Risk and Insurance

BY: Gyanendra P Kayastha

Content

 Risks and their Allocation

 Contractual provisions for Works and
Goods Contract
 Insurance practices

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Risk
 Risk is “the combined effect of occurrence
of an undesirable events, and the
magnitude of the event”. (British Standard no.
4778)
 Insurance: A loss-sharing mechanism that guards
the policy holder from damages that may be
incurred in the future.
Identification of Risk Elements
 the Invitation to Bid
 the contract documents
 design, drawings, specifications
 related laws/regulations, codes
 local labor conditions- quality, availability, local
unions
 historical weather reports
 geological/sub-soil investigation reports
 schedule requirements
 local sociological and political situation reports
 etc.
 Duty, Responsibility, Liability & Indemnity

Duties of the
Risks in
Contracting Responsibility Liabilities Indemnity
Performance
parties

As defined in Towards Through

Unlimited
Limited
Code of ethics

Self insurance
Other party

employees
Involved in
Contract

Amount
Society

project

Scope

Insurer
Period
Own

Self
Flow of Risk into Responsibility, Liability and
insurance indemnity
Risk in Construction

Loss of life and Material/plant/equipment Loss of Time and other

Personal injury Damage Consequential losses
Others associated

Professional team
Property of Others
temporary works

Plant, equipment

Owner/employer
and machinery
Permanent and

Contractor and
Subcontractor
Third parties
Third parties
with project

with project

Property of
associated
Property of
Employer
Employer

Responsibility for each risk is defined and allocated

Liability for each risk is defined and allocated

Insurance
 Allocation of Risks

Responsibility is allocated

In accordance with

CONTROL of the risks ABILITY to INABILITY

Or INFLUENCE Perform a task To accept certain
Over their effect Of the project risks

To the To the

Contractor,
Designer /other Owner
Supplier, Society
Professionals (Employer)
Manufacturer
Insurance Requirement
 Works, Plants, Materials
 Contractor’s Equipment, Machinery
 Personnel
 Contractor Personnel
 Third Party Persons
 Employer’s Personnel

 Property
 Third Party’s Property
 Employer’s Property
Prevailing Contracts in Nepal

