BSR609

PROFESSIONAL
PRACTICE II

RISK
&
INSURANCE
Yazid sarkom 1
Nor Amin Mohd Radzuan
zulkifly sapeciay
Department of building surveying
RISK
2
RISK IN CONSTRUCTION INDUSTRY

1. Client Risk
2. Site Risk
3. Planning Risk
4. Design Risk
5. Construction On Site Risk
6. External Risk

3
RISK IN CONSTRUCTION INDUSTRY

1. Client Risk
DEVELOPER,GOVERNMENT AGENCIES,PRIVATE LAND OWNER

⦿ Decision to build
⦿ Team Selection (buy,JV,)
⦿ Briefing
⦿ Time
⦿ Cost
⦿ Quality

4
RISK IN CONSTRUCTION INDUSTRY

2. Site Risk
⦿ Choice of Site
⦿ Ground Condition
⦿ Existing Building
⦿ Existing Owner & Occupants
⦿ Availability of Services
⦿ Site Management

5
RISK IN CONSTRUCTION INDUSTRY

3. Planning Risk

⦿ Planning Restriction
⦿ Clients requirements
⦿ Environmental Concern
⦿ Changing acts and guidelines

6
RISK IN CONSTRUCTION INDUSTRY

4. Design Risk
⦿ Interpretation of brief
⦿ By Laws requirement
⦿ Aesthetics and space
⦿ Early price estimates
⦿ Appointment of consultants/Contractor

7
RISK IN CONSTRUCTION INDUSTRY

5. Construction On Site Risk

⦿ Site Management
⦿ Delays
⦿ Increased material costs
⦿ Liquidation and Insolvency
⦿ Latent Defect (undiscovered fault in the property after a
reasonably thorough inspection before the sale.)
⦿ Labour shortage, permits
⦿ Health and Safety

8
RISK IN CONSTRUCTION INDUSTRY

6. External Risk
⦿ Market Condition
⦿ Political Consideration
⦿ Government Legislation
⦿ Weather condition
⦿ View around the site
⦿ Economic Environment
⦿ Ability to control the project risk.

9
INSURANCE 10
 Introduction

❖ Construction works are full of risks.

❖ When employers and contractors enter into construction
contracts, they are basically taking risks.
❖ One of the primary functions of a contract is to distribute
risks.
❖ The construction contracts contain express and implied
terms distributing risks to the contracting parties.
❖ In relation to risks imposed on contractors, the contracts
require them to provide insurance coverage.

11
 Introduction

❖ Insurance is an important part of the provisions in

construction contracts.
❖ The terms are worded in insurance legal language and
principles.

❖ Understanding of the basic principles of the law of

insurance will be useful to comprehend the basis of the
insurance provisions found in construction contracts.

12
 Governing Law

❑ The Law of insurance in Malaysia is governed by:.

❖ The Insurance Act 1963 (Rev. 1972)

❖ English common law (s.5 Civil Law Act 1956)

13
 Definition

❖ Dictionary

❖ Law Dictionary

❖ Books/Authors

❖ Judge/Case

14
 Definition

❖ Insurance is a voluntary consumption of specified risk in

return for an agreed payment.

❖ It is a transfer of specified financial risk from a party

initially subject to it (the insured) to the insurer for a fee
(the premium)

15
 Definition

❖ “A contract of insurance is a contract whereby one party

called the ‘insurer’ on receipt of a consideration called the
‘premium’ from another party called the ‘insured’ undertakes
to indemnify the latter for losses suffered on the happening
of a specified event called the ‘perils insured against.’

❖ “A contract of insurance is any contract whereby one party

assumes the risk of an uncertain event which is not within his
control, happening at a future time, in which event the other
party has an interest, and the first party is bound to pay
money if the uncertain event occurs. (WMA – Pacific Orient)
16
 Definition

o The insurer assumes the risks of the contingency in

consideration for a payment of premium so that the insured
who suffers damage will be compensated.

o It is a contract of ‘uberrimei fidei’ that requires full disclosure

of all material facts affecting the risk insured against.
o ‘Insurance’ is used with reference to events which may
happen (e.g. fire on one’s property).

o ‘Assurance’ is used to refer to events that must happen (e.g.

deaths – in life insurance).

17
 Formation of Contract of Insurance

❖ The Parties

❖ Formality

❖ The Premium

❖ Insurable Interest
A Latin phrase meaning "utmost good faith". A legal name which
governs insurance contracts - all parties to an insurance contract

❖ Uberrimae Fidei
must deal in good faith, making a full declaration of all material
facts in the insurance proposal.

