Construction Insurances Kuala Lumpur Malaysia

Construction Insurances Explained

– Contractors’ All Risks Insurance

Contractors’ All Risks Insurance

There are several terms used in the insurance world that mean different things to different people and one of these is Contractors’ all risks (CAR) insurance. The term is sometimes used to refer to both the material damage and liability covers required by a Contractor. Most insurance practitioners would regard CAR as referring only to the material damage cover on the contract works unless the real intention was obvious from the rest of the text. Anyone using the term, whether verbally or in writing, should make their intention clear, so as to avoid any ambiguity in interpretation.

CAR covers what is stated within the actual insurance policy for which the premium is paid. The Employer has the opportunity to specify his requirements as to what is to be included within the CAR within the contract if the Contractor is responsible for the provision of such insurance alternatively the Employer specifies the cover within the policy he takes out where the Contractor is not obligated to provide insurance under the Contract.

A CAR policy provides insurance coverage when the Works being constructed, as defined in the Contract, are damaged by an insured peril and require replacing and/or repairing. It is normal for the Contract to stipulate who will provide this cover. If it were the Contractor then it would be normal for them to take out a specific policy to cover the project or alternatively if available to them add it to a policy covering all their contracts up to a specific limit. In the event the responsibility should fall upon the Employer then cover would normally be under a policy arranged specifically for that project.

When arranging the CAR coverage for a project it is essential that care be taken in identifying the correct Contract Value, Construction Period, Defects Liability Period and Description of the Works. The policy will normally cover any physical loss or damage unless the cause is specifically excluded, thus the term ‘All-Risks’ whilst commonly used, is to some extent, misleading. Nevertheless the cover is very wide and embraces protection against fire, aircraft, explosion, earthquake, riot, malicious damage, storm, flood, burst pipes, impact and other accidental damage. However, CAR policies can be issued covering loss or damage by particular and specified perils, e.g. fire, flood, storm. In both cases the policy should generally be extended to provide protection in respect of damage by terrorists where such is commercially available.

In addition material damage to the Works or the machinery being erected CAR generally includes coverage for third-party liability for bodily injury and property damage to the surrounding properties. The policy can in some circumstances be extended to include consequential losses or losses due to delay in start-up following loss or damage under material damage section. This cover is also called advanced loss of profit.

Either way it is imperative that the parties fully understand what exclusions apply or which perils are listed to ensure that the cover gives sufficient protection to the Employer and the Contractor. The Sum to be insured under CAR should be adequately calculated and must include at least the Contract Value, value of Contractors’ plant and machinery, value of Employers existing property, estimated cost of debris removal, value of all temporary facilities, tax and an allowance for inflation. In addition it is wise to make sure that on site as well as offsite storage facilities are included under the policy together with the value of any free issue materials where the Employer transfers the risk to the Contractor under the Contract.

The policy should always be in the joint names of the Employer and Contractor although the Contract may stipulate that the Bank or Financing institutions are also named in the policy, depending upon their specific requirements for providing project financing.

Joint names insurance is where two or more parties (for example the Employer and the Contractor) are jointly insured under a single policy. Each party has legal rights under the policy and can claim against the insurer, but the insurer has no right of subrogation against the other insured party.

It is important to remember that each party is bound by the normal rules, and to avoid any difficulties each should individually comply with the duties of disclosure and notification.

Having an interest noted on a policy is very different and is rarely an acceptable substitute for a joint names policy.

A third-party is not a party to the contract of insurance, and thus cannot claim against the insurer. Similarly, it does not prevent the insurer from exercising rights of subrogation against the third-party.

PAM, IEM, FIDIC and generally most standard forms of contract contain fairly detailed provisions for property and liability insurance. Generic amendments to these insurance provisions are not normally essential, however, discreet changes may be required depending on the nature of a specific project (for example, amending the definition of joint names insurance policy to include the project funders, or to reconcile the standard provisions with a project insurance policy taken out by the Employer).

