“INSURANCE IN CONSTRUCTION

INDUSTRY’’

Bachelor of Commerce
Banking & Insurance
Semester VI

(2015-2016)

Submitted by
AYUSH SARAF
ROLL NO. 44

H.R. COLLEGE OF COMMERCE & ECONOMICS

123, D.W. Road, Churchgate, Mumbai – 400 020.

 INSURANCE IN CONSTRUCTION
INDUSTRY

Bachelor of Commerce
Banking and Insurance
Semester VI

(2015-2016)
In Final Fulfillment of the requirements

For the Award of Degree of Bachelor of

Commerce – Banking & Insurance

Submitted by
AYUSH SARAF
ROLL NO. 44

H.R. COLLEGE OF COMMERCE & ECONOMICS

123, D.W. Road, Churchgate, Mumbai – 400 020.

 H.R. COLLEGE OF COMMERCE & ECONOMICS

123, D.W. Road, Churchgate, Mumbai – 400 020.

CERTIFICATE

This is to certify that Shri Ayush Saraf of B.Com.-Banking & Insurance Semester

VI (2015-2016) has successfully completed the project on “Insurance in

Construction Industry ” under the guidance of Mr. Rahul Mishra .

Principal Project Guide

Internal Examiner External Examiner

 DECLARATION

I Ayush Saraf the student of B.Com.- Banking & Insurance Semester VI (2015 -

2016) hereby declare that I have completed the Project on “Insurance in

Construction Industry ”.

The information submitted is true and original to the best of my knowledge.

Signature of the Student

AYUSH SARAF

Roll No. 44
 ACKNOWLEGEMENT

I would sincerely like to thank University of Mumbai for introducing a

degree course in B.Com with Banking and Insurance. This has given me

an opportunity to gain knowledge on the insights of the banking and

insurance industry. A special thanks to our esteemed coordinator Prof.

Rahul Mishra for guiding and motivating me during the project . I would

also like to thank the librarian of H.R College who helped me in finding

out various books on my topic.

This project was highly educational and it was a great learning

experience making this project.

 INDEX

SR. NO. TOPIC PAGE NO.

1 Executive Summary 1
2 Introduction 3

3 Risk in Construction 8
4 Possible Ways Of Mitigation Of Risks 11
5 Need For Insurance In Construction Industry 13

6 Importance Of Insurance In Construction Industry 14

7 Types Of Insurance In The Construction Industry 17

8 Factors Affecting Cost And Availability Of 31

Insurance

9 Insurance Requirements In The General 34

Conditions

10 Common Cost Of Construction Insurance 43

11 Construction, Insurance & Requirements 45
12 Factors That Affect Different Types Of Insurance. 46
13 Key Provisions 51

14 Contractors All Risk Policy Overview 54

15 General Questions 56

16 Conclusion 63

17 Bibliography 65
 EXECUTIVE SUMMARY

To determine the insurance requirements of public agencies that

contract construction projects, the general conditions of several agency
specifications were
investigated. The agencies chosen were state highway departments and
municipal public works departments. A checklist was developed to
record provisions relating to
insurance coverage, and the data was examined to identify major
differences or consistencies among agencies. It was found that the
public agencies were consistent
in requiring contractors to obtain insurance before construction begins.
All agencies required liability insurance in one form or another. However,
the insurance limits and types of coverage required varied
considerablyamong the agencies.
For example, the Missouri Department of Transportation had minimum
required limits of $250,000 for bodily injury, while the New Jersey
Department of Transportation required minimum limits of $3,000,000.
Another common requirement was for the contractor to furnish the
agency with an insurance certificate as proof of insurance, although
many agencies are not using this provision to their advantage. The
benefits far outweigh the filing costs to maintain these certificates. The
majority of agencies who require the certificate further protect
themselves by requiring notification if the policy is cancelled. Among this
majority, a few have contractually reserved the right to suspend progress
payments if the insurance is cancelled or lapses. Indemnification clauses
were required by all highway departments, and by a majority of the
municipalities. These clauses indicate that the agencies recognize the
risk to their organizations. To protect the organization the holdharmless

1
agreements are an effective method of keeping the liability burden on
the contractors. Another measure of protection, requiring the agency to
be named as an additional insured on the insurance policies, was used
by only a few agencies. Another little-used provision was the
requirement for extended coverages, as some agencies required several
additional coverages, while others specified none.

To determine the importance of various factors to insurance companies

when setting premium rates for construction contractors, personal
interviews were conducted
with underwriters from six major insurance companies with offices in
Seattle. As with the specification reviews, the data obtained was
examined to determine differences and consistencies.
The interviews revealed that with the exception of prices, there was a
fair amount of consistency among underwriters. The most important
information disclosed was
that while contractors have little control over the base rates charged for
insurance premiums, they have great control over the multipliers used by
insurance companies
when setting rates for different contractors. If a contractor utilizes a well-
trained work force and maintains safe jobsites, the frequency of injuries
and property damage
should lessen. A good safety record is an effective means of reducing
the premiums paid for all coverages. Other important factors within the
contractors control are
profitability of the firm and the type of construction work undertaken.

2
 INTRODUCTION
Insurance is a means of protection from financial loss. It is a form of risk
management primarily used to hedge against the risk of a contingent,
uncertain loss. An insurer, or insurance carrier (often called an
"insurance company), is sells the insurance policy to customers. The
customers, who are called the insured or policyholder, are the person or
entity (which may be a private company or other organization) buying
the insurance policy. The amount of money to the customer pays for a
certain amount of insurance coverage is called the "premium".Risk
management, the practice of appraising and controlling risk, has evolved
as a discrete field of study and practice.

The transaction involves the insured making a payment to the insurer in

exchange for the insurer's promise to compensate (indemnity) the
insured in the case of a financial (personal) loss. The insured receives
a contract, called the insurance policy, which details the conditions and
circumstances under which the insured will be financially compensated.
In the event that the insured experiences a financial or personal loss
which is covered by the insurance policy, the insured makes an
insurance claim to the insurer. Insurance company claims adjusters and
other insurance company employees assess the claim. Insurance
policies typically set out certain circumstances or actions which will void
the insurance policy; if the insurance policy is voided, then the insurer
may not have to pay out the claim.

Some typical examples of insurance purchased by individuals

include house insurance (which may protect the insured against loss or
damage to the home due to fire or other hazards); car insurance (which
protects the driver against damage to her car, other vehicles she may
3
have a collision with, liability for damages suffered by others in a
collision, etc.) and life insurance.

Insurance involves pooling funds from many insured entities (known as

exposures) to pay for the losses that some may incur. The insured
entities are therefore protected from risk for a fee, with the fee being
dependent upon the frequency and severity of the event occurring. In
order to be an insurable risk, the risk insured against must meet certain
characteristics. Insurance as a financial intermediary is a commercial
enterprise and a major part of the financial services industry, but
individual entities can also self-insurethrough saving money for possible
future losses.

Risk which can be insured by private companies typically shares seven

common characteristics:

Large number of similar exposure units: Since insurance operates

through pooling resources, the majority of insurance policies are
provided for individual members of large classes, allowing insurers to
benefit from the law of large numbers in which predicted losses are
similar to the actual losses. Exceptions include Lloyd's of London, which
is famous for insuring the life or health of actors, sports figures, and
other famous individuals. However, all exposures will have particular
differences, which may lead to different premium rates.

Definite loss: The loss takes place at a known time, in a known place,
and from a known cause. The classic example is death of an insured
person on a life insurance policy. Fire, automobile accidents, and worker
injuries may all easily meet this criterion. Other types of losses may only
be definite in theory. Occupational disease, for instance, may involve

4
prolonged exposure to injurious conditions where no specific time, place,
or cause is identifiable. Ideally, the time, place, and cause of a loss
should be clear enough that a reasonable person, with sufficient
information, could objectively verify all three elements.

Accidental loss: The event that constitutes the trigger of a claim should
be fortuitous, or at least outside the control of the beneficiary of the
insurance. The loss should be pure, in the sense that it results from an
event for which there is only the opportunity for cost. Events that contain
speculative elements such as ordinary business risks or even
purchasing a lottery ticket are generally not considered insurable.

Large loss: The size of the loss must be meaningful from the
perspective of the insured. Insurance premiums need to cover both the
expected cost of losses, plus the cost of issuing and administering the
policy, adjusting losses, and supplying the capital needed to reasonably
assure that the insurer will be able to pay claims. For small losses, these
latter costs may be several times the size of the expected cost of losses.
There is hardly any point in paying such costs unless the protection
offered has real value to a buyer.Affordable premium: If the likelihood of
an insured event is so high, or the cost of the event so large, that the
resulting premium is large relative to the amount of protection offered,
then it is not likely that the insurance will be purchased, even if on offer.
Furthermore, as the accounting profession formally recognizes in
financial accounting standards, the premium cannot be so large that
there is not a reasonable chance of a significant loss to the insurer. If
there is no such chance of loss, then the transaction may have the form
of insurance, but not the .

