CPD 2015016j

Insurance and Bond
Sr. Kenny Lui

BSc(QS), LLB, MMgt, MACS
MHKIS, MRICS, RPS (QS)
What are we going to cover today?
Introduction
Why do we have insurance?
Some insurance “jargon”
Insurance arrangement
Types of insurance
Some notes for CAR / TPL / ECI
Surety Bond
Experience Sharing (if time allowed)
Reasons for Insurance Policies
Contract Risk
Legislation
Requirements Allocation
Contract Requirements
Clause 21 - Insurance against injury to persons or
property
Covers both "Employees' Compensation Insurance"
and "Third party liability insurance“
Both insurances are to be in the joint names of the

Employer, the Contractor, his sub-contractors and their
respective sub-contractors of all tiers.
The Employees’ Compensation Insurance is to be taken

out by the Contractor
Clause 21 - Insurance against injury to persons or
property
Third Party insurance is to be taken out by whichever
party takes out the Contractors' All Risks Insurance
The Third Party insurance shall cover the Employer’s

liability for damage to real or personal property other
than the Works due to collapse and subsidence
The period of cover is to run from the Commencement

Date until the Defects Rectification Certificate for the
whole of the Works has been issued
Clause 22 - Insurance of the Works
There are 3 alternative clauses:
- Clause 22A
covers the insurance of the Works by the
Contractor
- Clause 22B
covers the insurance of the Works by the Employer
- Clause 22C
covers the insurance of the existing building and
the insurance of the Works by the Employer
The insurer chosen by the party taking out the

insurance have to be approved by the other party
Clause 22 - Insurance of the Works
Evidence of cover has to be supplied prior to the
commencement of the Works
The remedy for a party defaulting in taking out the

insurance is provided for
The conditions for using an annual policy (Clause 22A.3)

maintained by the Contractor as an alternative to
taking out a specific policy for insurance of the works
are set out
Legislation
Legal Requirements
Employees’ Compensation Ordinance Cap 282
Employers are required

to take out employees compensation insurance policy
to cover their liability
when death or injuries involving ……
due to an accident arising out of and
in the course of his/her employment
Risk Allocation
Risk Allocation – Indemnity Clause
Clause 20 Injury to persons and property and
indemnity to Employer
Contractor to indemnify Employer
The Contractor shall be liable for and shall indemnify the Employer against
any damage, expense, liability or loss in respect of any claim or proceedings
for:
(a) Bodily injury to, disease contracted by or the death of any person
…….except to the extent that the injury, disease or death of that person
is due to any act or neglect of the Employer or any person for whom
the Employer is responsible; and
(b) Injury or damage to real or personal property arising out of, or in the
course of, or by reason of the carrying out of the Works……due to a
breach of contract or other default of the Contractor or any person for
whom the Contractor is responsible.
Risk Allocation – Indemnity Clause
Clause 20 Injury to persons and property and indemnity to Employer
(a) except to the extent …… due to
any act or neglect of the
Employer or any person for
whom the Employer is
responsible
(b) ……due to breach of contract or other

default of the Contractor or any person for
whom the Contractor is responsible
Risk Allocation
Insurance transfers part of a commercial risk
The risk still remains, it is now being shared
with an insurer
The liability still remains
Insurance does not remove liability
A Reminder
Legislation
Risk Allocation
Contract Requirements
Story Time
25 Most Ridiculous Insurance Claims Ever
http://list25.com/25-most-ridiculous-insurance-claims-ever/3/
A clever lawyer bought a pack of (24) cigars and had them

insured against all sorts of catastrophes including floods,
storms, and of course fire. A few months later he filed a
claim saying his cigars had all disappeared in a series of
“small fires”.
The insurance company correctly assumed that he had

smoked them and told him to get lost.
The judge however force the insurance company to pay

up because they didn’t specify the type or size of fire in
the contract.
The insurer was obligated to pay

