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<h2 class="wp-block-heading"><strong>Hazards &amp; Risks in Construction Projects</strong></h2>
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<p><strong>Hazard - </strong>A situation or event whose realization has the potential for damage to human life, society, the economy, or the environment.</p>
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<p><strong>Risk - </strong>Risk is the uncertainty of loss.</p>
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<p><strong>Risk = Hazard x Probability of Occurrence</strong></p>
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<li>The hazard is measured in terms of severity. The probability of occurrence of a catastrophic hazard is extremely low; therefore, the risk may still be acceptable. If the probability of a marginal hazard is extremely high, the risk may not be acceptable.</li>
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<p>Uncertainty of loss covers a range of losses from life to property and from liability to statutory compensations.</p>
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<p>This uncertainty has two distinct features.</p>
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<p>1. The uncertainty of when it will occur.</p>
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<p>2. The uncertainty of how severe the loss will be.</p>
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<p><strong>Insurance - </strong>Insurance is concerned with financial compensation in the event of a loss. Hence, the risk may be further defined as the possibility of a financial loss.</p>
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<p>Insurance is primarily concerned with <strong>pure risks</strong>.</p>
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<p><strong>Pure risk</strong> is a risk in which there is only a possibility of loss or no loss and there is no possibility of gain.</p>
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<p><em>Pure risk refers to risks beyond human control that result in a loss or no loss with no possibility of financial gain.&nbsp;Natural disasters such as f</em><em>ires, and floods, are categorized as pure risk. Also, some unforeseen incidents, such as acts of terrorism or untimely deaths may be identified as pure risks.</em><em></em></p>
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<p><strong>Speculative risk</strong> differs from pure risk because there is the possibility of profit or loss. This characterizes most financial investments. Most speculative risks are uninsurable because they are undertaken willingly in the hope of profit.</p>
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<p><strong>Pure risk</strong> is insurable, because the law of large numbers can be applied to forecast future losses, and, therefore, insurance companies can calculate what premium to charge based on expected losses.</p>
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<p><em>The law of large numbers, in probability and statistics, states that as a sample size grows, its mean gets closer to the average of the whole population. This is due to the sample being more representative of the population as the sample becomes larger.</em></p>
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<p>On the other hand, Speculative Risks have more varied conditions that make estimating future losses difficult or impossible. Also, speculative risk will generally involve a greater frequency of loss than a pure risk. For instance, people do many things to protect their lives or their property, but people willingly engage in speculative risks, such as investing in the stock market, to make a profit; otherwise, a person can avoid most speculative risks simply by avoiding the activity that gives rise to it.</p>
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<p><strong>Perils - </strong>Risk is sometimes used to mean the Peril insured against and more often to mean the person or property protected and should be considered in the relevant context to avoid confusion.</p>
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<p>Risk is the chance of loss, and peril is the direct cause of the loss. If a house burns down, then fire is the peril.</p>
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<p>The terms Peril and Hazard are sometimes used interchangeably with each other and with Risk. However, it is important to note the different meanings.</p>
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<h2 class="wp-block-heading"><strong>Risk transfer through Insurance</strong></h2>
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<p>People face risks in their daily lives. If unprotected, damage caused by the risks could sometimes cause harm and losses that might affect lives, occupations, businesses, and assets.</p>
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<p>Insurance companies are prepared to provide such protection by taking over many of the critical risks people face at affordable costs.</p>
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<p>The mechanism behind the insurance concept is;</p>
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<p>(a) Risk transfer from one party to another at an affordable cost,</p>
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<p>(b) Probability of occurrence of a loss,</p>
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<p>(c) Operation of a common pool (fund) to share the losses,</p>
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<p>(d) Payment of an equitable contribution to the pool.</p>
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<p>From the point of view of the public, insurance is an economic risk transfer mechanism.</p>
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<p>The insurance policy is a Contract of insurance between a party called "insured or assured” and a party who takes over the risk called “Insurer” for a financial consideration called "Premium".</p>
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<p>The insurer does not guarantee that the event insured will not happen. He operates on the probability of transforming the risks to a loss on a "may or may not occur basis".</p>
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<p>It will also not guarantee that a loss suffered by the insured will be fully paid back. This is because of imitations in the insurance policies.</p>
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<h3 class="wp-block-heading"><strong>Factors that cause losses</strong></h3>
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<p>Perils and hazards are the two factors that cause losses. Examples of perils are fire, lightning, cyclones, floods, tsunamis, earthquakes, burglary, thefts, terrorist activity, etc.</p>
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<p>Hazard is a condition that may create or increase the chances of a loss arising from a Peril.</p>
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<h3 class="wp-block-heading"><strong>Physical Hazard</strong></h3>
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<p>A hazard is anything that either causes or increases the likelihood of a loss. For instance, gas furnaces are a hazard for carbon monoxide poisoning. A physical hazard is a physical condition that increases the possibility of a loss. Thus, smoking is a physical hazard that increases the likelihood of a house fire and illness.</p>
