Insurance and Bond. Sr. Kenny Lui BSc(QS), LLB, MMgt, MACS MHKIS, MRICS, RPS (QS)

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Insurance and Bond

Sr. Kenny Lui

BSc(QS), LLB, MMgt, MACS MHKIS, MRICS, RPS (QS)

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What are we going to cover today?

Introduction

Why do we have insurance?

Some insurance “jargon”

Insurance arrangement

Types of insurance

Some notes for CAR / TPL / ECI

Surety Bond

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Reasons for Insurance Policies

Contract

Requirements

Legislation

Risk

Allocation

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Reasons for Insurance Policies

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Clause 21 - Insurance against injury to persons or

property

Covers both "Employees' Compensation Insurance" and "Third party liability insurance“

Both insurances are to be in the joint names of the

Employer, the Contractor, his sub-contractors and their respective sub-contractors of all tiers.

The Employees’ Compensation Insurance is to be taken out by the Contractor

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Clause 21 - Insurance against injury to persons or

property

Third Party insurance is to be taken out by whichever party takes out the Contractors' All Risks Insurance The Third Party insurance shall cover the Employer’s liability for damage to real or personal property other than the Works due to collapse and subsidence

The period of cover is to run from the Commencement Date until the Defects Rectification Certificate for the whole of the Works has been issued

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Clause 22 - Insurance of the Works

There are 3 alternative clauses:

- Clause 22A

covers the insurance of the Works by the Contractor

- Clause 22B

covers the insurance of the Works by the Employer - Clause 22C

covers the insurance of the existing building and the insurance of the Works by the Employer

The insurer chosen by the party taking out the insurance have to be approved by the other party

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Clause 22 - Insurance of the Works

Evidence of cover has to be supplied prior to the commencement of the Works

The remedy for a party defaulting in taking out the insurance is provided for

The conditions for using an annual policy (Clause 22A.3) maintained by the Contractor as an alternative to

taking out a specific policy for insurance of the works are set out

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Reasons for Insurance Policies

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Legal Requirements

Employees’ Compensation Ordinance Cap 282

Employers are required

to take out employees compensation insurance policy to cover their liability

when death or injuries involving …… due to an accident arising out of and in the course of his/her employment

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Reasons for Insurance Policies

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Risk Allocation – Indemnity Clause

Clause 20 Injury to persons and property and

indemnity to Employer

Contractor to indemnify Employer

The Contractor shall be liable for and shall indemnify the Employer against any damage, expense, liability or loss in respect of any claim or proceedings for:

(a) Bodily injury to, disease contracted by or the death of any person

…….except to the extent that the injury, disease or death of that person is due to any act or neglect of the Employer or any person for whom the Employer is responsible; and

(b) Injury or damage to real or personal property arising out of, or in the

course of, or by reason of the carrying out of the Works……due to a breach of contract or other default of the Contractor or any person for whom the Contractor is responsible.

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Risk Allocation – Indemnity Clause

Clause 20 Injury to persons and property and indemnity to Employer

(a) except to the extent …… due to any act or neglect of the

Employer or any person for whom the Employer is

responsible

(b) ……due to breach of contract or other default of the Contractor or any person for whom the Contractor is responsible

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Risk Allocation

Insurance transfers part of a commercial risk

The risk still remains, it is now being shared

with an insurer

The liability still remains

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A Reminder

Legislation Risk Allocation

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25 Most Ridiculous Insurance Claims Ever

http://list25.com/25-most-ridiculous-insurance-claims-ever/3/

A clever lawyer bought a pack of (24) cigars and had them insured against all sorts of catastrophes including floods, storms, and of course fire. A few months later he filed a claim saying his cigars had all disappeared in a series of “small fires”.

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25 Most Ridiculous Insurance Claims Ever

The insurance company correctly assumed that he had smoked them and told him to get lost.

The judge however force the insurance company to pay up because they didn’t specify the type or size of fire in the contract.