All CAR policies will have an excess that will be deducted from any claim settlement. On occasions insurers will apply more than one excess under a policy for specific losses where a certain risk warrants such and additional excess being imposed.

In addition generally most policies include exclusions for which extensions of CAR coverage maybe granted or included within the CAR coverage of the CAR policy may be extended to cover such as:

(A)        professional fees;

(B)        automatic reinstatement of the policy limit following a loss;

(C)        debris removal;

(D)        free issue materials;

(E)        discovery of munitions of war;

(F)         inflation clause;

(G)        plans and documents;

(H)        others.

Individual insurance providers specialising in this class of insurance will also have their own list of extensions that they will negotiate with insurers. As an example you may refer to the example provided which is so provided as an example and these will vary depending upon the general insurance market at the time the CAR insurance is taken out by the insuring party.

In addition the parties need to consider if the CAR policy is to cover the respective party’s to the Contract for:

Additional cost of construction of un-built works in the event of

(A) Inflationary Costs

(B) Out of sequence working

(C) Defective design, materials and workmanship

(D) Extended defective condition exclusion

(E) Limited defective condition exclusion

(F) Design improvement exclusion

It is understood that various legal challenges are currently on-going as to the validity of these clauses and therefore whilst the description of coverage above may not reflect the current or future legal interpretation. As with all contractual documentation it is recommended that all parties seek professional advice in respect of these risks.

It should be noted here that if the Contractor arranges CAR cover it may restrict or even remove the ability of the Employer to purchase any consequential loss coverage.

Construction Insurances Explained

– Public Liability Insurance

Public Liability Insurance

Typical public liability insurance will provide indemnity in respect of liability at law for damages arising from accidental injury to third parties (not employees) or accidental damage to third-party property arising in connection with the project. It may also cover liability for damages arising out of any nuisance or trespass committed by the insured and any rights (such as a right of way) with which the insured may accidentally interfere in the course of the development. Other elements of cover normally provided include defence of claims costs, the use of plant on the site and legal defence costs in respect of prosecutions brought under the Health and Safety legislation.

Many insurance providers now exclude claims arising from sources they regard as particularly hazardous, such as terrorism, asbestos, gradual pollution, mould, e-commerce transactions and, potentially, financial loss where there has been no ‘injury or damage’ as defined in the policy. Insurers may restrict their liability for particular risks by imposing inner limits much smaller than the overall policy limit.

Public liability insurance coverage may be arranged on an annual basis with a specific limit being the maximum amount payable in the event of any one claim or series of claims arising from one occurrence. It is normal for this limit to apply in respect of any one claim but some limits do apply to all claims in the period of insurance. There may be a limit on any one claim and then a separate aggregate limit. Sometimes there are elements of cover that insurers may be particularly concerned about, e.g. sudden and accidental pollution may be subject to lower limits of liability and/or separate aggregates.

Whatever type is issued, it is the insured party or parties that decide on the level of cover to be purchased dependent upon the risk exposure arising from the work being undertaken. When deciding upon the limits to be purchased it is best not to rely on any figure requested within a contract document, as this is normally the minimum amount required. The policy will normally be subject to an excess that will be deducted from the total amount claimed and may apply only in respect of claims for property damage or in respect of all claims.

Every party on site with a potential liability to the public will require an insurance policy. Additional responsibilities for each party will also be set out in the contract. It is traditional and still common for the Contractor to arrange a cover on behalf of the Employer. However, it has to be asked if this is in the best interests of everyone, whether the Employer who may find he has only nominal cover or a claimant who may find they are passed from one insurer to another if there are different policies in different names. One option is to effect a project policy arranged by the Employer.

The parties protected by the policy will vary according to the Employer’s requirements and the nature of the contract forms being adopted. The indemnity can apply to the Employer only or together with the Contractor, his subcontractors and tradesmen. In addition there may be freeholders, superior landlords, financiers plus professional consultants and suppliers (on site exposures only) to be added to the list of insured. The policy should set out the names of all insured and specify in which policy covers they have an insurable interest.