5
Calculable loss: There are two elements that must be at least
estimable, if not formally calculable: the probability of loss, and the
attendant cost. Probability of loss is generally an empirical exercise,
while cost has more to do with the ability of a reasonable person in
possession of a copy of the insurance policy and a proof of loss
associated with a claim presented under that policy to make a
reasonably definite and objective evaluation of the amount of the loss
recoverable as a result of the claim.

Limited risk of catastrophically large losses: Insurable losses are

ideally independent and non-catastrophic, meaning that the losses do
not happen all at once and individual losses are not severe enough to
bankrupt the insurer; insurers may prefer to limit their exposure to a loss
from a single event to some small portion of their capital
base. Capital constrains insurers' ability to sell earthquake insurance as
well as wind insurance in hurricane zones. In the United States, flood
risk is insured by the federal government. In commercial fire insurance, it
is possible to find single properties whose total exposed value is well in
excess of any individual insurer's capital constraint. Such properties are
generally shared among several insurers, or are insured by a single
insurer who syndicates the risk into the reinsurance market.

6
Construction Industry plays a major role in the economic growth of a
nation and occupies a pivotal position in the nation’s development
plans.India’s construction industry employs a work force of nearly 32
million and its market size is worth about Rs. 2,48,000 crores. It is the
second largest contributor to the GDP after the agricultural
sectorI.Construction sector is viewed as a service industry. It generates
substantial employment and provides growth impetus to other
manufacturing sectors like cement, bitumen, iron and steel, chemicals,
bricks, paints, tiles etc. whose combined value is Rs.1, 92,000 crores
annually. The construction equipment market is valued at Rs.1, 05,000
crores.

7
 RISK IN CONSTRUCTION

Risk in Construction needless to mention, with huge money, comes the

company of big risks. Construction is a high-risk business. Or is it? This
is a classic dilemma, which haunts every participant in the business. The
Project owner, construction companies, consultants, bankers and
financial institutions, vendors & suppliers and even the service providers,
each has his own fears of facing risks in the conduct of business.What
needs to be determined is:

a. The proportion of real versus perceived risks.

b. The monetary quantification of risks.
c. The real import and the impact of a type of risk.

Risks, when indeterminate, are worse than assessed risks. The obvious
outcome of the situation is that the Banks and Financial Institutions
hesitate in lending to the operators of Construction Industry or
alternatively lend in absence of authentic and reliable inputs. Either of
the situations is detrimental to the overall growth of the industry and
thus, the economy.It is therefore of paramount importance that the
present operating systems be substantially strengthened to provide
comfort to the financial systems.Broadly speaking, Construction Projects
face the following type of risks :

§ Business Risks
§ Financial Risks
§ Technology Risk
§ Project Risk
§ Political Risk

8
The risks in a standalone project are big. They include:

Completion risk
This is the risk that the project may not be completed on time, or at all,
due to various reasons such as cost overruns, technology failure, force
majeure etc.
Price risk
This is the risk that the price of the project's output might be volatile due
to supply-demand factors. If new capacities are coming up or if there is
likelihood of fall in demand of the project output, the price risk is high.
Resource risk
This risk includes the non-availability of raw materials for the project
operation. It also includes the risk that the raw material prices might
move adversely
Technology risk
This is the risk that the technology used in the project is not sufficiently
proven.
Operating risk
This is a risk that the project operational and maintenance costs would
escalate. It also includes the risk that the project will have operational
problems.
Political risk
This risk relates to matters such as increased taxes and royalties,
revocations or changes to the concession, exchange controls on
proceeds, forced government participation in shares and refusal of
import licenses for essential equipment.
Casualty risk
This is the risk of physical damage to the project equipment. It also
includes liabilities to third parties on account of accidents at the project

9
site.
Environmental risk
This risk refers to increased project costs for complying with new
environmental standards. There could also be environmental protests
from the local populace against the project.
Permission risk
This is the risk that official clearances for the project may not be
forthcoming or subject to expensive conditions.
Exchange rate risk
This is the risk that the currency of sale of the project produce would
depreciate with reference to the currency of the project loans. Even
though the debt being rated might be Rupee denominated, the presence
of foreign currency liabilities can decrease the debt service coverage
ratio of the bonds in case there is adverse exchange rate movement.
Interest rate risk
This is the risk that the floating interest rate of the project loans would
increase beyond the levels assumed for preparing projected cash
flows.
Insolvency risk
This is the risk of insolvency of contractors, project sponsors, suppliers,
purchasers of project output, insurers or a syndicate bank.
Site risk
This is the risk that the project site might have legal encumbrances. It
also includes the risk that the site has technical problems.
Financial closure risk
This is the risk that the project that the project might not reach financial
closure.

10
 POSSIBLE WAYS OF MITIGATION OF RISKS
Where as the basic premises remain unaltered and the broader
classification is still valid, the exigencies and the systems adopted,
reduce or enhance the intensity of encounter, even in the present day.
An effort, therefore, has to be made, to make an assessment of such
risks, quantify them and also to work out solutions, products, or the
practices, to mitigate them. If not mitigated, following could be the
possible repercussions (behavioural) outcome:-

I. Dilemma of the Project Owner to invest in the project.

II. Dilemma of the construction company to complete the project in
time and within the scheduled costs.
III. Dilemma of the consultants to provide effective support services.
IV. Dilemma of the Banker to provide the required financial support to
the venture.
V. Dilemma of the vendor to meet his supply obligations in time.

Regarding mitigation of such risks, the elements continue to remain

unchanged, with varying degree of sophistication arising out of the type
and the nature of mitigant used. While defining the elements, one can
again classify them in the following broad categories. By evolving a risk
spread system, to reduce the impact. By following better work practices
and enacting regulations to allow only the acknowledged masters of the
trade to practice independently. By creating systems and subsystems to
facilitate and operationalize the practices in consonance with above two
premises. (e.g. initiation of formal training and HRD)

Having thus articulated the premises, and cutting out the charter of

11
activities, one vital question yet confronts all concerned, and that is to
devise the mechanisms of Profiling and Quantifying the risks. The
answer is found in creation of a database (Some call it colloquial
wisdom, or experience) and applying the principles of mathematics.

An attempt, therefore, is to be made to develop following:

a. Risk identification Instruments.

b. Risk management Instruments.
c. Risk mitigation Instruments, & eventually.
d. Damage control, containment and resolutions Instruments.

Experts, who work on evaluating the possibility and the quantum of risks
as numbers, are named as Actuaries. Actuaries document the details of
the events, which lead to failures, analyse the causes as mathematical
expressions, determining the frequencies, and the extent of damage/
losses.

Construction, as a large economic activity, has now started drawing

attention from several quarters, and work in right earnest has begun on
such aspects, which, though vital, remained neglected all this while.

Evolution of techno-commercial grading systems, Institutional Systems

for performance surveillance, designing of Insurance/ non-insurance
backed products, and several other such services and support systems
are being designed and practiced to continuously improve the
performance of the Industry as a whole.

12
 NEED FOR INSURANCE IN CONSTRUCTION INDUSTRY

For a variety of reasons, construction contractors face many

uncertainties as they start projects. Construction operations do not
always take place according to plans-- mistakes occur, workers suffer
injuries, property is damaged, and acts of God or other mishaps can
impede or halt progress on a construction project. Most of these
incidents require money to rectify. The prudent contractor realizes the
importance of having adequate insurance and will purchase the types
that will offer the best protective coverage for each project undertaken.
Since contractors may be potentially at risk for multimillion dollar liability
suits and since they are responsible for millions of dollars worth of
materials and work-in-place, they must consider the purchase of
adequate insurance as one of their most important administrative
functions. Public agencies recognize the fact that mishaps occur, and
that liability suits can be brought against them, as owners, even though
the prime contractor or subcontractor is at fault. To minimize the risk of
financial loss during construction of the project, agencies may include
provisions in their specifications that require contractors to maintain
certain types and levels of insurance. In addition to contractually
required insurance, there are many other types of insurance available to
construction contractors to offset almost any loss. This paper will
examine the types of insurance required by various state and local
agencies. It will also explore some pertinent factors, from the
underwriters position, that are related to purchasing insurance and that
affect the cost of insurance.

13
 IMPORTANCE OF INSURANCE IN CONSTRUCTION INDUSTRY

Construction involves large number of manpower and huge investments

of money. The workers at a construction site risk their lives working at
great heights, with dangerous tools, toxic materials, heavy equipment,
under tunnels, etc. Hence, construction is associated with high amount
of risk for money and lives. A slight negligence or bad fortune on part of
the worker or owner may prove too costly. It may lead to a huge financial
loss. These unfortunate events require tools, which can bail the
company out of the situation. Here arises the need of 'Construction
Insurance', the risk management tool, customised specifically for the
construction industry. Construction insurance is like any other insurance,
which is used to protect the various parties associated with construction
process.

A comprehensive construction insurance policy covers all the expenses

that may occur due to property damage or personal injuries at the
construction site. This insurance not only includes the organization
owner, but also workers, employees, tenants, sub-contractors, sole
proprietors and business partners.