The insurer was obligated to pay $15,000 for the lawyer’s his loss of the rare cigars lost in the "fires".

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25 Most Ridiculous Insurance Claims Ever

After the lawyer cashed the cheque, the insurance company had him arrested on 24 counts of ARSON!!!

The lawyer was convicted of

intentionally burning his insured property and was sentenced to 24 months in jail and a $24,000 fine ……

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25 Most Ridiculous Insurance Claims Ever

Lesson Learnt from the story:

1. Do not abuse the insurance protection.

2. Insurance company can sue the wrong doer

after the insurance company paid the

compensation to the insured

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Insurance “Jargon” (Glossary)

Subrogation

Joint names

Cross liability

Deductibles / Excess

Escalation

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Insurance “Jargon” (Glossary)

– Subrogation

[律] 代位；取代

One party takes on the legal rights of another, especially substituting one creditor for another.

For example, when an insurance company compensates a policy holder for an injury, often the policy holder's right to sue the person who harmed him is subrogated,

meaning it is transferred from him to the insurance company.

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Party A Party B

Causes Damage Claims for Damage

Insurance Company Co mpensa tion Subr og ation

Insurance “Jargon” (Glossary)

– Subrogation

[律] 代位；取代

Party A

Causes Damage

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Insurance “Jargon” (Glossary)

– Joint Names

An employer is insured against any liability (vicariously) incurred by reason of a breach by the contractor.

A party named under an insurance policy can make claims under that policy and it is also common for insurers to be required to waive their rights of subrogation against co-insured parties.

This means that the insurer agrees not to seek to recover against a co-insured party (i.e. the employer) even if the insurer paid out on account of the actions of the employer.

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Causes Damage Insurance Company Compens ati on Subr og ati on MC SC - B

Insurance “Jargon” (Glossary) – Joint Names

Causes Damage Insurance Company Compens ati on Subr og ati on MC SC - B Subrogation is waived MC +SC - B

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Insurance “Jargon” (Glossary)

– Cross Liability

A cross liability clause essentially means that each party is insured in its own right as if a separate policy had been issued. Each of the insured gets treated as a separate entity even though they are under the same policy. This means that one individual that is covered by the

policy could potentially damage or hurt another individual that is also covered by the same policy.

Read more: http://www.finweb.com/insurance/what-is-an-insurance-cross-liability-clause.html#ixzz3ZVJg9E2n

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Insurance “Jargon” (Glossary)

– Cross Liability

Joint Names

Employer, Main Contractor, Sub-Contractors

Joint Names with Cross Liability Clause

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Causes Damage SC - B

SC - A + SC - B

Insurance “Jargon” (Glossary) – Cross Liability

Compens ati on Causes Damage Insurance Company SC - A SC - B Clai m for Damag e Insurance Company Cause Damage

Joint Insured Joint Insured

Clai

m

for

Damag

e

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Insurance “Jargon” (Glossary) – Cross Liability

Compens ati on Insurance Company Causes Damage

Joint Insured Joint Insured

Clai

m

for

Damag

e

Policy with Cross Liability Clause SC - B

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Insurance “Jargon” (Glossary)

– Deductible / Excess

The insured shall bear certain amount of ‘loss’ even if he can get compensation from the insurer.

Employers should carefully assess the level of the

deductible under an insurance policy to ensure that the deductible is reasonable and not prohibitively high.

Excessive deductibles could lead to a risk being effectively uninsured.

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Insurance “Jargon” (Glossary)

– Escalation Clause

To avoid under-insurance especially for long term projects, it is important to regularly review the total contract value upwards.

Inflation can also cause the contractor to be

under-insured due to the increase in the contract value of the project. Hence, the Escalation Clause is inserted in the policy to ensure the Total Contract Value is reviewed upwards and protects the insured from being

under-insured when a claim arises. 10 - 15% per annum is usual the increase in value of projects.