Public liability insurance is not a cheap insurance and if one party does arrange cover in two or more names the cost of this and the potential savings to the other names should to be reflected in tender prices.

It is important for the Employer to decide responsibilities for placing public liability insurance before contracts are signed, rather than just follow the provisions of the basic contract conditions. Whoever is making the decision as to who must arrange the cover must consider all those who may need to be protected.

Construction Insurances Explained

– Existing Building Insurance

Existing Building Insurance

Where an existing building is to be the subject of Contract Works care is needed by those responsible for drawing up the contract conditions and those responsible for insuring the building. The insurance of new build contract is relatively straightforward compared to the difficulties that can arise when an existing building is being worked upon. Such a building will in most circumstances be insured under a commercial all risks property owners’ policy whilst occupied or temporarily unoccupied pending the works. There will be a number of conditions in that policy that will apply when works are being carried out and these should be examined. If the contract does not involve much of an increase in risk the current insurers may be happy to continue the cover without additional charge but it will require reasonable precautions to be taken. On the other hand if there is hot work involving welding equipment or blowtorches, they may require an additional premium and/or risk improvements. If there are to be structural alterations, particularly if they involve foundations, insurers may wish to reconsider the cover and, say, exclude subsidence occurring as a result of the works. The remaining subsidence risk may then be insured under a non-negligence policy at terms reflecting the insurance providers’ assessment of the revised risk. The specific action will depend on the particular circumstances and the attitude of the insurance provider. However, it is also possible that the current insurer will wish to exclude the cover altogether on the grounds that the building is now a construction risk and best insured under a construction policy. The problem with this is that the construction insurance market does not always have the capacity to insure a substantial building.

Contractors often seek to take out joint names insurance with the Employer in respect of the existing building as they wish to avoid taking out public liability insurance due to the high premiums for a large building. This is all very well if the Employer is also the insured under the policy and is prepared to pay any additional premium and/or to accept restrictions in cover and/or to pay for additional risk precautions during the contract period. Either way it should be made clear that this is at the Employer’s risk.

Problems start if the insurers of the building do not want to carry the additional risk. Alternatively the Employer may not control the buildings insurance and the landlord or freeholder that does may refuse to agree to joint names status for the Contractor. If either of these eventualities arises, a solution has to be found. There are solutions or partial solutions but they may be very expensive and still leave the Employer carrying some risk.

Where the Contract Works will include very little of the original building, perhaps just the exterior walls or the facade, it may be better to cover both the existing building and the contract works under the CAR policy with one sum insured. It should be cheaper and make settlement of any claims easier. A CAR policy is designed for construction works and the cover is drawn up to reflect the risks inherent in construction. There are elements of the cover that may make it beneficial to insure the existing building under such a policy,

The insurance providers for the existing building must be advised of the nature and extent of the Contract Works or the policy could be invalidated. However, it may be better to cover the existing building under an all-encompassing CAR policy, as mentioned above.

Where the Employer is undertaking to arrange a joint names cover on the existing building to protect the Contractor, he should make sure this is possible. If the Employer is a lessee or has not arranged the policy there could be problems that are both time-consuming and expensive for the Employer to resolve.

Construction Insurances Explained

– Consequential Loss Insurance

Consequential Losses Insurance

Property Developers have to carry risks it is part and parcel of their business. The risk due to consequential losses on a construction site is a high one as there are so many factors that could delay completion and then so many headings under which additional expense or actual loss of anticipated income could arise. The measurement of each potential loss can be a problem and if not correctly assessed there may be underinsurance or an unnecessarily high premium being paid.

If any party involved with the construction will require consequential loss cover of any kind it is very unlikely that any insurer will be willing to assist unless it also provides the CAR insurances on the Contract Works. The reason for this lies with the fact that only by the insurer controlling the settlement of the material damage claim can the size of the consequential loss be minimised. Therefore, if the Contract Conditions call for the Contractor to arrange insurance on the works, it may be impossible for the Employer to arrange any consequential loss cover. The Employer will then have to arrange its own cover on the Contract Works in order to secure that consequential loss protection.

