Mitigation of Risk through Insurance in Construction Contracts

Mitigation of Risk through Insurance in Construction Contracts

1.     General

·       Infrastructure construction contracts are often very large and very complex and follow a formal and complex bidding process. Therefore, the potential for loss in construction-related events can be devastating. The size and nature of most construction contracts has a significant necessity for requiring specific insurance for different types of exposure to risk.

·       The construction contracts are mostly related to public entities. Therefore, there are a number of requirements and restrictions, affecting risk transfer in such contracts. One significant restriction is the extent to which a public entity may be held harmless for damages arising from construction contracts.

·       The risk-identification, risk-allocation and identification of specific insurance should be carried out early in the project preferably at the planning and design stage so that Entity of owner clearly identifies insurance requirements and provide the bidding contractors with all the requirements.

·       Risk is a probability of damage, injury, liability or any other accidents caused by external or internal vulnerability. The construction industry is subject to following risks: 1. Environmental Risk: Natural Disaster, Weather and season, Pollution. 2. Technical Risk: Uncertainty of resource and availability of materials, inadequate site investigation, incomplete design, 3. Financial Risks: Delays, price escalation, fluctuation in estimates. 4. Construction Risks: Dispute with labour, Damage to third party properties and persons, Change of sequencing, non-availability of resources, variations, safety of workers, safety of work, safety of equipment due to accidents, fire, water, collapse, earthquake etc.

2.      Contract clauses related to risks and insurance

2.1 A major feature of any construction contract is to allocate risks between the parties for example the risk of damage to the Works and employees, claims by third parties for personal injury, property damage and infringement of intellectual property, are allocated through specific provisions of insurance. In addition, the risks of delay, defect liability during DLP, T&P damage during transport may also require to be insured.

2.2 Risks anticipated are generally of following nature:

Responsibility Allocated to Contractor [for the care of the Works, Goods and Contractor’s Documents from the Commencement Date until the Date of Completion of the Works]. The Contractor shall also be liable for any loss or damage, which occurs after the issue of a Taking-Over Certificate and which arose from an event which occurred before the issue of  Taking-Over Certificate, for which the Contractor was liable. Risks for contractors are wider than the risks for consultants. There can be cases where loss or damage due to sabotage by persons other than those of contractor, which is generally not defined.

§ Loss or damage to the works, materials, equipment and documents.

§ Loss or injury to the Contractors’ persons

§ Loss or damage to the property other than the Work.

§ Loss or damage relating to the matters or events risk of which is allocated to the Employer.

§ Loss or damage to the facilities provided by the Employer to the Contractor

§ Loss or damage to the property or person of the third party. [ i.e. party other than Employer and Contractor and not designed by the contractor], exceptional events and Employers other contractors.

§ Claims related to infringement of intellectual or industrial property rights of third parties when the infringement takes place out of contractor’s design, execution of works and equipment.

§ In an international construction project, Plant or Materials may be manufactured a country other than where the Site is located. Consequently, even though the occurrence of these events outside of the Country may also cause loss or damage to the Goods (or even possibly the Contractor’s Documents), the risk of such loss or damage is not an Employer’s risk and thus should be borne by the Contractor.

Responsibility Allocated to Employer [for the care of the Works after Taking-Over Certificate is issued (or is deemed to be issued) for any Section or Part or the date of termination of the Contract]. Sometimes, the Employer takes over the works for a limited use, nevertheless, the risk is allocated to the Employer, therefore the PCC may add like ‘other than as a temporary measure which is either specified in the Contract or agreed by both Parties’, if any such use is intended’.

·       For third party claims in respect of damages, losses, and expenses for bodily injury, sickness, disease or death, or loss of or damage to any property other than the Works which is attributable to the Employer. What will the responsibility of risk be determined if it is unclear whether damage has been caused by defective design or by faulty workmanship.

·       Claims related to infringement of intellectual or industrial property rights of third parties when the infringement takes place out of Contractor’s compliance with the specifications, design and drawings given in the contract agreement or its variation or works being used by the Employer for a purpose other than intended or due to a thing not provided by the contractor.

·       While stipulating for optional termination of contract, contracts provide ‘the Cost of removal of Temporary Works and Contractor’s Equipment from the Site and the return of these items to the Contractor’s place of business in the Contractor’s country (or to any other destination(s) at no greater cost)’, and while stipulating Consequences of Exceptional Event’ it provides ‘in the case of rebellion, terrorism, riot, strike , encountering explosive materials, ionising radiation or contamination by radio-activity [except as may be attributable to the Contractor], occurs in the Country, payment of such Cost shall be the responsibility of Employer.

·       The contractor shall not be responsible for any loss or damage occurring due to execution of works as per the contract, use by the Employer, faulty design and specifications given by the Employer, forces of nature [which an experienced contractor have reasonably expected]

Shared Responsibility: The liability of one party to indemnify the other party, shall be reduced to the extent the other party may have contributed to the said damage, loss or injury.

Insurance not available for exceptional events: Insurance for exceptional events is generally not available in many countries. An Exceptional Event or Force Majeure is the event which cannot be substantially attributed to a party and is beyond any Party’s anticipation and control and no party can avoid it. An Exceptional Event may comprise but is not limited to any of the following events or circumstances (a) war, rebellion, terrorism, riot, strike, encountering explosive materials, ionising radiation or contamination by radio-activity [except as may be attributable to the Contractor], earthquake, tsunami, volcanic activity, hurricane or typhoon.

From the above, it may be seen that the Employer is allocated responsibility for the matters set out for the reasons including Intellectual Property Rights, which are not generally insurable on commercially reasonably terms, therefore, the indemnity by the Employer is very important.

Limitation of Liability: Liability of parties for abovementioned risks excludes loss of profit, loss of contract or any other indirect loss and limits the total liability of the Contractor to the sum stated in the Contract Data. This should be part of the risk allocation clause.

