RISK MANAGEMENT

Dr. Medha Joshi

Define : Project
Risk
&
Project Risk Management

Discuss :
Classification of Risks
 WHAT IS PROJECT?
Cost Success

Project
Constraints
Quality Time
 Cost
overrun

Risks
Project
Poor Constraints Delays
Quality
 WHAT IS RISK?
Phenomenon closely associated with
uncertain events.
 It is chance (probability) of loss.

 It may be either frequency or a

probability of occurrence .
 Risk Means that
 There is a possibility of loss or damage.
 Exposure to Danger.
THE RISK MANAGEMENT PROCESS

ion
sultat
review Establish the context

Identify the risks

& con
d
Monitoring an

Analyze the risks

ion
unicat
Evaluate the risks

Treat the risks

Comm
 Risk Elimination

 Risk is avoided when the consequences or impact of

the risk are very high. In such cases risk is totally
avoided by
 Change in location
 Change in process
 Change in design
 Change in scope and specifications
 Cancellation of project totally
 Risk Response
Risk Response Methods

Elimination Retention Reduction Transfer

Risk Elimination Practices

 Tendering a very high bid
 Placing conditions on the bid
 Pre-contract negotiations as to which party takes
certain risks
 Not biding on the high risk portion of the contract
 RISK RETENTION

 Risk may be retained as part of deliberate

management strategy
 After a conscious evaluation of possible losses
and the cost of alternative ways of handling
them – Self Insurance
 E.g. Employer withholds a ( 3 to 5) percentage
of each payment creating a fund for immediate
use in the event of contractor’s insolvency or
failure to remedy minor defects after the work
is completed.
 Risks that may prove to be more expensive in
transfer may be retained where the losses
involved are not significant
 Risk retention might otherwise occur through
neglect. Eg. Firm may fail to identify the risk
or may underestimate its magnitude.
 Alternatively it may insure but may fail to
adjust the sum insured in line with current
market values
 Such retention may prove to be catastrophic to
the contractor
Risk Response
Risk Response Methods

Elimination Retention Reduction Transfer

Risk Retention
 Handling risks by the company who is undertaking the
project.
 Two retention methods, active and passive.
 Active retention is a deliberate management strategy
after a conscious evaluation of the possible losses and
costs of alternative ways of handling risks.
 Passive retention occurs through negligence,
ignorance or absence of decision.
 RISK REDUCTION
 Risk reduction is done either by reducing the
probability or size of occurrence of loss producing
event or its financial implications if it occurs
 Risk reduction through safety and security measures
e.g. risk of theft of material on site is reduced by the
installation of security system, watchmen, etc.
 Risk reduction through organisational planning
Involves systematic risk reduction by a conscious
management policy & organisational planning. This
could be done through defined job responsibilities,
training etc. though initially expensive but in long
run it proves to be advantageous against the cost of
mitigation of risk at full force
 Risk Response
Risk Response Methods

Elimination Retention Reduction Transfer

Risk Reduction
 Continuous effort.
 Related with improvements of a company’s physical,
procedural, educational, and training devices.
 Improving housekeeping, maintenance, first aid
procedures and security.
 Education and training within every department .
 Risk Response
Risk Response Methods

Elimination Retention Reduction Transfer

Risk Transfer
 Two basic forms.
 (a) The activity responsible for the risk may be
transferred, i.e. hire a subcontractor to work on a
hazardous process. Expected risk cost is built in
contract price – Selection of contract
 (b) The activity may be retained, but the financial risk
transferred to insurance.
 RISK IN INSURANCE
 RISK is defined for Insurance Purpose as the
UNCERTAINTY OF A FINANCIAL LOSS.
 The object of Insurance is to provide
protection against Financial Losses caused by
Unexpected Events. Thus Insurance is a
protection against the Consequences of RISK.
 In Insurance, the word Risk may be used
interchangeably with Peril-which means the
Prime Event or occurrence which causes the
loss.
RISK IN INSURANCE
 In Insurance, the word Risk may
also refer to the Property or
Subject Matter of Insurance
 The Subject Matter of Insurance
can be Life, Limb, Property,
Interest & Liability
Peril, Hazard & Proximate Cause
 Peril means prime event which causes loss and the
factors which have an effect on the outcome of loss.
 E.g. A house constructed on a beach and there is a
risk of cyclone.
 Hazard : It is a condition that increases chance,
size and severity of loss. E.g A house constructed
on beach
 Physical hazards arise from the physical
characteristics of an object that increases severity of
loss from given peril
 E.g. ship damaged and lost due to collision on
iceberg Earth faults – hazard for earthquakes,
dense forest – hazard for fire
 Moral Hazards & Proximate Cause
 Moral Hazard : It arises from attitude of the
insured or they are acts of dishonest
individuals. E.g. Intentionally hitting the car
on lamp post
 Proximate cause means the effect of cause is
active and which sets in a motion chain of
events between the occurrence of events
between the occurrence of covered perils and
damage of the property
DEALING WITH RISK

