Course title.
Project risk management
Section D
Group 3
Name ID No.
1. Habtamu Desalegn……………………………….………….MAPM(1)267/14
2. Tariku Yalew………...……………………………………... MAPM(1)266/14
3. Abeba G/kidan ……………………………………. MAPM(1)034/14
4. Bethelhem Tegegn……………………………………………MAPM(1)007/14
5. Askale Banjaw………………………………………………..MAPM(1)006/14
6. Alemu Geletew…………...……………………………………MAPM(1)173/14
7. Johnson Kelta Mega…………...……………………………….MAPM(1)062/14
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Contents
Introduction .................................................................................................................................................. 3
Types of Insurance in Construction .......................................................................................................... 3
Benefits of insurance to projects .................................................................................................................. 5
What Is an Insurance Premium? ............................................................................................................... 8
How Much Is an Insurance Premium? ..................................................................................................... 8
How to Calculate Insurance Premiums .................................................................................................... 8
How to Lower Your Premiums .................................................................................................................. 9
What’s an insurance premium? .............................................................................................................. 10
How much are insurance premiums? ..................................................................................................... 10
Does a higher insurance premium mean better insurance? .................................................................... 10
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Introduction
Insurance is a specific form of contractual agreement, typically regulated by state statutes, under
which the insurer agrees to defend the insured against certain claims and/or pay certain losses. In
the case of liability policies, such losses are those incurred by third parties. Consequently,
liability coverage is frequently referred to as third-party coverage. In the case of casualty
insurance, the losses are those incurred by the insured. Thus, casualty coverage is frequently
referred to as first-party coverage. In either case, however, the contract of insurance is an
obligation by a third party who does not control or participate in the risk being insured. Thus,
casualty coverage is frequently referred to as first-party coverage.
In either case, however, the contract of insurance is an obligation by a third party who does not
control or participate in the risk being insured. Indemnification, on the other hand, is typically a
contractual provision between parties whose conduct or agreement create the risk being
indemnified. For example, in a sales contract, the agreement might provide for the seller to
indemnify the purchasers against certain fees or costs assessed against the purchaser. Likewise,
in construction contracts, the contractor may be required by an indemnification clause to
indemnify the owner for losses incurred by the owner as a result of the negligence of the
contractor or its subcontractors. Thus, in cases of indemnification, the parties to the
indemnification agreement typically create, control, or are subject to the risk of loss.
Types of Insurance in Construction
Various types of insurance policies which must be taken out by a party. A common requirement
is the approval of the insurance terms by the Employer and the provision of copies of the
insurance policies to the Employer, which the Contractor is to obtain, to ensure that adequate
insurance is in place. Insurance policies may be once off or annual, depending on the works
contract requirements, the type of insurance required and the purpose for the insurance, among
other variables.
Although there are many types of insurance coverages relevant to the construction industry,
works contracts commonly require the following insurance coverage:
Insurance against liability for any loss of or damage to the works,
Insurance for Works,
plant, equipment, materials and/or contractor’s documents. This may
Plant, Materials and/or
include insurance for the removal of debris, the costs of demolition
Equipment
and cover of hired equipment.
Third Party Insurance /
Insurance against Insurance against liability for any loss, damage, death or bodily injury
Injury to or Death of which may affect any third party or occur to any property arising out
Persons and Damage to of the Contractor’s performance of the works contract.
Property
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Insurance against liability for claims, damages, losses and expenses
Employer’s Liability
arising from sickness, disease, injury or death to the Contractor’s
Insurance
employees in the course and scope of their employment.
Insurance against liability for loss or damage to the works, plant and
equipment due to incidents such as strikes, riots, public disorder,
Political Risk Insurance politically-motivated malicious attacks and terrorism. In South Africa,
special risks insurance is issued by the South African Special Risks
Insurance Association (SASRIA), a public enterprise.
Insurance against liability for legal costs and expenses incurred due to
allegations of professional misconduct and negligence. PI Insurance
Professional Liability will often also cover damages payable following negligence. In
Insurance construction projects, PI Insurance is usually required by professionals
such as engineers, project managers, architects, land surveyors and
quantity surveyors.
Insurance obtained by the Contractor or Sub-contractor to the benefit
Construction / of the Employer guaranteeing the Contractor or Sub-contractor’s
Performance performance of its obligations under the works contract and
Guarantee indemnifying the Employer against damages as a result of non-
performance.