3.         Insurance: Insurance is a social device to reduce or eliminate risk of life and property. It is a contract between two parties where one party [ Insurer or ] undertakes to pay [ to cover losses] the other party [Insured] on happening of a certain risk event in exchange of a fixed sum [called premium]. Insurance rate is the factor used to determine premium against the insurance coverage.

Need for Insurance: An asset or person may get damaged / injured, destroyed/ killed or may become non- operational due to certain risks. Insurance provides sense of security against loss of income, wealth or life. Risks are unpredictable in nature. Insurance does not protect the asset or life, it assures that the insurer will bear the loss.

When general ways of risk allocation do not work out as intended, indemnity and insurance as risk allocation mechanisms play important role in the construction contracts The contract should provide that which party should obtain which insurance policy under the given circumstances. The third-party beneficiary or noted interest beneficiary may also be identified.

Insurance vs Indemnity: Insurance transfers risk from one party to another in exchange for a premium. Insurance hedges against the cost of claims caused directly by the insured or other affiliated third parties. Indemnification involves three parties: party one (indemnitor) makes a promise of financial protection to party two (indemnitee) for any potential legal liabilities and claims issued by a third party.

In the provisions mandating a party to get insurance on behalf of another party, consideration should be taken on how the insurance and indemnity provisions will co-exist.

4.    Insurance Laws in India:

Insurance business in India is divided in three groups: Life insurance, General Insurance and Re-insurance. General Insurance is further divided in a. Marine, fire, Motor Vehicle and Miscellaneous Insurances. Reinsurance occurs when the insurer passes on some the coverage to another insurance company, because it is unable to retain the entire risk.

Insurance Regulatory and Development Authority (IRDA), an autonomous body regulates and develops and regulates the insurance industry with the objective to promote competition, enhance customer satisfaction while ensuring the financial security of the insurance market.

Following Acts and Rules mainly regulate the Insurance business in India: Insurance Act, 1938 with Insurance Amendment Act, 2002. · IRDA Act, 1999 & Regulations passed thereunder. Exchange Control Regulations (FEMA). · Indian Stamp Act, 1899. · Consumer Protection Act, 1986. · Insurance Ombudsman Rules, 2017 · Labour Law legislations. ·Public Liability Insurance Act, 1991. · Employee State Insurance Act,1948  · Consumer Protection Act 1986

Essentials of a valid Insurance contract

For a valid insurance contract, the proposal, the acceptance and the consideration are the essential components. Every person who is of the age of majority is competent to enter into a contract according to the law and who is sound mind and is not disqualified from contracting by the law. Both the insurance company and the Policyholder must agree on the same thing in the same sense. The consideration or object of an agreement must be lawful.

5.     Insurance Policies prevalent in India:

5.1 Contractor's All Risk Policy (CAR): This policy gives financial protection to the Contractors in the event of an accident to the works under construction. In case the policy period exceeds 12 months, the premium can be paid in quarterly instalments. All risks insurance typically covers the full reinstatement value of the works plus a mark-up for any ancillary costs such as consultancy and professional fees, that are incurred.

The defects are usually excluded from all risks insurance policies, but the cover can be purchased for damage that a defect causes to other parts of the works. This insurance is generally available only if the works are being undertaken in accordance with well-established construction techniques.

Contractor and Employer jointly take-out CAR insurance policies. Financing companies have the option of being named to the policy. Because multiple parties are included in the policy, they each retain the right to file a claim against the insurer, all parties have the duty of informing the insurer of any injuries and damages that may result in a claim.

The CAR insurance policy covers all the parties on a project, regardless of the type of damage or who caused the damage. Insurers who underwrite this type of policy lose the right to subrogation.

A CAR policy covers risk of fire, flood, wind, earthquakes and water damage, construction faults and negligence. But it does not cover damage due to normal wear and tear, wilful negligence or poor workmanship. The policy can also be expanded to cover Additional custom duty, Air freight, Damage to surrounding property, Debris removal and Earthquake. The losses incurred as a result of a delay in opening the damaged property while the damage is being repaired may also be covered. CAR policy can also be expanded to include a provision price for escalation.

Exclusions:

·       War, invasion, act of foreign enemy, hostilities or war like or destruction or damage by order of any Government 2. Nuclear reaction, nuclear radiation or radioactive contamination; 3.  Wilful act or wilful negligence of the Insured or of his responsible representative; 4. Cessation of work whether total or partial. 5. loss, damage, caused by any act of terrorism. 6. loss discovered only at the time of taking an inventory; 7. normal wear and tear, gradual deterioration due to atmospheric conditions or lack of use 8. loss or damage due to faulty design;

·       The Excess stated in the Schedule to be borne by the Insured in any one occurrence. 2. Liability consequent upon - a) bodily injury to or illness of employees of the Contractor’s or the Employer’s or any other firm connected with the project b) Loss of property belonging to the insured; c) any accident caused by licensed vehicles d) any agreement by the Insured to pay any sum by way of indemnity.

·       Any extra charges incurred for overtime, work on holidays, express freight (excluding air freight) [unless agreed upon at an additional premium to be prescribed by the Company].

·       Loss of or damage to property located on or adjacent to the site and belonging to or held in care custody or control of the Employer or the Contractor [shall only be covered if occurring directly due to the construction of the items insured].

·       Damage to construction/erection machinery, plants and equipment.

·       Third party liability (TPL) cover during extended maintenance.

Exclusions restrict the insurance cover. Sometimes, these may exclude guarantees, delay damages, fitness for purpose. Therefore, extent of cover should be reviewed carefully in the light of risks involved.

Sum Insured

The sum insured shall not be less than the completely erected value of the property inclusive of freights, custom duty, and erection cost [i.e. the contract amount] and it shall be increased or decreased in the event of any material fluctuation in the level of wages or prices.