 The Problem of Risk in Economic and

Commercial Activities can be dealt with in
FOUR WAYS.
1. Risk Elimination
2. Risk Retention
3. Risk Reduction
4. Risk Transfer
Insurance is ONE of the most Import method
of Risk Transfer
WHAT IS INSURANCE ?
 Insurance Indemnifies Assets & Income.

 Every Asset has a value and generates Income

to its Owner.
 There is a normally expected Life-time for the

Asset during which time it is expected to

perform.
 If the Asset gets lost earlier, being destroyed or

made non-functional through an accident or

other unfortunate event the Owner is
Prejudiced.
 Insurance helps to reduce consequences of such
Adverse Circumstances which are called Risks
WHAT IS INSURANCE?
 Insurance is the science of spreading of the
risk.
 It is the system of spreading the losses of an
Individual over a group of Individuals
 Insurance is a method of sharing of financial
losses of a few, from a common fund formed
out of contribution of the many, who are
equally exposed to the same loss. What is
uncertain for an Individual becomes a
certainty for a Group. This is the basis of All
Insurance Operations. Thus insurance converts
uncertainty to certainty
WHAT IS INSURANCE?
 Insurance is a risk transfer mechanism,
whereby the individual or the business
enterprise can shift some of the
uncertainty of life on the shoulders of
others; in return for a known premium,
usually a small amount compared with
the potential loss. The cost of the loss can
be transferred to the insurer (Dickson,
1984).
 Requirements of Insurable risks
 There must be large number of exposure
units
 The loss must be accidental or
unintentional
 The loss must be determinable or
measurable
 The loss should not be catastrophic
 The chance of loss must be calculable
 The premium must be economically
feasible
15th Dec 2009 27
 INSURABLE & NON INSURABLE RISK
 Pure Risks : Risks where there is loss or No
 Personal – death, disability, sickness, old age,
loss of income and employment
 Social –theft, fraud negligence, etc.
 Technical – Machinery breakdown, Erection of
Machinery, Boiler explosion, Construction risk,
etc.
 Natural – Flood, earthquake, cyclone Chemical –
Fire, explosion
These risks are Insurable
 Business risk : Technical – New Technology
 Speculative Risk : Risks where there is loss,
gain or no gain. Eg. Share trading
 Social – consumer behaviour, industrial
unrest
 Economic – inflation, tax policy, competition
 Political – war, nationalisation
 Such risks can be avoided / controlled by
General Management / functional
management in the areas of production,
marketing, finance, R&D.
These risks are generally Non insurable.
 INSURANCE CONTRACT