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Insurance “Jargon” (Glossary)

– Escalation Clause

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A Reminder:

Subrogation

Joint

Names

Joint Names with Cross Liability Clause

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Contractor Broker Insurance Company Co-insurers or Sub-Underwriters Insurance Policy Premium (A)

Method 1 – via insurance broker

Fees

Premium (B)

Negotiation

$$Premium Payment$$

Insurance Arrangement

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Contractor Insurance Company

Co-insurers or Sub-Underwriters

Insurance Policy Method 2 – direct contact to insurance company

Negotiation

$$Premium Payment$$

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Types of Insurance

Contractor’s All Risks

Property All Risks Professional Indemnity Employee’s Compensation Public Liability

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Premium depends on

• Contract Sum

• Excess

• Limit of Indemnity (Coverage) • Contract Period

• Nature of the projects

• External Wall Renovation

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Parts of a CAR Policy

• The Schedules

• The “All Risks” Clause

• General exceptions to the “All Risks” cover • Section 1 : The Material Damage Clause

• Exceptions to Section 1 – Material Damage • Conditions to Section 1 – Material Damage • Section 2: The Third Party Liability Clause

• Exceptions to Section 2 – Third Party Liability • Conditions to Section 2 – Third Party Liability • General Conditions

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Parts of a CAR Policy

• The Schedules

• Exceptions to Section 2 – Third Party Liability • General Conditions

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The Schedule

· The Insured

· The Project / Site · The Sum Insured

· The Limit of Indemnity · The Excess Clauses

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Parts of a CAR Policy

• The Schedules

• The “All Risks” Clause

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The “All Risks” Clause

1.0 NOW THIS POLICY WITNESSETH that in consideration of the Insured having paid or agreed to pay to the Insurers the

premium stated in the said Schedule.

1.1 THE INSURERS HEREBY AGREE subject to the terms, exceptions and conditions contained herein or attached hereto or

endorsed hereon that if during the Period of Insurance stated in the said Schedule or during any further period in respect of which the Insured shall have paid and the Insurers shall have accepted premium the Insured shall sustain loss or damage or shall incur liability in the circumstances provided for by this Policy and defined herein the Insurers shall indemnify the Insured in the manner hereinafter described.

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Parts of a CAR Policy

• The Schedules

• General exceptions to the “All Risks” cover

• Section 1 : The Material Damage Clause • Exceptions to Section 1 – Material Damage • Conditions to Section 1 – Material Damage • Section 2: The Third Party Liability Clause

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General Exception

• Political risks, war or warlike operations, SRCC* • Nuclear, radioactive contamination

• Willful act or willful negligence of the insured or their representatives

• Cessation of work whether total or partial • Electronic Data Exclusion

• Terrorism

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Parts of a CAR Policy

• The Schedules

• General exceptions to the “All Risks” cover

• Section 1 : The Material Damage Clause

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Contractor’s All Risks Insurance

SECTION 1- Material Damage to:

• Contract works (permanent and temporary works forming part of the contract)

• Removable of debris • Professional Fees

• Construction Equipment ( Site offices, storage sheds, silos, scaffolding, utilities etc.)

• Construction machinery (earthmoving equipment, cranes, site vehicles)

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Parts of a CAR Policy

• The Schedules

• Exceptions to Section 1 – Material Damage

• Conditions to Section 1 – Material Damage

• Section 2: The Third Party Liability Clause • Exceptions to Section 2 – Third Party Liability • General Conditions

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Exception to Section 1 – Material Damage

• Consequential loss of any kind

• Faulty design

• Defective material / workmanship (faulty part only) • Mechanical and/or electrical breakdown

• Wear and tear, corrosion, gradual deterioration • Road vehicles, waterborne vessels and air crafts

• Loss of use, liquidated damages, penalties, performance guarantees or other consequential losses

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Parts of a CAR Policy

• The Schedules

• Exceptions to Section 1 – Material Damage • Conditions to Section 1 – Material Damage

• Section 2: The Third Party Liability Clause

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Contractor’s All Risks Insurance

SECTION 2 – Third Parties Liability

Bodily injury & Property Damage

Where the Insured becomes legally liable to pay as damages consequent upon :

• Accidental bodily injury to third parties

• Accidental loss or damages to property owned by third party.