As discussed above, construction involves usage of heavy equipment,

materials, labour, etc. and is more prone to accidents. Since the
business stands liable for any accident on the construction site, it is the
business owner or the contractor that should pay for the medical
treatment charges of the injured or compensation to the families, in case
of death of the worker.Material costs associated with construction are
very high. Any damage to the structure or the materials leads to huge
financial loss. Insured with the construction insurance, one can seek
financial assistance from the insurance company.The buyers of the flats

14
or the constructed property will have all rights to sue the construction
company, in case of faulty construction. In such cases the construction
company has to pay for the remodelling or repairing the constructed site.
Construction insurance protects the builders from those claims, by
providing financial assistance.Apart from the above circumstances,
construction insurance provides wide coverage, providing security to the
business in case of unpredicted events.

The four main areas it covers are : Construction insurance is very

significant in terms of its coverage. It is very comprehensive and is
specifically designed to cover every aspect of construction process, to
make the business process flexible. Construction insurance covers four
major areas of business insurance. They are:

Public liability insurance

Public liability insurance is a general insurance to be possessed by any

business which involves interaction with the customers or people in
general. Public liability insurance as part of construction insurance helps
the businesses in case any damage to third party property or individuals
is caused by employees or the tools used in construction.

Employers liability insurance

As the construction industry involves lot of risks, any worker can get
injured or die at any point of time, due to the faulty equipment or
negligence of supervisors or co-workers. Employers are responsible for
the health and safety of their employees at construction site. Moreover,
the employees will have every right to sue the owner and claim for
compensation. In case of such unexpected events, the employer or the
owner can benefit from the construction liability insurance, as the

15
insurance company pays the medical costs or the compensation
associated with the claims.

Contractors all risks insurance

Contractors all risks insurance is customised for construction

businesses. It provides assistance for contract works of new houses,
theft of materials or tools, damage to the materials or tools due to
unexpected events, sudden stoppage of on-going works of new houses,
owned or hired plants, etc. This insurance acts as a perfect help for the
most commonly incurred accidents in the construction process.

Personal accident insurance

This insurance is specifically designed for managers, sole proprietors or

business partners. This is useful in the cases, where the person injured
can't blame any other person for the injury caused to him. This is helpful
in providing assistance during the period for which the injured person
cannot get income.

Construction insurance is very important for construction businesses as

the damage or the financial loss occurred is very hard to be recovered.
Businesses should realise that the cost of premiums for insurance is less
when compared to the compensation costs. Therefore, it can be
concluded that, construction insurance is very valuable in making the
business sustain for long run.

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 TYPES OF INSURANCE IN THE CONSTRUCTION
INDUSTRY

Purchasing the proper insurance with adequate limits can be one of the
most important administrative decisions a contractor will make. Before
discussing public agency requirements for insurance and factors
affecting insurance costs, it is necessary to first identify and describe the
types of insurance that are purchased in the construction marketplace,
and to briefly describe what each type will generally cover. Other
important terms that are used by the insurance industry will also be
described.

A. LIABILITY INSURANCE

Liability, as defined by Black's law dictionary, is "a condition of being

responsible for a possible or actual loss, penalty, evil, expense, or
burden"

In the construction industry, some situations in which the contractor may

be held liable for an accident or mishap are described as follows :

a) acts of commission or omission by the contractor may result in

individual(s), not employed by the contractor, suffering injury or death, or
property owned by third parties may be damaged or destroyed.

b) indirect liability may be brought about by the acts of parties for which
the general contractor is responsible, such as subcontractors.

c) liability of others, such as the owner, may be contractually assumed.

d) after work on the project has been completed, injury to third parties or
damage to the property of third parties may be attributed to the
contractor.

17
e) an accident may occur involving the use of the contractor's motor
vehicles, or the use of personal motor vehicles in the course of
conducting business for the contractor.

These are the primary means by which a contractor can be held liable.
Liability insurance serves the purpose of protecting the contractor
against third-party suits arising from such mishaps. There are many
forms of liability insurance available today to protect against the various
risks mentioned above. General liability policies will cover property
damage and bodily injury, but they exclude certain mishaps. If the basic
policy excludes a type of liability coverage desired by a contractor, the
coverage can be purchased separately, and it is then called extended
coverage to the basic policy.

Common exclusions in the general liability policy include the following :

a) any liability the contractor assumes by contract.

b) property damage caused by explosions or blasting.

c) collapse or structural damage of the building.

d) damage to underground utilities.

e) damage to property under the care, custody, and control of the

contractor.

f) personal injury to the contractor, owner, or third parties.

g) bodily injury to the contractor's own employees

h) motor vehicle liability.

Two types of general liability insurance that combine various coverages

in a single package are COMPREHENSIVE GENERAL LIABILITY (CGL)

18
INSURANCE and the newer COMMERCIAL GENERAL LIABILITY
(CmGL) INSURANCE. CGL was endorsed by all states prior to 1985. In
that year, however, the Insurance Service office (ISO) introduced CmGL
as a replacement coverage to CGL . The main reason for the advent of
CmGL was to include, as part of the general package, certain coverages
that were available only as extended coverages to the CGL. Another
reason was that the name, "comprehensive general liability", indicates
that all coverages are included, and it might be interpreted in court that
there should not be any exclusions. As of this writing all 50 states have
approved the use of Commercial General Liability insurance.

Contractors usually purchase general liability insurance on an annual

blanket basis with individual job coverage and specific requirements
brought under it by endorsement through extended coverages.
Insurance companies write the policy with stated upper limits of
monetary coverage.

The limits can be stated in different ways. The usual breakdown is to

separate claims by bodily injury and property damage. The bodily injury
portion will state limits for (1) each person, (2) each accident, and (3)
aggregate. The "each person" limit is the maximum amount the
insurance company will pay to each third-party individual that is injured.
The "each accident" limit is the maximum amount the insurance
company will pay for all third-party injuries in one accident. The
aggregate limit is the most the insurance company will pay for third-party
injuries during the policy period (usually one year). Similarly, the
property damage portion states limits for each accident and the
aggregate.

19
Once a contractor purchases insurance, the insurer provides a certificate
as proof of this purchase. The certificate will have all pertinent
information on it, such as coverages, policy limits, and the policy period.
The general liability policies come in two basic forms: occurrence and
claims-made. The occurrence form provides coverage for insurable
events that occur during the policy period, regardless of when a claim is
made, even if the claim is made years after the policy has been dropped
by the insured. Because insurance companies were defending claims
that were made years after the occurrence of an accident, they
developed an alternative type of coverage called "claims-made". This
policy only provides coverage for accidents that are claimed during the
policy period. Coverage gaps can arise with claims-made insurance
when a policy is cancelled or not renewed by either the insured or the
insurance company, or when an exclusion of specific accidents or type
of work is attached to a renewed policy .

A feature used by contractors to close these holes in the coverage is

called the "extended reporting period" (ERP), also known as "tail
coverage". The standard claims-made CmGL policy includes two types
of ERP: the basic ERP and the supplemental ERP. The basic ERP takes
effect automatically when the policy is cancelled or not renewed. It
covers any claims made against the insured contractor within five years
if the claims arise from occurrences that the contractor knew about and
reported to the insurer before or within sixty days after the policy is
cancelled or not renewed. This does not cover claims made against the
contractor that arise from occurrences that the contractor did not know
about and did not report to the insurance company before or within 60
days after the policy termination date.

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The supplemental ERP is available for this contingency. The
supplemental ERP eliminates the five year limitation of the basic ERP
and causes that particular tail coverage to be of unlimited duration. It
also provides coverage for claims made at any time in the future that
arise from occurrences that the insured Oid not know about and report
to the insurer before or within sixty days after the policy termination date.
A new set of aggregate limits also applies to claims covered by the
supplemental ERP. Whereas the basic ERP usually comes with no
additional premium charge, the supplemental ERP must be requested
and a premium is charged for this tail coverage .

B. SPECIFIC LIABILITY COVERAGES

The general liability policy is made up of several specific liability

coverages. Following are descriptions of the coverages usually included
in the general policy, as well as those coverages that contractors must
purchase as extended coverages.

1. OPERATIONS-PREMISES LIABILITY INSURANCE

Operations-premises liability insurance is purchased most frequently of

all the liability coverages Under this type of insurance, the contractor is
protected for liability arising out of bodily injury and property damage
caused by an incident on premises owned or occupied by the insured
contractor. This will only cover injuries caused to third parties and
damage to property owned by third parties.

2. ELEVATOR LIABILITY INSURANCE

Contractors can be held liable for bodily injury or property damage to

third parties caused by the operation, ownership, and maintenance of
elevators (or hoists) . The contractor is protected against these types of

21
claims by elevator liability insurance. Elevator liability can be part of the
operations-premises coverage.

