What is an Insurance?
An Insurance is a contract between two parties i.e. the insurance company (insurer) and the policy holder (insured). Under this contract, the insurer agrees to cover the losses faced by the insured in the event of some incidents which result in damages to the insured. The insured pays certain amount to the insurer known as premium.
Why is Insurance necessary in a construction project?
Construction projects are complex in nature and highly at risk of accidents resulting in damages to the property, machinery and most importantly to human life. In the event of such unforeseen incidents, the liable parties will be required to compensate the aggrieved parties. So in order to minimize this risk, the parties in a construction project get themselves insured by taking up various types of insurances.
What are the different types of Insurances on a construction project?
- All risk insurance
- Professional Indemnity Insurance (PII)
- Workmen’s Compensation insurance
- Third-party liability insurance / Public liability insurance
- Plant & Machinery insurance
- Employer liability insurance
- Cargo insurance
- Delay-in-start-up insurance
- Delayed completion insurance
- Standstill insurance
- Property all risk insurance
- Decennial liability insurance / Deferred liability insurance / Latent defects insurance
- Product liability insurance
- First party insurance
All risk insurance
All risks insurance (sometimes referred to as Contractor’s All Risk policy or CAR policy) covers physical damage to the works and site materials. It may be taken out by the contractor or the employer as specified in the construction contract. The contract usually details the specific insurance requirements such as which risks must be insured against and the amount of insurance. Whichever party obtains the insurance, the contract often requires it to be maintained in the joint names of the employer and the contractor.
The amount of insurance is usually the total contract value + some additional % for professional fees, demolition, debris removal etc. As per FIDIC, this % is 15%.
The insurance is maintained until the practical completion of the project.
Professional Indemnity Insurance (PII)
Professional indemnity insurance insures against liability arising from professional negligence. This usually includes a contractual liability that is equivalent to professional negligence, such as a breach of a contractual obligation to exercise reasonable skill, care and diligence when carrying out design. Architects, engineers, other professional consultants and a building contractor that owes a design responsibility to its employer are usually required to maintain such insurance. Even Cost Consultants can take PII to safeguard themselves against any breach such as over-certification of Final bill of a Contractor. It may also include cover for infringement of intellectual property
rights, breach of confidentiality and destruction/loss of documents. It is usually valid from the Project start date to the Extended Reporting Date (ERP).
Workmen’s Compensation insurance
Workmen’s Compensation Insurance covers the employer’s liability for compensation as a result of their employees suffering bodily injury or death due to work related accidents which occurred during the course of performance of his employment of the insured’s business. The compensation payable to employees is according to labour laws in force in the particular country.
Third-party liability insurance / Public liability insurance
Public liability insurance covers liability arising from death or personal injury to third parties other than the insured’s own employees and for damage to property belonging to third parties. Payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally and contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the right to defend the insured. The legal costs are also covered under the Liability Insurance Policy.
Plant & Machinery insurance
The policy covers losses or damages to Electrical or Mechanical machinery, Process plant and equipment in factories from causes such as defects in casting and material, faulty design, bad workmanship, physical explosion, tearing apart on account of centrifugal force, short circuit, vibration, mal-adjustment, misalignment etc. The Sum insured may be either on the basis of the actual value or the new replacement value of the property but should be adequate to cover the total exposure.
Employer liability insurance
Employer liability insurance protects the employers from major financial loss if a worker experiences a job-related injury or illness that workers compensation insurance doesn’t cover. Employer’s liability insurance can be packaged with workers compensation insurance to further protect companies against the costs associated with workplace injuries, illnesses and deaths that aren’t covered under workers compensation.
Cargo Insurance covers loss and/or damage of cargo while it is in transit between the points of origin and final destination. Goods may be transported by sea, air, or land. Cargo Insurance is essential for businesses engaging in international trade, especially those shipping large quantities of goods by boat.
Delay-in-start-up insurance or DSU insures project owners for the financial consequences of a delay to project completion arising from an insured physical damage event.
Delayed completion insurance
This insurance protects the insured against costs arising from the delay of a construction project. Delay in completion coverage may offer protection against soft costs caused by the delay, including real estate taxes accrued, as well as protection against additional construction expenses, including additional fees for engineers and architects.
There may be cases when projects are either suspended or terminated or absconded. The All risk policy ceases to cover any damages arising out of such situations. In such cases, a standstill insurance can be taken to protect any damages to the existing unfinished construction works. A site survey is conducted to assess the situation & progress.
Property all risk insurance
Property all risk insurance indemnifies the insured for accidental physical loss of or damage to the Property Insured which is situated at the premises described in the policy. This will include loss or damage by Fire, Lightning, Aircraft, Explosion, Earthquake, Strike, Riot, Civil Commotion, Malicious Damage, Storm, Tempest, Flood, Bursting or Overflowing of Water Apparatus (including Sprinkler Leakage), Impact damage, Theft or Attempted Theft and Accidental Loss or Damage. The Sum Insured may be either on
the basis of the actual value or the new replacement value of the property insured.
Decennial liability insurance / Deferred liability insurance / Latent defects insurance
Decennial liability insurance is taken out (by the contractor or principal) to cover costs associated with the potential collapse of the building after completion. The name derives from the fact that it covers the 10 year period after completion of the project.
Product liability insurance
Product liability insurance is taken by suppliers of products to protect against liability for injury to people or damage to property arising out of products supplied by them. Suppliers of equipment to a construction or engineering project, such as lifts or escalators, may be required to maintain such insurances.
First party insurance
It is a type of insurance policy under which an insured (i.e. the first party) is paid by their insurer (the second party) in the event of an accident, injury, or loss whether caused by itself or someone else (the third party).