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The Management of Construction a Project Lifecycle

The Management of Construction a Project Lifecycle

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Published by: muneeb2u on Jul 20, 2009
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Although the available insurancecoverages and the regulations governing insurance vary
among different countries, the contractor, in mobilising for the project, will always have to
arrange for appropriate insurance. This section gives a brief review of the types of insurance
utilised in the construction industry.
An insurance policy is an agreement under which the insurer agrees to assume financial
responsibility for a loss or liability covered by the policy. The insurance company has the duty
(1) to defend the contractor if a claim covered by the policy is brought against the contractor and
(2) to protect the contractor against loss covered by the policy. As consideration for the
insurance company’s promise to provide such protection, the contractor pays a fee, called a
premium. The contractor’s loss record is an important determinant of the premium rates. This
record is reflected in an experience rating. Standard, or ‘manual’, rates for given classes of risks
are adjusted up or down based on the experience rating, so that the contractor with a low loss
record benefits from savings in the costs of these experience-rated coverages.
The contract with the owner will specify certain types of required insurance coverage to be
purchased and maintained by the contractor. Beyond that, some insurance may be a legal
requirement even if not stipulated in the contract. Furthermore, the contractor may choose to
carry other insurance not required by law or by contract. Depending on the contract, the owner
may be responsible for obtaining some kinds of insurance, so the wise contractor will check to
make sure it is not purchasing duplicate insurance unnecessarily.
It is helpful to divide the types of construction insurance into property insurance, liability
insurance, employee insurance and other types. Details may be found in Clough and Sears
(1994) and Fisk (2003). Property insuranceis of two basic types, covering the contract works
underway during construction and the contractor’s own plant and other property. Builder’s risk
insurance provides coverage on the contract works. Such insurance may be of the all-risk type,
under which protection is afforded against all risks of physical loss or damage to the works or
associated materials, due to any external cause, unless an exception is stated. Or it may be a
standard, or named-peril, builder’s-risk policy, covering only stated perils such as fire and
lightning, vandalism and windstorm. Other contract works insurance can cover damage due to
earthquake, damage caused by the operation of boilers during construction and damage to
bridges; installation floater policies provide coverage for permanently installed equipment from
the time it is shipped to the project until it is installed and tested.
Insurance against the contractor’s own plant and other property will probably not be required
by the contract, but the contractor may choose to purchase this coverage. Among the types
available are coverage for various buildings such as sheds, warehouses and offices, equipment
(sometimes only on the site and sometimes regardless of location), materials and supplies
carried on the contractor’s trucks and valuable papers such as drawings, maps, books and
contracts. Crime insurance is a special category that protects the contractor against loss of office
equipment, money and other valuables due to theft, burglary, destruction and other crimes.
A common form of liability insuranceis comprehensive general liability insurance, which
protects the contractor, in a single policy, against liability to the public. It covers injuries to
people not employed on the project and damage to the property of others arising from operations
on the project. Various other kinds of coverage may be included, such as liability to the public
due to actions of subcontractors, completed-operations coverage for work handed over to the
owner, professional liability insurance for design and other professional services rendered by the
contractor and protection for injury and property damage caused by the contractor’s vehicles. If
not included in the comprehensive policy, these provisions may be purchased separately. The

128The Management of Construction

law may require that the contractor carry workers’ compensation insurance, a form of liability
insurance that provides benefits to employees injured on the job or to their heirs in cases of fatal

Among common forms of employee insurance, some of which may be required as part of a
collective bargaining contract, are employee benefit insurance, covering medical and hospital
costs beyond those provided by workers’ compensation, social security (in the USA) or similar
government programmes that provide retirement, disability and survivor benefits to insured
workers and unemployment insurance, normally a government-operated programme offering
benefits during periods of unemployment between jobs. In our other insurancecategory, we
note business-interruption insurance, covering losses due to times of business inactivity, key-
person life insurance, used to reimburse the company for financial loss due to the death of a
major officer or other designated essential employee and corporate continuity insurance,
providing cash to purchase a deceased stockholder’s corporate stock as a means of preventing
that stock from being purchased by a party unfriendly or otherwise undesirable to the

As indicated earlier, some insurance coverage is required by law or by contract. Early in the
mobilisation phase, the contractor must furnish evidence to the owner that it meets the
contractual requirements, just as it must for bonding requirements. Beyond the required
insurance, the contractor has considerable choice, as described above, about whether to protect
against its various risks by acquiring other insurance.

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