What's the worst that could happen?

Colm O'Suilleabhain.

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All construction projects carry with them inherent risk. Every standard form of contract requires certain types of insurance to be put in place.

What most employers and contractors don’t consider are the other risks that exist, which may or may not be provided for within the contract, but which could be mitigated by putting additional insurance in place.

For instance, there is always the risk that a contractor or sub-contractor may not perform their duties correctly or declare bankruptcy before completion. To address this risk, adequate retention should be held on all amounts paid under the contract. Alternatively (or in addition) payment and/or performance bonds could be requested.

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All standard forms of contract require that the contract works are insured. This can be the responsibility of either the contractor or the employer. Before commencing a project an employer should ensure that adequate insurance provisions are in place against possible loss or damage to the contract works. This can be achieved through project specific insurance or through the contractor’s ‘all risks’ policy.

On every project there is a risk to third parties. Insurance can be put in place by the employer or the contractor to provide for these risks.

The types of insurance that may be considered are third party insurance against loss or damage, public liability insurance, insurance against damage arising from the works to existing and surrounding buildings (if not covered under project insurance) and non-negligence insurance.

There is a risk that the designer, or other consultants involved with the project, may be professionally negligent. Before engaging any architects, engineers or consultants, the employer should ensure that they have the required experience as well as the adequate professional indemnity insurance for the activities that are being undertaken.

Plant and materials supplied by the contractor may be defective. An employer should put collateral warranties in place to ensure that they have a direct contractual link with suppliers, particularly the suppliers of the high value and maintenance items.

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There is a risk that the building will contain latent defects not evident prior to completion. A client and employer can put latent defects insurance in place against such an eventuality.

A client and employer may incur consequential loss as a result of the late delivery of the project. They can insure against this risk by taking out consequential loss cover, advance loss of profit insurance, delay in start-up insurance or loss of liquidated damages insurance.

All insurance policies should be maintained on ‘jointly named’ basis where possible with clearly defined contract provisions allocating responsibility for providing the insurance.

The benefit of maintaining policies on a jointly named basis is that the full risk can be transferred to the insurance company while at the same time ensuring that the insurance company cannot use subrogation against either the employer themselves or any of the project works contractors or sub-contractors.

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While it would be ideal to have all of the aforementioned policies in place on a project this may not be practical from a commercial point of view as each insurance policy will come at a cost which will either be acceptable or unacceptable to the employer/contractor.

Insurance actuaries no doubt have complicated formulas and equations to work out. I on the other hand have a more simple equation; divide the cost of putting the insurance in place by how foolish you would feel if the insured event actually happened and you lost out as a result. This will tell you if you should have put the policy in place or not.

About Colm O’Suilleabhain
Colm O’Suilleabhain is a Senior Consultant with Trett Consulting in their Abu Dhabi office. He is a Chartered Quantity Surveyor with extensive experience in a variety of fields. As well as having a Masters in Project Management, he is currently completing the second year of a three-year legal Masters (LLM). Colm is also a Member of the Chartered Institute of Arbitrators.