3. COMPLETED OPERATIONS AND PRODUCTS LIABILITY

INSURANCE

Although Completed Operations and Products liability insurance is

written as a single coverage, on construction projects only the completed
operations portion is generally applicable. This insurance is intended to
provide protection against claims for bodily injury or property damage
that may occur after the contractor has completed the project . It covers
damage to property other than the cost of replacing the contractor's own
work. It should also cover the cost of the contractor's legal defense. A
typical exclusion is liability incurred because of a design error if the
contractor also designed the work .

4. CONTRACTOR'S/OWNER'S PROTECTIVE LIABILITY INSURANCE

Contractor's protective liability insurance protects a contractor from

claims arising from damage or injuries to third parties caused by a
subcontractor working on the jobsite. A third party harmed by the actions
of a subcontractor can sue the prime contractor because the prime
exercises general supervision over the work and is responsible for the
conduct of construction operations . Similarly, owner's protective liability
insurance provides the owner protection for damage or injury claims
caused by the general contractor or any subcontractors. Owners can be
sued for a contractor's negligence because the owner has a
responsibility to inspect the work, employ competent contractors, and
ensure that work is undertaken in a safe manner.

22
5. CONTRACTUAL LIABILITY INSURANCE

Contractors may assume the legal liability of another party in a

construction contract. These "Hold-Harmless" agreements are used in
many construction contracts as well as in equipment rental agreements.
The other party can be the engineer, the owner, the architect, or a
material supplier. This type of liability can be an exclusion in general
liability policies, so the contractor must procure contractual liability as an
extended coverage. Contractual liability insurance is designed to protect
the contractor from claims made due to the assumption of liability in the
contract .There are three main forms of hold-harmless, or
indemnification, clauses that shift the burden of responsibility from the
owner to the contractor or from the contractor to the subcontractor.
These categories are limited, intermediate, and broad form agreements.

The limited agreement states that contractors will be liable for their own
negligent acts during the performance of work under the construction
contract. Further, the contractor will protect the owner from claims made
against the owner because of negligent acts of the contractor. The
intermediate agreement states that when the contractor and the owner
share negligence and are legally liable for a loss, the contractor will
provide defense for both the owner and contractor. This shifts more
responsibility onto the contractor. The broad form agreement requires
the contractor to accept the entire responsibility to protect the owner,
architect, engineer, their agents, and employees from all claims arising
out of occurrences in connection with contractor operations, without
regard to negligence. This is, of course, the harshest indemnification
language from the contractor's viewpoint .

23
6. EXPLOSION, COLLAPSE, OR UNDERGROUND LIABILITY
INSURANCE

A common exclusion to the general liability policy is damages caused by

explosion, collapse, and underground operations. Commonly known in
the industry as the X-C-U exclusions, these hazards are part of a large
portion of contracting. The exclusions do not delete liability for bodily
injury, only for property damage. If contractors want the X-C-U coverage,
they must purchase it as an extended coverage. The explosion portion
covers property damage arising out of blasting or explosion including
explosion of equipment such as pressure vessels. The collapse portion
covers property damage arising out of the collapse or structural injury to
an adjacent building resulting from work operations. The underground
portion covers property damage to buried conduit, pipe mains, sewers,
telephone wires, tanks, tunnels, and any other items resulting from
excavating or grading operations

C. BROAD-FORM PROPERTY DAMAGE LIABILITY INSURANCE

A normal exclusion to general liability policies is damage to property in

the care, custody, and control of the contractor. Because the entire
project is usually considered to be in the care, custody, and control of
the contractor, it is excluded from property damage coverage. Thus, if a
piece of equipment belonging to a third party is in the care, custody, or
control of the contractor and is damaged, the general liability policy will
not cover the loss. The broad-form property damage coverage will define
specific instances of care, custody, or control that are excluded, thus
including everything else.

This insurance is designed to answer the question of how much of the

property being worked on is subject to the care, custody, and control

24
exclusion. The contractor can close any resulting gaps in coverage by
purchasing other types of insurance such as builders risk, and
equipment and installation floater.

PERSONAL INJURY LIABILITY INSURANCE

Personal injury, as opposed to bodily injury, is not physical impairment,

but is defined as intangible harm . Instances where personal injury may
be claimed are: false arrest; malicious prosecution; libel, slander, and
defamation of character; wrongful eviction; invasion of privacy; and
wrongful entry. Personal injury insurance protects the contractor from
claims brought on for any of these reasons. The personal injury
endorsement normally excludes coverage of the contractor's own
employees, so if the contractor desires this coverage, the endorsement
must waive this exclusion .

UMBRELLA EXCESS LIABILITY INSURANCE

Umbrella Excess liability insurance extends the limits of liability

insurance beyond the maximum coverage of the general policy . The
main purpose of this insurance is to cover the contractor for judgements
greater than that provided by the basic liability policy. The umbrella
policy is only invoked in cases where the contractor is held liable for
damages greater than what is provided by the primary policy. The limit
on the primary policy is therefore the deductible on the umbrella
coverage. Usually the umbrella policy covers the same hazards as the
primary policy. However, an advantage is that it can be written to cover
losses that may not have been on the basic policy. These coverages
would take effect after a specified deductible limit is exceeded .

25
BUILDER'S RISK INSURANCE

Builder's Risk insurance is a form of property insurance that protects the

building or project against physical loss or damage from external causes
during construction. The protection provided depends upon the terms of
the written policy, but usually includes materials and supplies to be used
on the project. These items are insured while held in temporary storage
before delivery, during transit to the jobsite, and after delivery while
awaiting installation. The hazards covered by this insurance vary.

The policy may protect against loss due to fire (this is the primary
purpose of this insurance), vandalism and miscellaneous mischief,
lightning, wind, smoke, explosion, and other types of physical damage.
Some common exclusions stated within the policy are damage due to
freezing, explosion of steam boilers or pipes, glass breakage,
subsidence and settling, earthquake, and floods. There are two major
types of builder's risk insurance. The first type is called an All-Risk
Builder's Risk policy. Contrary to its name, it does not cover all risks, but
has specific exclusions in the policy and covers all risks not specifically
excluded. The second type is called namedperil builder's risk. This type
of policy will cover only those risks specifically named. Contractors can
purchase a third type of builder's risk insurance, called an installation
floater, when the chances of damage due to fire are minimal.

An example is utility construction involving the installation of water mains

and sewer lines. The installation floater will insure against damage to the
project and materials during construction. The coverage will also extend
to equipment and machinery to be installed on the project, beginning
with its shipment to the site and extending through the final testing
phase .

26
EQUIPMENT FLOATER INSURANCE

Construction equipment and machinery used on the project is subject to

damage and can be protected by what is known as an equipment floater
policy. This policy covers equipment that moves from job to job (the
equipment "floats"). The equipment covered, often referred to as offroad
vehicles, is not licensed and includes dozers, scrapers, power shovels,
loaders, cranes, pumps, and pavers. The major losses that typically
occur are due to theft and vandalism. No liability component is attached
as the policy only covers damage to the equipment.

KEY MAN INSURANCE

Key Man insurance is essentially a life insurance policy written on

company principals. It will protect the company from heavy losses that
may result from one or more principals (key men) of the firm dying.
There may also be a clause that will provide benefits if a principal is
disabled and unable to work.

AUTOMOBILE INSURANCE

There are two broad categories of risk involved when a contractor

operates automobiles. First, there is loss or damage to the contractor's
own vehicles caused by collision, fire, theft, vandalism, or other hazards.
Second, there is liability for bodily injury to third parties or damage to
their property caused in some way by the operation of the contractor's
licensed vehicles. Automobile liability coverage will cover any vehicle
fitting into one of three categories--owned automobiles, hired or rented
automobiles, and non-owned automobiles such as employees' personal
automobiles used in conjunction with official business. The coverage will
provide for legal defense and payment of damages resulting from

27
damage to persons or property due to the operation of vehicles fitting
into one of the categories listed above.

WORKER'S COMPENSATION INSURANCE

All of the states have enacted worker's compensation laws to give

statutory protection to employees injured on the job. Worker's
Compensation insurance provides medical care and other benefits for
the contractor's employees in the event that they are injured on the job.
The principle behind worker's compensation is that on-the-job injury or
death of a worker is a cost of doing business and should be borne by the
industry. The fundamental objective is for injured workers to receive
prompt medical attention and monetary assistance. Another principle
behind worker's compensation is that of strict liability of the employer,
regardless of any fault by the employee. Contributory negligence of the
employee will not affect the eriployer's liability, except in cases where
the worker was under the influence of drugs or alcohol . The insurance is
required for most employees, i.e., exemptions include domestic
servants, farm labor, casual employees, independent contractors, and
worker in religious or charitable organizations. Also exempted in some
states are businesses that employ less than a specified number of
employees . In six states, known as "monopolistic fund" states, the
insurance fund is run by the state.

The contractor is required to purchase the insurance from the state

rather than from a private insurer. In all other states the insurance can
be bought like any other type of insurance . Premiums are based
primarily on three factors: the employer's safety experience on prior
construction projects, the type of craft, and the geographic location.