$15,000 for the lawyer’s his loss of
the rare cigars lost in the "fires".
After the lawyer cashed the cheque, the

insurance company had him arrested on
24 counts of ARSON!!!
The lawyer was convicted of

intentionally burning his insured
property and was sentenced to 24
months in jail and a $24,000 fine ……
Lesson Learnt from the story:
1. Do not abuse the insurance protection.
2. Insurance company can sue the wrong doer

after the insurance company paid the
compensation to the insured
Subrogation
Insurance “Jargon” (Glossary)
Subrogation
Joint names
Cross liability
Deductibles / Excess
Escalation
– Subrogation [律] 代位；取代
One party takes on the legal rights of another, especially
substituting one creditor for another.
For example, when an insurance company compensates a

policy holder for an injury, often the policy holder's right
to sue the person who harmed him is subrogated,
meaning it is transferred from him to the insurance
company.
– Subrogation [律] 代位；取代
Causes Damage
Party A Party B
Claims for Damage
Party A Causes Damage Party B

Subrogation
Compensation
Insurance
Company
– Joint Names
An employer is insured against any liability (vicariously)
incurred by reason of a breach by the contractor.
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.
Insurance “Jargon” (Glossary) – Joint Names
MC Causes Damage SC - B
Subrogation
Compensation
Insurance Company
MC MC
+SC - B Causes Damage SC - B
Subrogation
Compensation
Subrogation is waived
Insurance Company
– Cross Liability
A cross liability clause essentially means that each party is
insured in its own right as if a separate policy had been
issued. Each of the insured gets treated as a separate
entity even though they are under the same policy.
This means that one individual that is covered by the

policy could potentially damage or hurt another individual
that is also covered by the same policy.
Read more: http://www.finweb.com/insurance/what-is-an-insurance-cross-liability-

clause.html#ixzz3ZVJg9E2n
– Cross Liability
Joint Names
Employer, Main Contractor, Sub-Contractors
Joint Names with Cross Liability Clause
MC SC - 1 ………. SC - N+1
Insurance “Jargon” (Glossary) – Cross Liability
SC - A
Claim for
Damage Causes Damage SC - B
Insurance Company
SC - A Insured
Joint + SC - B Causes
Cause Damage
Damage JointSCInsured
-B
Compensation
Claim for
Damage
Policy without Cross Liability Clause

Insurance Company
Insurance “Jargon” (Glossary) – Cross Liability
JointSCInsured
-A Causes Damage JointSCInsured
-B
Compensation
Claim for
Damage
Insurance Company Policy with Cross Liability Clause

– Deductible / Excess
The insured shall bear certain amount of ‘loss’ even if he
can get compensation from the insurer.
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.
– Escalation Clause
To avoid under-insurance especially for long term
projects, it is important to regularly review the total
contract value upwards.
Inflation can also cause the contractor to be under-

insured due to the increase in the contract value of the
project. Hence, the Escalation Clause is inserted in the
policy to ensure the Total Contract Value is reviewed
upwards and protects the insured from being under-
insured when a claim arises. 10 - 15% per annum is usual
the increase in value of projects.
http://www.answers.com/Q/What_is_an_escalation_clause_under_construction_all_risks_Insurance
– Escalation Clause
A Reminder:
Joint Names
Joint
with Cross
Subrogation
Names
Liability Clause
Insurance Arrangement
Method 1 – via insurance broker
Premium (B)
Premium (A)
Fees
Broker
Contractor Insurance Company

Insurance Policy
Co-insurers or
Sub-Underwriters
Negotiation
$$Premium Payment$$
Insurance Arrangement
Method 2 – direct contact to insurance company
Contractor Insurance Company
Insurance Policy
Negotiation
$$Premium Payment$$ Co-insurers or
Sub-Underwriters
Types of Insurance
Employee’s Contractor’s All Risks

Compensation
Public
Liability
Professional Property All

Indemnity Risks
Premium depends on
• Contract Sum
• Excess
• Limit of Indemnity (Coverage)
• Contract Period
• Nature of the projects
• External Wall Renovation
• Any Scaffolding or demolition work involved
Parts of a CAR Policy
• The Schedules
• The “All Risks” Clause
• General exceptions to the “All Risks” cover
• Section 1 : The Material Damage Clause
• Exceptions to Section 1 – Material Damage
• Conditions to Section 1 – Material Damage
• Section 2: The Third Party Liability Clause
• Exceptions to Section 2 – Third Party Liability
• Conditions to Section 2 – Third Party Liability
• General Conditions
• Endorsements / Special Conditions
• The Schedules
The Schedule
· The Insured
· The Project / Site
· The Sum Insured
· The Limit of Indemnity
· The Excess Clauses
· The Period of Insurance
• The Schedules
The “All Risks” Clause
1.0 NOW THIS POLICY WITNESSETH that in consideration of the
Insured having paid or agreed to pay to the Insurers the
premium stated in the said Schedule.
1.1 THE INSURERS HEREBY AGREE subject to the terms, exceptions

