Basics of Construction

Insurance
A Presentation to the HKIS

What are we going to cover

tonight?
Introduction
Why do we have Insurance?
Who is who in Construction Insurance?
Categories of Construction Insurances
A Controversial Comment
Some APC questions

Introduction

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Why do we have Insurance?

Insurance transfers part of a commercial
risk
The risk still remains, it is now being
shared with an insurer
The liability still remains
Insurance does not remove liability
Seek balance sheet protection

Why do we have Insurance?

Protection of assets
Protection against liability to third parties

Who is who in Construction

Insurance?
The Insured
The Insurance Broker
The Insurance Agent
The Insurance Company
The Loss Adjuster

Categories of Construction
Insurances

Contractors All Risk

Does

not cover all risks!

Deductibles
Exclusions
Conditions / Memoranda
Limit of Indemnity
Geographical restriction for territorial limits
7

Categories of Construction
Insurances

Third Party Liability

Does

not cover all risks!

Deductibles
Exclusions
Conditions / Memoranda
Limit of Indemnity
Geographical restriction for Legal Jurisdiction
8

Categories of Construction
Insurances

Delay in Start Up Insurance

Covers

Consequential Loss following an insured

event under the CAR Policy
Note consequential losses excluded under CAR
Policy
Contractor frequently gets EOT due to insured event
under CAR Policy
Provides Owner protection for delay in start up
High Premium cost
9

Categories of Construction
Insurances

Contractors Plant and Equipment

Does

not cover all risks!

Deductibles
Exclusions
Conditions / Memoranda
Limit of Indemnity
Geographical restriction for territorial limits
10

Categories of Construction
Insurances

Professional Indemnity Insurance

Not just for designers
No statutory requirement

for construction
professionals in Hong Kong
Does not cover all risks!
Deductibles
Exclusions
Conditions / Memoranda
Limit of Indemnity
Geographical restriction for Legal Jurisdiction

11

Categories of Construction
Insurances

Employees Compensation Insurance

Statutory

obligation to insure in Hong Kong

Indemnity to Principal W338

Other Compulsory Insurances

Motor

Liability
Aircraft Liability

12

A controversial comment
"Indemnity to Principal (W338)

It is hereby understood and agreed that this Policy is extended to indemnify ....
(hereinafter call the Principal) against Liability under the Law(s) or at Common Law in
like manner to the Insured but only so far as concerned the liability of the Principal to
employees of the Insured engaged in connection with a contract undertaken by the
Insured for the Principal.
Provided always that
(1) the Company shall not be liable under this Endorsement at Common Law in
respect of any injury by accident or disease due to or resulting from
any act default or neglect of the Principal, his servants or agents;
(2) the Principal shall as though he were the Insured observe fulfill and
be subject to the terms exceptions and conditions of this Policy
insofar as they can apply;
(3) the Company shall have full conduct and control of all claims in
respect of which indemnity is granted by this Endorsement.
Subject otherwise to the terms exceptions and conditions of this Policy."
13

A controversial comment
Indemnity to Principal (W338)
It is hereby understood and agreed that this Policy is extended to
indemnify .... (hereinafter call the Principal) against Liability under the
Law(s) or at Common Law in like manner to the Insured but only so far
as concerned the liability of the Principal to employees of the Insured
engaged in connection with a contract undertaken by the Insured for
the Principal.
Provided always that
(1) the Company shall not be liable under this Endorsement at Common Law
in respect of any injury by accident or disease due to or resulting from any
act default or neglect of the Principal, his servants or agents;

14

A controversial comment
Indemnity

to Principal W338 Proviso 1

The

Employer (Principal) has no cover for

Common Law Liability for accident or disease
arising out of his negligence and that of his
servants or agents
The TPL policy will not cover him (See next
slide)
He has a liability under Occupiers Liability
Ordinance

15

A controversial comment
TPL

exclusion might look something like

this

Provided always that the indemnity granted by this Policy shall

not apply to nor include:..
Liability for death of or bodily injury (including illness) arising out
of or in respect of undertaking any activity in connection with an
Insured Contract in respect of:
(i) any person employed directly or independently by or the
proprietor of any Contractor and/or sub-contractor of any tier;
and
(ii) any person to whom any part of the Insured Contract have
been sub-contracted including but not limited to self-employed
person and/or sole-proprietor.
16

A controversial comment
Indemnity

to Principal W338 Proviso 1

Did

you provide the Prelims clause wording

stating that a Principals Indemnity clause
W338 was to be included in the Contractors
EC Policy?
Does the Employer know about Proviso 1 to
W338?
Are you professionally qualified to be able to
draw up a Insurance Specification or provide
Insurance advice?
Does your Employers PI Insurance cover the
provision of Insurance Advice?
17