 NCB- PPMO Contract

 ICB- FIDIC Contract
PPMO NCB Contract

 Contractor to supply Policies and

certificates for insurance before Start date
 Policies to be approved by- Project
Manager
 Currency types and proportion- same as
currencies required to rectify the Loss or
damage incurred (currencies payment)
PPMO Contract
 If the Contractor does not provide any of
the policies and certificates required, the
Employer may effect the insurance which
the Contractor should have provided and
recover the premiums the Employer has
paid from payments otherwise due to the
Contractor or, if no payment is due, the
payment of the premiums shall be a debt
due.
 FIDIC 87/99/06 have similar provision
 PPMO Contract: NCB- Works
Stipulations Remarks
Period: Start Date to End of DLP
Loss of or damage to the Works, Plants and To cover all works, plant,
Materials materials under the contract
Loss of or damage to Equipment To cover Cr’s Plant, Equipment
Loss of or damage to Property (except the To cover
works, Plant, Materials and Equipment) in •Third Party Property
connection with the Contract •Employer’s Property
Personal Injury or death To Cover
i.For Contractor’s employees is that specified in i)Compensation for Cr’s worker
the Labour Act of Nepal according to Labor Act of Nepal
ii)Other People
ii.For other people with an unlimited number of a) Third Party
occurrence: b) Employer’s Employees
 FIDIC Contracts
18.2 Insurance for Works and
Contractor’s Equipment
The insuring Party shall insure the Works, Insuring Party: the
Plant, Materials and Contractor’s Contractor
Documents for not less than the full Coverage: Works, Plant,
reinstatement cost including the costs of Materials and Contractor’s
demolition, removal of debris and Documents
professional fees and profit. This Amount: Full Reinstatement
insurance shall be effective from the date cost plus cost of
by which the evidence is to be submitted Demolition, removal of
under sub-paragraph (a) of Sub-Clause Debris and Professional
18.1 [General Requirements for Fees and Profit
Insurances], until the date of issue of the Period: until the date of issue
Taking-Over Certificate for the Works. of the Taking Over
Certificate
FIDIC Contracts
18.2 Insurance for Works and Contractor’s Equipment
a. shall be effected and maintained by the Contractor a. The Contractor
as insuring Party,
b. shall be in the joint names of the Parties, who shall b. Joint names of
be jointly entitled to receive payments from the The Contractor
insurers, payments being held or allocated to the and the Employer
Party actually bearing the costs of rectifying the
loss or damage, c. Should cover
c. shall cover all loss and damage from any cause not other than listed in
listed in Sub-Clause 17.3 [Employer’s Risks ], 17.3 Employer
d. shall also cover, to the extent specifically required risks (may include
in the bidding documents of the Contract, loss or Strike, lock out,.
damage to a part of the Works which is attributable …)
to the use or occupation by the Employer of another
part of the Works, and loss or damage from the risks
listed in sub-paragraphs (c), (g) and (h) of Sub-
Clause 17.3 [Employer’s Risks ], excluding (in each
case) risks which are not insurable at commercially
reasonable terms
 FIDIC Contracts
17.3 Employer’s Risks
(a) war, hostilities (whether war be declared or not), invasion, act of Strike,
foreign enemies, Lock-out;
(b) rebellion, terrorism, sabotage by persons other than the Contractor’s
Personnel, revolution, insurrection, military or usurped power, or civil
war, within the Country,
(c) riot, commotion or disorder within the Country by persons other than
the Contractor’s Personnel,
(d) munitions of war, explosive materials, ionising radiation or
contamination by radio-activity, within the Country, except as may be
attributable to the Contractor’s use of such munitions, explosives,
radiation or radio-activity,
(e) pressure waves caused by aircraft or other aerial devices travelling at
sonic or supersonic speeds,
(f) use or occupation by the Employer of any part of the Permanent
Works, except as may be specified in the Contract,
(g) design of any part of the Works by the Employer’s Personnel or by
others for whom the Employer is responsible, and
(h) any operation of the forces of nature which is Unforeseeable or
against which an experienced contractor could not reasonably have
been expected to have taken adequate preventive precautions.
FIDIC Contracts
18.3 Insurance against Injury to Persons and
Damage to Property
The insuring Party shall insure against each Party’s
liability for:
any loss, damage, death or bodily injury which may
occur
: to any physical property (except things insured
under Sub-Clause 18.2 [Insurance for Works and
Contractor’s Equipment]) or
:to any person (except persons insured under Sub-
Clause 18.4 [Insurance for Contractor’s Personnel]),
which may arise out of the Contractor’s performance
of the Contract and
occurring before the issue of the Performance
Certificate
FIDIC Contracts
18.4 Insurance for Contractor’s Personnel
The Contractor shall effect and maintain insurance against liability
for claims, damages, losses and expenses (including legal fees and
expenses) arising from injury,
sickness, disease or death of any person employed by the
Contractor or any other of the Contractor’s Personnel.

The insurance shall cover the Employer and the Engineer against
liability for claims, damages, losses and expenses (including legal
fees and expenses) arising from injury,
sickness, disease or death of any person employed by the
Contractor or any other of the Contractor’s Personnel, except that
this insurance may exclude losses and claims
to the extent that they arise from any act or neglect of the Employer
or of the Employer’s Personnel.

