MSC.
CONSTRUCTION MANAGEMENT
YEAR I, PART I
ECM 521:
PROFESSIONAL ETHICS AND LIABILITY IN CONSTRUCTION
7. INSURANCE
Rabindra Pokhrel
[Link]@[Link]
27-Mar-2023
Introduction
■ Insurance is a contract, represented by a policy, in which an individual
or entity receives financial protection or reimbursement against losses
from an insurance company.
■ The basic principle of insurance is that an entity will choose to spend
small periodic amounts of money against a possibility of a huge
unexpected loss. Basically, all the policyholder pool their risks
together. The company pools clients' risks to make payments more
affordable for the insured, which is paid out of their premiums. It is a
system wherein large number of persons, exposed to a similar risk, are
covered and the risk is spread over among the larger insurable public.
Therefore, insurance is a social or cooperative method wherein losses
of one is borne by the society
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Types of Insurance
Life Insurance or Personal Insurance
■ Whole Life Insurance
■ Endowment Life Insurance
– Endowment insurance refers to a form of life insurance that pays
the face value to the insured either at the end of the contract
period or upon the insured's death.
■ Term Life Insurance.
Non-Life Insurance
■ Fire Insurance
■ Motor Insurance
■ Marine Insurance
■ Engineering and Contractor's Risk Insurance
■ Aviation Insurance
■ Miscellaneous Insurance (Property Insurance, Liability Insurance,
4 Guarantee Insurance).
Construction Insurance
■ Construction Insurance is an overall name given to various types of
insurance policies that provide coverage for property damage, third-
party injuries or damage claims.
■ It is a major method of managing risks in the construction industry. Its
primary function is to transfer certain risks from clients, contractors,
subcontractors and other parties involved in the construction project
to insurers to provide contingent funding in time of difficulty.
■ Construction insurances is a Liability insurance required for every
single construction project. Construction insurances can provide
coverage for material, risks, natural disasters, employees, and even
your own business.
■ By completing jobs on time, being responsible, and keeping a solid
business operation you can get extra benefits like smaller premiums
and deductibles in your insurances.
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Scope of Insurance in Construction
■ Injury Claims - medical expenses, funeral, and court-awarded
compensations
■ Damage Claims - damages to property
■ Product Claims - damages caused by equipment installed by your
company
■ Copyright Claims - copyright infringement
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Role of Insurance in Construction
■ It will protect your business against injury and/or property damage.
■ Liability insurance will assist you in covering costs and damages after
a judgment has passed.
■ It provides a certain level of value and security knowing that your
assets and employees are protected.
■ It can be used to cover the cost of attorney fees, witness fees, court
expenses, and more.
■ The construction liability will protect in many different ways: your
company as a whole and individual claims against the company.
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Contractors All Risk (CAR) Insurance
■ Contractors All Risk (CAR) policy is designed to cover all types of civil
engineering projects like buildings, dams, flyovers, etc. CAR insurance
provides an "all risk" cover.
■ The Contractors All Risks (CAR) Insurance offers comprehensive
coverage for all types of civil construction risks. This policy covers
physical loss or damage to property, as well as third party liability related
to work conducted on the contract site.
■ Generally stated as “This policy should be examined to ensure that it
meets with your requirements in all respects and returned immediately if
any amendments be required.”
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Coverage of Contractors All Risk (CAR) Insurance
Material/Physical Damage
■ Covers any unforeseen and sudden physical loss or damage from any
cause (other than those specifically excluded)
– The permanent and temporary works, plant and materials to be
incorporated in the works;
– Contractor’s plant & equipment not forming part of contract works
except vehicles licensed for road use;
– Other property (except above two) including clearance and removal
of debris.
Third Party Liability
■ Covers damages consequent upon accidental third party bodily injury
and/ or property damage, which is in direct connection with the contract
works and happening on or in the immediate vicinity of the contract site.
– Personal injury and death
– People other than Employer’s, consultant’s and contractor’s
personnel
– Property Damage
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General Conditions in CAR:
■ Truth of proposal by the insured shall be a condition of precedent to
any liability;
■ Insured takes all reasonable precautions to prevent or minimize the
loss. Informs the police & authorities;
■ If no notice of event within 14 days insurer has no liability for loss;
■ Dispute in claim amount to be settled through arbitration;
■ In case of false claim by the insured, all benefits under the policy shall
be forfeited;
■ In case of double insurance, either 1st dated insurer pays or both
proportionately share the payment.
