Insurance and Bond Sr. Kenny Lui BSc(QS), LLB, MMgt, MACS MHKIS, MRICS, RPS (QS)
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 Experience Sharing (if time allowed)
Reasons for Insurance Policies Contract Requirements Legislation Risk Allocation
Reasons for Insurance Policies Contract Requirements
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
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
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
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
Reasons for Insurance Policies Legislation
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
Reasons for Insurance Policies Risk Allocation
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.
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
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 Insurance does not remove liability
A Reminder Legislation Risk Allocation Contract Requirements
Story Time
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.
25 Most Ridiculous Insurance Claims Ever http://list25.com/25-most-ridiculous-insurance-claims-ever/3/ 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".
25 Most Ridiculous Insurance Claims Ever http://list25.com/25-most-ridiculous-insurance-claims-ever/3/ 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
25 Most Ridiculous Insurance Claims Ever http://list25.com/25-most-ridiculous-insurance-claims-ever/3/ 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 Subrogation
Insurance Jargon (Glossary) Subrogation Joint names Cross liability Deductibles / Excess Escalation
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.
Insurance Jargon (Glossary) Subrogation [ 律 ] 代 位 ; 取 代 Party A Causes Damage Claims for Damage Party B Party A Causes Damage Party B Compensation Subrogation Insurance Company
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 coinsured 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.
Insurance Jargon (Glossary) Joint Names MC Causes Damage SC - B Compensation Subrogation Insurance Company MC MC +SC - B Causes Damage SC - B Compensation Subrogation Subrogation is waived Insurance Company
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-liabilityclause.html#ixzz3zvjg9e2n
Insurance Jargon (Glossary) Cross Liability Joint Names Employer, Main Contractor, Sub-Contractors Joint Names with Cross Liability Clause MC SC - 1. SC - N+1
Insurance Jargon (Glossary) Cross Liability SC - A Causes Damage SC - B Claim for Damage Insurance Company SC Joint - A Insured + SC - B Causes Damage Joint SC Insured - B Claim for Damage Compensation Insurance Company Policy without Cross Liability Clause
Insurance Jargon (Glossary) Cross Liability Joint SC Insured - A Causes Damage Joint SC Insured - B Claim for Damage Compensation Insurance Company Policy with Cross Liability Clause
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.
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 underinsured 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 underinsured when a claim arises. 10-15% per annum is usual the increase in value of projects. http://www.answers.com/q/what_is_an_escalation_clause_under_construction_all_risks_insurance
Insurance Jargon (Glossary) Escalation Clause
A Reminder: Joint Joint Names Subrogation with Cross Liability Names Clause
Insurance Arrangement Method 1 via insurance broker Premium (B) Premium (A) Fees Broker Contractor Insurance Policy Negotiation $$Premium Payment$$ Insurance Company Co-insurers or Sub-Underwriters
Insurance Arrangement Method 2 direct contact to insurance company Contractor Insurance Company Insurance Policy Negotiation $$Premium Payment$$ Co-insurers or Sub-Underwriters
Types of Insurance Employee s Compensation Contractor s All Risks Public Liability Professional Indemnity Property All Risks
Premium depends on Contract Sum Excess Limit of Indemnity (Coverage) Contract Period Nature of the projects External Wall Renovation Any Scaffolding or demolition work involved
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 Endorsements / Special Conditions
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 General Conditions Endorsements / Special Conditions
The Schedule The Insured The Project / Site The Sum Insured The Limit of Indemnity The Excess Clauses The Period of Insurance
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 General Conditions Endorsements / Special Conditions
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.
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 General Conditions Endorsements / Special Conditions
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 * SRCC - Strikes, Riots, and Civil Commotion
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 General Conditions Endorsements / Special Conditions
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) Principal s existing property
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 General Conditions Endorsements / Special Conditions
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 The cost of maintenance
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 General Conditions Endorsements / Special Conditions
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.
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 General Conditions Endorsements / Special Conditions
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 Contractual liability (Fines, liquidated damages)
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
PWD Insurance Specimen
A Reminder Contractors All Risks Insurance Section 1 Materials Damages Works Professional Fees Removal of Debris Constructional Plant Section 2 Third Parties Liability
A Reminder Section 1 Section 2 10M 50M 50M 50M 250M 50M
Employees Compensation Insurance
Employees Compensation Insurance
Employees Compensation Insurance
Employees Compensation Insurance
Employees Compensation Insurance Sub-contractors employees are not insured??
Employees Compensation Insurance Sub-contractors employees are not insured??
Employees Compensation Insurance
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
Employees Compensation Insurance NOW THIS POLICY WITNESSETH that if any Employee in the Insured s immediate employ shall sustain bodily injury.. W348 Witnessing Clause Any employee in the immediate service of any of the parties jointly described as the INSURED shall
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
Employees Compensation Insurance Some particular provisions
A Reminder CAR Section 1 Property All Risks CAR Section 2 (Third Party Liability) Employees Compensation 14 /28 days after Substantial Completion Defects Rectification Certificate
A Reminder 4 Endorsement Clauses to an ECI policy W204 Employees of Sub-Contractors Endorsement W338 Indemnity to Principal Endorsement W348 Witnessing Clause Endorsement W358 Indemnity to Principal Contractor Endorsement
Bond Bond
Story Time
有 駕 駛 員 的 計 程 車 Types of Taxi
Surety Bond What is a 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? 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.
Surety Bond Guarantee (Employer who requires a bond) Surety Bond Building Contract Surety - Guarantor (Company who issues and guarantees a bond) Counter Indemnity Contractor (who is required to provide a bond)
Surety Bond Types of Bond by functions Bid Tender Bond Advance Payment Bond Performance Bond Maintenance Bond
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 Types of Bond by calling methods 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
Surety Bond
Surety Bond
Surety Bond
Seal? Common Seal
Surety Bond On-Default Bond or On-Demand Bond
Surety Bond On-Default / Conditional / Performance Bond 1. On Default by the Contractor 2. The damages sustained by the Employer
Surety Bond On-Default Bond or On-Demand Bond
Surety Bond On-Demand / Unconditional Bond 1. Upon demand in writing
Surety Bond HKIS Standard Form 2005 (w Qty) Schedule 1 On-Default Bond
Surety Bond 2005 with quantity Clause 33 2005 with quantity Schedule 1
Surety Bond 2005 with quantity Clause 33 2005 with quantity Schedule 1 Remember to use SCC to rectify the discrepancy
Surety Bond 2006 without quantity Clause 33 2006 without quantity Schedule 1
A Reminder Forms of Bond On-demand Bond (Unconditional) On-Default Bond (Conditional)
A Reminder Bond On-Demand On-Default Tender Payment Performance Retention Tender Payment Performance Retention
A Reminder Bond Tender Payment Performance Retention On-Demand On-Default On-Demand On-Default On-Demand On-Default On-Demand On-Default
Insurance vs Surety Bond Surety Bond Insurance 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
Experience Sharing Case 1 Information to be supplied for an insurance broker for insurance quote
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
Experience Sharing Case 2 CAR/TPL Original Policy End at XX Nov 2014 Current Quote Option 1 - Upto Aug 2015 [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 Current Quote Option 1 - Upto Aug 2015 Current Quote Option 2 - Upto Sept 2015 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
Experience Sharing Case 2 Premium $17.6M covers $1.4B CAR and ECI Extra $3.11M Extra $2.9M Commencement Date Completion Date Aug Sept Extended Completion Date
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.
Experience Sharing Case 2 Premium for CAR Work Value Duration
Experience Sharing Case 2 Premium for ECI Duration Work Value
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.