The Importance of Insurance in Construction Projects

Insurance is a vital risk mitigation tool in construction projects. Whether insurance is taken out due to a statutory, regulatory or contractual requirement or as an additional measure of protection, parties cannot afford to go without it.

In this bulletin, we consider the role of insurance, important insurance considerations and common types of insurance cover in construction projects.

Risk and Insurance

Protection against loss, damage and liability is required at every stage of construction – from conceptualisation and design to implementation, handover and operation, comprehensive insurance coverage is imperative. This is because the inherent risks associated with construction projects are numerous and substantial. Determining which party is responsible for which type of insurance cover in a project involving several contractors and sub-contractors is fundamental to the protection of the parties and the project.

In order to determine the incidence of risk in a construction project, the works contract must be considered. The works contract is entered into by parties with the intention of creating legally enforceable obligations, including the works to be done by the parties, the period for completion, the payment terms and the standards agreed upon. A works contract is usually entered into between an Employer and Contractor, or a Contractor and Sub-contractor. The works contract may be a standard form works contract (with special or particular conditions / contract data) or a bespoke contract.

In South Africa, standard form works contracts include the General Conditions of Contract for Construction Works (GCC), the New Engineering Contract (NEC), the Fédération Internationale Des Ingénieurs-Conseils (FIDIC) Conditions of Contract and the Joint Building Contracts Committee (JBCC) Contract (for building works). Standard form works contracts are then modified by parties to provide for the specific terms and conditions of the project.

Insurance in Works Contracts

The works contract typically includes the party responsible for taking out and maintaining the required insurance, as well as the minimum insurance coverage required.

Certain clauses are indicative of the incidence of risk and provide for each party’s obligations in respect of insurance. Such clauses include:

Types of Insurance in Construction

The works contract and the clauses highlighted above will stipulate the various types of insurance policies which must be taken out by a party. A common requirement is the approval of the insurance terms by the Employer and the provision of copies of the insurance policies to the Employer, which the Contractor is to obtain, to ensure that adequate insurance is in place. Insurance policies may be once off or annual, depending on the works contract requirements, the type of insurance required and the purpose for the insurance, among other variables.