The insurance shall be maintained in full force and effect during the
whole time that these personnel are assisting in the execution of the
Works. For a Subcontractor’s
employees, the insurance may be effected by the Subcontractor, but
the Contractor shall be responsible for compliance with this Clause.
FIDIC 99/06 (sub-clause 18)
 Policy approved by Employer
 insuring party- Contractor
 Joint name
 Should insure- works, plants, materials and
contractor’s documents for full value of
reinstatement cost including cost including the
cost of demolition, removal of debris, and
professional fees and profit.
 Contractor’s personnel
 Period- From the Start Date –taking over
certificate
 DLP
FIDIC 99/06
 Insurance against injury to persons and
Damage to property
 For other than insurance of works and
contractor’s equipment
 For other than insurance for Contractor’s
personnel (Employer’s personnel????)
 Insurance amount per occurrence with
unlimited number of occurrence should be
stated in the Appendix.
PPA/PPR provisions
 Works:
 Insurance mandatory for project value more
than 1 million NRs
 Full establishment cost of Materials,
Plant/equipment, Machinery,
 Professional fees/clearance of debris, etc.:
15 % of establishment cost
 Goods:
 110 % of CIP from source to destination
 War, strike, fire risk to be covered
Labor Act Nepal
Relevant to Insurance:
 Accident Insurance: The Proprietor shall have to insure
all workers engaged in the construction site against
accident in the way as prescribed.
 Compensation: In case any worker or employee of the
Enterprise is physically wounded or seriously hurt or dies
in course of his/her work, the compensation shall be paid
to him/her or to his/her family, as prescribed.
Labor Act Nepal
Relevant to Insurance:
 Injury
 Disability
 Death
 Employee
 Daily worker
 Contracted staff
Insurance Practices:
What can be insured?
 Civil Engineering Projects like Hydro
Power Projects, Road, Bridge, Irrigation
Projects, Dwelling Houses, Multistoried
Buildings, Office Buildings, Warehouses,
Hospitals, Schools can be insured under
Contractor’s All Risk Policy.
Insurance Practices:
Coverage Sections

 Section 1 : Material Damage

 Section 2 : Third Party Liability
Insurance Practices:
Section –1: Material Damage
 This Section Covers loss to the insured
Property stated in the schedule due to
Accidental means stated in the policy.
 The cost of clearance and removal of
debris can also be included in the policy
which will reimburse the cost incurred
for removal of debris in case of any
damage to the insured property . The
loss is compensated in case the claim
is admissible.
Insurance Practices:
Peril Cover
 Fire,Lightning, Explosion
 Flood, Inundation
 Windstorm of any kind
 Earthquake
 Landslide, Rockslide, Mudslide
 Bad workmanship, Lack of skill,
Negligence, Human error etc.
Insurance Practices:
Peril Covered Continued
 Theft and Burglary
 Collapse, Impact Damage
 Riot and Strike Damage
 Malicious Damage
 Sabotage and Terrorism
Insurance Practices:
Policy Extension
 Maintenance Period or Defect Liability
Period
 Escalation of Project Cost
 Extra Charges for Overtime, Night work,
Freight etc.
 Camp Facilities etc.
Insurance Practices:
Exclusion
 The amount shown as Excess in Policy
Schedule
 Loss Discovered at the time of inventory
 Normal Wear and tear, rusting etc.
 The Cost of Correction of any errors during
Construction unless resulting in Physical
Damage.
 Loss Damage due to Faulty Design
 War and Warlike perils
 Willful acts or willful negligence
 Nuclear reaction or Radiation
Insurance Practices:
Sum Insured

 Sum insured is required by the policy to

be equal to the estimated completely
erected value of the contract works
inclusive of Materials, Wages,
Construction cost, Freight, Custom
Duty and items supplied by the
Principal.
Insurance Practices:
Section – 2: Third Party Liability

 The section covers to legal liability of

the insured to pay compensation for
accidental loss of or damage to
property of others persons and/or fatal
or non-fatal injury to any person
subject to the limit of indemnity
specified in the schedule.
Insurance Practices:
Third Party Liability: General Exclusions
 Liability for bodily injury to employee or
workmen of the insured of any other firm
connected with the project or member of their
families.
 Loss or damage to property belonging to or
held in the custody of the insured of any firm
connected with the project.
 Liability following an accident caused by
vehicle license for road use.
 Liability assumed by special Contract.
Insurance Practices:
Pricing
 Location
 Soil / Rock Condition
 Flood Records etc.
 Re-insurance Market Capacities
 Political Situation
Insurance Practices:
Reinsurance
 Market Hardening
 Terms Dictated by Re-insurers
 High Deductibles
 Terrorism Issue
 Time Factor
 Escalation Factor
Relevant Laws