28
For the first factor, it is obvious that if a particular contractor has an
outstanding safety record, the premiums will be lower than a contractor
who has a poor safety record. An "experience modification rating" is
assigned to each company that reflects the frequency of injuries and the
monetary loss suffered over a three year period. This rating is a
multiplier that effectively raises or lowers the premiums. The second
factor is associated with the craft, as this is related generally to the
degree of risk involved.

For example, a roofer has a higher degree of day-to-day risk than a

concrete sidewalk installer. This difference results in various premium
rates based on the industry loss history for each craft in the state. For
the third factor, different states have varying injury experiences across
all types of crafts. This results in some states having much higher
premiums than others .

EMPLOYER'S LIABILITY INSURANCE

Employer's Liability insurance is written in conjunction with worker's

compensation insurance and provides the contractor with broad
coverage for personal injury or death of an employee. This can be
utilized by the employee when the injury is not covered by the worker's
compensation policy. Such instances may occur when the employer did
not use proper safety equipment required by law, and the employee
elects to sue for damages under common law. Another instance may be
when an employee is injured in another state where the contractor does
not have worker's compensation insurance in effect.

An example of how this might occur could be a worker crossing a state

border to pick up materials. If the worker is involved in an accident while
in the other state, and the employer has no worker's compensation

29
insurance for that state, the employer's liability insurance would cover
the loss. The employee may also refuse to accept the worker's
compensation benefits and elect to seek compensation through the court
system.

WRAP-UP INSURANCE

To lower the insurance cost of a construction project, the owner may

provide coverage for the owner, architectengineer, prime contractor, and
all subcontractors. This policy is referred to as wrap-up insurance. For
such a project, all contractors must exclude insurance coverages from
their bids and accept the coverages provided by the owner. The usual
procedure is for a single insurance company to provide all coverages,
including general liability, worker's compensation, and builder's risk .

30
 FACTORS AFFECTING COST AND AVAILABILITY OF
INSURANCE

While the articles were helpful in providing focus and general

information, none consolidated input from insurance underwriters
relating to factors that affect the cost and availability of insurance. It is
felt that information on factors that underwriters consider when setting
premium rates on construction insurance would be beneficial to
contractors. This may occur because of the wildly fluctuating prices on
insurance that were experienced during the 1980s and misconceptions
as to what causes rates to rise and fall. By knowing what actions
promote lower premium rates, contractors can take positive steps to
reduce their insurance burden and improve their competitiveness.

INSURANCE REQUIREMENTS OF PUBLIC AGENCIES

No studies were found that examined what the requirements were for
obtaining insurance before beginning work on projects for public
agencies. Most public agencies, as owners, will require contractors to
purchase some minimum amount of insurance before beginning
construction projects.

The types of insurance required by different public agencies varies

because of the differences in the class of work for which each agency is
responsible. If the contract spells out exactly what insurance is required,
then the only decision the contractor must make is whether to obtain
higher limits than required. If insurance is not required, the contractor
must weigh the potential costs of "going bare" against the cost of
insurance premiums. If the decision is made to buy insurance, the
contractor must choose appropriate limits that will provide adequate
coverage. What consists of adequate coverage? Contractors often

31
decide this based on how much risk the firm is capable of assuming in
the event of a accident where they may be held liable.

SPECIFICATION REVIEW CHECKLIST

The following questions were used to determine what insurance was
required by state highway and municipal public works agencies. After
each question is a description of what the purpose of each question was.

• Is liability insurance required before beginning work?

The specifications would indicate if liability insurance was required prior
to commencement of work. If no mention was made of liability insurance,
it was considered to not be required.
• Is employer's liability insurance required?
The contractor may be required to obtain employer's liability insurance in
addition to the worker's compensation insurance to protect against
claims made by employees choosing to seek compensation greater than
that provided by worker's compensation.
• Is automobile liability insurance required?
Automobile insurance is not included in the general liability policy.
Because most contractors have jobsite vehicles that can potentially
cause damage or injure people, the specifications may require
automobile liability insurance.
• Is it necessary for an insurance certificate to be filed with the
contracting agency?
The contractor may be required to file a copy of the insurance certificate
with the agency prior to commencement of work.

32
 • Does the agency provide a special form for submittal of the
insurance certificate?
The contractor may be required to coordinate with the insurance agent
to provide the insurance coverage information on the required form.
Most agents knowledgeable about the requirements of public agencies
may already have these forms available.
• Must a provision be made in the policy that the owner
(agency) be notified if the insurance policy is cancelled or
lapses?
The public agency may contractually establish a basis to halt progress
payments, if the insurance policy is cancelled. Otherwise the agency
may not even be aware of the cancellation. It is also important for the
insurance agency to be aware of different projects undertaken by the
contractor so a cancellation notice can be sent to the
appropriate agency.
• Can the agency refuse to make progress payments if the
policy is cancelled or lapses?
The agency may establish a method to force the contractor to maintain
the required insurance coverage.
• Is an Additional Insured Endorsement required?
The contractor may be required to include the agency under the
coverage that is procured for the project.
• Is an Indemnification Clause required?
If the contractor is required to indemnify the agency, the contractor must
purchase contractual liability insurance to provide protection from this
assumed liability.

33
 INSURANCE REQUIREMENTS IN THE GENERAL
CONDITIONS

1. Requirements and Limits of Liability Insurance

The majority of states require that contractors have liability insurance

prior to commencement of work. Typical of the wording of the provision
in the general conditions is from the Idaho Transportation Department:"
The Contractor shall carry such public liability and property damage
insurance that will protect him and the State from claims for damages for
bodily injury, including accidental death, as well as for claims for
property damages, which may arise from operations under the contract
whether such operations be by himself or by any subcontractor or by
anyone directly or indirectly employed by either of them and the amounts
of such insurance shall be not less than".

Although some states do not contractually require insurance, they do

have provisions in the general conditions that are designed to protect the
state from potential liability.

2. Worker's Compensation Requirements

Worker's Compensation laws are in effect in all 50 states, so it is no
surprise to see that the majority of state and local agencies require
worker's compensation insurance as part of the insurance coverage. The
agencies that did not require the insurance in the general conditions may
have excluded it because the general conditions all have a provision
requiring contractors to obey all federal and state laws, and the
requirement might be considered to be under these laws, making the
stipulation in the contract redundant. A small percentage of states

34
require this coverage, while more than half of the municipal
specifications contained this provision. This provision may reflect that
the agencies who require it feel that the worker's compensation laws do
not adequately protect workers. Requiring this insurance is another
means ofprotecting the agency from financial loss in the event of an
injured worker suing an employer under contract with the agency.
3. Automobile Liability Coverage
The great majority of the municipal agencies surveyed require
automobile liability insurance, but only one-third of state agencies did.
This is hard to understand,
especially since highway construction involves contractors utilizing a
great number of vehicles. However, these states may have laws that
require all vehicles to be insured, and thus a provision in the contract
would be redundant. For out-of-state contractors, it would be advisable
to check the state laws if unfamiliar with the requirements, because the
contractors may be forced to purchase insurance that was
notanticipated, raising the total cost of insurance and reducing the profit.
4. Requirements and Submittal of Insurance Certificates
Sixteen of forty-five state agencies do not require certificates of
insurance to be filed prior to the start of projects. This is surprising,
because the certificate is the only proof the state has that the contractor
is maintaining the proper insurance. One of the purposes of requiring
insurance is to avoid litigation, but this is likely to happen if a mishap
occurs and the contractor does not have insurance to cover the loss. A
certificate is easy to provide, and the administrative effort to file and
maintain them is small compared to the potential consequences if a
contractor has no insurance and a claim is filed against the agency. All
of the local agencies required certificates. The

35
The requirement of a special form on which to submit the certificate is
somewhat of an inconvenience to the contractor. From the state's point
of view, however, this
is a good provision because they will not have to interpret several
different types of certificates. Not many agencies have done this, as only
13 percent of state agencies and 8 percent of local agencies provide a
special form for submitting proof of insurance . The Indiana Department
of Highways states the provision in this way:
"Prior to commencing work, a certificate of insurance shall be filed on a
form furnished by the Department, or other acceptable form." This
provision is a small item that contractors must heed to avoid having to
resubmit insurance forms.
5. Consequences of Cancelled Insurance Policies
Agencies may require that they be notified if the contractor's insurance
coverage is cancelled or lapses. Provisions such as this are common as
38 percent of all state agencies and 84 percent of all municipal agencies
include them . Of the states that require insurance certificates, 59
percent must be notified in the event of a cancellation. The low
percentage of states requiring this notification seems unusual, because
insurance companies can easily provide this service, and the agency
benefits from the provision. A typical provision of this type for the Illinois
Department of Transportation reads: "All such insurance must include an
endorsement whereby the insurer agrees to notify the Department at
least 30 days prior to nonrenewal, reduction or cancellation." This
provision can have serious consequences for contractors. If contractors
let their insurance coverage lapse in order to save money on the
premiums, their cash flow may suffer through delayed
progress payments. This disruption in payments can be devastating to
contractors who regularly operate on a small margin.