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Parts of a CAR Policy

• The Schedules

• Exceptions to Section 2 – Third Party Liability

• General Conditions

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Exception to Section 2 – Third Party Liability

• Property insured or insurable under Section I

• Vibration, removal, weakening of support

• Liability for bodily injury to employee/ workmen of insured parties

• Liability for damage to property belonging to insured parties • Motor , Marine & Aviation liability

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A Reminder

Section 1 – Materials Damages • Works

• Professional Fees • Removal of Debris • Constructional Plant

Section 2 – Third Parties Liability

Con tr act or s’ All Risk s Insur ance

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A Reminder

Section 1 Section 2 50M 10M 50M 50M 250M 50M

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Employees’ Compensation Insurance

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Employees’ Compensation Insurance

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Employees’ Compensation Insurance

W338 Indemnity to Principal Endorsement

It is hereby understood and agreed that this Policy is extended to indemnify the Principal named in the Policy (hereinafter called the Principal) against legal liability ……

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Employees’ Compensation Insurance

W348 – Witnessing Clause

Any employee in the immediate service of any of the parties jointly described as the INSURED shall ……

NOW THIS POLICY WITNESSETH that if any Employee in the Insured’s immediate employ shall sustain bodily injury……..

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Employees’ Compensation Insurance

W358 Indemnity to Principal Contractor Endorsement

It is hereby understood and agreed that this Policy is extended to indemnify the Principal Contractor named in the Policy (hereinafter called the Principal) against legal liability ……

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Employees’ Compensation Insurance

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Property All Risks

A Reminder

CAR – Section 1

CAR – Section 2 (Third Party Liability)

Employees’ Compensation 14 /28 days after Substantial Completion Defects Rectification Certificate

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A Reminder

W204 – Employees of Sub-Contractors Endorsement W338 – Indemnity to Principal Endorsement W348 – Witnessing Clause Endorsement W358 – Indemnity to Principal Contractor Endorsement

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Bond

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Types of Taxi

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Surety Bond

A guarantee issued by a surety agency on behalf of a client, requiring the agency to pay a sum of money to a third party in the event the client fails to fulfill certain obligations.

What is a Surety Bond?

A guarantor of payment or performance if another fails to pay or perform, such as a bonding company which posts a bond for a guardian, an administrator, or a building contractor.

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Surety Bond

Guarantee

(Employer who requires a bond)

Contractor (who is required to

provide a bond) Surety - Guarantor

(Company who issues and guarantees a bond)

Building Contract Surety Bond

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Types of Bond –

by functions

Surety Bond

Bid Tender Bond

Performance Bond

Advance Payment Bond

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Types of Bond – by

calling methods

Surety Bond

On-demand Bond (Unconditional)

The Employer may call the Bond upon

presentation of a written statement stating that the

contractor has failed to perform

On-Default /

Performance Bond (Conditional)

The Employer should prove the non

performance was due to the default of the Contractor and the loss sustained before they can call the Bond

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Seal?

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Surety Bond

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Surety Bond

On-Default / Conditional / Performance Bond 1. On Default by the Contractor

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Surety Bond

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Surety Bond

On-Demand / Unconditional Bond

1. Upon demand in writing

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Surety Bond

HKIS Standard Form 2005 (w Qty) – Schedule 1

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Surety Bond

2005 with quantity – Clause 33

2005 with quantity – Schedule 1

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Surety Bond

2005 with quantity – Clause 33

2005 with quantity – Schedule 1

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Surety Bond

2006 without quantity – Clause 33

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Forms of Bond

A Reminder

On-demand Bond (Unconditional) On-Default Bond (Conditional)

