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| Photo by Mohammed Sadullah Khan - Massive Construction Project |
As lot of construction activity is taking place in the Kingdom of Saudi Arabia. The following information will be useful to the Principals, Contractors, sub-contractors and other interested parties.
In most of the Civil Engineering or Machinery Erection Projects the Project Management faces the problem of fixing the responsibility for insuring the risks to which the project is exposed and for administering the insurance policies. The Project Manager and the Risk Manager has to assess the risks they face in the Project and shall have to make a decicion on the extent of insurance covers needed. Even when the other parties are obliged to insure various risks relating to the Project ultimately the cost will have to be borne by the Employer directly or indirectly.
2. THE EMPLOYER'S RISKS:
2.1. The Employer has the highest stake in completing the Project and hence in its insurance covers.
2.2. In most of the cases, contracts can be better dealt with by the Employer assuming the responsibility for insurance. The Employer should foresee contingencies such as insolvency of the contractor, default by the Contractors, suspension/ termination of the Contractor replacing him with another Contractor etc while providing the insurance requirements.
2.3. The factors in favour of the Employer carrying the insurable risks are:
(a) The Employer has to pay the premium either directly or indirectly (costs built in the contract price). By combining the insurance requirements of various Contractors the volume of premium will be high enough to secure better insurance terms from the market.
(b) The Employers has the highest stake in completing the project since his investment is exposed to the perils
(c) The Contractors tend to cover their exposure only
(d) Cover can be continued with the Fire Insurers for the completed sections
(e) No gaps or grey areas as in the policies procured by the Contractors
(f) Employer is protected in case of insolvency or termination of the Contractor and apponintment of another to complete the contract
(g) Employer is protected against under-insurance if the insurances are properly arranged
(h) Employer's insurance can take care of common facilities and utilities which may be used by many contractors
(i) Employer can cover the risks of price escalation and replacement escalation where as the Contractors will be unwilling to cover such escalation in price
(j) Coordination and completion of restoration works following a major loss to works carried out by different contractors will be easy if the indemnity is provided by one insurer
(k) Following major losses it may not be possible to replace a machinery with another one of the same kind due to changes in technology. Employer's policy will be able to deal with the situation better in such a contingency
(l) Employer is familiar with the local law and the import and customs law. Hence he can arrange protection needed to meet their reqirement.
(m) If the Employer purchases the materials and supplies the same to the Contractor for Erection disputes may not arise between the Marine Insurer (of the Employer) and the Construction Risk Insurer as to when the damage occurred (when the materials are not checked as soon as they land or at the site) if both risks are covered by the same insurer
(n) Administration of the insurance function will be easier and less expensive if the Employer effects policies including the interest of the Contractors and manages the risk using one centralised office for the whole project. Coordination will be easier with this type of centralised administration. This will also avoid time and effort spent on actions for recovery by different Insurers insuring different interests of the same subject matter affected.
2.4. Even if the responsibility for managing the risks is passed on to the Contractors and the Employer is named as an insured, the Employer will continue to carry the following risks:
2.4.1. MATERIAL DAMAGE AND LIABILITY:
(a) Loss, damage or liability arising out of faulty design of the works by the Engineer
(b) Loss or damage arising out of or aggrevated by the "excepted risks" such as the war, hostilities (whether war be declared or not), invasion, act of foreighn enemies, revolution, insurrection or military or usurped power,civil war, riot, commotion or disorder, ionising radiations or contaminations by radio-activity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel, radio-active toxic explosive or other hazardous properties of any explosive, nuclear assembly or nuclear component thereof, pressure waves caused by air craft or other aerial devices travelling at sonic or super sonic speeds, or any other operation of the forces of nature as an experienced contractor could not foresee, or reasonably make provision for (force majeure)
(d) Loss or damage arising out of riot, strike or civil commotion or disorder
(e) Loss or damage to the works or part of the works taken in to use or is occupied by the Employer
(f) Non disclosure or misdescription of any material fact affecting the risk or any material changes affecting the risk
(g) Loss or damage arising out of or aggrevated by wilful act or wilful negligence of the insured (Employer) or his responsible representative
(h) Loss or damage arising out of or aggrevated by cessation of work whether total or partial
(i) Loss or damge occuring after commencement of tests on the second hand machinery installed
2.4.2. MATERIAL DAMAGE SECTION:
In addition to the above risks mentioned in paragraph 2.4.1, the following risk are also to the account of the Employer even if the responsibility for insurance is passed on to the contractor:
(a) Financial, consequential and trade losses such as the loss of anticipated profits due to delayed completion of the project, additional capital to be invested due to escalationin the project cost, penalties, fines, failure to secure special priviledges from the authorities due to delays (eg. concessional customs duties available during a period), loss of the targeted market etc.