 Insurance Act- 2049 BS (insurance can

be done with the company registered in
Nepal only; Local insurance company is
required for RI)
 Labor act- 2048 BS (Medical insurance as
per the act cannot be covered from
insurance)
Construction Risks Questionnaire
1. (a) Title of Project; (b) Location of Project
2. Full Contract Value (broken down into major sections of
work) – also include ‘free issue’ or other materials not
included in the final contract value but for which cover is
required.
3. Period of contract and Maintenance (if any) and
commencement date if known
4. Brief details of project including method o construction,
materials etc. and details of any foundation work,
excavation, blasting, etc. Attach a copy of the contract
specification/feasibility study if possible.
5. Please attach the following :
1. Overall contoured site plan – showing contract site, storage and
work areas
2. Construction schedule bar chart
3. Location Map
4. Photographs (if available)
Construction Risks Questionnaire
6) Parties to be insured :
1) Contractors
2) Employer and any other parties to be included and extent of
interest
7) Is cover required in respect of :
(a) (i) Construction Plant and Equipment. If so, we will
require values and descriptions of items involved,
indicating which are static and which are mobile.
ii) Temporary buildings. If so, of what materials are they constructed
and what is there value.
Are contents to be insured and if so, to what value ?
(b) Third Party Limit of Liability
(c) Tests, trial operation – if so nature and periods involved,
interests to be insured.
Construction Risks Questionnaire
8. Past experience of the contractor(s) in this class of work
(including brief details of previous similar contracts
undertaken).
9. What work is to be sub-contracted and to whom and
what is its value.
10. Will sub-contractors be required to maintain their own
insurances or will cover be required for them under the
insurance requested.
11. Details of the contracts conditions relating to the
responsibility for the works particularly maintenance
responsibilities and any special indemnities or insurance
requirements.
12. Relevant meteorological and/or geological data,
flood/earthquake exposure, violent weather conditions,
cyclones, bore hole readings, level of water-table, mine
working or underground water courses in the area etc.
Construction Risks Questionnaire
13. Nature of meteorological services in the area and details
of advance warning systems if any.
14. Are there any unusual hazards known ?
15. Will any part of the contract be handed over to or
occupied by the employer prior to the date of practical
completion of the contract ? If so, give full details
including values and periods involved.
16. Scale drawings, general arrangement drawings and
cross sectional drawings.
17. Any other useful background information (including and
precautions to e taken to minimise losses and details of
security and fire fighting facilities which are effective at
the beginning and the end of the construction period).
General definitions

 Deductible- Portion of any claim not

covered by the insurance Provider
 Premium- amount to be charged for a
certain amount of insurance coverage
 Higher the deductible, Lower the premium
 Insurer- company selling the insurance;
 Insured or policyholder -the person or
entity buying the insurance policy.
Premium
 Building works@ 0.1% per annum ( additional rate per
every month is 0.003%)
 Road works
 Hill @ 0.3% per annum ( additional rate per every month is 0.003%)
 Terai @ 0.2% per annum ( additional rate per every month is
0.002%)
 Bridge works
 Without water works @ 0.3% per annum ( additional rate per every
month is 0.005%)
 With water works @ 0.5% per annum ( additional rate per every
month is 0.003%)
 Irrigation works
 Headworks/Canal works in River @ 0.5% per annum ( additional
rate per every month is 0.005%)
 Other works @ 0.3% per annum ( additional rate per every month is
0.003%)
Premium
 Plant/ Equipment- @ 0.75% per annum of new value of
P/E
 Labor @ 0.2% per annum (limited to within working hour)
 Staff @ 0.22 % per annum (coverage for 24 hours)
 Max: Five year’s gross salary
 Medical: 10% of sum insured
 DLP
 Fire- @0.03% per annum
 Third party: similar to works and labor/staff
 DLP
 Fire- @0.03% per annum
 EQ- @ 0.125% per annum
 Flood- @ 0.09% per annum
Deductible

 Works
 Generally should not be greater than profit
margin
 Normal- 5% of claim/loss amount
 Act of god- 10% of claim/loss amount

 Plants/Equipment
 Normal – NRs. 25,000
 AOG- NRs. 50,000
Questions?
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