and conditions contained herein or attached hereto or
endorsed hereon that if during the Period of Insurance stated
in the said Schedule or during any further period in respect of
which the Insured shall have paid and the Insurers shall have
accepted premium the Insured shall sustain loss or damage or
shall incur liability in the circumstances provided for by this
Policy and defined herein the Insurers shall indemnify the
Insured in the manner hereinafter described.
• The Schedules
General Exception
• Political risks, war or warlike operations, SRCC*
• Nuclear, radioactive contamination
• Willful act or willful negligence of the insured or
their representatives
• Cessation of work whether total or partial
• Electronic Data Exclusion
• Terrorism
* SRCC - Strikes, Riots, and Civil Commotion

• The Schedules
Contractor’s All Risks Insurance
SECTION 1- Material Damage to:
• Contract works (permanent and temporary works
forming part of the contract)
• Removable of debris
• Professional Fees
• Construction Equipment ( Site offices, storage sheds,
silos, scaffolding, utilities etc.)
• Construction machinery (earthmoving equipment,
cranes, site vehicles)
• Principal’s existing property
• The Schedules
Exception to Section 1 – Material Damage
• Consequential loss of any kind

• Faulty design
• Defective material / workmanship (faulty part only)
• Mechanical and/or electrical breakdown
• Wear and tear, corrosion, gradual deterioration
• Road vehicles, waterborne vessels and air crafts
• Loss of use, liquidated damages, penalties, performance
guarantees or other consequential losses
• The cost of maintenance
• The Schedules
Contractor’s All Risks Insurance
SECTION 2 – Third Parties Liability
Bodily injury & Property Damage
Where the Insured becomes legally liable to pay as

damages consequent upon :
• Accidental bodily injury to third parties
• Accidental loss or damages to property owned by third
party.
• The Schedules
Exception to Section 2 – Third Party Liability
• Property insured or insurable under Section I

• Vibration, removal, weakening of support
• Liability for bodily injury to employee/ workmen of insured
parties
• Liability for damage to property belonging to insured parties
• Motor , Marine & Aviation liability
• Contractual liability (Fines, liquidated damages)
PWD Insurance Specimen
A Reminder
Contractors’ All Risks Insurance
Section 1 – Materials Damages

• Works
• Professional Fees
• Removal of Debris
• Constructional Plant
Section 2 – Third Parties Liability

A Reminder
Section 1 Section 2
10M 50M
50M
50M
250M 50M
Employees’ Compensation Insurance
Sub-contractors’ employees are not insured ??

Sub-contractors’ employees are not insured ??

W338 Indemnity to Principal Endorsement
It is hereby understood and agreed that this Policy is extended to

indemnify the Principal named in the Policy (hereinafter called the
Principal) against legal liability ……
NOW THIS POLICY WITNESSETH that if any Employee in the Insured’s

immediate employ shall sustain bodily injury……..
W348 – Witnessing Clause
Any employee in the immediate service of any of the parties jointly

described as the INSURED shall ……
W358 Indemnity to Principal Contractor Endorsement
It is hereby understood and agreed that this Policy is extended to

indemnify the Principal Contractor named in the Policy (hereinafter
called the Principal) against legal liability ……
Some particular provisions
A Reminder
CAR – Section 1
Property All Risks
CAR – Section 2 (Third Party Liability)
Employees’ Compensation
14 /28 days Defects

after Substantial Rectification
Completion Certificate
A Reminder
4 Endorsement Clauses to an ECI policy
W204 – Employees W338 – Indemnity to

of Sub-Contractors Principal
Endorsement Endorsement
W358 – Indemnity to
W348 – Witnessing
Principal Contractor
Clause Endorsement
Endorsement
Bond
Bond
Story Time
有駕駛員的計程車 Types of Taxi
Surety Bond
What is a Surety Bond?
A guarantee issued by a surety agency on behalf of a client,

requiring the agency to pay a sum of money to a third party in
the event the client fails to fulfill certain obligations.
What is a Surety?
A guarantor of payment or performance if another fails to
pay or perform, such as a bonding company which posts a
bond for a guardian, an administrator, or a building
contractor.
Surety Bond
Guarantee
(Employer who requires
a bond)
Surety Bond Building Contract
Counter Indemnity
Surety - Guarantor Contractor
(Company who issues (who is required to
and guarantees a bond) provide a bond)
Surety Bond Types of Bond –
by functions
Bid Tender Bond Advance Payment Bond
Performance Bond Maintenance Bond

