Insurance Applications in Construction Industry

Introduction

The types of risk faced by the present day construction industry have proliferated over the period. These risks range from the liabilities arising out of meeting the environmental obligations to meeting the compensation for injury and death of workmen in the construction sites. The risks also extend to the builder’s commitment to professional liability. However the construction insurance from the beginning has been applied with a limited scope based on the responsibilities of each of the parties involved in the construction projects with the main thrust on the completion of the project without hindrance from any financial problems emanating from losses or damages occurring during the periods of construction. Thus construction insurance is expected to deal with the exposure of the industry to risks arising during construction without considering other risks related to the location of the project and other lifetime hazards. The conventional insurance practices in the construction industry have just been sufficient to cover few of the problems and disputes in the industry. This has resulted in development of overlaps and gaps in the insurance cover for the construction industry which played a major role in the performance of large construction projects. The effect of such overlaps and gaps in the insurance cover has increased tremendously with the enlargement in the size of different construction projects. In this context the objective of this research is to examine the impact of different types of insurance covers that can be applied to construction industry and their effect in facilitating the insurance companies to expand their activities to riskier and large projects. As a case study this paper considers the impact of insurance on the functioning of the construction industry in Dubai UAE.

Insurance Practices in Construction Industry – An Overview

The definition of the term ‘insurance’ implies that insurance can be resorted as a mechanism for smoothing the costs of losses. At no point of time insurance can be equated to mechanism that transfers the losses from the insured to the insurance company. Insurance is an element that assists the guarantee of the future financial stability of any organization against the financial and business consequences of business risks which are speculative in nature and which occur unexpectedly (Edwards, 1995, p 28). Insurance in some cases operate as an option to ensure peace of mind to those who do not have the means to face huge losses or who do not have the capabilities, knowledge or inclination to run their business with a sophisticated approach. In some other cases there is the statutory or contractual liability to cover insurance. In those instances direct insurance is the one which is commonly adopted approach by most of the small and medium sized organizations to cover their exposure to risks. In the case of large corporations, insurance is considered as the cheapest method for managing the physical risks to the assets of the corporations. The corporations also cover higher levels of liability exposures by resorting to appropriate insurance coverage.

In the case of construction companies there are various types of insurance coverage which the construction companies need to provide for in order to carry on their business with exposure to reasonable risks. Insurance covering workplace safety, general liability insurance, property damage liability insurance, personal injury insurance, insurance against damages by fire and wrap up insurance are some of the common types of insurance which the construction companies normally cover during the currency of their business. Lack of adequate and proper insurance coverage expose the construction companies not only to financial losses but also to unnecessary litigations.

Construction projects are prone to inherent hazards and risks to people and property. This makes insurance an important factor in running construction business of any size. Insurance for the construction companies such as Builders Risk Insurance provides insurance cover to the construction business owners against the injury to the construction workers on project sites. However the mere coverage of insurance by the employer does not exempt him from maintaining safety in the workplace. Claims against construction insurance policies are paid out only when workplace safety and health is maintained in the constructions sites strictly in accordance with the required standards. Certain types of construction insurance policies cover the materials and machinery on the construction sites from the perils of accident, fire or theft. The high cost of construction materials in the current economic situation makes the construction insurance more significant.

However, the costs of insurance to construction industry have risen in the recent years due to various reasons including natural calamities, terrorist attacks and other economic events affecting the functioning of the construction industry. The occurrence of such types of events has made it impossible for several insurance companies to leave the industry unable to achieve profitability. Most of the insurance companies have exited the construction industry in order to eliminate further risks of underwriting the construction industry (Harris, 2003). The current market forces like non-availability of skilled labor, increasing litigations in the industry and exposure to unpredictable damages have made the cost of insurance in the construction industry spiral upwards. As of the year 2003 the cost of risk financing on a global basis amounts to 26.9% of the revenues from construction industry (Harris 2003, p 3). It appears that with the current economic conditions of the construction industry, the insurers have to change their methods of offering insurance services to the construction industry and develop new ways of providing insurance cover to the industry. Most of the insurance companies consider the construction industry to carry unusual risk factors which makes significant changes to the conditions of the policies including reduced coverage for the same amount of premiums and requiring the construction companies to go in for multiple policies to get the same quantum of insurance coverage. The insurance companies also resort to other options like increased warranties and penal clauses in the insurance policies and increase in the number of deductible clauses. Such practices have severely hindered the growth of the construction activities and it therefore necessitates looking into alternative and innovative ways of providing insurance cover to the industry. Precisely this forms the objective of this study to examine the current and future role of insurance in the construction sector.