5.2 Professional Indemnity Policy: This policy is meant for professionals or the consultants [i.e. Architects and Engineers] to cover liability falling on them as a result of errors and omissions committed by them whilst rendering professional service. Normally professional indemnity excludes cover for “fitness for purpose” warranties. Professional indemnity insurance is made on “a claims made basis” rather than when the breach of professional duty actually occurs. It means the professional indemnity insurance is generally required to remain in place until any limitation period, [say 10 years] ends. The amount of professional indemnity insurance cover the contractor/consultant is required to have in place is generally determined on a case-to-case basis, depending on the extent and the complexity of the design works in question.

For advanced levels of BIM where fully open sharing of information is required, a qualified individual needs to be assigned the duty of managing the combined model. Special insurance cover may be required for such professional work.

Indemnity shall be valid if the loss

- arises out of a negligent act, in the Professional Services by the Insured or any entity for whom the Insured is legally liable, within the Geographical Territory specified in the Schedule; and

- is made and reported during the Period of Insurance.

The Insurance Company shall not be liable under this Policy in respect of any circumstances known to the Insured prior to inception of the Policy. All Claim Expenses shall be included in the Limit of Liability and Deductibles, shall not be considered as sums payable in addition thereto.

Insured shall mean the Policyholder as stated in the Schedule of the Policy; or any current or former Employee rendering Professional Services on behalf of the policyholder or principal or partner.

Limit of Liability shall mean the maximum amount payable in any one Claim referred to as the Any one Accident limit of indemnity specified in the schedule and where an aggregate limit of liability be separately stated, the Any one Year limit specified in the schedule in respect of all Claims during the currency of the policy which the Company may be liable to pay to the Insured as per the terms and conditions contained herein.

Professional Services shall mean those services the Insured is legally qualified to perform for others on behalf of the Policyholder, including but not limited to: 1. architect or engineer; 2. landscape architect, land surveyor or planner; 3. construction manager; 4. interior designer or space planner; 5. scientist; 6. technical consultant; 7. and in conjunction with the Insured’s delivery of Professional Services.

Sub-contractors mean independent consultants or sub-contractors who provide services to the Insured. Subsidiary shall mean any entity in which the Policyholder holds directly or indirectly (through another Subsidiary) more than 50% of the voting rights.

All risk of loss resulting from the project including losses caused by the joint negligence of owner’s Entity and the contractor or its subcontractors or the risk of loss arising out of passive negligence or passive dysfunction of the owner can also be transferred through the indemnity agreement. General indemnity to the owner for any risk or loss caused by anybody’s negligence including active negligence of the owner would be void and unenforceable.

In short, the legal language of the indemnity insurance should be such that broadest protection is available to the Owner’s entity. Drafting hold harmless language in contracts is a crucial part of the risk transfer process and should not be undertaken without the advice and assistance of legal counsel.

Further, the clause should specifically spell out the responsibilities of the owner and the Contractor along with the losses /risks attached to each of them. Mutual indemnification language should be avoided. In the courts, the risk transfer to the contractor which does not commensurate with the compensation to the contractor may not hold good. Sometimes contractors have global all risk policy that cover all their projects.

Exclusions: Any Claim arising out of: -

1. any liability for death, bodily injury, disease or sickness sustained by any person and/or for any loss of or damage to property other than that in connection with which Professional Services have been or are being rendered by or on behalf of the Insured.2. damage to any property of the Insured. 3.liability of others assumed by an Insured under the contract. 4. any failure or malfunction of electrical, internet or telecommunications infrastructure or services 5. Faulty workmanship 6. fines, taxes, penalties  or any other Damages deemed uninsurable in law. 7. Dispute Insured vs. Insured 8. Any dishonest, fraudulent, criminal or malicious act, error or omission, [except when an Insured did not commit, or have knowledge of any such acts] 9. Any nuclear reaction, or contamination, under any circumstances and regardless of cause, within or originating from a nuclear facility. 10. by any entity or individual that the Insured operates, manages, or controls 11.  War or terrorism 12. Warranty, guaranty or promise 13. Intellectual Property Rights

Subrogation rights of the insurer are applicable in this policy.

Other Insurances If at the time of any claim there is or but for the existence of this Policy there would be other insurances covering the same liability, the indemnity provided by this Policy will not apply except in respect of any amount beyond that which would have been payable under such other insurance had this Policy not been effected.

Change in Exposure: If during the Period of Insurance any of the below occurs, the Insured must give written notice to the Insurer 1. a major change in the Professional Services provided a change in the Professional Services provided geographically. 2. If the insured’s turnover increases by more than 20% 3. if the Insured is a subject of a merger or acquisition. The Company is then entitled to impose additional premium, terms and conditions that it deems necessary.

Two or more Claims arising out of a single negligent act, error or omission or a series of related negligent acts, errors or omissions shall be treated as a single Claim and shall be subject to one Limit of Liability and one Deductible.

Limit of Insurer’s Liability: The limit of the Insurer’s liability shall be the maximum amount payable by the Insurer in the circumstances described irrespective of the number of persons or legal entities named as the Insured and any other persons or legal entities which may be entitled to indemnity under the Policy.

5.3 Contractor’s Plant and Machinery Policy:

The contractor deploys own equipment or hires equipment at the construction site. The damage or loss associated with the machinery can be covered by the Plant and Machinery Insurance policy. If the contractor fails to complete the project before the tolerance limits, heavy penalty should be paid to the client due to damage and breakdown of Plant and Machinery. These risk factors can be avoided by buying a comprehensive policy to cover the plant and machinery.

Coverage of Policy

The policy covers the following risk factors:

·       Construction equipment such as excavators, cranes, forklift trucks, bulldozers, compressors, pile driving devices, drilling machines and other heavy machinery

·       The accidental loss at the construction premises

·       The mobile machinery is covered during idle condition as well as running condition.

·       The insurance coverage is applicable while overhauling, cleaning and re-erection of the equipment

Add-on cover can be bought to get extensive coverage against various kinds of perils such as earthquake, terrorism and third-party liability. The downtime of machinery can be reduced and the operational efficiency can be enhanced.

