The subject of construction insurance is not as widely discussed in construction project meetings despite its undeniable importance. In fact it is rarely an issue that draws attention until and unless certain incidents or accidents happened on site and there is a desire to find out whether such incident was an insured risk that entitles one to compensation. Construction insurance policy is often reduced to mere a functional document that is deliverable under the contract that remained tucked away after submitted. 

Unlike the more popular subjects such as extensions of time, variation claims or loss and expense, construction insurance does not get the focus and attention that it richly deserved. This perhaps contributed to the relative lack of awareness amongst construction practitioners on this subject. This article therefore attempts to provide some basic concepts of construction insurance that hopefully provides a catalyst for greater awareness.

Construction projects are inherently risky. It involves cranes hoisting steel beams around densely populated urban environment and labourers scaling great heights with just a safety harness. There are other examples to illustrate the point. Accidents, injuries or even deaths occur from time to time even with the best safety plans. There are various express provisions in contract making main contractors or subcontractors shoulder civil liability since they are ultimately responsible for carrying out these works. There are also legislations enacted such as Workplace Safety and Health Act in Singapore to impose criminal liability to those who are liable. 

In reality most contractors rely on prompt cashflow and continuous stream of projects to remain solvent. They possess relatively limited assets to be able to cushion the hefty damages that arises due to accidents on site which often runs into millions of dollars. Therefore safeguards such as indemnity provisions under the contract have limited utility if its reliability is questionable. Notwithstanding this, it is useful to understand some relevant indemnity clauses and insurance clauses under a typical standard form of construction contract.

Indemnity and Insurance

In most standard forms of construction contracts, indemnity clauses and insurance clauses are often positioned side by side due to the correlation between these provisions. Whilst the contractors are contractual required to indemnify or to provide financial guarantee in favour of the Employer for any accidents that may occur on site, they are simultaneously required to procure and effect the necessary insurance policy. It is a recognition that the contractors are not likely to have the financial heft to underwrite or guarantee payment in case of large sums of damages. Therefore construction insurance will provide the relevant safety net when necessary. It is also a relatively inexpensive safety net. Very often, the insurance clauses are worded in such a way that the procurement of insurance coverage is without prejudice to the contractor’s obligation for indemnification. This avoids any misunderstanding as if the insurance substitutes the contractor’s responsibility to indemnify the Employer. This construction insurance therefore does not limit or reduce the contractor’s indemnification obligations. 

The double recovery rule prevents the Employer from getting payments twice for the same incident. This avoids the Employer from profiting from the insurance by getting paid by the insurer via the coverage of insurance policy and simultaneously getting indemnified by the contractor. 

It should be noted that there are often gaps in most insurance policies in terms of coverage. These are often couched as deductibles or co-insurance or outright exclusions. As the indemnification clauses and insurance clauses are meant to work in conjunction with one another, it follows that the indemnification provisions will financially plug any such insurance coverage gaps. However it can be tricky if the Employer actively prescribe the types of insurance, the limits of coverage, approves the insurer and the associated policies etc. The contractor may argue that it has discharged its contractual obligations upon complying with the detail requirements set out by the Employer. Therefore based on such argument any gaps that persist are deemed excluded from the contractor’s scope of liability. Ideally the Employer should limit its interference by relying on the contractor to manage its insurance coverage based on the contractor’s self understanding of the limits to the scope of its indemnification. However in reality if the contractor has insufficient insurance coverage and consequently becomes insolvent, the Employer is left to its own devices with limited recourse. This may explain why most standard conditions of contract are still rather prescriptive in its insurance clauses despite the risk of doing so. 