An insurance contract must have the

following essential ingredients in order to
make it enforceable at law:-
a) Offer and acceptance
b) Consideration
c) Agreement between the parties.
d) Legal competence of the parties and
e) Legality of the contract.
 Basic Parts
of an Insurance Contract
 Declarations
 Definitions
 Insuring agreement
 Exclusions
 Conditions
 Miscellaneous provisions
 Declarations
 Statements that provide information about
the property or activity to be insured.
 Information in declaration is used for
underwriting and rating purposes and for
identification of property.
 Name of Insured, Location of the property,
Period of Protection, Amount of insurance,
Amount of Premium, Size of deductible
 Declarations can be found on the first page
of the policy.
 INSURING AGREEMENT
 It is a contract gives information about
what is agreed upon between parties.
 It contains insuring clause which
normally states what the insurer agrees to
do and the conditions under which it
agrees
 E.g. Standard fire policy specifies the
term of contract
 Gives basis of recovery
 Limits recovery to cost to repair or
replace with like material and labour
 Describes perils insured against
 NAMED PERIL V/S ALL RISKS
 Peril : It is prime cause of loss. For e.g. Fire,
Accident, lightening, flood, explosion, etc.
 Named Peril approach is traditional
approach wherein the agreement lists the
perils to be covered
 All risks approach states the insurer’s
intention to cover all risks of accidental loss
to the described property except those
specifically excluded e.g. design fault
 EXCLUSIONS
 It is basic part of any insurance contract
 Excluded Perils : contract may exclude certain
perils. E.g. war and warlike perils, nuclear
radiation and radioactive contamination are
specifically excluded in CAR policy
 Excluded losses : Certain type of losses are
excluded. e.g Inventory losses – losses
discovered at the time of taking inventory,
losses due to theft due to infidelity of employee,
storages are excluded
 EXCLUSIONS
 Perils may be excluded or limited for at least
three reasons :
 They are basically uninsurable e.g. war, war like
situation or catastrophic losses
 It is intended to cover them elsewhere e.g.
Manuscripts, Plans, Coins, Paper money,
cheques, Books of accounts, Computer system
records
 It is intended to charge extra for them under an
endorsement that may be added to policy at the
option of insured. E.g standard fire policy does
not cover for riots or explosions. Use
endorsement to add perils
What Are The Benefits Of Exclusions?
 Exclusions are also necessary because coverage
can be better provided by other contracts
 They are used to avoid duplication of coverage
to limit coverage to the policy best designed to
provide it.
 General Exclusions : war, Nuclear radiation
and ratio active contamination, Due to falling
aircraft or other arial devics, wilful acts of
negligence of the insured or of his responsible
representative, cessation of work whether total
or partial.
 EXCLUSIONS: CAR POLICY
 First amount of the loss arising out of each and every
occurrence shown as excess on the schedule e.g.
material damage due to flood, fire or fault in erection,
short circuiting, excess voltage
 Loss discovered only at the time of taking an inventory
 Normal wear and tear, Gradual deterioration due to
atmospheric conditions
 Penalties
 Loss of Files, drawings, currency, cheques,
 Loss or Damage due to faulty design,
 The cost of Replacement, repair or rectification of
defective material or workmanship
 Rectification Work : Rectification of aesthetic
defects of structure
 Loss or damage due to defective material /
workmanship, General purpose vehicles.
 General Exclusions –
willful negligence,
Cessation of Work,
Nuclear / War risks.
 Insured Parties:- Contractor’s Staff &
labourers, Sub- Contractor’s Staff & labourers,
Third party
 CONDITIONS
 Conditions are provisions in the policy that qualify
or place limitations on the insurer’s promise to
perform.
 This section imposes certain duties on the insured.
If policy conditions are not met, the insurer can
refuse to pay.
 E.g. Notify insurer if a loss occurs, Protecting the
property after a loss, Preparing inventory of
damaged property, etc.
 Period of insurance is commencement date to
completion date this period includes erection
works period
 PREMIUM
 Premium required to pay on risk will
depend on the extent of risk that is
transferred to common pool and duration
of cover provided and the underwriter’s
assessment of the risk factors.
 In construction risk it depend on the
period of insurance which is generally
more than 1 year
 BASIC CONSIDERATIONS FOR
INSURANCE
 Insured : A person/s who is to receive the
benefit of the coverage provided.
 E.g. In fire insurance the parties to contract is
owner of property (insured) and Insurer
 In EAR policy the insured parties are Principal,
Contractor, Sub contractor, Manufacturer
 EAR Policy Covers :
 Structures, Machines, Installations forming part of
erection contract,
 Contractor’s Plant and Machinery,
 Other Property on or near the site for which the
contractor is responsible during erection
 Other insurable items
 Scope of Cover
 EAR Policy has 2 sections : Material Damage
and Third Party Liability
 Claims arising out Act of God Perils / major
perils : Earthquake- Fire and shock,
 Landslide, Rock slides,
 Flood, Inundation,
 Storm/ Hurricane/Typhoon/Windstorm/
Cyclone/ lightning or other atmospheric
disturbances
 Collapse, Explosion
 Wet damage for wet risks i.e. contract
involving works in river, canals, lakes or sea
 THIRD PARTY COVERAGE
 Some times some individuals are not
direct parties to the contract. Such
persons are known as third parties and the
rights of third parties are outlined in
various policies and vary considerably.
 E.g. In the Workmen Compensation policy
the parties to contract are employer/client
and insurance company. However
beneficiary is the injured worker in case
of an accident on site during the period of
insurance
 SUM INSURED
 The sum insured may be on a full value or a first loss
basis
 First Loss Basis
 This is a form of partial insurance where the Insured
decides he could not suffer a total loss and selects a
maximum sum to insure for any loss.
 If the works of construction are valued at 500 cr, and
the value is not concentrated in one or two items but
spread throughout the site, it is then unlikely that any
damage would cause a claim > 100 cr. The owner
then negotiates on the basis of losses up to 100 cr.
This does mean that in the event of a catastrophe,
whereby all works are lost, there will only be a
payment of 100 cr for items worth 500 cr. However,
such an approach will reduce the premium.
 Clauses Limiting Amount Payables
 Insurers include clauses such as
 Deductibles or Excess
 coinsurance agreements,
 time limitations clauses to limit the amount of
recovery.
Facilitates to reduce costs of offering the insurance
service
 To prevent too many small claims which are
expensive to administer claim
 To achieve a greater degree of fairness in the rate
structure
 To place an upper limit on insurer’s obligation on
any one policy
 Voluntarily to reduce premium outlay on major
projects
 Excess
 “Excess” : It is an amount of the limit beyond
which claims will be entertained. If the loss
does not reach this limit, it is not payable at all.
If it exceeds the limit excess only is payable.
Excess is also termed as deductibles
 In some policies an Excess or Franchise is
incorporated, which means that a certain
circumstances a part of the loss may have to be
borne by the insured.
 Coinsurance
 A contractual provision in property insurance encourages
the insured to insure the property to a stated % of its
insurable value. If the coinsurance requirement is not
met at the time of loss the insured must share the loss as a
coinsurer.
E.g. 80/20 coinsurance 80% Insurer and 20% insured
 A deductible is commonly used with Coinsurance. Pay
the deductible amount first and then left over coinsurance
amount.
 The fundamental purpose of coinsurance is to achieve
equity in rating. If everyone insures partial losses than
the total loss then the premium for Rs. 100 SI will be
higher . This rate would be inequitable to those insured
who would like to insure the property to full value
10/10/2022 Dr. Medha Joshi 49
 Coinsurance
 Coinsurance is a penalty imposed on the insured by the
insured for under reporting/declaring/insuring the value of
tangible property or business income. The penalty is based
on a percentage stated within the policy and the amount
under reported.