(b) Faulty design or defective material if these are supplied by the Employer
(c) Loss or damage to materials supplied by the Employer due to normal wear and tear, corrosion oxidation or other normal atmospheric conditions
2.4.3. THIRD PARTY LIABILITY:
In addition to the above risks mentioned in paragraph 2.4.1, the Employer is exposed to the following risks in case of bankruptcy or closure of the Contracting Company the following risk are also to the account of the Employer even if the responsibility for insurance is passed on to the Contractor, unless each of the following risks is adequately insured by the party directly liable for the loss under specific policies such as the Workmen Compensation Insurance Property All Risks Insurance, Aviation Liability Insurance or the Motor Vehicle Insurance.
(a) Legal liability to pay compensation for damages consequent up on accidental bodily injury to or illness of third parties not connected with the project work (whether fatal or not) and accidental loss of damage to property belonging to third parties occuring in direct connection with the erection, construction or testing on the insured project work and happening on or in the immediate vicinity of the of the site during the period of the cover
(b) Legal liability to pay similar compensation for damages to one party involved in the construction work caused by another party involved in the same contract work
(c) Liability consequent upon bodily injury to or illness of Employees or Workmen of the Principal, Contractors or any other Firm connected with the Project
(d) Liability consequent up on loss of or damage to property belonging to or held in care, custody or control of the the Principal, Contractors and any other Firm connected with the Project
(e) Liability consequent up on any accident caused by vehicles licensed for general road use or by waterborne vessel or craft
(f) Liability assumed by agreement unless such liability would have attached also in the absence of such agreement
(A) DAMAGE TO MATERIALS USED IN THE PROJECT:
Construction Projects involving Civil Engineering Works and Machinery Erection are exposed to the following risks:
1. Materials forming part of the construction work:
(a) Construction/ Erection Risks while carrying out exploratory and/ proto type testing works such as drilling of test bore holes, exploratory excavations etc
(b) Storage risks at the suppliers' and manufacturers' premises for imported and locally supplied materials which have already been sold but not delivered to the Contractor/ Principal
(c) Marine/ transit risks from the suppliers'/ manufacturers' premises to the site of erection for materials to be imported including the risks of incidental & or intermidiate storages
(d) Storages in bonded warehouses and/ or Project warehouses near the port of entry
(e) Transits to and from the fabricators premises outside the construction site (for materials procured by the Contractor/ Principal and sent for fabrication/ assembly/ further process prior to Erection at site)
(f) Risks during storage and fabrication/ assembly/ process at the intermediate fabricators premises mentioned in (d) above
(g) Off site storages and inland transit from such storage locations to the site
(h) Storage at site
(i) Storage risks of materials procured for contracted/ subcontracted work but in custody of the Principal/ Contractor waiting to be handed over to the Contractor/ Sub-Contractor
(j) Normal construction/ erection risk at site
(k) Risks due to defective material and/ or defective workmanship
(l) Risks due to faulty design
(m) Completed portion of the work handed over to the Contractor but not handed over to the Principal
(n) Completed sections taken over by the Principal but not taken in to use due to delay in completion of other sections
(o) Risks during testing of each section of the Machinery on load
(p) Integrated final testing of the complete line of Machinery on full load resulting in achievement of commercial production
(q) The period of test run on load
(r) Risks during the Period Of Maintenance
(s) Risks during the Period Of Guarantee
2. Materials used for or inconnection with the Project but not forming part of the work (temporary works not fully written of in the Project, Constructional Plant, Equipment and Machinery and Temporary Buildings such as Stores, Labour Camp etc):
(a) Risks during transit from the storage premises of the owner to the site of Erection/ Construction
(b) Risks during storage off site
(c) Transit to and from such storage location to site and back daily/ periodically
(c) Risks during storage at site.
