Insuring Risk in Construction Projects
THE NEED FOR INSURANCE Construction projects are inherently risky in terms of cost, time and quality. The parties therefore typically seek to contractually allocate these risks between them. The result of this allocation of risk and the application of the Abrahamson principles1 is that the risks are pushed downwards to the design consultants and subcontractors. This allocation of risk is also accompanied by an obligation on some of the parties to obtain insurance to manage the risks that they have assumed. In determining the insurance needs for each construction project, it is necessary to identify the risk that each of the parties to the project face.
In determining the insurance needs for each construction project, it is necessary to identify the risk that each of the parties to the project face. While the risks facing a principal can be summarised as time, cost and quality, the risks facing contractors are more extensive. They include design risks which can be laid off to the design sub-consultants; unforeseen site conditions; construction risk in terms of defects supervision; responsibility for the works of the subcontractors which can be dealt with via the provision of indemnities obtained from the subcontractors; specified, defect and warranty obligations; delay, penalties and liquidated damages claims as well as the obligation to monitor and ensure compliance with the insurance requirements of subcontractors. The risks facing design consultants are the risk of negligent and defective design. The risks facing financiers include the economic viability of the project, ensuring cash flow from the project which can be impacted upon by delays, claims against the contractor and the insolvency of major parties.
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