36
"In the event the Contractor fails or refuses to renew its insurance policy,
or the policy is canceled, terminated, or modified so that the insurance
does not meet the requirements of this Subsection, the State may refuse
to make payment of any further monies due under this Contract or
refuse to make payment of monies due or coming due under other
contracts between the Contractor and the State."
6. Additional Insured Endorsements
The effect of an additional insured endorsement is to provide the named
insured, usually the owner, with insurance coverage along with the
contractor. The contractor does not have to pay extra for this
endorsement. This clause benefits owners because they are provided
insurance at "no cost." However, because owners are the secondary
insureds, they have secondary rights if claims are filed against both
the contractor and owner. The contractor, as the primary insured, will be
protected first in case of a dual suit.
7. Hold Harmless Clauses
The effect of a hold harmless clause is to increase the risk assumed by
the contractor. To transfer this risk to an insurance company, the
contractor will have to purchase more insurance (contractual liability in
this case), which will increase the total insurance burden.
A majority of local agencies had the same provision. Most agencies
used the limited-form iademnification clause, which means contractors
are held
liable only for their own negligence. Sample wording for a state agency
comes from the Alabama Highway Department: "The Contractor shall
indemnify and save harmless the State, the Department, the County, the
Municipality, the officers and employees from all suits, actions, or claims

37
of any character brought because of any injuries or damages received or
sustained by any person, persons, or property due
to the operations of the said Contractor; or because of or in
consequence of any neglect in safeguarding the work; or through use of
unacceptable materials in constructing the work; or because of any act
or omission, neglect, or miscondut of said Contractor..."
A few agencies used the intermediate form, where contributory
negligence of the state is waived and the entire burden of defending
against third-party claims is
placed on -he contractor. Sample wording of this type of indemnification
clause comes from the Connecticut Department of Transportation:
"The Contractor shall indemnify and save harmless the State, the
Department and all of its officers, agents and employees from all suits,
actions or claims of any character, name or description brought for, or on
account of any injuries or damages received or sustained by any
persons or to any property as a result of, in connection with, and
pursuant to the execution and performance of the contract."

8. Other Types of Required Insurance

A public agency might have particular needs in protecting itself against
claims from specific mishaps. These needs will be reflected in any
insurance requirements
beyond standard liability coverages. Three types of additional coverage
were specified. Railroad protective liability insurance was required when
the project involves work on, over or under the right-of-way of any
railroad company.

38
Department of Transportation:

In the event of "suits, actions, or claims" brought against the state, "so
much of the money due the said Contractor under and by virtue of his
Contract as may be considered necessary by the Department for such
purpose may be retained for the use of the State"; "except that money
due the Contractor will not be withheld when the Contractor produces
satisfactory evidence that he is adequately protected by publir liability
and property damage insurance."

In effect, this provision means that the retainage and other monies due
the contractor are serving as insurance for the state. This pool of funds
can be "tapped" if an accident occurs and the contractor does not carry
insurance. All municipal agencies that were surveyed required liability
insurance.

"The Contractor shall obtain and maintain in full force and effect during
the term of the contract, public liability and property damage insurance."
Not all agencies that required insurance specified the necessary
amounts, so the amounts only reflect information concerning those
agencies that specified the limits. Typical wording comes from the
Montana Department of Highways: "The public liability insurance shall
be in the amount of at least $500,000 for each person and a total of
$1,000,000 for each occurrence. The property damage shall be in the
amount of at least $500,000 for one occurrence and $1,000,000 in the
aggregate."

The insurance underwriters were asked a number of questions that were

designed to provide information about the company and to obtain
general impressions about how the company does business.

39
The first question determined what insurance coverages were offered.
All of the companies provided a broad range of insurance policies
including casualty (liability) and property (builder's risk). Also available
was worker's compensation insurance, although the underwriters did not
write much of this insurance because Washington State is a
monopolistic fund state. Some of the companies claimed that while they
offered the major types of commercial construction insurance, they
specialized in certain kinds, and were able to provide better rates and
coverages for that specialty.

When asked what percentage of construction contractors are denied

insurance coverage, the underwriters gave a range from 5 to 67 percent.
This could be interpreted in many ways.
The insurers that had a low rejection rate may have been in a position
where cash was needed, and since the way to generate income in the
insurance industry is to write many policies, very few contractors are
denied the insurance. Just the opposite might be concluded from the
insurance companies with a high rejection rate. The companies that do
not have a strong need for more cash flow are able to reject more risky
contractors in need of insurance. Another reason for the high rejection
rate is that those companies might have higher standards when
screening potential customers (although none of the underwriters stated
this). It is interesting to note that the companies with the low rejection
rates sell only commercial insurance and no private policies. They may
not be able to be as selective as those companies who also provide
private insurance, due to the lower volume of customers.
All but one of the insurance companies interviewed required that
subcontractors who work with their insured contractors must obtain the
same types of insurance. In most cases insurers require that the same

40
limits be obtained. This can cause the contractor's premiums to De
lowered, as it substantially reduces the risk to the insurance company of
having to settle suits brought against the general contractor because of
the negligence of a subcontractor.

Two-thirds of the companies interviewed were not providing any liability

policies with a hazardous waste endorsement. The stated reason is that
the risk was too difficult to determine. Two of the companies were not
writing worker's compensation insurance because those policies were
not profitable to them at the time.

One company would not provide builder's risk insurance on multistory

buildings because this type of building is not being built in numbers
suitable for effectively spreading the
risk.

None of the companies interviewed offered dividends to general

contractors. However, one-third offered dividends to specialty
contractors. The basis for payment was the loss ratio for the
subcontractor's group classification.

For example, if the sheet metal contractors had a low number of claims
as a group, they might all get a dividend,presuming that no firm had
excessive claims. Conversely, if the electrical contractors had a large
number of claims as a group, no one would receive a dividend.

Information was sought as to whether contractors shopped around for

different coverages as a result of the strained relationship. The
underwriters were unanimous in their opinion that contractors have

41
always shopped around for the best price on insurance, and the liability
crisis did nothing to increase this practice. Contractors may seek to
ensure that they have purchased the proper insurance for particular
projects. A question was asked in this regard to determine if there was
direct contact between the contractor and the underwriter prior to bidding
on a project. All underwriters stated that occasionally they had direct
dealings with contractors, but the review of the contract specifications
was usually done by an independent insurance agent.
The last general question asked was if, in the underwriters opinion,
construction contracts contained adequate provisions for insurance to
protect the owner. The majority of underwriters agreed that most
contracts were adequate. One underwriter stated that "quality of work"
insurance should be a requirement for construction projects.
This type of insurance would protect against inferior workmanship in
finished projects.

42
 COMMON COST OF CONSTRUCTION INSURANCE

Running a construction business often comes with a number of

complexities that those not involved with the business may not be
familiar with. Among those complexities is the ability to manage and
handle soft costs associated with construction jobs. Soft costs refer to
those outside the spectrum of labor and materials. Among the most
important soft costs to consider is that of construction insurance. Without
a doubt, there are quite a few hazards associated with working on a
construction site. General contractors do have to protect themselves
from losses resulting from any potential liabilities. Construction
insurance may be able to offer the blanker protection to safeguard
against these liabilities.
Insurance Policies
In general, the low end of construction insurance will be about 4% of the
overall value of the contract signed. It is not without question that the
cost can rise up to about 8% of the contract value. So, with a $150,000
contract, insurance costs may range from $6,000 to $12,000.These
costs are related to general construction liability coverage. There can be
other insurance requirements necessary for certain jobs but not for
others. For example, certain vehicle liability insurance policies may be
required. In other scenarios, workman’s compensation insurance may
have to be factored in as well.

Again, for general construction general liability coverage, a cost of 4% to

8% is what most in the business are going to have to occur. At least that
is the case for now. There are major concerns the cost of construction
insurance may (and likely will) increase in the near future. There are a
few factors capable of contributing to this increase. Regulatory changes

43
expanding the minimum amount of coverage in a policy definitely is
going to increase premiums.

The more minimum requirements to a policy, the more comprehensive it

becomes. A comprehensive insurance policy is going to have higher
premium costs. After all, the insurance company is put in a position
where the potential to have to pay out more increases. Changes in state
laws regarding how a construction site has to be managed can also yield
a ripple effect that might increase costs.

44
 CONSTRUCTION, INSURANCE & REQUIREMENTS

To become a licensed contractor, there may be a minimum requirement

of coverage necessary to be approved or renewed for said license. How
much insurance you will need and, hence, how much the insurance will
cost ends up being based on quite a few factors. The exact type of
contracting work and the category of construction jobs you are
performing is going to factor into the type of insurance you must procure.
The number of employees you might have working for you and the size
and scope of the construction projects you are involved further play a
role in how much the insurance costs are going to be.
Rough estimations can help construction professionals and general
contractors gain some insight into how much insurance is going to cost.
Of course, rough estimates only have so much value. At some point,
there does need to be a specific figure quoted to the construction
business so the owners can budget for the related expenses and
premiums. The way to determine more specific costs is to request a
quote from a reputable insurance provider. A quote is an estimate of
what the insurance premiums are going to be along with what the
insurance coverage is going to entail. Reviewing the estimate thoroughly
is a must. No one should make any decisions whether to accept or reject
a policy based on only a cursory understanding of what it offers. Getting
the right construction insurance is too important to treat the matter
errantly.