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Exclusions in Contractors All Risk (CAR) Insurance
General Exclusions
■ The insurer will not indemnify (to pay compensation) the insured for
the loss, damage or liability caused by or arising out of or aggravated
by:
– War, civil war, rebellion, revolution, strike, lock-out, military power,
order of any govt. authority etc.
– Nuclear reaction/radiation or radio-active contamination
– Cessation of work (Total or partial)
– Willful act or negligence of the insured
– Wear tear or any other process of gradual deterioration.
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Special Exclusions to Material Damage under CAR
■ Consequential loss due to contractor’s delay, non-performance etc.
■ The cost of repair/replacement/rectification of defective
materials/workmanship
■ Loss of construction plant, equipment and machineries due to
electrical and mechanical breakdown
■ Loss of or damage to files, drawings, accounts, bills, currencies,
stamps, notes, securities, checks and such other documents
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Premium for CAR Policy
The basis of calculating the premium for CAR policy depends on the
following factors:
■ Country’s topography, situation, hazards etc.
■ Inflation, Interest rates, Exchange rates
■ Market competition
■ Type of works or goods under insurance contract
■ Insurance cover period
Arriving at the premium is not simply a matter of calculating the correct
figure using a mathematical formula.
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Third Party Liability Insurance
■ Third Party Liability Insurance is a risk cover whereby in case of an
unfortunate event, your insurer will compensate you to the extent of
your legal liability in such a situation.
■ It is referred to as a 'third-party' cover since the beneficiary of the
policy is not the insured but someone other than the
two parties involved in the contract (the owner and
the insurance company).
■ Third party insurance covers or liability of the owner against any
legal liability, accidental liability, financial loss or property damage,
medical expense cover in the event of an injury to or even death of
any third party, arising out of negligence on behalf of you or one of
your employee.
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Validity of Insurance
An insurance contract must meet 4 conditions in order to be legally valid:
– It must be for a legal purpose.
– The parties must have a legal capacity to contract.
– There must be evidence of a meeting of minds between the
insurer and the insured.
– There must be a payment or consideration.
■ An insurance Policy is valid over the specified over the agreed period
of time between the insurer and the insured if it fulfills all of above
factors. In absence of either one factor, the insurance agreement
becomes invalid
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Claiming an Insurance
■ The policy document of this insurance states the steps that the
insured needs to follow in the event of any loss or damage. Following
are the steps that the insured must follow:
■ Immediately notify the insurance company:
– The insured must immediately notify the insurers on the
happening of any damage which can give rise to a claim under
the policy. The insurers/insurance company can be notified
immediately either through a broker or telephone or telegram. It
is important to notify the insurance company within a stipulated
time-frame (days) given in the policy document of
the construction all risk insurance policy.
■ Provide a written notification:
– The insurance company should be given a written notification by
the insured regarding the event of loss or damage. This written
notification should include the nature or the extent of the
loss/damage caused to the property.
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Claiming an Insurance
■ Minimize the loss as much as possible:
– It is important that the insured takes all the necessary steps
required to minimize the further loss. He can take the steps which
are within his power to minimize the extent of loss or damage.
■ Inform the Police authority:
– In case of damage or loss caused due to the theft or burglary, the
insured must immediately inform the police authority about the
same.
■ Preserve the affected parts/property:
– In the event of the occurrence, the insurance company sends a
representative or surveyor to inspect the situation. Hence, the
insured must make sure that affected parts/property are preserved
so that they can be made available for inspection.
■ Extend full cooperation to the surveyor:
– The insured must extend his full cooperation to the appointed
surveyor for the investigation process. The insured must provide the
surveyor with all the information and documentary evidence
17 required.
Claiming an Insurance
■ Submit the claim form to the insurance company:
– The insured must properly fill the claim form and submit the same
to the insurance company. The claim form must contain all the
required information which is true.
■ The insured will have to provide the following information in the claim
form:
– Date and time of occurrence
– Details of damage to the contract works, construction plant and
equipment, property belonging to the third-party if any
– Probable cause of the damage
– Progress of the construction during the time of damage
– Details regarding the repairs of damaged items
– Damage to the surrounding property if any
– Estimated cost of repairs to the damage caused to the contract
works, construction plant and equipment, property belonging to the
third-party, owner’s surrounding property
■ All the necessary documents should be submitted along with the claim to
18 verify the financial loss suffered due to the loss or damage.