The works contract may also require special insurance to protect against specific risks. Special
insurance is usually required until the date of practical completion, although this would be
specified in the works contract. Examples of special insurance include:
Insurance against liability for third party bodily injury, damage to
property, clean-up operations and legal expenses due to pollution
Environmental
conditions including legacy environmental issues, site contamination
Insurance
and/or exposure to hazardous materials arising prior to or during
construction.
Insurance against liability for physical damage to adjacent property or for
Temporary Lateral
injury to third parties resulting from the removal of support from the site
Support Insurance
or the weakening of support due to construction activities.
Advance Loss of Insurance against liability for delays due to physical damage caused by an
Profit Insurance / insured peril. If the interference with the construction or testing affects the
Delayed Completion project milestones and causes delays in the project, indemnifiable costs are
Coverage payable to the insured party.
The inclusions and exclusions of the various insurance policies described above will vary
depending on the requirements of the project and the terms and conditions of the works contract.
Building Comprehensive Insurance Plans
A comprehensive insurance plan, including the insurances required in the works contract and any
special insurance, is a good risk management solution. To ensure full compliance with
obligations in the works contract and adequate insurance for the works and ancillary risks, the
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suite of contracts for the construction project and the insurance policies must align. The
importance of establishing an insurance strategy early on (prior to conclusion of the works
contract) cannot be understated – the risks are simply too great.
Benefits of insurance to projects
The major social and economic benefits of insurance include the following:
■ Indemnification for loss
■ Reduction of worry and fear
■ Source of investment funds
■ Loss prevention
■ Enhancement of credit
Indemnification for loss
Indemnification permits the project owner and/or contractor to remain in project endeavor and
project teams to keep their jobs. Suppliers continue to receive orders, and customers receive the
goods and services they desire. In short, the indemnification function contributes greatly project
stability and therefore is one of the most important social and economic benefits of insurance.
Reduction of Worry and Fear
a second benefit of insurance is that worry and fear are reduced. This is true both before and
after a loss. For example, property owners who are insured enjoy greater peace of mind because
they know they are covered if a loss occurs. Worry and fear are also reduced after a loss occurs,
because the insured know that they have insurance that will pay for the loss.
Source of Investment Funds
The insurance industry is an important source of funds for capital investment and accumulation.
Premiums are collected in advance of the loss, and funds not needed to pay immediate losses and
expenses can be loaned to business firms. These funds typically are invested in shopping centers,
hospitals, factories, housing developments, and new machinery and equipment. The investments
increase society’s stock of capital goods, and promote economic growth and full employment.
Loss Prevention
Insurance companies are actively involved in numerous loss-prevention programs and also
employ a wide variety of loss-prevention personnel, including safety engineers and specialists in
fire prevention, occupational safety and health, and products liability. The loss-prevention
activities reduce both direct and indirect, or consequential, losses. Society benefits, because both
types of losses are reduced.
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Enhancement of Credit
A final benefit is that insurance enhances a person’s credit. Insurance makes a borrower a better
credit risk because it guarantees the value of the borrower’s collateral or gives greater assurance
that the loan will be repaid.
Insurance policies for projects
Contractors insurance refers a group of policies that cover risks contractors typically covers.
Insurance providers don’t offer a policy called contractors insurance. They sell individual
policies, like general liability, commercial property, and builder’s risk, and you select the
policies that best fit your operations. Many providers bundle contractors insurance into a
business owner’s policy (BOP). That way, they can offer important coverage at a discounted
rate.
BOPs typically include:
General liability and
Commercial property insurance.
General liability insurance
General liability insurance for contractors covers third party lawsuits over property damage,
bodily injury, and advertising injuries. A third party is essentially anyone who doesn’t work for
you. That may include delivery people, visitors to your worksite or business, and clients. If
someone claims you’re responsible for their damages, general liability covers your
defense.
Commercial property insurance
Commercial property insurance covers the value of your business property, like your workroom
and the tools, furnishings, and fixtures in it. When these items are damaged by a covered event,
your insurer pays you the insured value so you can replace or repair them. Commercial property
usually covers items loaned to your business too.
Workers’ compensation insurance
Workers’ compensation insurance is a state-mandated coverage that comes in two parts. Part
one pays lost wages and medical bills of employees injured on the job. It also pays benefits to
survivors when an employee dies on the job. Part two covers the employer’s liability by paying
legal costs if the employee sues for negligence.