45
 FACTORS THAT AFFECT DIFFERENT TYPES OF
INSURANCE.

a. Liability Insurance
Two hypothetical building projects were presented to the underwriters for
analysis. The desired information was the limits of coverage and the
costs of general liability insurance and umbrella coverage. The first
hypothetical building was a $1 million project that was scheduled to take
seven months to complete. Each underwriter recommended that the
minimum liability limits should be at least $1 million dollars.However, the
cost of the policy varied greatly. Three thousand dollars ($3,000) was
the low cost for the policy period, while the high cost was thirty thousand
dollars ($30,000). The average cost was fourteen thousand dollars
($14,000). Umbrella coverage limits were recommended that ranged
between $1 million and $10 million, with an average recommended limit
of $3.7 million.
The second hypothetical building was a $10 million project scheduled to
take two years to complete by the same contractor. All underwriters
recommended the same liability limits as the $1 million project.

The premiums would increase, however, because they are based on

pay-oll. The umbrella coverage recommended was increased to an
average of $6.7 million. One underwriter stated that the umbrella
coverage should be equal to the net worth of the contractor.The
underwriters were asked how much the premiums would differ if written
on a claims-made basis rather than on an occurrences basis. Of the five
companies that offered claims-made coverage, all offered the coverage
less expensively than the occurrences form.
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The discount ranged from five to thirty percent during the first y2ar, with
a progressive reduction over a period of five years. The discount is not
given after five years because the extended reporting period that is a
part of claims-made insurance effectively makes the policy an
occurrences form. The underwriters identified methods that contractors
can use that are effective in lowering liability premiums. The most
effective method was for the contractor to have an effective safety
program. A minimal loss experience was the second most common
manner that effectively lowers liability premiums. If the contractor has an
effective safety program, a low loss experience should occur as a result.
Also mentioned were using specified materials, having good
supervisors, maintaining control over the subcontractors on the job, and
avoiding certain types of work.

All of the insurers reviewed the loss experience of contractors and based
the premiums for general liability policies on this claims history.
The underwriters were asked to provide the lower and upper limits of
umbrella coverage that their companies would offer. The lower limits for
all companies was $1 million. The upper limits varied from $10 million to
$30 million. Reinsurance with other insurance companies was
mentioned as a method contractors can use to increase their
umbrellacoverage above the upper limits that one insurance company
will provide.
Only one company allowed another insurer to provide the general
liability policy as the deductible on umbrella coverage the company
underwrote. The rest required that the general policy must be purchased
from them if umbrella coverage was desired.

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All companies surveyed included contractual liability coverage in the
general liability policy. This precludes the contractor from having to
purchase this coverage separately.

b. Builder's Risk Insurance

The same two hypothetical building projerts were used as examples to
determine builder's risk limits and costs. For both projects, the
underwriters were asked what limits they would recommend and the cost
of this coverage. For the $1 million project, all said that the contractors
should ask for the full value of the project. Determining the cost of
premiums was difficult because the rates depend on many
factors, the most important being the material used to construct the
building. Thus a range of values was sought, from a worst case situation
where the building is woodframed, to a situation where the building is
constructed with masonry. The costs ranged from $300 to $5,000 for the
policy period of seven months.
For the $10 million project, the same logic was used by contractors, i.e.,
the full value of the building was insured. Depending on the type of
materials used, the cost of premiums ranged from $3,000 to $40,000
annually. The majority of the underwriters believed that contractors
purchase enough builder's risk insurance to
cover potential losses. Those who did not feel this way thought that
contractors underestimate the actual costs of reconstruction if the
building burned down or was otherwise severely damaged. Additional
costs must be considered.
Examples include clean-up costs, and inflation, which might
conservatively increase the cost of construction of a building from $1
million to $1.05 million in one year.

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There are several methods used by contractors to lower their insurance
premiums, according to the underwriters.The most common way is to
raise the deductible limit. Safe building practices were mentioned, as
well as loss prevention. Loss prevention included measures such as
onsite security personnel, fences around the construction site, and
general "theft proofing". Contractors can also build with fire resistant
materials if given a choice.

Only one company used experience modification ratings, however. This

would seem to indicate that past performance or claims history is not as
important for builder's risk insurance as it is for liability coverage. The
most common exclusion for builder's risk policies is earthquake
coverage. The majority of underwriters also excluded nuclear hazards
(war or radiation) and floods. Faulty design, insects, unexplained loss,
faulty workmanship, and governmental action were other exclusions.

c. Wrap Up Insurance
The underwriters indicate that wrap-up insurance is rarely used. Only
one underwriter had ever been involved with this type of coverage, and
that was written many years ago. The premiums were paid on a
retrospective basis, where
the owner provided coverage for the project. The actual premium was
based on the amount of actual claims.

d. Automobile Insurance

The underwriters were asked to provide the factors that determine the
cost of comprehensive automobile coverage. Most commonly mentioned

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were the vehicle size and location. Licensing of drivers and maintenance
of the vehicles were
other important factors, along with the distance travelled and the nature
of the safety programs. When asked the same question for the factors
affecting the rates on equipment floater insurance, responses focused
first on the type and value of equipment. Next was the maintenance of
the equipment and operator experience, just as it was for the autos.

e. Keyman Insurance

The companies that offered private insurance offered keyman insurance

coverage, which is essentially life insurance. However, the insurance
was purchased through the life insurance division of the company, so no
information on the costs or limits could be obtained. The underwriters felt
that almost all large firms had some form of keyman insurance to protect
against the loss of life of one or more of the company principals.

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 KEY PROVISIONS

Apart from the basic requirement to take out and maintain insurance
policies, other important ancillary issues regarding insurance include:

• 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.

Generally speaking, a 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. This
means that 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.

• 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.

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• 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.
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.

• 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 effectively uninsured.

• Exclusions – Insurance policies are normally 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.

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• 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.
Additionally, lenders may prefer to use insurance proceeds to pay off 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 this right is accommodated by the underlying insurance policy.

• Identity of insurers – Employers usually impose minimum requirements

regarding the creditworthiness of insurers to reduce the risk of insurers
defaulting on their payment obligations.

• Caps on liability - It is a common misconception in the construction

industry that a contractor’s liability for a particular risk (especially for
breach of professional duty or negligence) is implicitly capped at the
amount of insurance that the contractor is required to have for that risk.

This is not the case. If, for example, the contractor is required to have
professional indemnity insurance of USD 5 million per claim, the
contractor’s liability, for say a defective design, is not automatically
capped at USD 5 million 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) .

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 CONTRACTORS ALL RISK POLICY OVERVIEW

(The New India Assurance Co. Ltd.)

Highlights

This policy is specially designed to give financial protection to the Civil

Engineering Contractors in the event of an accident to the civil
engineering works under construction.
In case the policy period exceeds 12 months, the premium can be paid
in quarterly installments with the first installment being more by 5% and
the last installment being paid 6 months before expiry of the policy.

Scope
The policy comprises of 2 Sections :
• Section I-Material Damage-covering physical loss, damage or
destruction of the property insured by any cause, other than those
specifically excluded in the policy.
• Section II-Third Party Liability-covering the legal liability falling on the
insured contractor as a result of bodily injury or property damage
belonging to a third party.
The main exclusions under Section I for which no claim is payable, are
loss or damage due to:
1. faulty design
2. rectification of aesthetic defects of structure not relating to any
physical loss or damage to the structure due to any accident, or of
material defect or of workmanship defect.
The exclusion of defective material / workmanship is limited to the
parts of the structure immediately affected and does not apply to any

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 consequential loss to correctly executed items, arising out of the
accident due to defective material or workmanship.
3. loss or damage due to gradual deterioration, atmospheric condition,
rusting etc.
4. loss discovered only at the time of taking inventory.
5. loss arising out of penalty for delay, non-fulfillment of terms of
contract.

Add on covers

The policy can be extended to cover the following items :-

1. construction equipment like scaffolding, shuttering materials
2. construction equipment like scaffolding, shuttering materials
3. damage to surrounding property not forming part of the contract
work.
4. maintenance visit / extended maintenance cover to cover accidental
loss or damage whilst carrying out any rectification during
maintenance period and / or any amount incurred for rectification of
such original defects or faults during construction.

Who can take the policy?

The policy can be taken by the principal, contractor or sub contractor,
jointly or separately.

How to select the sum insured?

The sum insured selected under section I should represent total contract
value including the estimated cost of labour charges and cost of
materials but excluding profit. The cost of materials supplied by the
principal is to be declared separately.