To avoid the possibility of the Employer effectively paying enhanced premiums for such Contract Works cover it is worthwhile making clear to the Contractor from the outset that the Employer is paying for its own cover, if this is the intention. The contract price quoted by the Contractor should then reflect this.

It is usually very difficult, if not impossible, to persuade the Contractor to reduce its price at a later date. In any case the Contractor may prefer to arrange its own cover on the Works so that he has control over any claims that may arise. This is understandable and the Contractor may also argue, possibly with some justification, that it can buy the CAR insurance more cheaply than the Employer. Faced with the problems of changing contract conditions, arranging cover on the works and, possibly, paying a higher premium for the privilege, any Employer could be forgiven for giving up the idea of arranging consequential loss cover.

It is not good practice to rely solely on liquidated damages instead. Apart from the fact that the Contractor may find it impossible to purchase insurance against liquidated damages, making recovery of a genuine loss uncertain, there is the possibility that the Contractor will be entitled to an extension of time under the Contract and will not be liable to pay any damages anyway. Properly arranged insurance for consequential losses will more accurately reflect the Employer’s loss than liquidated damages can and by arranging both CAR and consequential loss insurance with the same insurers there is the added advantage that the insurers will be looking for a quick resolution to any CAR claim in order to reduce the size of the consequential loss.

Under all the Standard Forms of Contract commonly used in Malaysia for construction works there exists clauses which make the Contractor obliged to compensate the Employer to the extent of liquidated and ascertained damages at the rate specified in the Contract. However, if the delay is due to certain relevant events an Extension of Time for completion of the Works will be given which will result in the Contractor not being obliged to pay any such damages.

Typically these relevant events would include:

A)  force majeure;

B)  exceptionally adverse weather conditions;

C)  loss or damage occasioned by any one or more of the specified perils (see below);

D)  civil commotion, local combination of workmen, strike or lock-out affecting any of the trades employed upon the works or any of the trades engaged in the preparation, manufacture or transportation of any of the goods or materials required for the works;

E)   terrorism.

Contract Conditions do vary and therefore the proposal that an extension of time may be available is not necessarily correct in every instance.

The specified perils are normally defined as: fire, lightning, explosion, storm, tempest, flood, bursting or overflowing of water tanks, apparatus or pipes, earthquake, aircraft and other aerial devices or articles dropped therefrom, riot and civil commotion, but excluding excepted risks. The excepted risks include, amongst other things, radioactivity and pressure waves.

Force majeure may be defined in the Contract however as all contract are normally executed and subject to the laws of Malaysia consideration should also be taken of the definition of force majeure contained within the Contracts Act and adopted by the Courts. For insurance purposes the principal force majeure perils include: fire and allied perils, strikes, lockouts, labour disputes, change of law, order of any court enforcing a change of law and any other cause beyond the control of the Contractor.

It was possible to buy commercially viable cover for the consequential losses flowing from late completion or permanent abandonment of a project following the occurrence of force majeure perils or restricted to limited specified peril but following some extremely large claims it is now very difficult to obtain such coverage at commercially viable rates.

Where an insurance policy makes reference to All-Risks of Specified Perils the coverage will almost certainly include not just those mentioned above but, in addition, malicious damage, impact, subsidence, landslip, heave and, possibly, other accidental damage. Again such insurance is getting harder and harder to obtain and even flood coverage is being limited after the events of 2011 in Thailand.

Where liquidated and ascertained damages can be applied due to any delay scenario, the reality of the impact upon the Employer’s financial position can often be beyond the level of liquidated and ascertained damages set during tender negotiations. Whilst every effort is made to set the level of damages at an appropriate level, the full consequences are not often appreciated until a loss is sustained. Equally, it can be the case that on smaller projects it is difficult to reach agreement with the Contractor involved for an appropriate level of damages. This is because, if set accurately, they may preclude the Contractor from undertaking the development or, alternatively, the imposition of such damages would adversely affect any tender amount submitted.