The sum assured will be equivalent to the replacement of the damaged item with the same quality and quantity of items. The replacement cost includes the procurement cost (customs charges and freight charges are included).

Benefits of Policy can be extended by opting for various add-ons for air shipment charges, express shipment charges (holiday or overtime wages are covered), the property surrounding the owner Escalation Risk, Act of terrorism, Earthquake and landslides, Clearance and Elimination of debris and Customs duty.

Exclusions of the Insurance Policy

·       pre-existing malfunction or defect

·       damage caused due to the design of Plant and machinery by the manufacturer

·       damage caused during the supply of the product

·       Using the machinery with wrong coolant or no coolant

·       Damage associated with the negligence of the equipment owner

·       Damage due to the explosion of the pressure vessel or boiler

·       Using the machinery for an application which is not recommended by the manufacturer

·       Rust and depreciation of the vehicle by not using it

·       Crafts used on water Damage due to immersion in natural calamities (tidal waves)

·       Parts which undergo wear and tear due to regular usage (bolts, nuts, etc.)

·       Public liability (when the machinery is deployed on public roads)

·       Damage due to war, war-like situation and terrorism

·       Wilful negligence of the equipment by the operator, representative or owner

Therefore, the insured should take precautions to keep the equipment in good condition, follow the recommendations of the manufacturer for maintenance and preventative maintenance, machine should be used as per recommendation of manufacturer and should be operated and maintained by trained personnel. If there is a change in risk perception, the insurance company may increase or decrease the premium after inspecting the property.

5.4 Public and Product Liability or Commercial General Liability Insurance

It is also known as combined liability or general liability. Public liability is a legal ability to pay compensation to third parties arising in connection with the business activities of the insured. Product liability is the legal ability to pay compensation to third parties arising in connection with the insured’s products.

The Public Liability Insurance Act, 1991 provides for mandatory public liability insurance for installations handling hazardous substances to provide minimum relief to victims of accidents, other than employees. The Act does not impose any fault liability. No fault liability means that the claimant is not required to prove that the death, injury or damage was due to any wrongful act, neglect or default of any person.

The amount of relief payable under Section 3 is as per the schedule incorporated in the Act as follows:

·       Fatal accident : Rs.25,000 per person

·       Permanent total disability : Rs.25,000 per person

·       Permanent partial disability : The amount of relief on the basis of percentage of Disablement as certified by an authorised physician

·       Temporary partial disability : Fixed monthly relief not exceeding Rs.1,000 p.m. Upto a maximum of 3 months (provided the victim has been hospitalized for a period exceeding 3 days and is above 16 years of age)

·       Actual medical expenses : Upto a maximum of Rs.12,500 in each case mentioned above

·       Actual damage to property : Upto Rs.6,000

Following are some of the terms specific to CGL Insurance.

·       General Aggregate Limit: This is the most the insurance company will pay in any one policy year for claims arising out of Operations of Insured, Personal or Advertising Injury, Fire Damage and/or Medical Payments. Operations coverage is the basic coverage afforded for Bodily Injury and Property Damage due to the negligence by Insured.

·       Products & Completed Operations Limit: This coverage provides protection to the contractors for perils in completed operation such as manufacture or sale. This is a separate aggregate limit and claims of this nature will not diminish the General Aggregate Limit but is still subject to the Per Occurrence Limit for each claim.

·       Personal & Advertising Injury Limit: Personal Injury refers to slander, libel, invasion of privacy, and defamation of character. Advertising injury refers to false advertising practices. This coverage provides protection from suits related to any of the above. This is the most the policy will pay for any one claim of this nature.

·       Each Occurrence Limit: For any one claim arising out of Operations of the insured, Personal or Advertising Injury or Products & Completed Operations. Each claim will reduce the General Aggregate Limit or in the case of Products & Completed Operations each claim will reduce that separate aggregate limit.

·       Fire Damage: This separate limit shows the coverage for fire damage to buildings that are leased or rented by the insured. For example, if Insured accidently leave a coffee pot on in office suite and it starts a fire, this coverage will pay for the repairs to the suite. Claims of this nature will diminish General Aggregate Limit.

·       Medical Payments: This limit provides coverage for incidental medical payments to third parties if they incur minor injuries while on premises of the Insured. This coverage will pay regardless of who is responsible for the injury. Claims of this nature will diminish General Aggregate Limit.

Limits of Insurance

·       The insurer shall at any time pay the applicable Limit of Insurance that remains as fixed in the Limits of Insurance section of the insurance contract regardless of the number of insureds; number of claims made or number of claimants.

·       The Limits of Insurance apply separately to each consecutive annual period and to any remaining period of less than 12 months, starting with the beginning of the policy period shown in the Declarations, unless the policy period is extended after issuance for an additional period of less than 12 months.

·       The General Aggregate Limit is the most Insurer will pay for the sum of damages for bodily injury and property damage, except damages included in the products-completed operations hazard.

·       The Products-Completed Operations Aggregate Limit is the most Insurer will pay for the sum of damages for bodily injury and property damage included in the products-completed operations hazard. The Each Occurrence Limit is the most Insurer will pay for the sum of damages for bodily injury and property damage arising out of any one occurrence. Any such sums Insurer pay will reduce the amount of the applicable aggregate limit available for any other payment. If the applicable aggregate limit has been reduced to an amount that is less than the Each Occurrence Limit, the remaining amount of such aggregate limit is the most that will be available for any other payment.

·       Any damages Insurer pays will reduce the Limits of Insurance.

Exclusions

·       does not apply to any actual or alleged damage arising out of infringement or violation of any intellectual property law or right.

·       does not apply to any damages arising out of failing to render professional service to the insured’s profession or advertising injury or breach of contract

·       This insurance does not apply to damage arising out of the transportation of mobile equipment by a motor vehicle.