 A building actually valued at Rs. 1,000,000 has an 80%

coinsurance clause but is insured for only Rs. 7,50,000. Since its
insured value is less than 80% of its actual value, when it suffers a
loss, the insurance payout will be subject to the underreporting
penalty. For example: It suffers a Rs. 2,00,000 loss. The insured
would recover
 Rs. 7,50,000 ÷ (.80 × 1,000,000) × 200,000 = Rs. 187,500 (less
any deductible). Underreporting penalty would be Rs. 12,500.
10/10/2022 Dr. Medha Joshi 50
 Illustrations of the Operation of the
Coinsurance Clause

51
 Impact of Insuring Partial Losses and Total Losses

Assume that 2000 buildings are valued at Rs. 2 Lacs

each and are insured to full value for a total of Rs. 400
million for fire insurance. Suppose 2 total and 30 partial
losses occur each at Rs. 20,000 each.
Damages Full Value Half Value
Rs. 400 m Rs. 200 m
2 Total Losses 4,00,000 200m/400m X0.4m =
0.2m
30 Partial Losses 6,00,000 6,00,000
@ Rs. 20,000 each
Total Losses paid 10,00,000 8,00,000
by the Insurer
Pure Premium 1/400 = 0.8/200 = 0.40
10/10/2022 0.25 Dr. Medha Joshi 52
 Legal Principles
 In addition insurance is governed by basic
principles evolved under Common Law. These
are:
1. Indemnity
2. Subrogation
3. Contribution
4. Utmost good faith
5. Insurable interest
 PRINCIPLE OF INDEMNITY
 The Principle of indemnity is strictly adhered to
in general insurance.
 A person/ co. may not collect more than the
actual loss in the event of damage caused by an
actual insured peril
 While a person may have purchased coverage
in excess of the value of the property, he cannot
make a profit by collecting more than the actual
loss, if the property is destroyed
 It means putting the insured back to the
position he was in, before the occurrence of the
loss.
 He is indemnified only to the extent of his loss,
no profit or undue benefit is allowed.
FACTORS LIMITING APPLICATION OF INDEMNITY