❖ Doctrine of subrogation

18
 Formation of Contract of Insurance
The Parties:
❖ The ‘Insurer’ companies registered under the Companies
S. 3 Act or Co-Operative Society Act
❖ The ‘Insured’ Below 16 – may enter into contract of
S. 41 insurance with parents’ consent
Above 16– do not require parents’ consent

19
 Formation of Contract of Insurance
Commencement of Risks:

PREMIUM RISK
PROPOSAL ACCEPTED POLICY
REJECTED
REJECTED

20
 Formation of Contract of Insurance
Commencement of Risks:
❖ General Assumption of risk commences upon acceptance
principle: of proposal

❖ Exception: Insurance company inserts clause:

a) Risks not assumed until payment of premium;
Canning v. Farquhar
b) Risks not assumed until issuance of policy;
Mohd Burhanudin v. AIA (1985)
21
 Formation of Contract of Insurance
Insurable Interests:
❖ In every insurance contract, the insurer must have
insurable interest with respect to the subject matter of the
insurance.
❖ A policy effected by an insured who has no insurable
interest is void.

Lucena v. Craufurd

22
 Formation of Contract of Insurance
Insurable Interests:
Own life
Life of husband/wife
❖ Insurable Interests are: Employer
Debtor
Common Law
Financier
a) Life Insurance

b. Insurance of Owner Beneficiary

Goods Trustee Buyer/seller
c. General Landlord/tenant Chargor/chargee
Insurance

23
 Formation of Contract of Insurance
Non-Disclosure and Misrepresentation:
a) Non-Disclosure:
The proposer is under a duty to disclose all material
facts.
Material facts are facts that would influence the
mind of a prudent insurer in:
i. accepting or rejecting a proposal; or
ii. in fixing the premium.

- all parties to an insurance contract must deal in good faith, making

a full declaration of all material facts in the insurance proposal.

24
 Formation of Contract of Insurance
Non-Disclosure and Misrepresentation:
Example (1) – Life Insurance: disease
Schoolman v. Hall
Goh Chooi Leong v. North British Insurance
Godfrey v. Britanic Insurance
Example (2) – Life Insurance: occupation
Example (3) – Motor vehicle insurance
Example (4) – Fire insurance
Buff v. Turner
25
 Formation of Contract of Insurance
Non-Disclosure and Misrepresentation:
b) Misrepresentation:
The insured is under a duty not to misrepresent.
If he does so, the insurer may elect to avoid the contract.
Ong Eng Chooi v. China Insurance

China Insurance v. Ngan Ah Kau

26
 Formation of Contract of Insurance
Basic Clause:
❖ If there is a non-disclosure of material facts, the
insurance company may avoid liability.
❖ The onus is on the insurer that the fact in dispute is
material fact.

27
 Formation of Contract of Insurance
Basic Clause:
❖ Doctrine of subrogation
❖ A legal term whereby one person takes over the rights
and liability of a creditor against his debtor.

❖ Example 1: The guarantor of someone’s debt.- if the

debtor fails to pay accordingly, the guarantor will
become subrogated to bank’s claim
❖ Example 2: Something was stolen and the insurance
company paid out accordingly, sometime later ,the
thing is recovered, then the item will belong to the
insurance company under rights of subrogation.

28
 Types of Insurance policy

❖ Generally there are two types of insurance policy:

a) Liability insurance policy
The insurer undertakes that, if the insured becomes
liable to some one else, the insurer will indemnify the
insured.
Similar to ‘third party’ motor insurance policy
for contractors its called public liability insurance
for consultants, professional indemnity policy for
consultants

29
 Types of Insurance policy

b) Loss insurance policy

Insured person is entitled to be compensated by the

insurer for loss or damage suffered whether caused
by accident or negligent.
Similar to ‘comprehensive’ motor insurance policy.
insurance of the works

30
 Types of losses

a) Loss or damage to the structures or machinery to be

erected on site.
b) Loss or damage to the materials on site to be used in
construction work.
c) Loss or damage to the contractor’s equipment and
plant used on site.
d) Property damage or bodily injury suffered by third
parties within and around the construction site.

31
 Types of losses

e) Bodily injury to workmen and the responsibility of

employers for their workmen.
f) Injury to employee who are not classified as
workmen.
g) Financial losses as a result of delay or accidents, bad
weather, default by sub-contractors, etc.