·       does not apply to any obligation of the insured under any workers' compensation, disability benefits or unemployment compensation law or any similar law.

·       Act of God Perils

·       liability connected with Premises disposed by the Insured

·       liability caused by the deliberate, conscious or intentional disregard of the Insured's technical or administrative management

·       Strike, Riots and Civil Commotion, War, Invasion and Act of Foreign Enemy, terrorism

Coverage of Insurance:

The Insurer shall indemnify the Insured for

·       liability arising out of Bodily Injury, Property Damage and/or Pollution which first occurs after the Retroactive date against an Occurrence in connection with the Insured Business.

·       i. all amount which the Insured becomes legally liable to pay as compensation (excluding punitive, exemplary, aggravated and liquidated damages) ii. Defense Cost iii. Supplementary Payments.

·       [in accordance with Indemnity Clause for] Insured’s legal liability to pay compensation for Bodily Injury and/or Property Damage and/or Pollution for an Occurrence arising out of the Insured Business .

·       [in accordance with Indemnity Clause for] Insured’s legal liability to pay compensation for Bodily Injury and/or Property Damage and/or Pollution for an Occurrence arising out of an unknown defect in the Insured Products.

Important Terms

·       “Occurrence” means an event which results in Bodily Injury or Property Damage, neither expected nor intended from the Insured’s standpoint and arising out of continuous or repeated exposure to substantially the same general conditions.

·       “Period of Insurance” means the period commencing from the retroactive date as shown in the Policy Schedule and terminating on the expiry date as shown in the Policy Schedule.

·       “Personal injury” means · libel and slander; · false arrest, detention, or imprisonment;

·       malicious prosecution; · wrongful entry into, or eviction of a person from, a room, dwelling or premises that they occupy; · invasion of any rights of privacy; · defamation; Including mental injury, anguish, or shock resulting there from.

·       “Policy Schedule” means the schedule of the Insurance or any endorsement schedule provided by the Company.

·       Any one Accident (AOA) Limit Any one Accident (AOA) limit is the most the Company will pay for the sum of damages for Injury and Property Damage arising out of any one Occurrence. Any such sums the Company pays will reduce the amount of the applicable Aggregate one Year limit available for any other payment.

·       Aggregate one Year (AOY) Limit is the most the Company will pay for the sum of damages for Injury and Property Damage. Any damages the Company pays will reduce the Limit of Indemnity. Payments made by the Company by way of the Defence Cost and Supplementary Payments under this insurance contract will reduce the Limit of Indemnity.

·       Compulsory Excess The Insured shall bear, as Compulsory Excess, the amount per any one accident so stipulated in the Policy Schedule. The Insurer's liability shall be for the claim in excess of such Compulsory Excess.

Indemnity as an Insured, but not named in the Policy Schedule

The indemnity granted extends to cover the legal liability accruing to the following as an Insured that are not named in the Policy Schedule:

·       In case Insured is an Individual - Insured’s spouse, persons having custody of Insured’s property and Insured’s legal representatives

·       In case Insured is a Partnership firm: Insured’s partners and their spouses

·       In case Insured is a Joint Venture : Insured’s joint venture partners and their spouses

·       In case of Insured is a Unincorporated Organisation : Insured’s principal office bearers and their spouses

·       In case Insured is an organization other than a partnership, joint venture or unincorporated organization :  Insured’s directors and officers

·       Insured’s Employees

·       Where Insured comprises of more than one entity or person: each entity or person

The Insured shall exercise reasonable care to prevent Occurrence and to comply with all statutory or other obligations and regulations imposed by any authority and shall maintain the Premises and all ways, works, machinery and plant in sound condition.

The Insurer shall be subrogated to all the Insured’s rights of recovery against any person or organisation.

Conditions precedent to liability of the Insurer: This insurance shall not cover any liability, arising out of failure of the Insured  to ensure 1. Insured Premises are walled premises. 2. Insured has taken required government / regulatory approvals and has followed related rules & regulations. 3. Proper fire safety arrangements are maintained by the Insured at the insured Premises as per the applicable rules and regulations. 4. Proper security arrangement is maintained by the Insured. 5. No goods or Products are obtained by the Insured on terms which prevent the Insured exercising their rights of recovery under the ordinary process of law against their supplier or any other party. 6. Insured provides proper labeling or instructions for usage or warning on each and every product 7. Insured maintains satisfactory details in respect of record keeping and traceability of the insured product and provides the same to the Company (as and when required by the Underwriters). 8. Insured Products follow Product Safety guidelines (FDA or CPSC or equivalent guidelines) applicable to the country where the product is sold.

5.5 Standard Fire and Special Perils Insurance Fire and special perils policy is an insurance contract that safeguards movable and immovable properties against unforeseen perils ,caused by accidental fire, lightning, explosion/implosion, destruction or damage caused by aerial devices, manmade perils in the form of riots, strike etc., natural calamities like storm, cyclone, flood etc., damage caused by impact by a rail or a road vehicle, damage caused by landslide or subsidence, peril caused by pollution and contamination, bursting and/or overflowing of water tanks, apparatus and pipes, missile testing operations, leakage from automatic sprinkler installations and bush fire.

Insurer shall pay to the Insured the value of the Property at the time of the happening of its destruction / damage or replace such property or any part thereof by

·       Fire excluding damage by natural heating/ combustion or order of Public Authority

·       Lightning

·       Explosion/implosion excluding damage by boilers or centrifugal forces

·       Aircraft damage

·       Riots, strike and malicious damage except burglary, theft and terrorism

·       Storm, cyclone, flood

·       Impact by rail/road vehicle

·       Subsidence, landslide, rock slide

·       Bursting and overflowing of tanks and pipes

·       Missile testing

·       Bush fire excluding forest fire

Exclusions:

Loss/ damage /destruction by

·       War, invasion

·       Radiations, explosives

·       Pollution, contamination

·       Damage/loss/destruction to bullion, precious stones and works of art etc.