Statutory Requirements
■ Governing Rules & Regulations are:
– Insurance Act, 2049 (1992)
– Insurance Regulation, 2049 (1993)
– Insurance Rules, 2049 (1993)
– Public Procurement Act/Regulation
■ Nepal Insurance Authority is the regulatory body to create a
professional developed insurance market in Nepal.
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Provisions in PPA/PPR
■ Unless otherwise stated in the Contract, contractor shall insure for
works above NRs TWO million contract amount (PPR 112).
■ Insurance shall be made and maintained for the following events
which are due to the Contractor’s risks (PPR: 112):
– Loss or damage to the Works, Plant for incorporation therein and
Materials, to the full replacement cost (including profit)
– Loss of or damage to Equipment and other things brought onto
the site, for a sum sufficient to provide for their replacement at
the site
– Loss of or damage to property (except the Works, Plant, Materials
and Equipment) in connection with the Contract; and
– Personal injury or death
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Provisions in a typical construction contract
■ The Contractor should provide & maintain total insurance cover:
– In the joint names of Employer and the Contractor
– In the amounts and deductibles stated in the SCC
– From the Start Date to the end of the Defects Liability Period, if
mentioned so.
■ An additional sum of 15% of replacement cost of Works, material and
equipment, or as may be specified in SCC, to cover any additional
costs of and incidental to the rectification of loss or damage including
professional fees and the cost demolishing and removing any part of
the Works and of removing debris of whatsoever nature.
■ To cover the Employer and Contractor against all loss or damage from
whatsoever cause arising, other than like war, hostiles, insurgency,
radiations, etc from the start of work at the site until the completion
period.
■ Insurance against liabilities for death of or injury to any person (other
than workmen) or loss of or damage to any property (other than the
works) arising out of the performance of the contract, other than
exceptions.
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Provisions in a typical construction contract
■ The Contractor’s liability:
– During the DLP for loss or damage arising from a cause occurring
prior to the commencement of the DLP, and;
– For loss or damage occasioned by the contractor in the course of
obligations carried out by him for complying with his obligations
during DLP.
■ The minimum for insurance of other property shall be with unlimited
number of occurrences;
■ The minimum cover for personal injury or death insurance for the
contractor’s employees is that specified in labor act of Nepal and for
other people is with an unlimited number of occurrences.
■ Policies and certificates for insurance shall be produced and delivered
by the Contractor for the approval before the Start Date;
■ Insurance shall provide for compensation to be payable in the types and
proportions of currencies required to rectify the loss or damage incurred.
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Provisions in a typical construction contract
■ If the Contractor does not provide any of the policies and certificates
required, the Employer may effect the insurance which the Contractor
should have provided and recover the premiums paid by the Employer.
■ Alterations to the terms of an insurance shall not be made without the
approval of the PM.
■ Both parties shall comply with any conditions of the insurance policies.
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PCC: minimum insurance amounts and deductibles
■ The minimum cover for loss of or damage to the Works, Plant and
Materials is: 115% of the Contract Amount.
■ The maximum deductible for insurance of the Works and of Plant and
Materials is: [insert …(a)… of sum insured ]**
■ The minimum cover for loss or damage to immovable Equipment/plants is:
100 % (i.e Replacement Cost).
■ The maximum deductible for insurance of Equipment/plant is: 1 % of sum
insured
■ The minimum cover for loss of or damage to other property is: [insert
amount]*** with unlimited number of occurrences
■ The maximum deductible for insurance of other property is: 1 % of sum
insured
■ The minimum cover for personal injury or death insurance
– for the Contractor’s employees is that specified in the Labor act of
Nepal and
– for other people is: [insert amount between 0.7 to 1 million] with an
unlimited number of occurrences
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■ NOTE
**
(a) Insert value in percentage [For works with value up to 250 million
0.75%, for works with value 250 million to 1 billion value calculated by
linear interpolation between 0.75% and 0.5% and for works with value
above 1 billion 0.25 %]. As the value of works increases, deductibles
should be lower.
***
The amount depends on location, environment of construction site
,surrounding property etc. and hence differs case to case. Suitable
amount should be inserted depending upon site condition and
surrounding environment.
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Sample Insurance Agreement for Works Contract
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