32
 FACTORS THAT INFLUENCE AND
DETERMINE THE AMOUNT OF PREMIUM
:
•Limit of indemnity
•Contract sum
•Site location
•Insurance companies’ regulations
•Sources of risk
•Site safety
•Physical conditions of surrounding buildings

33
INSURANCE IN
CONSTRUCTION
INDUSTRY

34
Types of insurances that are commonly
used in construction industry

a) Contractor all risk (CAR)

b) Workman Compensations
c) Public liability insurance
d) Bond/ contract guarantee :
- bid or tender bond,
- performance bond
- advance payment bond
e) Fire insurance

35
 a. Contractor’s all risks (CAR)
Contractors' All Risk insurance (CAR) provides coverage
involving construction of buildings and other civil
engineering works.

It provides coverage against:

Loss or damage to the contract works caused by any

unforeseen and sudden physical loss or damage from
any cause, other than those specifically excluded.

Damage to third party property and/or bodily injury

occurring in direct connection with the erection works.
36
 a. Contractor’s all risks (CAR)

Losses described below are usually covered by the

“Contractor’s All Risks [CAR]” insurance but with
additional premiums:

a) Loss or damage to the structures or machinery to be

erected on site.
b) Loss or damage to the materials on site to be used in
construction work.
c) Loss or damage to the contractor’s equipment and
plant used on site.

37
 Insurance available

Losses described below is also covered by Section II of

CAR policy or may be covered by a separate Public
Liability Policy.

d) Property damage or bodily injury suffered by third

parties within and around the construction site.

38
 b. Workmen compensation
insurance
Contractors/Employers can be held responsible due to:

• personal negligence
• failure to provide a safe place and a safe system of
work
• failure to exercise reasonable care in recruitment of
competent staff
• failure to provide proper machinery and maintaining
them in good working order

39
 b. Workmen compensation
insurance
This policy indemnifies the contractor against all
sums for which the contractor shall be liable to pay
compensation to any employee for personal injury
sustained by accidents or occupational diseases
arising out of and in the course of his employment
under the Workmen’s Compensation Act 1952 and
the subsequent amendments to the Act or The
Common Law.

The standard Common Law limit is RM1,000,000 on

any one accident.

40
 b. Workmen compensation
insurance

This policy covers the contractor in respect of its

statutory liability under the Workmen’s Compensation
Act as well as Common Law to its employees who are
generally not covered by SOCSO.

This policy will only cover foreign workers.

The locals will be covered under the employees social
security Act 1969. (SOCSO)

41
 c. Public liability insurance
It protects the contractor in the event it is sued for
claims that come within the coverage of
the insurance policy.

For construction or other activities that have the

potential to affect third parties (public, visitors,
trespassers, sub-contractors, etc. who may be
physically injured or whose property may be
damaged or both).

42
 c. Public liability insurance
Public liability insurance company has two (or three, in
some jurisdictions) major duties:

1) To indemnify the participant (employer) when held

to pay damages

2) To pay legal defence costs incurred when defending claims

3) the duty to settle a reasonably clear claim

43
 d. Bond / Contract Guarantee :
Bond is an instrument to guarantee the performance of the
Contractor in fulfilling the contractual obligations/
responsibilities as required by the Principal (in a
construction or construction-related contract).

In the event of default of the said contractual obligations/

responsibilities by the Contractor, the Principal shall be
entitled to demand the amount of the Bond and the
Insurance Company shall pay the said amount guaranteed
accordingly. The Insurance Company, in turn, shall recover
the losses from the Contractor and the guarantors.

44
 d. Bond / Contract Guarantee :

⦿ Bond can be issued either in the form of a Bank

Guarantee or an Insurance Guarantee.
⦿ The most common types of bonds in use in
connection with the construction industry are :

a ) bid or tender bond,

b ) performance bond
c ) advance payment bond ( for gov’t
contract only )
45
 d. Bond / Contract Guarantee :
a. Bid or Tender Bond
This is required by a Contractor in connection with the
submission of tender for a contract job to the Principal.

The purpose of the Bond is to guarantee the Contractor

submits a bone-fide tender (in good faith, honest), stands by
it, and is capable of providing a Performance Bond in the
event the said Contractor's tender is accepted by the
Principal.

46
 d. Bond / Contract Guarantee :
b) Performance Bond Insurance
A Performance Bond is to ensure that contractors
faithfully carry out the terms & conditions of a
written contract.

The amount of the bond will be recovered by the

principal should the contractor fail to perform in
accordance with the terms of the contract.