 The Sum Insured – which is the maximum

amount recoverable i.e. limit of indemnity
under the policy
 Condition of Average : It ensures that claims
are paid in relation to the extent of insurance
effected vis-à-vis the entire value at risk
 Where there is under insurance, the insurers are
only receiving premium for a proportion of the
entire value at risk. Thus average condition
makes insured to indemnify himself for the
proportion of Under Insurance.
 Every item of policy is separately subject to the
condition of average
 Claim Amount = (SI / Full Value) X Loss
 Reinstatement Value (RIV)
 This is the value at which the damaged property can be
reinstated or replaced by new property of the same kind.
 Replacement cost is current cost of restoring damaged
property with new materials of like kind and quality.
Depreciation is wear and tear, age, economic obsolescence
 Fair Market Value : At which willing buyer is ready to
buy from a willing seller

BOOK VALUE
 This is the value of the property as indicated in the
insured’s books of accounts.
 It is arrived at by applying depreciation on the original cost
of the property.
 At some point of time this value may be nominal and not
adequate for insurance purposes.
 MARKET VALUE
‘Market Value’ is determined, for insurance
purposes, with reference to
Present cost of construction of similar building
less (the purchase cost + suitable depreciation
based on age + usage + maintenance, etc.)

• For plant and machinery, market value for

insurance purposes, is Present cost of
Machinery less suitable depreciation for age,
usage, wear and tear, etc. from the current
replacement cost.
 TO SUM UP,
a) The sum insured is always to be fixed by the
insured
b) It is the limit of liability under the policy.
c) It is the amount on which the rate is applied to
arrive at the premium under the policy.
d) The sum insured should represent the actual
value of the property insured.
 Mode Of Indemnity
 Buildings: the cost of reinstating or repairing the
damaged portion, is assessed, and from that an
appropriate allowance is made towards depreciation,
depending on the age and condition of the building.
Allowances are made for improvement due to repairs.
 Machinery: the market value for a similar machine of
same age and model as determined on the date of loss.
In practice this is difficult so the measure of indemnity
becomes the replacement value less depreciation.
 In case of repairs the cost of repairing is borne by the
insured. However replacement of parts is subject to an
allowance towards depreciation.

10/10/2022 Dr. Medha Joshi 59

 • Household goods: Consideration similar to those
applicable for machines.
• Stocks: In case of wholesalers or retailers, the
measure of indemnity is the price at which he will be
able to replace his goods. The element of profit will
not be taken care of. 
• Fire Insurance policies may be issued on
Reinstatement Value basis. Although the insured gets
new property which is in similar condition and of same
kind, to protect the basic of idea of indemnity the
property will not be of superior nature.
• Motor: If the vehicle is a total loss, the sum insured
or the value of the vehicle, which ever is less is paid.
If the vehicle is damaged the cost of repairs or paid, if
parts are replaced the cost of new part will be
subjected to depreciation. In all the cases age and
general maintenanceDr.of
10/10/2022
the vehicle are considered. 60
Medha Joshi
 • Marine Insurance : In this branch what is
provided as indemnity becomes Commercial
indemnity because, almost all the policies
issued are agreed value policies. To be precise,
the insured and the insurer agree that the SI is
the value of the property insured. The agreed
amount is then payable in case of total loss,
with no attachments what so ever.
• Miscellaneous Insurance: the insurances of
property, liability and Misc. insurance are
contracts of strict indemnity. Normally books of
accounts are referred when settling claims in
this branch. ( ex. fidelity guarantee insurance

10/10/2022 Dr. Medha Joshi 61

 COROLLARY: SUBROGATION
 Subrogation : If the loss suffered by the
insured is recoverable from third parties who
are responsible for the loss, the insured’s rights
of recovery are transferred or subrogated to the
insurers when they indemnify the loss.
 Substitution of insurer in place of insured for the
purpose of claiming an indemnity from third
party for a loss covered by insurance.,
 Insurer is entitled to recover form a negligent
third party any loss payments made to the
insured
 COROLLARY: SUBROGATION

• Subrogation prevents the insured from collecting

twice for the same loss
• Insured could collect from insurer and also from
third party
• To hold guilty person responsible for loss
• Helps to hold down insurance rates
 Corollary : Contribution

If the same property is insured under more

than one policy, insured cannot recover more
than his loss; he can recover only a rateable
proportion of the loss under each policy.