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In case of long term contracts, there is bound to be escalation in prices.
The basic policy will pay only as per the original cost and prices.
However escalation clause can be opted for, under which escalation
upto 50%, can be selected to take care of such increase in prices.
The sum insured under section II should represent the per accident limit
(the maximum legal liability that may fall on the insured as a result of an
accident in the insured's site). The limit per policy period should be fixed
taking into account the maximum number of such accidents which can
reasonably be expected to occur.

How to claim?

In the event of any loss or damage giving rise to a claim under the
policy, the following steps should be taken :-
• take necessary steps to minimise the loss.
• inform insurance company immediately.
• extend full cooperation to the surveyor deputed by the company.
• submit duly filled in claim form along with necessary documents to
substantiate the financial loss suffered as a result of the accident.

Period of Insurance
Unlike other policies where the period of insurance is one year, in this
policy the period of insurance should be equivalent to the period of
contract, commencing from the date of unloading of the first batch of
material at the site of construction and expiring on the date of handing
over of the contract work to the principal. Although it is possible to
extend the policy period in case of delay in completion of contract, it is
always advisable to choose a slightly longer period of insurance initially,
to avoid paying the higher extension premium.

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 GENERAL QUESTIONS

If 100 construction contractors requested insurance from your

insurance company, how many would you deny coverage to?
Many construction companies may be viewed as poor risks, and this
question was intended to get a feel from the underwriter as to how many
poor risks are out there. The requested response was an estimated
percentage.

Do you require subcontractors who work for a general contractor

insured by your company to carry the same insurance as the
general contractor?
The insurance company could find itself paying for the liability of
subcontractors if the subcontractors do not have limits at least close to
the general contractor's. This question is designed to determine another
aspect of risk that the underwriter is willing to take on.

Are there any specific policies that you are reluctant to give?
This question was meant to identify policies that consistently lose
money, and underwriters will not write policies where their loss ratios are
too high.

Do you offer dividends to contractors? On what basis?

Safe contractors, that is, contractors who do not have a great number of
claims, might feel that they should share in the savings. This was to
determine if the underwriters held the same view.

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Since the liability crisis of the mid-80's, do contractors remain with
your company for all coverages or is shopping around for different
coverages more common?
From reading various periodicals, it seems that loyalty was not a strong
suit between insurance companies and contractors. The answers
obtained should determine the validity of that assumption.

Do contractors ask you to review insurance requirements in the

contract specifications?
Contractors may not understand the benefits and exclusions of various
types of insurance. This question would determine if the underwriters
were involved in forming an insurance package for a contractor. Another
possibility is that an insurance agent would review the specifications.

CONTRACTOR RISK ASSIGNMENT

1. When one of your clients' policies comes due for

renewal, what is the importance of each of the following factors on
assigning risk, thus premium rates:
a) contractor's construction experience
b) dollar volume of work the past year
c) net worth of company
d) profitability during the past year
e) claims history
f) principal type of construction

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2. If an experienced contractor that has never before bought
insurance from your company comes to you desiring coverage,
what is the importance of each of the following factors on
assigning risk, thus premium rates:
a) contractor's construction experience
b) dollar volume of work the past year
c) net worth of company
d) profitability during the past year
e) claims history
f) principal type of construction

3. If a construction company is formed and comes to

you looking to purchase insurance, what is the importance of each
of the following factors on
assigning risk, thus premium rates:
a) construction experience of the principle of the firm
b) expected dollar volume of work
c) debt burden of company
d) principal type of construction
e) business outlook for that particular type of construction

This series of questions was meant to determine the importance that the
underwriters place on the listed factors in assessing risk for three
different situations in which contractors request insurance coverage.
These factors include items that the contractor cannot change, but
contractors must understand their importance from the underwriters
viewpoint.

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Consider a $1 million building project, scheduled to take 7 months to
complete. What general liability limits would you recommend, and how
much would the premiums cost?(assume a reputable, experienced
general contractor).
The underwriter's experience was relied on with this question, which will
determine general limits common today, and the cost of these policies.

What umbrella coverage would be appropriate for this size project?

The same information was sought as the previous question. Now

consider a $20 million building project, scheduled to take 24 months to
complete. How would the liability limits change, and how much more
would the premiums be?
The purpose of this question was to see if the liability limits and
premiums change on projects with greater value.
For the two projects identified above, how would the premiums differ
from a claims-made policy versus an occurrences form?
The desired information was to see if the cost of these two types of
policies would differ, because of the changed risk to the insurance
company.

What are the methods used by contractors to lower liability

premiums?
Contractors are not totally powerless in regard to lowering their
premiums--this question reveals actions by contractors that underwriters
take into account when determining premium rates.

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Builder's Risk

Consider the $1 million project again. What Builder's risk insurance limits
would the typical contractor ask for, and what would the premiums cost?
This question is meant to determine not what the insurance underwriter
would recommend, but what the contractor would ask for. Would the
contractor attempt to get limits less than the value of the building? Or do
contractors recognize that if the building burned down, the costs to clean
up and rebuild might be greater than the original cost of the building, and
as a result the contractor should get limits greater than the value of the
building. Recognizing that the type of building constructed will determine
the cost of builders' risk premiums, a range of premium values was
sought rather than an estimated single cost.
In general, do you feel that contractors are purchasing enough
builders risk coverage to adequately cover losses?
Again relying on the underwriter's experience and knowledge of potential
claims, the answer to this question will indicate if the contractor is
exposing himself to out-ofpocket expenses if losses exceed the
insurance limits.

What are the common ways that contractors lower their Builders
Risk premiums?
Like liability insurance premiums,builders risk policy premiums can be
lowered by the contractor taking a proactive stance in some cases.

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What are typical exclusions in Builders Risk policies?
This will give some idea of those consequences that the underwriters
feel are too risky to include in the general policy, and these exclusions
must be purchased separately.

Do you use experience modification ratings for setting premiums

on contractors Builders Risk policies?
These ratings are one method the insurance companies use to assign
premiums. Competent contractors likely prefer these ratings because the
ratings give them a competitive advantage over unsafe contractors.

Equipment/Automobile insurance
What factors come into play when setting premium rates for
comprehensive automobile insurance for jobsite vehicles?
This question reveals the methods contractors can use to improve their
rating for automobile insurance with the insurance company.

What factors affect equipment insurance rates (damage only)?

Similar to automobile or property insurance,contractors can do many
things to lower their premiums for equipment damage. This question
identifies any specificactions or preventive measures that contribute to
lower premiums.

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 CONCLUSION
The results of this study can be used by the construction industry to
better understand the factors affecting insurance premium rates. From
reviewing insurance requirements in the general conditions, it can be
concluded that there are significant differences between public agency
insurance requirements. Because the requirements vary, missed details
can have an adverse affect on the contractor's financial position. It can
be concluded after interviewing several underwriters from insurance
companies that based on prices quoted for various coverages, there is
great variance in prices. Even though the premiums quoted were at best
rough estimates, some were ten times greater than others. Based on the
information obtained from the underwriters, it appears that prices for
insurance are not "cast in stone," and by demonstrating efforts to control
losses, contractors can negotiate for lower premium rates.
If bidding on projects for many agencies, contractors should read and
understand all insurance provisions of the contract because these
provisions vary among different agencies. Contractors should also
ensure that the insurance and limits specified will protect their own
interests in the event of a mishap, and purchase more coverage if
necessary. When shopping for insurance coverage, contractors must
realize that prices for the same coverage will vary among insurance
companies. Contractors should also understand the factors that affect
premium rates and use this knowledge when negotiating with insurers
on insurance prices.
The drafting of insurance clauses usually requires a contractors to
“warrant” (or, in other words, guarantee) that it has satisfied all the
requirements imposed by the construction contract. As such, these
requirements cannot be taken lightly and may result in an inadvertent
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 (and serious) breach of contract if they are not adhered to. It is therefore
important that, prior to executing a contract, each party:

• ensures that it understands the extent of its insurance obligations;

• makes sure that the insurance requirements are reviewed by its legal
advisor to ensure that they are consistent with the underlying obligations
under the contract and confirm with market norms;

• confirms with its insurance advisor that the insurance requirements

under the contract can be accommodated by the relevant insurance
policies (and also determines any cost implications); and

• checks that any necessary amendments are made to the relevant

insurance policies to ensure that the contractually agreed insurance
requirements are adequately reflected.

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 BIBLIOGRAPHY

BOOKS:

• Black, Henry Campbell. Black's Law Dictionary, 5th ed. St. Paul:
West Publishing Co.

• Clough, Richard H. Construction Contracting, 4th ed. New York:

John Wiley & Sons, Inc.

• Gahin, Fikry S. Spreading the blame for the liability insurance

crisis. Professional Safety, Vol. 33 .

WEBSITES:

• http://construction.about.com/od/Insurances/tp/List-Of-
Construction-Insurance.html

• http://www.lockton.com/construction

• http://www.axisinsurance.ca/commercial/policy-types/construction-
insurance

• http://www.dtic.mil/dtic/tr/fulltext/u2

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