Surety Bond Types of Bond – by
calling methods
On-Default /
On-demand Bond Performance Bond
(Unconditional) (Conditional)
The Employer may call The Employer should
the Bond upon prove the non
presentation of a performance was due
written statement to the default of the
stating that the Contractor and the
contractor has failed loss sustained before
to perform they can call the Bond
Surety Bond
Surety Bond
Surety Bond
Seal?
Common Seal
Surety Bond
On-Default Bond or On-Demand Bond

Surety Bond
On-Default / Conditional / Performance Bond

1. On Default by the Contractor
2. The damages sustained by the Employer
Surety Bond
On-Default Bond or On-Demand Bond

Surety Bond
On-Demand / Unconditional Bond

1. Upon demand in writing
Surety Bond
HKIS Standard Form 2005 (w Qty) – Schedule 1
On-Default Bond
Surety Bond
2005 with quantity

– Clause 33
2005 with quantity

– Schedule 1
Surety Bond
2005 with quantity – Clause 33
2005 with quantity – Schedule 1
Remember to use SCC to rectify the discrepancy

Surety Bond
2006 without quantity – Clause 33
2006 without quantity – Schedule 1

A Reminder Forms of Bond
On-demand Bond On-Default Bond

(Unconditional) (Conditional)
A Reminder
Tender
Payment
On-Demand
Performance
Retention
Bond
Tender
Payment
On-Default
Performance
Retention
A Reminder
On-Demand
Tender
On-Default
On-Demand
Payment
On-Default
Bond
On-Demand
Performance
On-Default
On-Demand
Retention
On-Default
Insurance vs Surety Bond
Surety Bond Insurance
• 3-party agreement • 2-party agreement

• Guarantee of • Transfer of risk from
performance contractor to insurer
• Perquisite for • Expectation of claims
interim payment to be paid
• Financial obligation • Financial obligation to
to Contractor Insurer / wrong-doer
Experience Sharing – Case 1
Information to be supplied for an insurance broker for insurance quote
A D&B Contract is about 40 months with about 6
months extension of time.
The Contractor anticipates that some outstanding

works have to be completed during defects liability
period.
The Contractor seeks quotations to cover the

“outstanding works” for about 3 – 4 months beyond
the extended completion date
Current Quote Current Quote
Original Policy End at Difference
CAR/TPL Option 1 - Upto Aug 2015 Option 2 - Upto Sept 2015
XX Nov 2014 [B-A]
[A] [B]
Est. Contract Value 1,400,000,000.00 1,400,000,000.00 1,400,000,000.00 -

TPL Limit 112,000,000.00 112,000,000.00 112,000,000.00 -
Premium 5,670,095.00 1,300,000.00 1,450,000.00 150,000.00
Contract Period ~40 months 279 days 309 days 30 days
Premium / day 4,659.08 4,659.50 4,692.56
Original Policy End at Current Quote Current Quote Difference

ECI
XX Nov 2014 Option 1 - Upto Aug 2015 Option 2 - Upto Sept 2015 [B-A]
Est. Contract Value 1,400,000,000.00 1,400,000,000.00 1,400,000,000.00 -

Outstanding Value for insurance coverage 1,400,000,000.00 180,000,000.00 180,000,000.00 -
Premium (Quoted + Levy) 10,761,633 + Levy 1,500,000 + Levy 1,500,000 + Levy -
Premium with Levy value 11,923,889.36 1,662,000.00 1,662,000.00 -
Contract Period ~40 months 279 days 309 days 30.00
Premium / day 9,797.77 5,956.99 5,378.64 (578.35)
Premium / Outstanding Value 0.859% 0.923% 0.923%
Levy = 10.8%
Premium Required
CAR / TPL 5,670,095.00 1,300,000.00 1,450,000.00 150,000.00
ECI 11,923,889.36 1,662,000.00 1,662,000.00 -
Total Premium Required (Estimate) (HK$) 17,593,984.36 2,962,000.00 3,112,000.00 150,000.00
Premium / day 14,456.85 10,616.49 10,071.20