·       Change of temperature in cold storage

·       Overheating, short circuit and excessive pressure on electric machines

·       Loss of earning, loss of market etc.

·       Earthquake, volcanoes [Add-on cover]

Subrogation rights of the insurer shall apply.

5.6 Worker’s Compensation Policy or Employee Compensation Insurance or Labour Insurance

The Workmen Compensation Act, 1923 is an employee compensation act that mandates certain classes of employers to pay compensation to their employees or workmen for an accident or injury. The act enables workmen and their dependents to get compensation from their employers in case an accident or injury caused at work or due to the nature of the work results in their death or disability. It also mandates employers to pay compensation to their workmen if they end up contracting certain occupational diseases related to that employment. The Act covers people working in factories, plantations, mines, construction works, mechanically propelled vehicles and other kinds of hazardous activities.

The ESI Act mandates every employer to provide for its worker's insurance. The said Act covers both workers employed directly under an employer and through a contractor.

The policy protects the employers against their legal liability for payment of compensation arising as a result of death or disablement of the employees arising out of and in the course of employment. The policy provides indemnity against legal liability under the Workmen’s Compensation Act, Fatal Accidents Act and Common Law.

Sum Insured: The policy does not specify any sum insured because the amounts of compensation stipulated in the Act(s) or awarded by a Court of Law determine the limits of liability of the insurers.

The total earnings of the employees cannot be accurately computed at the commencement of the policy. An estimate of the total earnings is made and a deposit premium is charged. The premium is finally adjusted after the expiry of the policy, on the basis of the actual total earnings of the employees during the period.

However, the minimum and the maximum compensation rate is fixed for death and disability, subject to timely revisions. In case of the death of the workmen, the employer is supposed to pay the compensation to the dependents of that workmen. The Ministry of Labour and Employment in India has constituted the ‘Social Security Division’ which is responsible for framing social security policies for the workmen and ensuring its implementation. It is responsible for enforcing the workmen compensation Act in India. However, the various state governments administer the Act through Workmen’s Compensation Commissioners.

Coverage of Policy:  

·       Bodily injury caused by accident during the course and scope of employment.

·       Bodily injury caused by disease or aggravated by the conditions of the employment.

·       Death or temporary disablement Permanent total or partial disablement

·       Legal costs and expenses incurred with the company's consent

Add-on

·       Contractor by charging additional premium can get coverage for

·       Tariff rate on total contract amount, if the contract is for labour only If the contract is for labour and materials, labour value will be decided as per merits, subject to a minimum of 75% of the contract amount.

·       Non-fatal injuries: The initial 3 days of disablement and the total disablement is lesser than 28 days. All the injuries that do not cause partial disablement for more than 3 days.

·       Injuries caused due to war, nuclear, or riot.

·       Injuries caused to the internal removal of the security device or due to the carelessness of the security device.

·       Accident or injury caused under the influence of alcohol or drug.

·       The employees who are not considered as workmen as per ‘Workmen’s Compensation Act’.

·       All the diseases that are specified in part ‘C’ of ‘Workmen’s Compensation Act’.

·       Any changes made in the statute of the provisions after the commencement of the policy.

5.7 Compulsory Third Party Motor Vehicle Insurance Policy: Principals often require the inclusion as required by the statute in the relevant jurisdiction for vehicles used in connection with work under the contractor.

6.0 Bid Deduct: When contractors' bids for a project exclude the cost of providing workers' compensation, general liability, and excess liability insurance because insurance is already provided by the owner of the project through an Owner-Controlled Insurance Program (CIP). The bid deduct methodology will reduce the amount a contractor bids for a project as they no longer have to include the cost of insurance. Bid deduct is also known as insurance credit. Bid deductions reduce the mark-up that contractors apply to their bids and  ensures a safe work environment. Bid deduct is not prevalent in Indian construction contracts.

7.0  Other Insurances:

7.1  Decennial Liability Insurance –The contractor is liable to the employer for a period [ usually of 10 years from the date the works are taken over] for any defect that threatens the safety or stability of the building or if it collapses completely or partially. Contractors usually take-out insurance against this liability in middle east countries.

7.2 Delay in start-up insurance (DSU) – The contractors are normally required to pay liquidated damages to the employer if the works are not taken over by the date for completion or, depending on the nature of the works, fail to satisfy specified output criteria. The liquidated damages are normally capped at 10% of the contract price. Caps of this nature may mean that the employer is not fully compensated for any loss suffered and even though caps on delay damages can sometimes be set aside and damages reassessed so that they correspond with the actual loss suffered, this can be a slow, uncertain and expensive process. For this reason, employers sometimes (especially if the works are project financed) take out DSU insurance which provides compensation for losses (including loss of revenue and other consequential losses) arising out of late completion as well as other forms of delay (such as force majeure).

8.0 Key Provisions of Insurance Policies:

8.1 Joint names – Certain insurance policies (especially public liability insurance) are generally taken out in the joint names of the employer and the contractor (as well as a funder) so that, for instance, the employer is insured against any liability (vicariously) incurred by reason of a breach by the contractor. As a matter of good order, co-insured parties should obtain copies of the policy that they are insured under so they know exactly what they are covered for.

Any party named under an insurance policy can make claims under that policy and it is also common for insurers to be required to waive their rights of subrogation against co-insured parties. It means - the insurer agrees not to seek to recover against a co-insured party (i.e. the employer) even if the insurer paid out on account of the actions of the employer.

It is important that, if two or more parties are insured under the same policy, the policy provides that no act or omission of a co-insured party (i.e. misrepresentation, non-disclosure or failure to notify) will vitiate the policy or otherwise prejudice the cover of the other co-insured (and non-breaching) parties under the policy.

8.2 Cross liability – It is usual for contracts that are in joint names to contain a cross liability clause. A cross liability clause essentially means that each party is insured in its own right as if a separate policy had been issued and, as such, the policy will respond to liability incurred by one co-insured party to another co-insured party.