CAR Insurance – All Risks vs Named Perils

Whilst most insurance clauses in construction contract specifies the types of risk that requires insurance coverage, it does not specifically name the actual insurance policy in question. The Contractors’ All Risks insurance policy or ‘CAR’ is the insurance policy that it typically refers to. One unique feature of CAR is the element of ‘all risks’. This element makes it different from other conventional insurance policies that one would encounter in their day to day life such as travel insurance policy. Under the conventional insurance policy, its coverage is based on the list of perils that is specifically named. To know if a specific event entitles one to compensation under the policy, one will need to refer to the list of perils. By way of example if cancelled or delayed flights are provided for under the list of named perils in one’s travel insurance policy, then one can file a claim and be compensated as soon as such event happens. The reverse is true for CAR policy which has the ‘all risks’ element. CAR policy covers everything unless it is expressly excluded. As an example, a common exclusion of CAR policy is damages caused directly or indirectly by events of strikes, riot, civil commotion, war etc. There is a reason for this. If event such as war occurs, it is likely to be nationwide or even region wide which means multiple projects will be affected simultaneously. It is unlikely to be isolated to a single project for a limited period of time. The scale and magnitude of damages that ensue in such a widespread manner would not be financially manageable for a primary insurer, thus the exclusion. 

The structure of any CAR is quite typical in that it consists of two sections. Section I deals with Material Damage whilst Section II deals with Third Party Liability. Under Section I, the coverage include the construction works for the project in hand as well as any property of the Employer adjacent to the construction works. The coverage usually amounts to the contract sum including any professional fees, cost of removal of debris off site as well as associated plant, machineries and equipment. Under Section II, the coverage includes physical or bodily injuries of any third parties including damages to their properties. The descriptions on Sections I and II above are intentionally abbreviated as it is to provide a broad perspective on the nature of the coverage.

Endorsements

Due to the standard exclusions to most CAR policies, gaps in insurance coverage exist as a matter of standard market practice. The larger the gaps are, the more the Employer would need to rely on the indemnification provision for any recourse. In case where the Employer prefers to rely on the guarantee of an insurer rather than the balance sheet of a contractor, there are options available to Employer to plug those gaps. The Employer could specify certain endorsements to be included in the policy, which typically would attract additional premium charges. Endorsements are generally amendments to the base CAR policy to broaden its coverage. Endorsements therefore can be viewed as the opposite of exclusions. 

By way of example, a standard exclusion as alluded to earlier in this article pertains to strike, riot and civil commotion or otherwise known as SRCC. It is possible to remove such exclusion of SRCC by purchasing an SRCC endorsement. Endorsements are typically listed in the Schedule portion of the insurance policy and would be included in the tenderers’ offer price at the point of tender.

Whilst it is possible to select the types of endorsements to plug the gaps from standard exclusions of CAR policies, there are times when the insurer may include exclusions based on the nature and specificity of the project. The insurer may upon its review of the project scope of works decide that certain parts of the works be excluded from insurance coverage. By way of example, the risks arising from marine piling works or seabed dredging works in respect of coastal infrastructure project may be excluded from insurance coverage as these may be deemed to have unmanageable risk profile. The Employer may not be aware of these bespoke gaps at the inception of the project if it is a contractor controlled insurance policy where the insurer’s assessment only arises after the main contractor is appointed. Therefore the Employer will be well served to either allocate certain provisional sums under the main contract to effect additional insurance endorsements where necessary or to invite an insurer to review the project at the outset on a without prejudice basis to understand the project’s risk profile.

Uberrimae Fidei – Utmost Good Faith

An insurance policy is ultimately a commercial agreement between two contracting parties namely the policyholder and the insurer. In simple terms, the insurer agrees to provide financial guarantee on certain agreed risks in consideration of premium paid by the policyholder. It is trite that the principle of freedom to contract is upheld in most jurisdictions including Singapore. Under this principle, parties are free to negotiate at arms length and to act in their self interest. The court rarely steps in to rescue a party from what is perceived as a raw deal due to the lack of due diligence from one party prior to signing on the dotted line. The court expects the buyer to beware, or caveat emptor. This is especially so if the party who cries foul has superior if not equal bargaining power. Whilst the principles above is generally true, it is arguably not entirely applicable in the context of construction insurance. This is due to the concept of uberrimae fidei or utmost good faith in Latin. Uberrimae fidei is in fact the opposite of caveat emptor.

