With tough economic conditions cutting into margins as companies compete for business in a struggling construction sector, the temptation to reduce costs could see some operators cutting back on insurance cover – something that could have major consequences in the event of a site incident, says Standard Bank.
“The actions of companies cutting back on insurance cover could also impact on the sub-contractors they appoint to undertake specialised services on their behalf,” says Siya Gumede, Senior Account Executive: Corporate & Business Insurance for Standard Bank Insurance Brokers, highlighting it could lead to unexpected costs and even legal action.
“It is critical that clearly defined written agreements and specifications are in place and adhered to by all parties to a major construction contract because of the number of variables that are part of this major activity,” says Mr Gumede.
To avoid the consequences of inadequate insurance cover, developers should find what minimum cover is applicable to a sub-contractor on a particular segment of a project. These requirements should be included in the request for proposals and also the contract pertaining to the work to be performed. The sub-contractor will then have to provide the developer with proof of insurance.
A prudent developer should then refer the proof of insurance to a broker for review and confirmation of adequacy.
The most common insurance on construction sites remains the ‘contractors all risk insurance’ which provides for materials and equipment on site. Extensions to this policy may be added to cover hired plant, as well as material supplied by the principal or owner of the site, and can also cover sub-contractors, Mr Gumede notes.
Of importance is that a contractor’s all risk policy does not cover losses arising from professional negligence or defective workmanship. Policies covering these specific risks therefore have to be obtained separately and supplied to the developer.
“Developers should cover this eventuality by ensuring that a professional/defective workmanship policy is in place to protect against losses, negligence or shoddy workmanship. If the contractor is the responsible party the ‘contract works insurer’ would take recourse against the professional indemnity/defective workmanship insurer for reimbursement of costs. If the contractor does not have such cover, he is required to reimburse the ‘contract works insurer’ for the costs incurred.”
Turning to the possibility of contractor or developer’s negligence resulting in damage to plant, installations and possible injury or death of workers, Mr Gumede warns:
“The contract works policy would not respond to these issues. Contractor’s liability, plant all risks, tool of trade, general liability and personal accident insurances would be required in order to address the different aspects of the loss. This would apply, for instance, if because of a lack of supervision and safety planning, an avoidable accident occurred. An example would be a crane hitting an overhead electricity cable, resulting in plant damage and injury or death of a driver.”
In these instances, because of legislation and the possibility of a site being shut for accident investigations, consideration should be given to include an ‘Advanced Loss of Profits’ clause.
“This is important for large projects where a delay in project completion could have a substantial impact on the expected revenue of the company. These type of policies pay for expected net profit plus standing charges, which includes wages during the period of delay, from the scheduled date of commencement of commercial operation up to the actual date of commencement of commercial operation, subject to a time excess and the indemnity period.”
The delay must have happened due to a loss during construction, and be payable under the ‘Construction/Erection All Risks’ policy.
“Particular attention needs to be paid to the Indemnity Period, which must anticipate the maximum time to rebuild, re-erect and retest any part of the project if damaged. Many financiers choose to insure standing charges only, as this keeps costs down.”
“The moral of the story is that insuring a major construction project is an activity that should not be neglected. The various activities and need to appoint sub-contractors, as well as potential sticking points on a project, requires that all eventualities are adequately covered. Trying to increase margins by cutting back on insurance cover could prove to be economically crippling,” concludes Mr Gumede.