Consider the scenario where an Employer is constructing a commercial development and has entered into lease or purchase agreements with a tenant. It may not simply be the Employers loss in rental which needs to be considered but also the tenant’s losses which result from delays. The amount of such damages will depend greatly on the activities and circumstances of the tenant and the content of the Employers lease or purchase agreement with that tenant.

Unfortunately, Employer’s acting as developers often carry more risk than is necessary by failing to insure or insure adequately, even though insurance cover can be purchased. Employers should at least consider taking insurance coverage for the following potential risks:

1)   Loss of Rent/Revenue and Loss of Use of Sale Proceeds, including Assessment of Indemnity Period.

The loss of rental income/revenue income from use or the Employer being prevented from investing or using the proceeds of a sale are straight forward concepts even if their estimation may not be so. The indemnity period refers to the time limit imposed in a policy for which the Employer may claim losses as a result of event which allows the Employer to claim consequential losses. Thus Employers need to consider the period required to rebuild the project or how long it may take for the resale or re-letting following such rebuilding.

2)   Expediting Costs (Additional Cost of Working)

Cover for expediting costs relates to the additional costs in executing and repair or rebuilding works over and above any amount recoverable under the CAR insurance covering the Contract Works. The amount recoverable is generally limited to what is reasonable compared to the saving produced on the claim for losses due to delays in completion. In practice this means that insurers will be reluctant to pay for expenditure that did not produce at least a corresponding saving on another part of the claim.

3)   Costs Incurred in Raising or Extending Loans

The legal and other costs incurred in continuing existing loans or raising new ones as a result of delay by insured damage should also be covered. These may be included within the cover for lost rental income/revenue income or delays in repatriation of proceeds cover referred to above without the need for a separate sum insured.

4)   Additional Overhead Costs

A delay in completion of the Works may incur the Employer in additional costs involving marketing, leasing, selling and legal costs in the case of a developer or where the facility will be used to manufacture or operate a business there could be additional rental costs, redundant employee costs, no productive machinery costs and many other increased overheads.

5)   Higher cost of development finance

Many covers that are arranged which ignore the fact that development finance can cost more than finance secured against a completed project and that the level of borrowing which can be secured against a completed project is normally greater. The consequences of this are twofold. One being the increased cost of borrowing and secondly that more capital is tied up in the project for a longer period as a result of not being able to re-finance the loan against the completed project.

6)   Additional Increase in Cost of Working Cover

It had been addressed that generally the Employer will be limited to reasonable cost of expediting completion of the Works. It may be possible to obtain cover over and above this to further expedite the works by means of an additional item although sometimes the matter is dealt with by means of an extension to the cover with an inner limit. The ability to make a claim under expediting costs might give the Employer useful options in the event of a loss. For example, the ability to make extra payments to speed up completion may enable them to avoid losses in the future that would fall outside the indemnity period.

7)   Damage Away from the Site including Prevention of Access

Where CAR policies exclude coverage for losses that result from damage off site be it to the Contractors’ offices, materials or equipment stored off site, vehicles or plant in transit or whilst stored and damage to other phases of development It is prudent for the Employer to consider extending coverage and also insuring for such events as denial of access and/or failure of utilities.

8)   Damage at suppliers’ premises

Some CAR policies offer limited cover in respect of delays incurred following damage at the premises of suppliers of materials to be used in the Contract Works. The most serious losses are likely to occur if there is a delay in the arrival of crucial or bespoke supplies such as lifts, special equipment and the like. And the limits of cover normally fail to adequately protect the Employer. Accordingly it is prudent for the Employer to consider the purchased sufficient levels of cover for delays as a result of damage to all suppliers to the development not named on other policies although such insurance can be very expensive, especially where suppliers are importing goods from outside of Malaysia.

To summarise an Employer who is seeking Consequential Loss Insurance will be better off arranging the CAR Insurance for the Contract Works or alternatively an all-encompassing Project Insurance. Consequential Loss Insurance is a generally considered a more certain route to recovery of Employer costs than reliance solely on liquidated damages. Consequential Loss Insurance will be a more accurate reflection of the Employer’s loss risks than liquidated damages and finally in Malaysia the recovery of Liquidated damages from a Contractor still requires the Employer to prove his losses if challenged in the courts, thus regardless of the sum stated in the Contract this does not guarantee the amount will be recovered, which will be dependent upon the extent to which the Contractors is liable under the contract for the Employers costs.

