Belling the insurance cat

Project owner or contractor-who should be buying the insurance? Vikash Khandelwal explains.

On a recent flight back to Delhi, I bumped in to a builder friend, who told me that in most of his projects, he asked his various contractors to buy insurance policies on their contracts. In reality, this practice is surprisingly quite widespread and is not restr¡cted to my builder friend alone. There is often a debate on who is the appropriate party to buy the insurance. Should the principal buy the insurance for the entire project, or should the contractor be responsible for his relevant portion of the construction works?

An assessment of the risks and the insurance requirements at the beginning of the project can be useful tools to assist decision making on who the appropriate parties should be.

When owner/developer should: There are several benefits for the principal to take out cover for the project naming the contractor, consultants and contractor’s sub-contractors as insured parties.

• Seamless and wide cover for the entire project under one policy and certainty of insurance cover
• Economies of scale and cost savings for premiums
• Uniformity including coverage against goods in tran¡sit, during storage and while during erection / construction
• Opportunity to select deductable as per risk appetite
• Project stage insurance covers are designed in a manner suited to the principal. With this claim settlement process may be more effective.
• Control over the structure of cover.
• A principal initiated policy may reduce or prevent subrogation and cross-claims, particularly in circum¡stances where there may be a number of contractors working on different aspects of the project and where their works interface. On the other hand, there may be a number of practical difficulties which may arise where the principal takes out insurance including:
• Who makes the claim, pays the deductible and signs a release for claims?
• What happens if the principal settles a claim with insurers for less than the amount that the contractor believes the damage has cost?
• Has the principal obtained adequate coverage for all contractors? What happens if the actual provisions of the works require one of the contractors to accept greater risks than those insured?

Careful drafting of the policies should be able to overcome the above issues but it is important to address them.

Contractor-specific: A contractor may find himself in direct control of insurance. But fragmented policies may lead to a huge operational disadvantage. Issues may arise in relation to the coordination and checking of policies-whether they provide complete cover or are there gaps where there are any uninsured risks with respect to the overall project. Coordinating and revie¡wing the policies to ensure seamless and sufficient cover for all phases of the project can be a challenge.

There is obviously limited control on the administration of the insurance programme in terms of quality and issues related to obtaining policies, payment of prem¡ums, and the subsequent renewal of the policies not only for the duration of the project but for an identified period after the completion of the project as well. Moreover, with the principal having limited involvement, it may be extremely difficult to ensure uniformity of cover. Insurance as a subject typically draws its structure and enforceability from the legal framework in force.

The benefits of a supervening coverage arranged by the principal were acknowledged by ruling in one of the cases in the United Kingdom way back in 1984:

"There can be no doubt about the convenience from everybody’s point of view, including, I would think, insurers, of allowing the head contractor to take out a single policy covering the whole risk, that is to say cove¡ring all contractors and sub-contractors in respect of loss of or damage to the entire contract works. Otherwise each sub-contractor would be compelled to take out his own separate policy. This would mean, at the very least, extra paperwork; at worst it could lead to overlapping claims and cross-claims in the event of an accident. Furthermore, the cost of insuring his liability might, in the case of a small sub-contractor, be uneconomic. The premium might be out of all proportion to the value of the sub-contract."