Commercial auto insurance
Commercial auto insurance is a necessity if your contractor business owns vehicles. Much like
personal auto insurance, commercial auto has liability coverage to pay for other people’s damage
and injuries when you’re responsible. You can also get coverage for your car’s damage, your
medical bills, and accidents with uninsured motorists.
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Professional Liability Insurance
Sometimes called contractors errors and omissions, professional liability insurance covers
lawsuits over mistakes made by you and your employees. It pays for your defense should a client
claim a financial loss due to your professional negligence. For instance, if a client sues for
shoddy or incomplete work, professional liability covers lawyers’ bills and awards against you.
Insurance Costs for projects
Cost of insurance is a fee associated with certain types of life insurance, such as variable and
universal life insurance. Different from premiums, these charges are billed to pay for
administration, mortality and other responsibilities of the insurer. The amount is largely
determined by the risk class and age of the policyholder.
Age is a large factor for insurance companies as older people tend to be at higher risk of illness
and a shorter life expectancy. In fact, age is so important that many life insurance companies
underwrite based on age alone.
Younger applicants may only need to answer a short health questionnaire online while older
applicants need to submit a doctor’s letter or submit to a medical exam prior to securing
insurance.
The medical questionnaire will ask for common risk factors such as pre-existing illnesses, history
or dangerous medical conditions like heart attack or stroke, and family history for illnesses like
cancer, heart disease, or diabetes.
The main cost of contractors insurance is the combined annual premium of their various
insurance types. The amount usually depends on coverage amounts, annual revenue, types of
jobs, and other factors. Some policies also require out-of-pocket deductibles, which add to
projects overall insurance cost. General liability typically doesn’t require a deductible; however,
some insurers may include one for the construction industry.
Contractor’s insurance costs vary widely. That’s because insurers consider a number factors
when calculating the premium. Your costs may be significantly different depending on
your specific profession, the size and types of jobs you take, and what your insurer can offer you
for your unique situation.
Cost of insurance charges tend to increase as a life insurance policyholder gets older. This is
largely because as the policyholder ages, the more likely they are to die and thereby require the
insurer to pay out a death benefit.
Age is such an important factor that many policies are priced purely on age. All things being
equal, an older person will always pay more for insurance due to their shorter life expectancy.
Older individuals trying to get life insurance for the first time may also be required to sit a
medical exam or provide a doctor’s note.
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Another factor that can impact your cost of insurance is your health. If your medical records
show that you are in poor health (ie. had a stroke, suffer from heart disease or diabetes) or are at
higher risk of poor health your costs will be higher. Common risk factors here include body
weight, medical history, family history, and smoking habits.
Your occupation and hobbies also play a big role in determining your cost of insurance. People
in dangerous occupations like roofing, manual labor, stuntmen, miners, etc. are more likely to die
than people working low-risk jobs sitting at a desk. Similarly, policyholders who have a fondness
for dangerous activities like skydiving should expect a higher cost of insurance.
Another small but important factor is gender. Women generally have longer life expectancies
than men and therefore represent a lower risk to insurers. As a result, they typically can expect to
pay 10-25% less for health insurance.
Cost of insurance fees are typically charged on a monthly basis.
What Is an Insurance Premium?
Insurance Premium is the cost, when you have an insurance policy, the company charges you
money in exchange for that coverage. That cost is known as the insurance premium. Depending
on the insurance policy, you might pay the premium each month or on a semiannual basis. In
some cases, you might be required to pay the full amount up front, before coverage starts.
Most insurance companies offer a variety of ways to pay your bill, including online options,
automatic payments, credit and debit cards, checks, money orders, cashier’s checks, and bank
drafts. You may qualify for a discount if you sign up for paperless billing options or if you pay
the full amount all at once instead of making minimum payments.
How Much Is an Insurance Premium?
There’s no set cost for insurance premiums. You could have the same car as your neighbor and
end up paying more (or less) for insurance—even with the exact same coverage. It pays to shop
around and compare prices and policies.
You’ll pay more for “better” coverage. For example, a health insurance policy with a $1,000
deductible will be pricier than one with a $5,000 deductible. Similarly, a car insurance policy
with a $0 deductible will be more expensive than a policy with a $500 one, all other factors
being the same.
Still, that doesn’t mean you should automatically go for the cheapest policy just to save money.
It’s essential that you consider your situation—and the likelihood that you’ll need to use that
policy—when choosing the plan that will work best for you.
