What insurances are the parties required to hold? And how long for?
The parties are free to agree upon what insurances to hold.
According to the NS contracts, the contractor must maintain insurance over the contract work until delivery of the contract work. The employer shall be co-insured.
The NS contracts also require the contractor to hold a liability insurance to cover any property damage, financial loss or bodily injuries, including those concerning a third party, caused during the contract work.
There is no specific legislation that regulates the insurance requirements in construction projects. The parties are free agree on this in their contracts. Under the dominant standard forms (AB 04 and ABT 06), the contractor is required to maintain all-risk insurance and general liability insurance during the construction period and for two years following final completion. In the Swedish insurance market, there are special insurance policies which are designed to meet the requirements under AB 04 and ABT 06.
The contractual terms usually dictate the required insurances.
It is typical for construction contracts, at a minimum, to require (i) contractor all risk insurance (as works generally are at the contractor’s risk until practical completion); (ii) third party liability insurance and (iii) professional indemnity insurance to cover any professional works or services performed (e.g. architecture services). It also is common in Hong Kong to require marine cargo insurance to cover transportation of construction materials by barge.
The only insurances required by statute to be taken out are third party motor vehicle insurance (for vehicles on roads other than those in areas wholly or mainly used for the carrying out of construction work or industry) and insurance under the Employees’ Compensation Ordinance (Cap. 282). The latter requires all employers to effect insurance to provide compensation to employees for bodily injury or death arising out, and in the course, of employment. Specific requirements apply to the amount of insurance which must be taken out by principal contractors to cover their liability to their employees and sub-contractors under the Ordinance and at common law.
The types of insurance most often required are:
- All risks insurance covering physical damage to the works and site materials is typically maintained by the contractor for a new building until practical completion, and by the employer for refurbishments and some major projects;
- Public liability insurance (covering defects in design) is typically required from consultants and design and build contractors, and must be renewed for the duration of their liability;
- Professional indemnity insurance must be maintained throughout the insured professional’s period of liability;
- Employers' liability insurance is maintained throughout the period of employment: this is the only insurance required by statute.
On some PPP projects, particularly those creating an income generating asset, additional insurances such as delayed start-up (DSU), and advanced loss of profit (ALOP) insurance may be required. These respond when the income stream is delayed or affected by a shut-down. These are maintained during the life of the works.
Most contractors are covered for all of their projects by annual insurance policies.
Parties to a construction contract often procure multiple types of insurance coverage to account for different types of risk. These insurance products fall under either first party coverage or third party coverage. First party coverage applies to and protects an organization’s own physical assets, such as equipment, buildings, and personal property. Third party coverage, also known as liability or casualty insurance, covers the insured’s liability for damages to third parties.
A typical first party insurance is known as Builder’s Risk insurance, which covers loss or damage to the work during construction, including losses arising from the negligence of contractors and other acts of God. Builder’s Risk is often provided on an “all risk” basis, which means that all risks of physical loss or damage to property is covered, unless otherwise excluded. Other types of first party coverage typically carried are Worker’s Compensation insurance, which covers injuries to employees suffered in the course of their employment, and Automobile Liability insurance, which covers parties who may be traveling to the construction site. Owner’s generally procure Builder’s Risk, while contractors generally procure Worker’s Compensation and Automobile Liability insurance.
A typical third party insurance is Commercial General Liability (“CGL”) insurance, which protects the insured against third-party claims and lawsuits for bodily injury or property damage arising out of its business operations. Another type of third party insurance is professional liability coverage (also called Errors & Omissions coverage), which covers losses arising from services deemed “professional” in nature, such as architects and engineers. The difference between a CGL policy and a professional liability policy is that the later covers purely economic losses, while the former only covers claims for bodily injury or property damage.
Parties may procure other types of insurance not automatically provided for in the aforementioned types of coverage, such as coverage for environmental and pollution exposure, land acquisition, financing, zoning, and other aspects of construction, although these policies tend to be more expensive.
The length of the policy period can vary, but is generally the anticipated length of the project or the duration of the contract period. Sometimes policies are required for longer durations to cover warranty periods or claims periods for defective workmanship.
The choice of the type of insurances, as well as their duration, is to be made freely upon the parties required to a contractual relationship. Still, when bigger construction works are to be performed, the Contractors’ All Risk (CAR) insurances are often agreed upon.