 If a house is insured with company X for

Rs.5,000 and with company Y for Rs.10000
and the damage amounts to Rs.1200,
 company X will apparently be liable to
contribute Rs.400 and company Y Rs.800.
10/10/2022 Dr. Medha Joshi 64
 Differences between the Doctrines
of Contribution and Subrogation
i. In contribution the purpose is to
distribute the loss while in subrogation
the loss is shifted from one person to
another
ii. Contribution is between insurers but
subrogation is against third party
iii. In contribution there must be more
than one insurer but in subrogation
there may be one insurer and one
policy.
10/10/2022 Dr. Medha Joshi 65
 UTMOST GOOD FAITH
 In insurance contracts, the legal doctrine of utmost
good faith applies.
 High degree of honesty is imposed on both the
parties to insurance contract than it is imposed in
other contracts. This principle is supported by
important legal doctrine representation,
concealment.
 This casts on the insured the duty to disclose all
material facts which have a bearing on the
insurance.
 A Misrepresentation of material fact makes the
contract voidable at the option of the insurer
 An applicant must also disclosed material facts
even if disclosure of such facts might result in
rejection of the application
 A breach of this duty may make the contract
void or voidable depending upon the nature of
the breach.
 The duty of disclosure continues throughout
the currency of the policy.
 Where the premises are surveyed by the
insurers, they are deemed to be in possession of
the material information concerning the risk.
 INSURABLE INTEREST
 In any insurance contract, persons who stand to
gain financially from the safety of a property or
stand to lose financially by its destruction are
said to have insurable interest on a property
and thereby can take an insurance policy.
 Examples of persons who can have insurable
interest are as follows -
Absolute ownership or partner
Mortgagor/ lessor / administrator.
In construction projects, the contractor, client as
well as the consultants are some of the people
who have an insurable interest in the project.
 INSURABLE INTEREST
 Insurable interest of a bank or a financial
institution that has advanced a loan is
recognised by the Agreed Bank Clause.
 Insurable interest should exist
 at the time of taking the policy,
 continue throughout its currency and
 should exist at the time of a loss
 Assignment
 A majority of policies issued with a
particular named insured party and will
continue in that name until expiry or
cancellation.
 Assignment occurs when a policy is
transferred from one person to another
 Assignment is the transfer of rights and
liabilities of an insured to a third party
who has acquired insurable interest in
the subject matter of insurance
 RISK IN CONSTRUCTIONS

Client Team
Type of Client Change in Govt. Policy
Constraints on Delay in Decisions/
Contractor’s Choice Approvals
Competence Lender Requirements
Bureaucratic Procedures Approval Procedures
Change In Requirements Communication Risks
Confirmed Brief Interpretation of
Requirements
 RISKS IN CONSTRUCTIONS
 Contractual Risk  Design Risk
 Form of Contract  Practicality of Concept
 One Sided Contracts  Extent of Foundations
 Modification of  Pioneer/ Experimental
Contract conditions Design
 Arbitration  Use of Latest
 Scope Of Project Equipments
 Additional Facilities
 Specifications of
materials
 Service
Requirements
 Tolerances
 Change In Scope
 Change In
Regulations
Design Team Financial Risk
Experience of Team Interest Rates
Continuity of Team Delay in Funding approval
Authority of Team Restrictions on cashflow
Project Mgt. Role Inflation
Level of Design Fixed / Fluctuating Contract
Information
Exchange rates
Delay in financial closure
Public & Safety Regulations
Fire Services Req. Health & Safety
Environment Risks Requirements
Planning Approvals Building Byelaws
Construction Risk Pricing / Estimation Risk
Bankruptcy of contractor Market Conditions
Variation & Change order Tender Price Levels
Time and Cost Overruns Tax changes
Defective works Changes in Labour /
Fire Risks, Force Majeure Material Rates
Performance Of Change in Insurance
Subcontractors Premium
Hidden Problems
Material & Plant
Availability
Completed Operations Risk
 SITE PARAMETERS RISK
 Location and Climatic Considerations
 Soil and Geology
 Access Problems and Right of way
 Contaminated ground
 Waste Treatment
 Infrastructure Requirements
 Encroachment
 NON CONSTRUCTION RISKS
 Inadequate Forecasting of revenues
 Frauds
 High Operating costs due to high maintenance
 Competition from other operators eroding
market share and therefore revenues
 Natural disaster (e.g. hurricane or earthquake)
 Product Obsolescence
 Managerial Incompetence
 Reduction in use due to economic downturn
Categories of Engineering
Insurance