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<h3 class="wp-block-heading"><strong>Moral hazard</strong></h3>
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<p>Moral hazards arise from human involvement in a risk. The Client may be a cunning and dishonest person and may intentionally cause loss (often fire) or enhance a loss (after initial damage) and try to claim against the insurer. This hazard is not obvious at the inception of a claim but may emerge during the period of insurance or at the time of a claim. Moral hazards are losses that result from dishonesty. Thus, insurance companies suffer losses because of fraudulent or inflated claims.</p>
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<h2 class="wp-block-heading"><strong>Common features of insurable Risks</strong></h2>
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<p>1. It is concerned with pure risk only. Risks should not involve any prospect of gain or profit. Thus losses incurred in trading are not insurable.</p>
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<p>2. The event causing loss must have some sort of uncertainty. The uncertainty may be either in the fact that the happening of the event depends on accidental (fortuitous) causes, which means it may or may not happen at all.</p>
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<p>3. A person can only insure something if he is likely to suffer financially if anything happens to it. The insured must have an insurable interest in what he intends to insure.</p>
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<p>4. Anything that is against Public policy (what society considers the right and normal thing to do) is not insurable. For example, spot fines imposed by the Police for traffic offenses are not insurable.</p>
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<p>5. Losses of a high or inevitable catastrophic nature caused by war may not be insurable.</p>
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<p>6. Certain physical occurrences like climatic or tidal conditions, cyclones, floods, earthquakes, etc., may also not be insurable in certain geographic locations due to inevitable nature or high frequency of occurrence.</p>
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<p>7. The premium should be reasonable compared to the risk being insured.</p>
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<h2 class="wp-block-heading"><strong>Principles of Construction Insurance</strong></h2>
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<h3 class="wp-block-heading">1. <strong>Utmost good faith</strong></h3>
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<p>As one party to a proposed insurance (the insurer) contract relies upon the other party (the insured) for information about the risk, the rule of utmost good faith applies. This is the duty of the proposer to reveal all material facts about the proposed risk. A material fact would influence the mind of a prudent underwriter in deciding whether to accept a risk and what terms to apply.</p>
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<h3 class="wp-block-heading">2. <strong>Insurable interest</strong></h3>
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<p>To remove from an insurance policy, the insured must stand in some legally recognized relationship to the subject matter of the policy whereby he benefits from its safekeeping or is prejudiced by its loss.</p>
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<h3 class="wp-block-heading">3. <strong>Indemnity</strong></h3>
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<p>The idea of indemnity is that the insured should be placed after a loss in, as near as possible, the same position that he enjoyed before the loss – an exact financial compensation. The insured will not profit from a loss. In practice, this is very difficult to achieve. This is because of;</p>
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<p>(a) Variations in policies;</p>
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<p>(b) Sum insured is not being adequate (average applies);</p>
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<p>(c) Deductibles imposed on policies.</p>
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<h3 class="wp-block-heading">4<strong>. Subrogation</strong></h3>
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<p>If an insured recovers under his policy, then the insurer assumes his legal rights and remedies against third parties. This prevents an insured from making a recovery from both his insurers and a third party and thereby receiving more than indemnity.</p>
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<h3 class="wp-block-heading">5. <strong>Contribution</strong></h3>
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<p>An insured cannot make a profit from a loss by recovering from more than one property or pecuniary insurance policy. Contribution only arises when policies cover;</p>
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<p>(a) the same loss or damage by the same insured peril;</p>
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<p>(b) the same subject matter;</p>
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<p>(c) the same interest of the insured.</p>
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<h3 class="wp-block-heading">6. <strong>Proximate cause</strong></h3>
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<p>Insurance policies are designed to pay for losses from specific perils. For a claim to be valid the loss must be directly attributed to one of the insured perils. If caused by an independent, intervening, and uninsured peril, the claim will not be allowable.</p>
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<p>The Doctrine of proximate cause helps to establish whether the loss was caused by a peril insured against or whether the loss was caused by an excluded peril.</p>
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<p>It is often difficult to determine the cause of loss. Where there is a chain of events, to entitle the insured to recover, the chain of events leading from the insured peril to the actual loss suffered by the insured must be unbroken.</p>
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<p>In the case of the Asian tsunami in 2014, an earthquake was found to be the proximate cause of loss.</p>
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<p>In another case, a fire left a brick wall in an unusable state. A few days later a storm caused the wall to collapse which caused damage to the adjacent property. It was held by the court that the active efficient cause of damage was not the fire, but the failure of the owner to demolish the wall or provide adequate support to the wall.</p>
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<h2 class="wp-block-heading"><strong>Construction Insurance</strong></h2>
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<p>From the legal viewpoint, insurance allocates the risks to which the construction project is exposed between the parties. From an insurance aspect, risks form the basis of insurability and the premium calculation.</p>