47
 d. Bond / Contract Guarantee :
c. Advance Payment Bond
. This is required in the event a Contractor is applying for an
advance payment from the Principal to help funding the
preliminary costs and mobilization works of the contract.
. The purpose of the Bond is to guarantee the Contractor is able
to make repayments for the advanced money. The mode of
repayment is through deduction/recoupment from subsequent
progress payments, the quantum of which is determined by the
Principal.
. This type of Bond is only applicable for Government contracts
only.

48
 d. Bond / Contract Guarantee :
Financial losses as a result of delay or accidents, bad
weather, default by sub-contractors, etc.

Losses above are mainly uninsurable as these losses arises

from normal trading risks. However some insurance
policies in the Performance or Advance Payment Bonds
and Advance loss of Profits for the Principle are available

49
 e. Fire insurance
Provide coverage against losses or damages of property due to
fire and lightning. It includes furniture , fixture and fittings
already in the building.

Some insurance companies will allow extended cover for loss or

damages with additional premium for certain perils:
[Link] caused by riot or strike.
[Link]
[Link] from vehicles, aircraft
[Link] (lalang) fire, falling trees
[Link], flood

50
 Insurance Act 1996
Under the Insurance Act 1996, all property in Malaysia must be
insured with a licensed general insurer in Malaysia. The property
can be generally classified into 3 categories:

[Link] (dwellings, factories, offices, shopping complexes,

etc).
[Link] (raw materials, finished goods, packaging materials, etc).
[Link] (plant & machinery, furniture, fittings and fixtures,
office equipment and tools, plans and documents, etc).

51
 Insurance Act 1996

All the above are tangible assets belonging to the

Insured or held in trust or for which the Insured is
responsible. These assets are normally covered under a
material damage insurance. When a loss occurs, the
earning power of the Insured can be interrupted. This
earning income lost can be protected by a Consequential
Loss Insurance.

52
 Engineering insurance

Generally, engineering insurance is mainly

confined to 2 main categories:

1. construction insurances
2. machinery insurances

53
Construction Insurance v Machinery
Insurances
Construction insurances encompass construction of
buildings, roads, bridges, erection of plant and
machinery, etc.

Machinery insurances provides protection against loss

of or damage following breakdown and/or accidental
damage to all kinds of plant and machinery including
loss of profits there from.

54
 CAR and EAR insurances

Contractors All Risk (CAR) and Erection All Risks (EAR)

are Policies designed to meet the insurance obligations placed
upon Contractors under the contract conditions.

The Policy covers the works to be executed in accordance

with the contract, temporary works, materials, construction
plant and equipment brought into the site and liabilities
arising out of the performance of the contract. The interest of
the Principal (Employer) is noted on the Policy.

55
 CAR and EAR insurances
In general, CAR insurance is intended to cover buildings and
civil engineering works under construction while EAR for
erection of plant, steel structure and machinery (telco tower,
water treatment plant). Both are broad form in cover on All
Risks basis. However, since EAR relates more to plant and
machinery, cover is usually extended beyond erection to
include testing and commissioning.

Some insurance company combine CAR and EAR in one form.

56
 CAR insurance
Section 1 of the CAR policy covers almost any sudden and unforeseen
physical loss or damage occurring (except as specifically excluded) to the
contract works/property/items insured, during the period of insurance.

Cover for Section II of the policy is in respect of third party liability for
which the Insured shall become legally liable to pay as damages consequent
upon :-
⦿Accidental bodily injury to or illness of third party
⦿Accidental loss or damage to property belonging to third party
⦿The third party liability cover is based on legal liability for accidental loss or
damage in direct connection with the works and happening at or in the
immediate vicinity of the site occurring during the period of cover.

57
 FINANCIAL LIMIT & LIABILITY

Contract Sum Limit of Liability per Accident for an unlimited

no. of accident
1. Not exceeding RM25,000 RM10,000

2. RM25,001 – RM50,000 RM25,000

3. RM50,001 – RM150,000 RM50,000
4. RM150,001 – RM250,000 RM75,000
5. RM250,001 – RM500,000 RM100,000
6. RM500,001 – RM1 m RM150,000
7. Exceeding RM1 m RM200,000

* Based on JKR baseline

58
INSURANCE CLAUSES
UNDER STANDARD
FORMS OF
BUILDING
CONTRACTS
59
 PAM 1998

Clause 19
Insurance against injury to persons and property
and employer’s indemnity
(public liability, workmen insurance )
Clause 20
Insurance of works against fire, etc.
(fire and CAR)

60
 CIDB 2000 EDITION
Clause 36
Insurance for personal injury and property damage.

Clause 37
Insurance for workmen.

Clause 38
Insurance of the works.