CAR (Contractor’s All Risk)

EAR (Erection All Risk)
MCE (Marine cum Erection)
MB (Machinery Breakdown)
CECR (Civil Engg Completed Risks)
DOS (Deterioration of Stocks)
ALOP/MLOP (Advanced Loss of Profits)
 Insurance Policies to Project Risk

Construction &
Development Risk :
Defective Design,
Workmanship, Material
CAR
Damage to work
Injury to third parties Third Party
Liability
covering all
parties
 Financial Losses ALOP following a
following a delay or material damage

operational start up loss

Negligent acts, errors Professional

or omissions of Indemnity
professionals
Employees death, Workmen
injury or disease, war, Compensation or
terrorism Employers Liability
 Contractor’s All Risk (CAR) Policy
 CAR policy is designed to cater for such
projects where the major portion of the risk
(not less than 50% of the total project cost)
pertains to civil engineering works in nature
 This includes construction of building, laying
of pipelines, roads, railways, construction,
waterways, drainage scheme, sewage works,
irrigation canals bridge construction, erection
of docks, piers dams and reservoirs, etc.
 Contractor’s All Risk (CAR) Policy
 Insured : Employer/ Principal, Conttractor
and subcontractors
 The contract for civil engineering works
states that the contractor will be responsbile
for the loss or damage to works until they
are handed over to the principals.
 CAR policy does not cover the interest of
professional advisors namely architects
consulting engineers,e tc. Against their
liabilities arising out of professional
negligence
 Scope of Cover
 CAR Policy has 2 sections : Material Damage
and Third Party Liability
 Claims arising out Act of God Perils / major
perils : Earthquake- Fire and shock,
 Landslide, Rock slides,
 Flood, Inundation,
 Storm/ Hurricane/Typhoon/Windstorm/
Cyclone/ lightning or other atmospheric
disturbances
 Collapse, Explosion
 Wet damage for wet risks i.e. contract
involving works in river, canals, lakes or sea
 Third Party Liability
Provides compensation against :
 Legal liability for accidental loss or damage caused
to property of other persons including property held
in trust by or under custody of the insured for which
he is responsible excluding any such property used
in connection with erection.
 Legal liability for fatal or non fatal injury to any
person other than insured’s own employees or
workman or employees of the owner of the works or
premises or other firms connected with any other
construction work thereon or members of the
insured’s family or of any of the aforesaid.
 The excess stated in the schedule to be borne by
insured in any one occurrence related to property
damage. Generally 5% of claim amount
 Third Party Liability
 Separate sum insured limit to be selected for third
party cover.
 For policies with sum insured upto Rs.10 crore. Max
Any one person any one accident (AOA)/ AOP limit
upto Rs.1 crore.
 For policies with sum insured above Rs.10 crore Max
AOA/AOP upto 10% of the completely erected value
of the project or Rs.10 crore whichever is lower.
 The limit selected is applicable during the entire
period of the policy & cannot be reinstated.
 Period – Total Project Duration
 The date of uploading of the first batch of
material at site of construction and can be taken
for a duration relevant for the project.
 The policy expires with the handing over of
contract work to the principal.
 It is generally advisable to take a sufficiently
longer period for any contract work
considering possible delays in execution
 On expiry of the policy the extension provision
rates are substantially heavy
 Sum Insured
 SI stated in the schedule shall not be less than
the completely erected value of the property
inclusive of freight, custom duty, erection cost
 the estimated cost of labour charges
 Cost of materials supplied by principal to be
declared separately.
 Insured undertakes the increase or decrease the
amount of insurance in the event of any material
fluctuation in the level of wages or prices
 These break up costs simplify the assessment in
the event of claim
 REFUND OF PREMIUM
Refund of premium, due to completion of project earlier
than the period mentioned in policy Schedule, can be
allowed provided the following conditions are fulfilled
 The period of insurance is 18 months and above;
 Notice for early completion being given in advance to
the insurer before completion of the project.
 Claims experience under the policy being < 60%.
 The original policy period is not exceeding the contract
period as per contractual clause.
 The minimum period for which refund can be claimed
shall be 3 months.
 Basis of Settlement of Claims
 In the event of any loss or damage
 In case of loss or damage which can be repaired