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<p>Insurance is a risk transfer mechanism in that the insured transfers from a state of uncertainty to a state of certainty at a certain cost of the insurance premium. It is a cost-smoothing mechanism, in which contractors exchange a regular known annual premium for an unknown potential toss.</p>
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<h3 class="wp-block-heading"><strong>Insurable Risks</strong></h3>
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<p>Insurable risk means a risk, which can be covered by insurance. For a risk to be acceptable by an insurer, it has to be a "pure risk which means it has the downside of the effect only (opportunity for loss only), speculative risks are not covered by traditional insurance. Moreover, it has to be sudden and accidental, with statistics available for insurers to simulate past events and generate a creditable premium.</p>
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<p>- An insurable risk must be measurable in quantitative terms and in such a way that the theories of probability and the law of inertia of large numbers may be used.</p>
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<p>- A large number of homogeneous and relatively independent exposure units.</p>
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<p>- Potential losses that are accidental and unintentional.</p>
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<p>- Losses are determinable and measurable.</p>
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<p>- Reliable estimates of claim frequency and severity are available.</p>
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<p>- The risk charge or premium is economically feasible.</p>
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<p>The insured must have an insurable interest in the object of the insurance contract.</p>
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<p>Therefore, whether insurance can be used as a solution depends on:</p>
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<p>- The insurability of the risk.</p>
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<p>- The adequate and tailored policy.</p>
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<p>- The comparison of the insurance premium and the cover of potential risks.</p>
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<p>- The trust and confidence of insurers about their solvency and claim service.</p>
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<p>- No other alternative risk transfer solutions are available.</p>
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<p>A typical construction project will consider insurance on:</p>
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<p>- Material Damage.</p>
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<p>- Third-Party Liability.</p>
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<p>- Materials in Transit</p>
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<p>- Damage to Construction Plant.</p>
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<p>- Non-negligent indemnity.</p>
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<p>- Consequential loss.</p>
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<p>Insurance covers not usually included but obtainable:</p>
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<p>- Employer's Liability / Workmen's Compensation.</p>
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<p>- Professional indemnity (for Architects, Consulting Engineers, etc.)</p>
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<p>Some of the risks associated with the construction process are fairly predictable or readily identifiable; others may be unforeseen.</p>
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<p>The risks list from the Contractors’ perspective includes;</p>
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<p>- Inclement weather.</p>
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<p>- Delays in site availability.</p>
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<p>- Site conditions – surface and &amp; subsurface.</p>
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<p>- Inadequate detailed drawings.</p>
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<p>- Late material deliveries.</p>
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<p>- Unanticipated price changes.</p>
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<p>- Subcontractors' failure to perform.</p>
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<p>- Unproductive labor and strikes.</p>
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<p>- Design risks.</p>
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<p>- Construction defects.</p>
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<p>- Damages, penalties, and</p>
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<p>- Costs caused by delays in the completion of the works.</p>
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<p>Contractors should also consider the obligations to carry insurance and the capacity to transfer risks to subcontractors, insurers, or consultants.</p>
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<p>When deciding on risk management strategies, a contractor must consider many aspects, including risk responsibilities, risk patterns, and risk management capabilities.</p>
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<p>The risks can be insurable, such as fire, theft, and other physical risks; some risks can be transferred to subcontractors or suppliers, such as quality of materials, and workmanship; some risks can be shared with clients, such as uninsurable risks and bureaucratic delays.</p>
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<p>- Construction risks are complex, hazardous, and difficult to assess, price, and control.</p>
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<p>- Requires highly trained officers to handle.</p>
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<p>- Construction projects are too vulnerable to loss especially due to unpredictable weather changes.</p>
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<p>- They are more risky than property risks (static properties).</p>
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<p>- Too many insured parties - Owner/principal, contractor, sub-contractors, financiers, suppliers.</p>
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<p>- Liability issues can be complex.</p>
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<p>- Construction insurance is a one-off policy, with no renewal applicable like property policy (issued for every year).</p>
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<p>No time to assess risks properly. Usually, due to high competition, policies are transacted with quick negotiations. The consequences can go either way.</p>
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<p>Insurers could recommend appropriate risk management procedures for contractors to:</p>
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<p>- Reduce the probability of a risk happening.</p>
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<p>- Reduce the size of a claim when it happens.</p>
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<p>- Increase certainty on contractor's financial exposure.</p>
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<p>- Advise on Loss Prevention.</p>
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