61
 JKR (PWD) FORM 203A
Clause 32
Indemnities to Government in Respect of Personal
Injuries and Damage to Property
Clause 33
Insurance against personal injuries and damage to
property.
Clause 34
Workmen’s Compensation
Clause 36
Insurance of works.

62
 JKR (PWD) FORM 203A
32. Indemnities to Government in Respect of
Personal Injuries and Damage to Property
a) Contractor is liable and shall indemnify the
Government for any damage, expense,
liability, loss, claim or other proceedings
against personal injury or death of any person
in the execution of the Works.

63
 32. Indemnities to Government in Respect of
Personal Injuries and Damage to Property
(cont.)
b) Contractor is liable and shall indemnify the
Government for any damage, expense,
liability, loss, claim or other proceedings due
to damage of any property in the execution of
the Works, and also due to any negligence,
omission, breach of Contract, including
default of Contractor responsibilities.

64
32. Indemnities to Government in Respect of Personal
Injuries and Damage to Property (cont.)
c) For any negligence or omission by
Government or S.O. in failing to supervise
Contractor’s site operation, the indemnities
given by the Contractor under sub-clauses (a)
and (b) should not be reduced.

65
 JKR (PWD) FORM 203A
33. Insurance Against Personal Injuries
and Damage to Property
a) That the obligations of the contractor to effect
and maintain insurances is additional to and does
not effect the indemnity given by the contractor
to the government under clause 32

The insurances must be effected before the

commencement of any work under the contract

66
 33. Insurance Against Personal Injuries and
Damage to Property (cont.)

b) The insurance as referred to sub-clause (a) shall

be effected and maintained in the joint names of
the Government and Contractor for the whole
construction period, including the Defects
Liability Period. Contractor is responsible to
produce the relevant policies of the insurance
together with receipts of premium paid to the
S.O.

67
33. Insurance Against Personal Injuries and
Damage to Property (cont.)

c) If any default in renewing such insurance by

Contractor, the Government or S.O. may
renew the insurance as aforesaid and may
deduct the amount paid due to Contractor in
respect of premiums paid.

68
 JKR (PWD) FORM 203A
34. Workmen’s Compensation
a) Contractor is liable and shall indemnify the
Government, and all workmen employed for
compensation payment under the Workmen’s
Compensation Ordinance 1952 and the
Employee’s Social Security Act, 1969.

69
 34. Workmen’s Compensation (cont.)

b) Policies of insurance in the joint names of the

Government and Contractor are necessary at
Contractor own cost and expense to cover his
liability in respect of workmen employed by him.
Also, if any Nominated Sub-contractor to take out,
insurance policies should in the joint names of the
Government, the Contractor and the Nominated
Sub-contractor to cover the liability of Contractor in
respect of workmen employed by the Nominated
Sub-contractor.

70
 34. Workmen’s Compensation (cont.)

c) The policies must be deposited with the S.O.

and Contractor shall maintain it for the whole
construction period, and also covered during
Defects Liability Period where defect
rectification work (if any) is carried out. The
Contractor also responsible to produce the
receipt in respect of premium paid to the S.O.

71
 34. Workmen’s Compensation (cont.)

d) If any default is made by the Contractor in

complying the term of this Condition or any
term of this Contract, the Government or S.O.
may withhold an amount from any money which
would due to Contractor, and pay such claim for
compensation by workmen.
e) The provision in this clause would not derogate
the Government’s right to be indemnified by
Contractor under sub-clause (a) of this
Condition.

72
 JKR (PWD) FORM 203A
36. Insurance of Works
a) The Contractor shall in the joint names of the
Government and Contractor insure against
loss and damage by fire, lightning, explosion,
storm, flood, ground subsidence and
others, including materials and goods so
insured until the completion of the whole
Works.

73
 36. Insurance of Works (cont.)

b) The insurance shall be effected with an

insurance company approved by the
S.O. and the Contractor shall produce to
the S.O. the policy and the receipts in
respect of the premium paid.

74
 36. Insurance of Works (cont.)

c) If Contractor failed to renew such insurance,

the Government or S.O. may renew such
insurance and pay the premium by
deducting the amount from any monies due to
the Contractor.

75
 36. Insurance of Works (cont.)
d) If any occurrences of loss or damage to Work
prior to the completion of the Works, the
Contractor shall restore the damaged work even
before the pay out by the insurance company has
been made. All monies received from the
insurance shall be paid to the Government first
and then be released to the Contractor by
installments on the certificate for payment issued
by S.O. end

76
THANK YOU

77