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A Reminder

Bond Tender Payment Performance Retention On-Demand On-Default Tender Payment Performance Retention

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A Reminder

Bond On-Demand On-Default Tender Payment Performance Retention On-Demand On-Default On-Demand On-Default On-Demand On-Default

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Insurance vs Surety Bond

• 3-party agreement • Guarantee of performance • Perquisite for interim payment • Financial obligation to Contractor • 2-party agreement • Transfer of risk from

contractor to insurer • Expectation of claims to be paid • Financial obligation to Insurer / wrong-doer Insurance Surety Bond

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Experience Sharing – Case 1

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Experience Sharing – Case 2

A D&B Contract is about 40 months with about 6 months extension of time.

The Contractor anticipates that some outstanding works have to be completed during defects liability period.

The Contractor seeks quotations to cover the

“outstanding works” for about 3 – 4 months beyond the extended completion date

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CAR/TPL Original Policy End at_{XX Nov 2014} Option 1 - Upto Aug 2015Current Quote [A]

Current Quote

Option 2 - Upto Sept 2015 [B]

Difference [B-A] Est. Contract Value 1,400,000,000.00 1,400,000,000.00 1,400,000,000.00 -TPL Limit 112,000,000.00 112,000,000.00 112,000,000.00 -Premium 5,670,095.00 1,300,000.00 1,450,000.00 150,000.00 Contract Period ~40 months 279 days 309 days 30 days Premium / day 4,659.08 4,659.50 4,692.56

ECI Original Policy End at_{XX Nov 2014} _{Option 1 - Upto Aug 2015}Current Quote _{Option 2 - Upto Sept 2015}Current Quote Difference_[B-A] Est. Contract Value 1,400,000,000.00 1,400,000,000.00 1,400,000,000.00 -Outstanding Value for insurance coverage 1,400,000,000.00 180,000,000.00 180,000,000.00 -Premium (Quoted + Levy) 10,761,633 + Levy 1,500,000 + Levy 1,500,000 + Levy -Premium with Levy value 11,923,889.36 1,662,000.00 1,662,000.00 -Contract Period ~40 months 279 days 309 days 30.00 Premium / day 9,797.77 5,956.99 5,378.64 (578.35) Premium / Outstanding Value 0.859% 0.923% 0.923%

Levy = 10.8%

Premium Required

CAR / TPL 5,670,095.00 1,300,000.00 1,450,000.00 150,000.00 ECI 11,923,889.36 1,662,000.00 1,662,000.00

-Total Premium Required (Estimate) (HK$) 17,593,984.36 2,962,000.00 3,112,000.00 150,000.00

Premium / day 14,456.85 10,616.49 10,071.20

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Experience Sharing – Case 2

Premium $17.6M covers $1.4B CAR and ECI

Commencement

Date Completion _Date

Extra $2.9M Extra $3.11M Aug Sept Extended Completion Date

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Experience Sharing – Case 2

Even if you insure and pay the full premium for whole contract works, you have to pay EXTRA PREMIUM to:

1. Extend your coverage period to the extended completion date (at least)

2. Extend the insurance to cover ‘outstanding works’ unless only defects rectification works to be done during the defects liability period

Insurance Company will not consider the already paid premium for those outstanding works in the original contract.

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Experience Sharing – Case 2

Duration

Work Value

Premium

for CAR

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Experience Sharing – Case 2

Work Value

Duration

Premium

for ECI

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Disclaimer Note

This set of notes has been prepared according to the author’s own experience of the relevant practice and is intended for information only. No responsibility for loss occasioned to any person acting or refraining from action occasioned by or as a result of any material included will be accepted by the author or its company.

The materials and information contained herein are not intended to offer or provide any insurance / legal advice concerning the topics covered. Please consult your insurance company / brokers where necessary.

Copyright in all or part of this set of notes rests with the author and no part or parts of the material herein shall be reproduced in any form or by any means electronic, mechanical, photocopying recording or otherwise without prior consent of the author.

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