The insurer decides whether or not to provide insurance coverage based on material facts that it receives about the project. This enables the insurer to perform its risk assessments. If the insurer decides to proceed to offer insurance coverage, the risk profile that it perceives based on those material facts will determine the premium that it charges on the policyholder. The policyholder typically is in possession of the material facts and the insurer is dependent on the policyholder to share those material facts. By way of example of a medical and hospitalisation insurance policy, the insurer would not be aware of the policyholder’s medical history and lifestyle unless the latter decides to provide a full and frank disclosure. If the policyholder decides to suppress and conceal its lung cancer medical history and regular smokes cigarettes, the insurer’s ability to make an informed risk assessment will be compromised and the amount of premium charged will also be distorted. Therefore by the same token in the context of construction insurance, the insurer takes the position that all material facts and relevant information about the project should be disclosed, failing which the policy may be rescinded. 

The full and frank disclosure of all material facts under uberrimae fidei principle may seemed straightforward in regular insurance scenarios but can potentially be vague and contentious in the context of construction insurance. This is because the main contractor being the policyholder may not be in the position to appreciate what constitute material facts beyond sharing with the insurer the scope of works, project schedule and the construction method statement all of which are subject to change based on the dynamic site condition. The policyholder of a medical insurance is expected to disclose its medical history based on a retrospective perspective of events happened in the past. On the other hand, the main contractor could only disclose material facts prospectively based on its best guess of what will happen during construction period. There is always a fear that the insurer may not honour a covered claim on the pretext of non disclosure of material facts. It is advisable to agree and document with the insurer prior to the conclusion of any policy of the specific scope of disclosure and to what extent an update is required after the policy is concluded.

Subrogation Right

The insurer typically has the right provided for under the policy to seek reimbursement from the third party at fault after paying the insured the compensation for the covered risk. This is known as the insurer’s subrogation right. This right ensures that the insurer continues to be financially viable even after responding to the claim of a covered risk under the policy. Assuming the supplier who is not covered under the main contract insurance policy causes damages to the construction works, the insurer could seek reimbursement from such supplier upon compensating the main contractor. The main contractor not only gets compensated relatively quickly but is also relieved from the burden and cost of pursuing such claim directly from the   supplier that is at fault. 

However this raises the question of what if the Employer or its agent were at fault for causing those damages? Theoretically, the insurer would similarly have the same subrogation right against the Employer or its agent. This is why the standard form of contract would generally specify that the main contractor shall arrange for insurance policy that additionally names the Employer as the “insured”. As a general rule, the insurer does not have the right of subrogation or to seek indemnification from the insured. The terms under the policy would typically ensure that such arrangement is effected. This is why upon the procurement of the draft insurance policy, this aspect will be reviewed by the Employer’s contract administrator or the consultant quantity surveyor prior to facilitating progress payment for the cost of the policy. It should also be noted that the additionally insured named under the construction insurance policy would usually be protected if the accident arises only out of the ordinary execution of the construction works.

Workmen Compensation Policies

Whilst risk of injuries suffered by workers during construction works is real and undeniable, it is somehow treated quite differently from other construction related risks. In certain jurisdictions such as Singapore, there are legislations enacted by Parliament that focus on amongst others, how such risks should be addressed. Unlike other construction risks such as material damage and third party liabilities where contracting parties are free to agree on how such risks are to be allocated and be dealt with among themselves, workers’ injuries seemed to take treated with a higher level of sensitivity. This may not be surprising given the additional political dimension associated with optics of rank and file workers not being taken care of adequately when they work in dangerous environments. In many jurisdictions around the world, there are examples of workers who get organised amongst themselves to carry out demonstrations and industrial strikes when they believe that they are not being treated fairly. 

