Insurances, Bonds and Warranties

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Note

  • 3/2/2023: Revised.
  • 5/4/2022: Punctuation style changed.
  • 2/2/2021: Typo correction.
  • 24/12/2014: Moved from wiki.
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Common terms

  1. Insurer - The party providing the insurance.
  2. Agent - The party representing the insurance company.
  3. Broker - The party representing the insurance buyer.
  4. Insured - The party buying (taking out / maintaining) the insurance.
  5. Joint names - more than one party insured.
  6. Third parties - other than the insured and the insurer.
  7. Cross liability - If one of the insureds causes personal injury or death or property loss or damage to another of the insureds, since both of them are jointly insured, the other one would not be treated as a third party, and the one liable would not be covered by the insurance. To remedy this situation, a cross liability clause is required to deem that a separate insurance is issued to every one of the insureds, and all other insureds are treated as third party for that purpose.
  8. Waiver of subrogation - By subrogation, the insurer can stand in the shoes of the insured and enforce the insured's rights against the third party tortfeasor who is responsible for the loss. A waiver of subrogation is therefore required if the tortfeasor is one of the insureds.
  9. Excess / deductible - The amount to be borne by the insureds before they are compensated.
  10. Surety / bondsman - The party providing the surety / performance bond. It can be an insurance company or a bank.
  11. Guarantor - The party guaranteeing the performance of another party.
  12. Beneficiary - The party to whom the benefits of the guarantee is given.

(revised, 3/2/2023)

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Insurances

  1. Contractors' all risks and third party liability insurances:
    • Discretionary unless mandated by the works contracts.
    • Covering:
      • Materials damage - covering the period until the issue of the Practical Completion / Substantial Completion Certificate for the relevant section of the Works plus a short period for transition during handover (14 days under the private Standard Form of Contract)
      • Third party liability - covering the period until the issue of the Certificate of Completion of Making Good Defects / Defects Rectification Certificate / Maintenance Certificate (different terms used by different contracts) for the relevant section of the Works.
  2. Insurances of construction plant, temporary buildings and vehicles:
    • Discretionary for construction plant and temporary buildings.
    • Vehicles mandated by law.
  3. Insurances prior to delivery to site:
    • Discretionary.
  4. Employees' compensation insurances:
    • Mandated by the Employees' Compensation Ordinance.
  5. Exclusion of self-employed persons and sole proprietors:
    • Insurance cover not required by the Employees' Compensation Ordinance.
    • Not automatically covered by the Contractors' all risks and third party liability insurances.
    • These persons will not lose their rights to compensation but will have to pursue as third parties.
    • Their employers do not have insurance covers if they are liable.
    • Can be covered by "Contractors' Insurance Policy".
    • Can be covered by special endorsement to the Contractors' all risks and third party liability insurances.
  6. Professional liability insurances:
    • Discretionary unless mandated by the consultancy appointments or works contracts.
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Contractor Controlled Insurance Programme (CCIP)

  1. Insurance procured by the Contractor.
  2. This is the usual approach.
  3. Contractor taking up the administrative role of procuring the insurance.
  4. Contractor may have an established department or experienced staff to do it.
  5. Contractor may have long established insurance agents or brokers to do it.
  6. Contractor in the best position to manage his own site safety / risks.
  7. Contractor's good track records may lead to lower insurance premium.
  8. The lower insurance premium would be reflected in the Contractor's tender price.
  9. A desire to keep the premium low for the future would encourage keeping good track records for now.
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Owner Controlled Insurance Programme (OCIP)

  1. Insurance procured by the Owner (Employer).
  2. Mainly for mega projects involving a number of contracts interfacing with one another.
  3. Best to avoid overlaps and gaps, split of responsibilities and mutual claims within the same mega project.
  4. Also suitable when the Employer will have a number of projects coming up over the years.
  5. Employer in better control in areas such as premium, insurance security and insurance coverage.
  6. The limit and scope of indemnity may be higher and bigger than those could be procured by smaller contracts.
  7. Excesses may be too high for smaller contractors within the same mega project.
  8. Employer taking up the administrative role of procuring the insurance.
  9. Employer may not have an established department or experienced staff to do it.
  10. Employer may need to employ insurance consultants to give advice and do it.
  11. It may require a long lead time from deciding to employ the insurance consultant to procurement of insurance.
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Bonds

  1. Surety bonds / Performance bonds:
    • Conditional - compensation made only if faults are proved.
    • On-demand - can be called to pay without the need to prove faults, but must avoid conditional wording leading to the requirement to prove faults.
    • Validity period:
      • Until the issue of the Practical / Substantial Completion of the whole of the Works or until the issue of the Certificate of Completion of Making Good Defects / Defects Rectification Certificate / Maintenance Certificate (different terms used by different contracts) of the whole of the Works.
      • Should be a floating date related to the actual date of the above certificate because the actual date may vary from the original programmed dates.
      • Fixed calendar date as the expiry date should be avoided, but may be tolerated in special circumstances provided it is sufficiently later than the originally expected expiry date to cover possible delays, e.g. 1 year longer.
      • Different ways to specify the expiry date lead to different premia but the floating date method is still procurable.
      • Unless otherwise stated, the bond amount will not be reduced in case of sectional completion.
    • Bond amount:
      • Normally 5% for main contract for private projects.
      • Should consider 10% for demolition contracts, piling contracts and sub-contracts because their risk implications may not be correspondingly low inspite of their lower contract sums.
      • Government projects may not require a bond and do specify much lower percentages.
  2. Tender / bid bonds:
    • Guaranteeing that the tender / bid will be submitted and abided by without withdrawal.
    • Seldom used in Hong Kong.
  3. Advance payment bonds:
    • Guaranteeing that the advance payments will be refunded.
    • Seldom used in Hong Kong.
  4. Retention bonds:
    • Provided in lieu of actual retention money being withheld.
    • Seldom used in Hong Kong.
  5. Payment guarantee bonds:
    • Guaranteeing payment by the paying party.
    • Seldom used in Hong Kong.

(revised, 3/2/2023)

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Guarantees

  1. Joint venture guarantees.
  2. Parent company guarantees.
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Warranties

  1. Form of Warranty / Collateral Agreement by Nominated Sub-Contractor / Supplier.
  2. Quality warranties:
    • Waterproofing
    • Glass breakage.

(Typo in item 1 corrected, 2/2/2021)

 

See also Vetting Insurances, Bonds and Warranties.

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