works
• Cover for losses during Maintenance period

Typically, Contractor all Risk Insurance (CAR) policy excludes the following items:

• Faulty Design
• Wilful act or wilful Negligence
• War
• Political Risk
• Injury to own workers
• Financial loses due to bankruptcy or insolvency

The policy covers total contract works value plus a mark up for any ancillary cost such as professional/consultancy fees. The policy is valid until the issuance of a Taking-over certificate for the completed works and for another 12 months (or any such period stipulated in the contract towards Defects Liability Period) to cover the works outstanding on the date of Taking-over certificate

• Workmen Compensation: 

Workmen compensation policy covers contractors’ liability for death, injury, sickness of contractors personal and employees while executing the works. As per UAE laws, it is mandatory for the Employers to compensate the employees for an accident arising out of and in course of their employment. The main benefits include.

• Occupational death but can be expanded to cover non work accidental death
• Permanent disability but can be expanded to non-work permanent disability
• Medical expenses.

Few of major exclusion in the policy is – Natural Death, suicide, death, or injury resulting from alcohol or drugs.

• Contractors Plant and Machinery:

The policy covers loss or damage to the contractor’s construction mobile equipment’s such as excavators, cranes, and construction vehicles (owned, hired or leased) against sudden accidental and unforeseen loss or damage excluding electrical mechanical and electrical failure whilst at work or rest, in transit as well as during maintenance.

• Public Liability Insurance:

The policy covers for liability arising out of death, personal injury and property damage to the third-party prior to the works being taken over. The policy covers legal liability to third parties including legal fees and pay out arising from injury to people or accidental damage to property because of business activity.

Public Liability is part of the Comprehensive General Liability policy wherein Public liability insurance covers injuries to the visitors to the business property while General liability coverage is more extensive covering visitor injuries, employee injuries and defective-product damages.

• Professional Indemnity Insurance:

The policy covers legal liability for breach out duty arising due to professional negligence, error, or omission by an engineer/architects or by a contractor in a design build contract.  Professional Indemnity typically are adopted by the Design Consultants or the Design- Build Contractors for financial protection due to faulty deign, and professional negligence (incorrect or wrongful advice). The policy can be issued for a single basis or annually.

The PI is made on a “claims made basis” which means that the claim reported during the term of reinsurance are therefore covered regardless of when the claim occurred. In UAE, the Professional Indemnity insurance is required to be in place until the limitation period, i.e. 10 years.

• Decennial liability insurance:

In some countries such as UAE, there is  a 10 year strict liability wherein the contractor, engineers and architect are jointly liable to the employer in case of total or partial collapse of a structure or building, or for any defect that threatens the structural integrity of the building from the date of handing over of the works. This insurance is very difficult to obtain from the insurance companies and even if any insurance company would provide this insurance, the premium is likely to be very high