The application of insurances and bonds
to manage the risks is not new. However, not all the contractors and clients
fully understand or appreciate their benefits, even if they obtain insurance coverage
for their project. The reason that they purchase is mostly to comply with
standard contracts or construction laws instead of their own interests of
mitigating the construction risks.
The real trouble is the difficulty in
making claims which they believe that the claim service is not standard. The
fear and distrust of claims discourage the contractors to buy insurance.
Bonds/Guarantees are interesting but it
is necessary to note the legal aspect of them. The owner may be refused in some
cases because of illegal bond. It is the reason that the State Bank of Vietnam
issued on October 3, 2012 Circular No. 28/2012/TT-NHNN on bank guarantees
issued by credit institutions and branches of foreign banks.
Indentifying
risks and transferring by insurances and bonds are the good ways for risk
management, therefore the project performance will be better. Mr. Ly Minh Van made a case study aimed to :
(i) study the risks of owners in high
rise building project development
(ii) study the application of insurances
and bonds to manage the owners’ risks
(iii) study the administration of
insurances and bonds
a) Conditions and negotiation process
b) Claim procedure
(iv) develop a risk, insurance and bonds
management framework
1
Conclusion
Objective
1: To study the risks of owners in high rise building project development
The findings for this objective have
indicated various kinds of risks in construction projects. The external risks
are weather, political, economic, legal, and public and third party. The
internal risks are contractor, consultant, designer, lender related, personal
related, bidders related, contractual, technical, design and specification.
The owners’ risks may come any time from
the planning stage of the project to the operation and maintenance stage. Risks
affect the project through three primary constraints which are time, cost and
quality.
The positive aspect of risks is that if
any contractor has a good management of risk, they have ability to compete with
others. This aspect is illustrated in figure below:
The application of insurances and bonds
to manage the risks is not new. However, not all the contractors and clients
fully understand or appreciate their benefits, even if they obtain insurance coverage
for their project. The reason that they purchase is mostly to comply with
standard contracts or construction laws instead of their own interests of
mitigating the construction risks.
The real trouble is the difficulty in
making claims which they believe that the claim service is not standard. The
fear and distrust of claims discourage the contractors to buy insurance.
Bonds/Guarantees are interesting but it
is necessary to note the legal aspect of them. The owner may be refused in some
cases because of illegal bond. It is the reason that the State Bank of Vietnam
issued on October 3, 2012 Circular No. 28/2012/TT-NHNN on bank guarantees
issued by credit institutions and branches of foreign banks.
Indentifying
risks and transferring by insurances and bonds are the good ways for risk
management, therefore the project performance will be better. Mr. Ly Minh Van made a case study aimed to :
(i) study the risks of owners in high
rise building project development
(ii) study the application of insurances
and bonds to manage the owners’ risks
(iii) study the administration of
insurances and bonds
a) Conditions and negotiation process
b) Claim procedure
(iv) develop a risk, insurance and bonds
management framework
1
Conclusion
Objective
1: To study the risks of owners in high rise building project development
The findings for this objective have
indicated various kinds of risks in construction projects. The external risks
are weather, political, economic, legal, and public and third party. The
internal risks are contractor, consultant, designer, lender related, personal
related, bidders related, contractual, technical, design and specification.
The owners’ risks may come any time from
the planning stage of the project to the operation and maintenance stage. Risks
affect the project through three primary constraints which are time, cost and
quality.
The positive aspect of risks is that if
any contractor has a good management of risk, they have ability to compete with
others. This aspect is illustrated in figure below:
Objective 2: To
study the application of insurances and bonds to manage the owners’ risks”
One of the risk management methods is
that the owner transfer risks to the other parties by applying the insurances
and bonds. Based on the case study data analysis, each type of insurances and
bonds can provide different categories of risk coverage for the project as
follows:
(i) Professional Liability Insurance
covers breach of professional duty arising from any act of error or omission.
(ii) Worker’s Compensation Insurance
covers personnel injury and death of employees in the project.
(iii) Construction Plant and Equipment
Insurance covers for unforeseeable, accidental losses, physical damages to
plant and equipment because of external causes, working or at rest, being
dismantled specifically excluded in the policy.
(iv) Erection All Risks Insurance covers for unforeseen and sudden physical
damage during erection, including but not limited to the following risks: fire,
lightning, chemical explosion, physical explosion, theft, burglary, earthquake,
flood, inundation, windstorm, malicious acts, human errors, lack of skills...
and for the insured’s legal liability for accidental bodily injury to or
illness and/or loss of or damage to property damage belong to third parties
arisen in connection with the insured erection works.
(v) Product Liability Insurance cover
legal liability for personal injury or damage occurring anywhere in the world
caused by goods or products which the Insured has supplied, sold, erected,
repaired, altered, treated or installed in connection with and in the course of
Business.
(vi) Construction All Risks Insurance
covers physical loss of or damage to the contract works necessary for repair or
reinstatement costs caused by all risks not otherwise excluded by the policy
wordings and endorsement.
(vii) Third Party Liability Insurance
covers legally to pay for accident bodily injury to any third party, damage to
third party property occurring in direct connection with the construction or
erection of the items insured.
(viii) Bid Bond means a commitment of
the guarantee party with respect to the party receiving the guarantee (bid
solicitor) for assurance of obligation participating in bidding of the
guaranteed party. If the guaranteed party violates the regulation of biding
without performance or with insufficient performance of finance obligation for
participation in bidding, the guarantee party shall perform for replacement.