8.3 Interest noted on a policy – It is important to distinguish between insurance being taken out in joint names and a party’s interest being simply noted on a policy. Although a party whose name is noted on a policy has the right to share in insurance proceeds, party does not have any direct right to claim under the policy. Furthermore, the insurer generally will not waive its rights of subrogation against a party whose interest is noted on the policy.

8.4 Per occurrence or in the aggregate – It is important to check if insurance cover is provided on a per occurrence or on an aggregate basis. For the employer, cover on a per occurrence basis is obviously advantageous as, if insurance is provided on an aggregate basis, a previous claim could severely impact on (and even completely exhaust) the amount of available insurance. This point is made all the more relevant if the insurance is not project specific, as a claim from one project could mean that no cover is available for any other projects.

8.5 Deductibles – Employers should carefully assess the level of the deductible under an insurance policy to ensure that the deductible is reasonable and not prohibitively high. Excessive deductibles could lead to a risk being not insured.

8.6 Exclusions – Insurance policies are subject to exclusions that may restrict the amount of available cover (i.e. some insurance policies exclude cover for guarantees and liability for delay damages while “fitness for purpose” warranties are also a relatively common exclusion). It is therefore important for employers and contractors to review the extent of cover to assess the suitability of a policy in light of the risks that are likely to occur under the contract.

8.7 Lender’s interests – As part of their security package, a lender may require an assignment of the borrower’s rights under insurance policies and may also wish to be named as the loss payee of the insurance proceeds. Lenders may also prefer to use insurance proceeds to pay the loan instead of reinstating the project, if the project is destroyed or badly damaged. If lenders require this ability, care needs to be taken to ensure that their right is accommodated by the underlying insurance policy.

8.8 Identity of insurers – Employers may impose certain requirements regarding the creditworthiness of insurers to reduce the risk of insurers defaulting on their payment obligations.

8.09 Caps on liability –A contractor’s liability for a particular risk especially for breach of professional duty or negligence should not be capped at the amount of insurance that the contractor is required to have for that risk. If, for example, the contractor is required to have professional indemnity insurance of x amount per claim, the contractor’s liability, for say a defective design, is not automatically capped at x amount per claim and the employer may seek to recover from the contractor’s assets (or any additional insurance policy that the contractor has in place for any loss incurred that exceeds x amount. Therefore, contract provision should be clear about contractor’s liability for loss or damage.

In fact, insurance follows the liability route. If there are difficulties in attempting to render liability, liability cap can be imposed equal to the indemnity limit under the policy. There is no point in mandating insurance above the contractual cap because the insurer will never pay more than an insured person’s liability. A party’s liability should not be restricted to an amount recovered under the liability insurance.

8.10 Contractual Liabilities: There are certain liabilities which are excluded from the scope of the insurance. Such exclusions are called ‘contractual liabilities’ exclusion. This is a clause that would exclude cover for assumed liabilities of the insured via Indemnity, Guarantee, Warranty or Agreement. Provision should be made against such exclusions to protect against uninsured liabilities that may hit suddenly. Insurance may not cover liabilities that are above general law mandates in regards to breach of contract, unless parties include special terms in an agreement.

8.11 Severability or Non-imputation: In the cases where an insurance policy covers many insured people, and some of the people fail to disclose the vital information or fail to comply with the requirements of the insurance policy, their failure of disclosure and compliance will not prejudice the rights of other parties under the policy. This phenomenon is called ‘Severability’. All information on one covered person cannot be imputed (assigned to) another insured person, it is called Non-imputation.

8.12 Currency of Insurance: A Certificate of Currency is not an insurance policy, but a limited representation in regards to the policy that’s been procured. Certificates of Currency do not show gaps to cover or exclusions and provide a bare outline of the cover. It should be the term of contract that the insurance policy shall be maintained throughout a specific term, i.e. period of construction or defects maintenance period. Further, there are insurance types like professional indemnity and other financial liability insurances which respond to certain events that may occur during a policy, despite the work having been completed.

8.13 Surety is different from Insurance: “Surety” is a three-party contract wherein a person or entity agrees to be responsible for the contractual obligations of another should those obligations not be met. A bond differs from insurance in two fundamental ways: (1) the number of parties to the agreement, and (2) the surety’s right of indemnity from the contractor, if they fail. Insurance has two parties to the insuring agreement: the insurer and the insured (policyholder). A bond, however, has three parties to the surety agreement: the bonding company (surety), the entity being bonded (principal), and the entity who benefits in the event of a bonded default (obligee).

9. Principles of Insurance Law

Principle of Uberrimae Fidei [Utmost Good Faith] [ A Latin phrase]- Insurance contract must be signed by both the parties in an absolute good faith i.e. the insured should disclose and surrender his / her complete information regarding the subject matter of insurance and the insurer’s liability get void if the facts given by the insured are either omitted, hidden, falsified or wrongly presented. But, the onus / burden of proving that the insured had made false representation or suppressed the material facts lies on the Insurer. After passing of two years from the date on which the policy came into effect, policy cannot be called in question.

Principle of Insurable Interest: The person getting insured must have insurable interest in the object of insurance i.e. the physical existence of object gives him some gain and its non-existence will give him a loss. The creditor has interest in the life of his debtor.

Principle of Indemnity: An indemnity Insurance contract is signed for getting protection against unpredictable financial losses arising out of future uncertainties. Compensation will accrue in case of damage or loss and compensation is limited to amount assured or the actual loss, whichever is lower. However, in case of life insurance, principle of indemnity does not apply. Although the insured is to be placed in the same position as if the loss has not occurred, the amount of indemnity may be limited by certain conditions: Injury or loss sustained by the insured has to be proved. The indemnity is limited to the amount specified in the policy. The insured is indemnified only for the proximate causes. The market value of the property determines the amount of indemnity.