- the cost of repairs necessary to restore the
property to original condition immediately
before the occurrence of the damage, less
salvage value, under insurance and excess
 In case of total loss the actual value of property
before the loss less salvage value, under
insurance and excess
 Extensions
 Construction equipments like scaffolding,
shuttering material can be separately declared
and covered along with the contract work
 Construction Plant and machinery like mobile
cranes, winches, diesel generators, concrete
mixers etc. can be covered under the same
policy as per the terms and conditions of
Contractor’s Plant and machinery policy can be
covered separately under CPM policy
 Extensions
 First Loss Covers –
 Clearance of Debris,
 Surrounding Property
 Third party Liability : External personnel who are
not concerned with the works directly and
incidentally happen to be present at the site during
the accident
 A reasonable limit should be selected and after
the loss the sum insured can be reinstated by
payment of additional premium during the
course of policy
Escalation :
A suitable percentage of escalation over the total
contract value can be selected from the inception
of the policy so that claim canbe paid to the
extent of such selected percentage of escalation
over the original contract price
Maintenance :
Maintenance visit : Any fresh mistakes made by
the contractor during rectification work and any
such accidental loss during rectification work is
covered
Extended Maintenance Cover : Any amount
incurred by the contractor for rectification of
such original defects or faults during
construction
 Erection All Risks Insurance
 Erection All Risks (EAR) policy is designed to
cover Plant and Machinery under erection.
 Interest of Suppliers/Manufacturers, Contractors,
Subcontractors can be recorded in the policy.
 Erection All Risks (EAR) insurance offers
protection to contractors and to manufacturers
and suppliers erecting machinery and plant etc.
against financial loss due to any sudden fortuitous
and unforeseen causes resulting in loss or damage
to the property insured at the project site whilst
being stored, erected, tested and commisioned.
Erection All Risks Insurance (EAR)
 Erection All Risks Insurance offers
comprehensive coverage for plant and
machinery construction risks.
 This policy can be extended to include third
party liability related to work conducted on the
contract site.
 Various add-on covers are available as per
customer’s requirement
 EAR
 This policy covers risks associated with
storage, assembly/erection and testing of Plant
and Machinery. EAR insurance provides
comprehensive cover. All perils are covered
unless specifically excluded.
 Cover incepts from the time of unloading of the
first consignment at the project site and
terminates on completion of testing or handing
over of the project to the Principal, or the
period chosen, whichever is earlier.
 Sum Insured
Sum to be insured is the completely erected value
of the plant and machinery inclusive of freight,
custom duty and cost of erection
Main Extension : Policy can be extended on
payment of additional premium to cover
 Escalation Maintenance Clearance and Removal of Debris
 Damage to Owner’s Surrounding Property
 Third Party Liability
 Additional Customs Duty
 Express Freight Holiday and
 Overtime rates and Wages
 How is the premium computed?
 Premium shall be computed for the total period
commencing from
 Commencement of work or Date of
arrival of the first consignment at the
site of erection whichever is earlier
until completion.
 In a construction contract the value of the
property at risk is low initially increases at
various stages of construction and decreases
when completed parts of the project are handed
over and taken into use.
 Many times insurer would not ask for schedule
of a plant but they want to know the maximum
value of any one item of plant and the length of
time it will be on site together with some idea of
plant’s movements during the period of contract
 Valuation of plant is difficult when equipments
are old. Book value is less than market value.
For insurance purposes the value declared
should be the estimated replacement costs
including transport costs and custom duties
Average
 ‘If a policy is ‘subject to average’, then, if the
sum insured at the time of a loss is less than the
actual value of the property insured, then the
amount of claimed under the policy will be
reduced in proportion to the underinsurance.
In mathematical terms:
 Allowable Claim = Loss x Sum Insured
Value at risk
 If you do not insure for the full values at risk,
then you may not be able to obtain a full
settlement of any loss.