(ix) Performance Bond implies that the
tenderer provides security by paying a deposit, providing collateral or
providing a letter of guarantee for a definite term as stipulated in the tender
invitation documents, in order to secure the liability of the winning tenderer
to perform the contract.
(x) Advance Payment Bond means a
commitment of the guarantee party with respect to the party receiving the
guarantee in order to ensure for obligation of repaying the advance of the
guaranteed party under contract signed with the party receiving the guarantee.
If the guaranteed party must repay advance but not repay or repay
insufficiently, the guarantee party shall perform for replacement.
(xi) Warranty Bond is similar to Performance
Bonds but usually covers a warranty period after the contract completion.
Although the
application of the insurances and bonds listed above brings the project owner a
lot of benefits, these insurances and bonds still have some limitations that deserve
the owner’s consideration.
Objective 3: To
study the administration of insurances and bonds
The main points of the insurance policy
that must be taken into account include:
(i) Preparing the survey report on the
condition of any endangered surrounding property or land or building
(ii) Period of insurance;
(iii) Exclusion conditions;
(iv) Deductible;
(v) Some conditions are adverse or
difficult to meet;
(vi) Some conditions need to be noticed;
(vii) Some conditions are useful for the
insured.
The owners also need to pay attention to
the following features of the bond:
(i) Its legality
(ii) Period of bond validity
(iii) Term of payment
Due to the perennial problem of failure
to make full disclosure of all material facts and failure to promptly notify possible
claims when making a claim, the claim management plays an important role in
risk management. Any party taking out insurance should always carefully
consider the policy wording to check that it is adequate for their purpose.
Recommendation
for the owners
1. Using the
insurance brokers
Policies are all too
often unclearly or inconsistently worded and may contain exclusions which limit
their usefulness. It is a reason that the owner should buy insurance through
insurance brokers.
Technically, brokers work for the
insurance buyer and are able to arrange insurance with any insurance company
(Palmer et al., 1996). Under most
insurance laws of the State, the broker has a legal obligation to be diligent
in the placement of coverage. Their role
is to represent and protect the exclusive rights and interests of their
clients. Additionally, insurance brokers offer a wide variety of risk
management support services such as:
(i) Issuance of certificates of
insurance, endorsements, and other evidences of coverage
(ii) Premium cost estimation and billing
(iii)
Advising the clients on insurance and risk management based on careful analysis
and understanding of clients' requirements
(iv)
Negotiation with the insurers to find the best terms, conditions and premiums
based on experience acquired in the
world and in Vietnam
The owners can therefore be reasonably
comfortable with the idea that their broker will make an effort to assure that
there are no errors in the placement of insurance coverage.
2. Using one
person specialized in insurances and bonds.
It is a good idea to assign one person
full responsibility for all insurance matters. This person should maintain a
checklist of a complete coverage, the due dates of reports and returns, and
similar matters. It is this person’s responsibility to follow up on all
reports, claims, cancellations and renewals (Palmer et al., 1996).
3. It is better
if the contractor buy all insurances.
If the project scale is small or the
owner chooses only one contractor for all of works, the contractor should purchase
all types of insurance. The advantage is that the administration work is easier
as compared to the owner buying insurance. Furthermore, the owner can transfer
all of risks to the contractor.
On the other hand, the project scale is
large or has many contractors; the owner should purchase Construction All Risks
and Third Party Liability Insurance. The good point is that the owner just only
purchase one time covering for all contractors. Therefore, the owner can get
cheaper premium. However, the administration work may be complicated.
4. The
consultants must purchase professional liability insurance with high limited
liability.
The expense for consultants (soil
survey, design, supervise, management) is often very small (3-5% of project
cost), so it is difficult to pay compensation if the big loss come from the
consultants’ fault. The owners should require the consultants to purchase
professional liability insurance with high limited liability.
5. Getting bonds
from the guarantee bank that is prestigious and reliable.
The prestigious bank with financial
strength assures that the finances are available during the performance of the
project. The reliability of the bank is also essential to assure the legality
of the bond.
6. Risks,
insurances and bonds management framework
Table below illustrates the
recommendation for risks, insurances and bonds management framework.
His thesis abstract is copied below:
Abstract
Construction projects have a lot of uncertainties and risks that affect
both project performance and human being. Particularly, the high-rise building
projects have more uncertainties and risks. Geological risks, height and others
are one of the causes. In such cases, insurance and bond are very important to
these projects because they can cover the risks and the contractor’s default.
As a result, the project can get the financial and performance security.
With a focus on a case study approach to the high-rise building
projects, an eighteen-storey complex in Ho Chi Minh City conducted in this
study is to examine different types of risks, insurance and bonds of the
owner.
Although a variety of risks occur in construction projects, most of
them can be protected by applying for insurance and bond schemes. The most
common insurable risks include professional errors or omission, personnel
injury and death of employees, material damages and losses, erection risks,
public liability, construction risks and third party liability. The other risks
which can be protected by bonds are contractor’s breach from tender phase to
warranty phase.
Some problems, however, occur in administrating the insurances and
bonds. This study is then to analyze the conditions of the processes and claim
procedures. A framework for risk, insurance and bonds management are
recommended at the end of the study.