How to Calculate Insurance Premiums
Insurance companies consider several factors when calculating insurance preYour
age. Insurance companies look at your age because that can predict the likelihood that
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you’ll need to use the insurance. With health insurance, younger people are less likely to
need medical care, so their premiums are generally cheaper. Premiums increase as
people age and have a higher chance of needing more medical services. And teenage
drivers are still working on building experience, so their auto insurance is more
expensive. Likewise, older drivers—who tend to have slower reflexes—will also pay
more.
The type of coverage. In general, you have several options when you buy an insurance
policy. The more comprehensive the coverage that you get, the more expensive it will
be. For example, if you have an auto insurance policy that covers liability only, it will be
cheaper than if you have a plan with collision, comprehensive, liability, medical
payments, and uninsured/underinsured motorist coverage.
The amount of coverage. The less coverage, the cheaper the premiums—no matter
what you’re insuring. For example, if you buy health insurance, you’ll pay lower
premiums for the same type of coverage if you have a higher deductible and a higher
out-of-pocket maximum. Similarly, it will cost more to insure a $400,000 home than a
$200,000 home.
Personal information. Depending on the type of insurance for which you’re shopping,
the insurance company may take a close look at things like your claims history, driving
record, credit history, gender, marital status, lifestyle, family medical history, health,
smoking status, hobbies, job, and where you live.
Actuarial tables. Most insurance companies employ actuaries—business professionals
who assess the risk of financial loss, using mathematics and statistics to predict the
likelihood of an insurance claim, based on much of the aforementioned criteria. They
typically produce something called an actuarial table that is provided to an insurance
company’s underwriting department, which uses the input to set policy premiums.
95%
The percentage of car insurance companies that consider credit ratings when calculating
insurance premiums.
How to Lower Your Premiums
Insurance companies are all about risk assessment. The higher the risk, the higher the
premiums. Still, there are ways to lower your premiums.
One way is to bundle your insurance. For example, if you have your auto, home, and life
insurance policies with one company, then you’ll probably qualify for a discount.
Of course, you can save money if you reduce your coverage (e.g., increase your deductible);
however, that’s not always a good choice. Consider your situation and the likelihood that you’ll
use the policy before making any decisions.
There are other ways to save on your premiums, but they take more of a commitment. For
instance, most states charge smokers up to 50% more than nonsmokers for health insurance
policies. As an example, if you’re a smoker paying $600 a month for health insurance, you
might be able to reduce your premium to, say, $400 if you quit smoking.
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Another example: You may qualify for lower auto insurance rates if you improve your credit
score. That’s because people with lower credit scores are, statistically speaking, more likely to
file a claim.
What’s an insurance premium?
Your insurance premium is the monthly amount that you pay to maintain coverage by an
insurance company. Depending on the plan, you may have the option to pay monthly, quarterly,
or annually. Some plans require you to pay up front before coverage starts.
How much are insurance premiums?
Insurance premiums vary based on the coverage and the person taking out the policy. Many
variables factor into the amount that you’ll pay, but the main considerations are the level of
coverage that you’ll receive and personal information such as age and personal information. For
car insurance, that could mean age and driving record. For health insurance, it could be based
on personal habits such as smoking or on preexisting conditions.
Does a higher insurance premium mean better insurance?
Not necessarily. Because so many variables go into determining your premium, your premium
may be higher than someone else’s for the exact same coverage. Typically, you’ll pay a higher
premium for more extensive coverage, such as a lower deductible, or for more added services,
such as roadside assistance or rental car coverage.
How can I lower my insurance premiums?
The most foolproof way to lower your premiums is by choosing a lower level of coverage. If
you like the coverage that you have, consider bundling—combining several different types of
insurance—to qualify for multi-policy discounts. For health insurance, some companies offer
incentives to build healthy habits, such as getting a yearly health assessment or trying to quit
smoking. Some car insurance companies will also lower your premiums based on a good
driving record or credit score.
The Bottom Line
Several metrics factor into the price of an insurance premium, including age, state and county of
residence, and amount of coverage. You cannot change your age, obviously, but you can take
advantage of incentives to lower the cost by, for example, quitting smoking or improving your
credit score. Whether or not you bundle your insurance, change a health habit, or improve
financial picture, it always pays to shop around. That way, you can find the best insurance
policy at a price that you can afford.
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Insurance is a vital risk mitigation tool in construction projects. Whether insurance is taken out
due to a statutory, regulatory or contractual requirement or as an additional measure of
protection, parties cannot afford to go without it.
In this bulletin, we consider the role of insurance, important insurance considerations and
common types of insurance cover in construction projects.
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