Construction Insurance – never assume your project is fully covered!

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September 20, 2018
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Construction Insurance – never assume your project is fully covered!

From the humble home to mega structures that defy physics, construction of any scale is wrought with risks and dangers. In this quick guide we introduce the foundation of ‘all risks’ construction insurance policies to help principal contractors and insurers create the best possible cover.

Construction Insurance ‘All Risks’ Policies

Construction insurance - Sampoong Collapse

Sampoong Collapse (Image Source – The Korea Bizwire)

Construction is a dangerous business, and the larger the project, the greater the risk. Buildings usually start with deep foundations in the ground and often end up scraping the sky. Both extremes create heightened risks, with falling items plummeting from the sky and subterranean levels presenting unique perils, especially when crews are tunneling underground.

While the extremes create obvious issues, most activities on a construction site are prone to perils, making construction one of the most dangerous industries in the world. In fact, according to the U.S. Bureau of Labor Statistics, occupations like roofing and first-line supervisors were among the top ten most fatal jobs in 2016. Nearly a thousand construction and extraction workers lost their lives in the U.S. that year.

Construction insurance - Morandi Bridge collapse

The bridge collapse in Genoa claimed 43 lives

Examples of tragic failures such as the Sampoong Department Store collapse in South Korea (pictured), which claimed more than 500 lives, or the recent Genoa bridge collapse (pictured), are a tragic reminder of the results of structural failure. If you’re a contractor or principal on a new project, you have many important and urgent concerns, but insurance is usually something you want to get sorted as quickly and as easily as possible. The two most important factors for creating insurance for construction projects are: a/ defining the project; and b/ understanding exclusions.

Here is a quick guide to help you protect your project with insurance, in the most effective and affordable way.

The long-established, international wordings for this cover are devised to be extremely wide in scope. i.e. ‘all risks’ that could happen with the construction project excluding certain perils. Those perils will be contained in the exclusions section of the policy. So, to understand what is, or what is not covered, we need to examine the exclusions carefully. Everything else is covered.

However, before we come to these exclusions, we need to examine the actual description of the project because each project is unique. Even the simplest of buildings have different design specifications, building materials, fittings, foundations etc. For that reason, it’s advisable that all parties to the project contract meet to discuss insurance arrangements prior to any work commencing.

Construction insurance - Construction site in Moscow

Construction site in Moscow

Creating a project description for construction insurance

Insurers will need to know and get written details on the following project details:

  • The actual drawings (at least the overall plot plan showing separation and any surrounding property involved)
  • Scope of Work (how it will be built, piling type etc.)
  • Bar Chart with milestones showing the full construction period including any testing, commissioning etc.
  • Insurance Clauses in the contract – the requirements of the principal and any lenders differ from contract to contract, so insurers need to match minimum requirements and deductible levels and thereby tailor-make each policy

Care needs to be taken to ensure that the Construction All Risks policy is covering all that is requested under the contract. Factors like offsite fabrication, construction plant & equipment, inland transit, and marine cargo may also be stipulated under the insurance clauses of the contract. Please let your insurers assist on this – use their free advice before confirming cover and a premium quotation. Remember that it’s in their interest to reduce risk and ensure you have suitable cover.

Now let’s look at the ‘All Risks’ exclusions of the standard construction insurance policy. This is the neat way to write a policy wording because you begin with a guarantee that everything is covered, and instead of listing every peril (a very long list when insuring construction projects) you just determine the exceptions.

The Leaning Tower of Pisa

The Leaning Tower of Pisa – not insured!

Common exceptions in construction Insurance policies

War Risks

These are never covered on land – only at sea and in the air where insurers can quantify the risks.

Consequential Losses

Types of losses include penalties for delay and any guarantees given by the contractor on workmanship. These are trade risks which should be borne by the contractor, preferably in the form of separate insurance policies.

Gradual deterioration or wear and tear

This is never covered under any ‘all-risks’ policy. Insurers only cover fortuitous damage, not inevitable damage.

Inventory losses and unexplained shortages

Theft is covered, but only where an actual break-in takes place. For example, it does not include shortages noticed after a routine inventory. Pilferage on construction sites is a common occurrence. Scaffolding is a good example of this.

Defective design and material or workmanship

This needs to be understood. The standard policy excludes the cost of repairing, replacing or rectifying any part of work which is defective in design, material or workmanship.

However, this only applies to the actual part of the structure that is defective, and any other loss or damage caused by the defect is covered. For example, I have seen an almost completed mosque in Abu Dhabi collapse because of a defective girder in the Minaret Tower. The defective girder cost very little but the mosque almost completely collapsed when more than 75% finished. The cost of the collapse was covered excluding the replacement cost of the steel girder, which was less than US$500.

Cessation of work

Silent risks where work has stopped for some reason are excluded until and unless the insurers agree to reinstate the cover. Insurers do not want the site to be unused or unattended at any time during the construction period.

Other exclusions

On certain types of contracts insurers will add specific exclusions e.g., length of trenches before in-fill. It pays to check all exclusions, both general and specific, to each project to ensure you are covered.

Never assume you are completely covered

Every construction insurance client needs to be familiar with their policy, and your insurer should be available to answer any queries whenever you have doubts. Never assume you are covered – make sure of it by knowing what’s included and excluded.

That type of disclosure and transparency is equally important for insurers. You should always be familiar with the project and understand exactly how it will be built. Always check with the client to make sure the cover is appropriately tailored to meet their needs.

The ideal scenario is a safe construction site where perils are understood, risks are reduced, and all eventualities covered. It would be nice to live in a world where clients simply paid affordable premiums for the right cover, and no claims were ever required. But anyone who has worked on a construction site, or in the insurance industry, knows accidents inevitably happen, so a carefully tailored Construction All Risks insurance policy is an incredibly important part of every successful project.

Jeffrey James Whittaker has enjoyed a long and distinguished career in the insurance industry, working in high-profile roles in the UK, Africa, Australia and South-East Asia. He has worked on numerous ‘Mega Projects’ like sky trains, subway systems, hydro-electric dams and various oil/gas projects. Jeff is a Fellow of the Chartered Insurance Institute (London), a Chartered Insurer, and currently Vice Chairman of the Insurance Association of Cambodia (IAC).

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