A controversial comment
Quote from notes to Assessors for APC
paper Autumn 2002
As a side effect of their expertise in contract, Quantity
Surveyors are now deemed by the Employer and fellow
consultants as having the responsibility for checking the
insurance policies. While Quantity Surveyors should not
profess themselves as insurance experts, their expertise in
providing advice from the contractual aspect would be an
edge over other consultants and may probably be one of
the factors why Quantity Surveyors are necessary for a
project

18

APC question no. 1

With the presence of the indemnity Clause

18 of the Conditions of Contract, why then
is there a need for Insurance clauses 19
and 20 which effectively require the
Employer to bear the costs of the
insurance premium?

19

APC question no. 1

Indemnity clause defines liability
Insurance clauses indicate required
insurances
Insurance Policy does not relieve or limit
Contractors liability
Liability may not be fully indemnified by
the required insurance policy

20

APC question no. 1

The liability arising from the Indemnity may
exceed the Contractors financial
capability. If he is bankrupt he cannot
indemnify!
Provides an independent and potentially
financially stronger source of funding for
the indemnity than either the Contractor or
Employer

21

APC question no. 2

What is the differences between the scope

of insurance cover required by clause 20
and that provided by section 1 of the usual
Contractors All Risks Insurance Policy?

22

APC question no. 2

Clause 20 calls for a named perils

Insurance policy. In other words the Policy
only responds if the works have been
damaged by one of the named perils

A usual CAR policy will respond to any

damage to the works, subject to
exclusions, conditions etc.
23

APC question no. 3

What is the purpose of specifying limits for

insurance excesses in the tender
documents and the implications of
specifying higher or lower limits?

24

APC question no. 3

Purpose of specifying excess levels

Excess

level affects the premium

Common basis for pricing, but this can cause
problems as well.
Excess or deductible requires the insured to
suffer the first part of any claim. Makes him
take care and excludes trivial claims which
incur Insurers administration costs greater
than value of claim.
25

APC question no. 3

Consequence of Low Excess levels

Higher

premium
Makes smaller claims claimable.
Reduces incentive to take care

26

APC question no. 3

Consequence of High Excess levels

Lower

premium
Excludes smaller claims
Increases risk, Tender price might be higher

27

APC question no. 4

Why is the Insurance of the Works policy

required to be in effect until 14 days after
Practical Completion while the Third Party
Liability Insurance Policy is required to be
in effect until the end of the Defects
Liability Period?

28

APC question no. 4

Insurance of the Works (CAR)

This

covers damage to the Works

Upon issue of the Certificate of Practical
Completion Contractor is relieved of his Care
of Works obligation
Grace period of 14 (or sometimes 28) days is
to allow Owner to make his own insurance
arrangements
29

APC question no. 4

Insurance of the Works (CAR)

Difficulties

for succeeding Contractor (if any)

to insure completed work carried out by
another, also more expensive

30

APC question no. 4

Third Party Liability Insurance

Risk

of legal liability to Third Parties continues

as long as Contractor continues to work on
site for any reason, extra works or defect
rectification
Owner should effect his own TPL insurance
with his Property All Risks insurance upon
taking over the works
31

APC question no. 5

What is the purpose of specifying a cross

liability clause and which type of insurance is
this applicable to?
This

is applicable to Third Party Liability Insurance

Policies
Has the effect of treating each insured (if there is
more than one) as if they were separately insured
Allows one insured to claim against another, whilst
Insurers waive subrogation (right of recovery) right
Limit of Indemnity remains the same
32

APC question no. 6

Which are the empowering clauses in the
Conditions of Contract and its
corresponding Standard form of NSC
imposing obligations on the Contractor
and the NSC to respectively effect ECI?
Under which Insurance Policies are the
Resident Architect / Engineer covered for
death / injury caused by accident on site?

33

APC question no. 6

Which are the empowering clauses?

There

is a statutory obligation, even if the Contract is

silent
Clause 4 requires Main Contractor to comply with
Law
Clause 19(1)(a)(i) requires Main Contractor to insure
for personal injury or death out of the works. This
covers workmen and third parties
Clause 4 of NSC requires Main Contractor and NSC
to respectively effect insurances for liability under
statute and Common Law for workmen employed by
them

34

APC question no. 6

Under which Insurance Policies are the

Resident Architect / Engineer covered for
death / injury caused by accident on site?
His

employers
The inured person or his insurer can sue the
person causing the accident

35