Premium $17.6M covers Extra $3.11M

$1.4B CAR and ECI
Extra
$2.9M
Commencement Completion Aug Sept

Date Date
Extended
Completion Date
Even if you insure and pay the full premium for whole
contract works, you have to pay EXTRA PREMIUM to:
1. Extend your coverage period to the extended

completion date (at least)
2. Extend the insurance to cover ‘outstanding works’
unless only defects rectification works to be done
during the defects liability period
Insurance Company will not consider the already paid
premium for those outstanding works in the original
contract.
Premium
for CAR
Work Value
Duration
Premium
for ECI
Duration
Work Value
Disclaimer Note
This set of notes has been prepared according to the author’s own
experience of the relevant practice and is intended for information
only. No responsibility for loss occasioned to any person acting or
refraining from action occasioned by or as a result of any material
included will be accepted by the author or its company.
The materials and information contained herein are not intended to

offer or provide any insurance / legal advice concerning the topics
covered. Please consult your insurance company / brokers where
necessary.
Copyright in all or part of this set of notes rests with the author and
no part or parts of the material herein shall be reproduced in any
form or by any means electronic, mechanical, photocopying
recording or otherwise without prior consent of the author.

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Insurance and Bond

Sr. Kenny Lui

Both insurances are to be in the joint names of the

The Employees’ Compensation Insurance is to be taken

The Third Party insurance shall cover the Employer’s

The period of cover is to run from the Commencement

The insurer chosen by the party taking out the

The remedy for a party defaulting in taking out the

The conditions for using an annual policy (Clause 22A.3)

Employers are required

(b) ……due to breach of contract or other

A clever lawyer bought a pack of (24) cigars and had them

The insurance company correctly assumed that he had

The judge however force the insurance company to pay

The insurer was obligated to pay

After the lawyer cashed the cheque, the

The lawyer was convicted of

Lesson Learnt from the story:

1. Do not abuse the insurance protection.

2. Insurance company can sue the wrong doer

For example, when an insurance company compensates a

Party A Causes Damage Party B

A party named under an insurance policy can make claims

This means that the insurer agrees not to seek to recover

This means that one individual that is covered by the

Read more: http://www.finweb.com/insurance/what-is-an-insurance-cross-liability-

Employer, Main Contractor, Sub-Contractors

Joint Names with Cross Liability Clause

Policy without Cross Liability Clause

Insurance Company Policy with Cross Liability Clause

Employers should carefully assess the level of the

Excessive deductibles could lead to a risk being effectively

Inflation can also cause the contractor to be under-

Contractor Insurance Company

Contractor Insurance Company

Employee’s Contractor’s All Risks

Professional Property All

1.1 THE INSURERS HEREBY AGREE subject to the terms, exceptions

* SRCC - Strikes, Riots, and Civil Commotion

• Consequential loss of any kind

Bodily injury & Property Damage

Where the Insured becomes legally liable to pay as

• Property insured or insurable under Section I

Section 1 – Materials Damages

Section 2 – Third Parties Liability

Sub-contractors’ employees are not insured ??

Sub-contractors’ employees are not insured ??

W338 Indemnity to Principal Endorsement

It is hereby understood and agreed that this Policy is extended to

NOW THIS POLICY WITNESSETH that if any Employee in the Insured’s

W348 – Witnessing Clause

Any employee in the immediate service of any of the parties jointly

W358 Indemnity to Principal Contractor Endorsement

It is hereby understood and agreed that this Policy is extended to

CAR – Section 2 (Third Party Liability)

14 /28 days Defects

W204 – Employees W338 – Indemnity to

A guarantee issued by a surety agency on behalf of a client,

Surety Bond Building Contract

Bid Tender Bond Advance Payment Bond

Performance Bond Maintenance Bond

On-Default Bond or On-Demand Bond

On-Default / Conditional / Performance Bond