In Singapore, the Work Injury Compensation Act plays an important role in prescribing, amongst others the types of coverage and minimum compensation amount that are required under relevant insurance policies relating to construction works injuries. The subject of workers injuries can often be vague and complex. This is because the contracting companies hiring such workers are required to procure insurance policies to cover injuries sustained at work but at the same time the building project under which those very companies are engaged would typically effect certain workmen compensation policies. In other words there are risks of duplicity and ambiguity between the companies’ policies and the project policies. Since January 2021, the Work Injury Compensation Act made it clear that risks of workers’ injuries shall be covered under the approved policies procured by the contracting companies rather than the project’s insurance policies. However any injured worker is free to either pursue his claim under the regime of Work Injury Compensation Act or via litigation based upon his common law rights. As regards the latter, any contracting companies or the Employer may choose to procure additional project level insurance policies so as to mitigate any such risk of claims.

Owner Controlled Insurance Programme

Based on the above, what is clear so far is that the main contractor shoulders the responsibility of procuring construction insurance for the project. This is consistent with the relevant provisions under the standard form of construction contract which follows the industry norm. The owner of the project, being the Employer establishes these arrangement via its choice of form of contract. The owner indirectly pays for these insurance policies when the main contractor includes the costs of the premiums in its tender price. This arrangement serves the owner’s interest but unfortunately leaves much of the other participants in the lower end of the supply chain such as the subcontractors and suppliers exposed. 

This is because as compared to the main contract with fairly prescriptive insurance requirements, the insurance requirements at the subcontract level remain vague other than the general requirement for the subcontractor to observe, perform and fulfil the insurance conditions under the main contract. Further, the subcontractor are expected to effect any other supplemental insurance policies in such a manner that the main contractor and the Employer remain indemnified. Ironically, it is the subcontractors and suppliers that physically carry out much of the construction works as the main contractor typically outsources a significant portion of such works externally. Consequently, gaps and duplicative coverage occur as regards the insurance policies procured at the lower end of the supply chain. Any duplicative coverage would inevitably give rise to unnecessary higher construction cost. The effect could be considerably magnified for projects of a larger scale, say $100million and above. 

Therefore, an alternative arrangement which is known as the Owner Controlled Insurance Programme or OCIP in short is commonly adopted for larger construction projects. Occasionally, such programme are also known as the ‘project wide blanket insurance’. As the name of this programme suggests, this scheme reverses the conventional arrangement where it is the owner or the Employer that procures, effects and directly pays for the insurance policies. The Employer is the policyholder. The nature of coverage such as material damage and third party liabilities remain largely unchanged or could be enhanced based on the risks of a large scale project. The terms of such policy would then be shared with the contractors for them to effect any supplemental policies where necessary based on their unique needs. This arrangement appear to resolve much of the gaps and duplicative covers that exist under the conventional approach. However it should be noted that for every alternative arrangement that seeks to resolve certain existing problems, it may inadvertently give rise to unintended new issues. 

This is because the OCIP would be effected at the inception of the project presumably at the stage of initial design development phase prior to the engagement of main contractor, subcontractors and suppliers. The OCIP insurer may regard certain contractors to have a higher risk profile and failure to disclose every participant in such project could constitute failure to disclose material facts. As mentioned earlier in this article, the principle of utmost good faith assumes an information asymmetry between the policyholder and the insurer. The lack of full and frank disclosure may result in having the policies rescinded. The insurer may also require an additional premium if the project involves certain main contractor or subcontractor that are deemed risker by the insurer. At this juncture, the Employer has limited  negotiation leverage as it would be manifestly unwise to change an insurer in the mid stream of the project. These issues should be discussed and agreed upfront so that a mechanism can be built into the OCIP policies to cater to these scenarios.

Conclusion

As illustrated from the nuances and intricacies above, construction insurance is indeed an important and complex subject which should not be reduced to a mere deliverable under the contract. It deserves to be discussed and explored widely during the planning and execution of construction works. Admittedly, site accidents that require responses from insurance policy do not occur on a daily basis, thus giving the perception of less urgency. However it is worth noting that what is important may not always be urgent. 

Koon Tak Hong Consulting Private Limited