Principle of Contribution: It is a corollary of Principle of Indemnity and applies to all contracts of indemnity. The insured can claim the compensation only to the extent of actual loss either from one insurer or from all the insurers in case he has taken more than one policy against same object and all the policies relate to same subject matter, same interest cover same peril and all policies must be in force at the time of loss.

Principle of Subrogation:

The principle of Subrogation is a corollary of Principle of Indemnity in as much the insured is precluded from obtaining more than the loss he has sustained. The most common form of subrogation is when an insurance company pays a claim caused by the negligence of another. The doctrine of subrogation confers two specific rights on the insurer. Firstly, the insurer is entitled to all the remedies which the insured has against the third-party incidental to the subject matter of the loss, such that the insurer can take advantage of any means available to extinguish or diminish, the loss for which the insurer has indemnified the insured. Secondly, the insurer is entitled to the benefits received by the assured from the third party with a view to compensate himself for the loss. The fact that an insurer is subrogated to the rights and remedies of the insured does not ipso jure enable him to sue third parties in his own name. It will only entitle the insurer to sue in the name of insured, it being an obligation of the insured to lend his name and assistance to such an action. An insurance policy may contain a special clause whereby the insured assigns all his rights, against third parties, in favour of the insurer. In case of subrogation, which vest by operation of law rather than as the product of express agreement, the insured would be entitled to only to the extent of his loss. The excess amount, if any, would be returned to the insured.

Doctrine of Adhesion: Insured must accept the entire insurance contract and all of its terms and conditions without bargaining. Because the insured has no opportunity to change the terms, any ambiguities in the contract will be interpreted in his or her favour.

Principle of Waiver and Estoppel: A waiver is a voluntary surrender of a known right. Estoppel prevents a person from asserting those rights because he or she has acted in such a way as to deny interest in preserving those rights. Presume that a insured fails to disclose some information in the insurance proposal form. The insurer doesn't request that information and issues the insurance policy. This is a waiver. In the future, when a claim arises, insurer cannot question the contract on the basis of non-disclosure. This is estoppel. For this reason, the insurer will have to pay the claim.

Conditions precedent or subsequent:

Conditions are terms which prescribe the limitations under which an insurance policy is granted and which specify the duties of the assured. They can be either conditions precedent or subsequent. They can be further classified into express conditions and implied conditions. Implied conditions are those, which are implied by law to apply to every contract of insurance irrespective of any specific inclusion or reference to them such as insurable interest, good faith etc.

The doctrine of proximate cause

The doctrine of proximate cause is expressed in the maxim 'Causa Proxima non remota spectator', which means that the proximate and not the remote cause, shall be taken as the cause of loss. The insurer is thus has to make good the loss of the insured that clearly and proximately results, whether directly or indirectly, from the event insured against in the policy. The burden of proof that the loss occurred on account of the proximate cause, lies on the insured.

10. Caution in framing contract conditions

Contracts may be similar, but they may differ in the perception of risks by virtue of their location, project requirements and funding pattern. Therefore, the clauses should be carefully provided in each case.

Contract clauses should clearly mention about the risks allocation, risks covered by the insurance policy, parties’ liability, types of insurances to be obtained, limits of insurance, exclusions, period of insurance and deductibles.  Condition for insurance in case of variations and increase and decrease of scope of work should also be provided. Conditions regarding proportion of liability to be borne in case of shared liability and the provisions for responsibility for non-recovery from insurers should also be inserted. It should also be mentioned that which policy shall be in the joint name and in which case name of a party shall be mentioned.

Availability of insurance policies available in the market should also be kept in mind while drafting conditions regarding insurance. Scope of different insurance policies planned to be obtained by the parties, Employer, Contractor, consultant and sub-contractor should neither overlap nor should have gaps to be filled. Because overlapping risks are wastage of money and gaps are risks not covered.

The Contract should provide all other insurances required by the Laws of the country at the Contractor’s own cost. Other insurances required by local practice should also be detailed in the Contract Data.

The tender documents may include details of such insurances as an annexure to the Special Conditions of Contract so that tenderers can estimate what other insurances they may wish to have for their own protection. A professional with extensive experience in construction insurance and liability in the preparation of the wording of the revised sub-clauses should be engaged to draft the contract conditions for insurance. If the insurance provisions are changed without due care and attention, there is a risk that the Employer will inadvertently carry liabilities for which the Employer is neither prepared nor covered by insurance.

References [with due acknowledgement]

1.      Website of Insurance Regulatory and Development Authority [www.irdai.gov.in]

2.     Commercial Liability Insurance - HDFC Ergo General Insurance Company Limited

3.     Professional Indemnity (Architects &Engineers) –Policy Wordings - L&T General Insurance Company Limited

4.     Decennial Liability Insurance - hfw.com

5.     Insurance in Construction Contracts : A few Things to Know – Euan Lloyd

6.     Glossary on General Insurance Terms A to Z – www.royalsundaram.in

7.     Investopedia -Ali Hussain [Bid Deduct], CAR Insurance – Adam Barone

8.     Decennial liability -www.designingbuildings.co.uk

9.     Decennial Liability -Wikipedia

10.   Study on Sources of Disputes in Construction Projects, to Incorporate Suitable Clauses in Contract for Dispute Resolutions - International Research Journal of Engineering and Technology (IRJET)- Dr. K. Divakar and Sreyas S Kumar

11.    Insurance - Law & Practice Module 3- The Institute of Company Secretaries of India

12.   THE INSURANCE ACT, 1938 (Incorporating all amendments including the amendment by the Finance (No.2) Act, 2019)

13.   Insurance Clauses in Contracts: Everything You Need to Know -upcounsel.com

14.   Insurance clauses in contracts - keeping the focus - Knowledge - Clayton Utz

15.   A Study On Insurance In Construction Industry Queen Martina M, Satheesh Kumar S

16.   Insurance Laws of India: CA Rajkumar s Adukia

17.   Insurance Law & Regulations in India Parveen Nagree-Mahtani [Nishith Desai Associates]