In order for the Employer to secure adequate Consequential Loss Insurance at a competitive rate he should ensure that those responsible for arranging the policy have a full understanding of how the project is to be financed, the programming of the Works and the financial implications of any delay.

Construction Insurances Explained

– Workmen Compensation Insurance

for Contractors, Builders & Other Construction Professionals

Construction and contracting professionals know all too well the risks of their industry. From on-the-job accidents to illnesses from handling hazardous materials, even the best-prepared carpenter can be the victim of unforeseen events.

If one of your subcontractors is hurt due to malfunctioning equipment or falls ill due to exposure to asbestos-containing materials (ACM), your construction and contracting business could be held responsible. Workers’ Compensation Insurance is the protection construction and contracting business owners rely on to cover the medical expenses related to an employee’s injury or illness or for the earnings the employee missed while recovering.

Read on to learn how you can protect your construction and contracting business and your employees from uncertainty with Workers’ Compensation Insurance.

Workers’ Compensation Insurance: Protecting Contractors

The dangers of operating industrial machinery, the exposure to potentially hazardous materials, and the toll of repetitive motion injuries are all risks contractors face daily. And while safety training and personal protective equipment are a necessary risk management tools, construction and contracting businesses know accidents happen all the time.

Workers’ Compensation Insurance helps offset some of the risks you can’t avoid by providing coverage that protects your construction and contracting business assets in the event of a costly lawsuit brought by an injured or ill employee. With an adequate policy, you know your construction and contracting business will have the necessary funds to cover court costs and settlements should unexpected accidents and lawsuits occur.

As a rule, Workers’ Compensation is currently necessary for all businesses with employees, though the laws vary from state to state. For example, North Dakota, Ohio, Washington, and Wyoming have monopolistic markets, which means the state sets rates and operates a state-administered fund of Workers’ Compensation Insurance. private employers can choose whether or not to carry Workers’ Compensation Insurance coverage.

How Construction & Contracting Professionals Benefit from Workers’ Compensation Insurance

While some contractors know this coverage as “workman’s comp” or “workers’ liability insurance,” Workers’ Compensation Insurance acts as a safety net for your construction and contracting business by covering the costs of…

Medical expenses relating to the employees’ on-the-job injuries and work-related illnesses. 

Wages your employee would have earned if they were able to perform their work. 

Legal fees should your employee file a lawsuit against your construction and contracting business for their work-related injury or illness.

Because on-the-job accidents can quickly lead to lawsuits, most Workers’ Compensation policies also include Employers’ Liability Insurance. If your injured or ill employee sues your company, this policy will help pay for the legal costs of defending against the claim.

And legal fees add up quickly. Between attorney’s fees and the time lost from work to attend court, your construction and contracting business could suffer a deep financial burden even if the court finds that your business is not responsible for the illness or injury. 

What is Contractors’ All Risks & Erection All Risks insurance? 

These 2 policies are designed to meet the insurance obligation placed upon Contractors under the contract conditions.

• Contractors’ All Risks
  Covers buildings and civil engineering works under construction
• Erection All Risks
  Covers plants, machinery, equipment and steel structures like bridges in the course of erection

Key coverage

Here is an overview of your coverage

Contractors’ All Risks / Erection All Risks

• Material Damage
  Covers against sudden and unforeseen physical loss or damage to contract or erection works/property/items  
• Third Party Liability
  Covers third party liability for which we shall become legally liable to pay as damages consequent upon
• Accidental bodily injury or illness of third party
• Accidental loss or damage to property belonging to third party
  Occurring in direct connection with the works and happening at or in the immediate vicinity of the site.
  The indemnity is also provided for legal costs and expenses provided the liability is within the limit of liability insured.