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.

Risk and Insurance

Protection against loss, damage and liability is required at every stage of construction – from conceptualisation and design to implementation, handover and operation, comprehensive insurance coverage is imperative. This is because the inherent risks associated with construction projects are numerous and substantial. Determining which party is responsible for which type of insurance cover in a project involving several contractors and sub-contractors is fundamental to the protection of the parties and the project.

In order to determine the incidence of risk in a construction project, the works contract must be considered. The works contract is entered into by parties with the intention of creating legally enforceable obligations, including the works to be done by the parties, the period for completion, the payment terms and the standards agreed upon. A works contract is usually entered into between an Employer and Contractor, or a Contractor and Sub-contractor. The works contract may be a standard form works contract (with special or particular conditions / contract data) or a bespoke contract.

In South Africa, standard form works contracts include the General Conditions of Contract for Construction Works (GCC), the New Engineering Contract (NEC), the Fédération Internationale Des Ingénieurs-Conseils (FIDIC) Conditions of Contract and the Joint Building Contracts Committee (JBCC) Contract (for building works). Standard form works contracts are then modified by parties to provide for the specific terms and conditions of the project.

Insurance in Works Contracts

The works contract typically includes the party responsible for taking out and maintaining the required insurance, as well as the minimum insurance coverage required.

Certain clauses are indicative of the incidence of risk and provide for each party’s obligations in respect of insurance. Such clauses include:

Types of Insurance in Construction

The works contract and the clauses highlighted above will stipulate the 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 for Works, Plant, Materials and/or Equipment

Insurance against liability for any loss of or damage to the works, plant, equipment, materials and/or contractor’s documents. This may include insurance for the removal of debris, the costs of demolition and cover of hired equipment.

Third Party Insurance /

Insurance against Injury to or Death of Persons and Damage to Property

Insurance against liability for any loss, damage, death or bodily injury which may affect any third party or occur to any property arising out of the Contractor’s performance of the works contract.

Employer’s Liability Insurance

Insurance against liability for claims, damages, losses and expenses arising from sickness, disease, injury or death to the Contractor’s employees in the course and scope of their employment.

Political Risk Insurance

Insurance against liability for loss or damage to the works, plant and equipment due to incidents such as strikes, riots, public disorder, 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.

Professional Liability Insurance

Insurance against liability for legal costs and expenses incurred due to allegations of professional misconduct and negligence. PI Insurance will often also cover damages payable following negligence. In construction projects, PI Insurance is usually required by professionals such as engineers, project managers, architects, land surveyors and quantity surveyors.

Construction / Performance Guarantee

Insurance obtained by the Contractor or Sub-contractor to the benefit of the Employer guaranteeing the Contractor or Sub-contractor’s performance of its obligations under the works contract and 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:

Environmental Insurance

Insurance against liability for third party bodily injury, damage to property, clean-up operations and legal expenses due to pollution conditions including legacy environmental issues, site contamination and/or exposure to hazardous materials arising prior to or during construction.

Temporary Lateral Support Insurance

Insurance against liability for physical damage to adjacent property or for injury to third parties resulting from the removal of support from the site or the weakening of support due to construction activities.

Advance Loss of Profit Insurance /

Delayed Completion Coverage

Insurance against liability for delays due to physical damage caused by an insured peril. If the interference with the construction or testing affects the project milestones and causes delays in the project, indemnifiable costs are 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 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.