3. Unless specifically insured a normal Contractors/ Erection All Risks Policy will indemnify the Insured the cost of rectifying or replacing the item affected to the extent insured provided the loss did not occur due to any excepted peril. Such cover is provided for items 1(g) and 1(i) above if only the total contract value is declared for insurance. Even for these the following losses and/ or costs are not covered unless specifically agreed at the inception of the policy:
(a) Architects, Surveyors and Consulting Engineers Fees to be incurred for reinstating the damaged property
(b) Riot, strike and civil commotion risks
(c) Cost of removal of debris following an indemnifiable damage to the contract work
(d) Express freight (other than air freight) for replacements/ spares following an occurrence
(e) Overtime, night work and holiday wages for repairs/ replacements following an occurrence
(f) Air freight for replacements and spare parts to be procured following an occurrence
(g) Additional customs duties for replacements/ spares to be procured following an occurrence
(h) Escalation in prices of replacements/ spares to be procured following an occurrence (escalation may be due to inflation, incresed demand, reduced supply, increased cost of production, exchange rate fluctuation, original discounts not available for replacements etc; estimation of this should be based on the replacement cost of the project following a major catastrophic loss at the end of the construction period)
(i) Escalation in the cost of the project due to the reasons stated in (h) above (limit of indemnity being the Escalated Project Value)
(j) Cost of new parts for repairing second hand machinery and equipments
(k) Loss of or damage to existing or surrounding property (not forming part of the contract work) caused by the construction work
(l) Cost of removal of debris following land slides/ erosions and the cost of repairing the erroded slopes
(m) Cost of replacement with newer/ improved model of the machine in the place of the destroyed (total loss) machine when the same model or its equivalent is not produced any more
(n) Financial losses such as the loss of expected profits to be generated caused by the delay in completion of the project on account of an indemnifiable material loss or damage
(o) Guarantee for the works following the maintenance period (5 years or 10 years guarantee for Buildings and Civil Engineering Works and additional 1 or 2 years guarantee for Machinery)
(p) Loss of or damage to the Material Handling Equipments and other Machinery when they are being used for the Construction/ Erection activity after such equipments have been installed unless such equipments are insured as "Construction Plant and Machinery" for the period they will be used for the erection work by the Contractor or the Principal. Such equipments should also be insured as part of the Contract Work (the Contract Work sum insured also should include the value of such equipments) if such equipments will be taken over by the Principal as a part of the Main Project). An example is a gantry crane installed in a production bay and used for lifting the production machinery during installation.
(B) LIABILITY TO THIRD PARTIES ARISING OUT OF THE WORK:
Third party liability risks to which the Principal is exposed to are:
Liability for accidental bodily injury or illness and for accidental loss of or damage to property caused by
(a) The Principal or his representatives and employees to Third Parties and the Property of Third Parties not connected with the Project
(b) The Principal or his representatives and employees to other Parties engaged in the Contract Work and to their Property
Liability for accidental bodily injury or illness and for accidental loss of damage to property caused by
(a) The Contractors and other parties employed by the Principal in connection with the Construction/ Erection Work to third parties not connected with the project
(b) Any of the Contractor or the other parties employed by the Contractor in connection with the Contract Work caused to another party or another Contractor employed for the same project
Liability for loss of or damage to property in care, custody or control of the Principal
CHECKLIST FOR RISK MANAGERS OF CONSTRUCTION/ ERECTION PROJECTS:
DESIGN & CONSULT:
Insurance cover for Architects, Design Engineers and Consulting Engineers:
(a) Professional Indemnity cover to be producured by the Architects, Design Engineers and Consulting Engineers: limit of indemnity to be specified by the Principal depending on the exposure
Name of the specialist Period of cover Limit of indemnity
(b) Personal insurances for these officials and their assistants:
Cover Period of Limit of Schedule of
required insurance indemnity items
Motor vehicle insurance
Workmen Compensation insurance
General liability insurance
Insurance covers for the employer/ principal:
(a) Contactors all risks and third party liability covers including the following extensions:
Risks to be covered:
Insurance covers for the contractors and the sub contractors:
(a) Marine/ inland transit cover for materials supplied
(a) Contractors all risks and third party liability covers including the following extensions
(b) Plant all risks cover
(c) Motor vehicle insurance
Cover to include:
(d) Workmen compensation insurance
(e) Medicare and personal accident covers
(f) Bonds
(g) Fire and perils covers for off site accommodation, offices, warehouse buildings etc (permanent buildings taken on lease and the contents not absorbed in the contract price)
(h) General liability cover
Courtesy - S A Khan, General Manager, Creative Associates