Rationale

Insurance and law are interwoven in running the business of construction, necessitating those involved in the industry to cope up with the learning of insurance and law which already are complex and intense in nature. The procedures used in construction industry in all its facets like construction, design, supervision and operation make acquiring adequate knowledge of insurance critically important for the owners and managers to successfully run the business. From an insurance perspective such knowledge should extend to the identification of the risks and adequately covering them. To this end, this study is expected to add to the existing knowledge on insurance applications in the construction industry. Escalating insurance costs being a significant cost factor in construction makes it essential for the decision-makers to have a thorough understanding of the risks, liabilities, and indemnities, as these play an important role in defining the relationship between the various parties involved in the construction contracts. This study since it examines the impact of insurance on the expansion of business opportunities in the construction industry also provides some additional insight into the significance of new avenues of insurance applications in the construction industry.

Aims and Objectives

The aim of the study is to study the impact of different insurance policies to looks into the diverse covers available to engineers and contractors in the construction industry. The study therefore attempts to examine both existing and emerging trends in insurance covering the construction sector. The study also examines whether such policies contribute to the growth of the industry in the current economic situations. The objectives of the study are:

• To study the salience of risk identification and assessment in the risk management practices in construction projects for ensuring effective risk transfers
• To examine the role and responsibilities of different stakeholders of the construction industry with respect to covering the risks associated with the industry
• To study different types of key construction insurance policies along with their exclusions to assess the risk cover under these policies
• To study the perceptions of construction industry professionals and managers about the risk management and insurance coverage in the construction industry

Hypotheses

This research will try to find theoretical support to the hypotheses that:

• Greater use of insurance will lead to increased construction services.
• Insurance will make contractors to enter into risky construction activities.

Method and Structure

This study will use quantitative research method of survey questionnaire to accomplish the objective of examining the role and contribution of insurance to the growth and development of construction industry. The survey questionnaire will be distributed to some of the major construction companies in UAE to gather information on the insurance covers purchased by them in respect of their exposures to various industry risks.

This paper is structured to have different chapters in order to present a comprehensive research report on the topic of insurance applications in the construction industry. Immediately following this introductory chapter, the next chapter presents a detailed review of literature relevant to the topic. The objective of chapter two is to extend the existing knowledge on the insurance practices in the construction industry. Chapter three provides a descriptive analysis of the research methodology used by this study. Findings of this research will be presented in chapter four. This chapter will also contain an analysis of the findings of the study. Chapter five concludes the paper with a recap on the text of the report with a few suggestions for effective use of insurance for the promotion of the growth of construction industry.

Risk Management in Construction Industry

The objective of this chapter is to review the available and relevant literature on the topic of insurance coverage of construction industry. This review is undertaken with the intention of adding to the existing knowledge on the insurance policies covering the risks of construction industry and the benefits accruing to the industry. This chapter will also review the latest developments in the field of insurance in the construction industry.

Introduction

Construction insurance is the mechanism by which the interests of the parties involved in a construction project against contingent claims in exchange for a fixed amount of charges levied as premium. Insurance is being practiced in the construction industry as a major tool for risk management. By insuring the construction projects, the insurers undertake to indemnify certain types of risks by getting such risks transferred to themselves from clients, contractors, subcontractors and other parties connected with the construction projects. This enables the construction projects to obtain contingent funds at times when the construction projects sail through difficult periods. Construction insurance plays an increasingly pertinent role in making large and small construction projects successful with the financial losses resulting from natural disasters and other contingent events shared by the insurers. The irony is that the role and importance of insurance in construction industry is some instances not recognized and is also not given the attention it deserves. This is mainly due to the lack of knowledge of the practitioners on risk assessment in the construction industry and non-allocation of necessary resources for adequate insurance cover. This ignorance prevents them from implementing appropriate strategies for risk management through different and suitable insurance covers. A thorough study of the nature of construction risks would enable the identification of the areas of exposure to risks which need to be covered against such exposure.

Overview of Construction Risks

The inherent characteristics of construction projects present a number of risks associated with construction works and make the projects more vulnerable to financial risks (Bunni, 2003). There are a number of risks identified with the progress of the construction projects. (Palmer, 1999) categorizes these risks in the areas of

1. timing,
2. project nature,
3. approvals,
4. owner structure,
5. project delivery, and
6. project controls.

Timing risks are associated with not only the time spent on preplanning of a construction project but also the time taken by the project during its progress. Time is the essence of any construction contract and without a proper preplanning the project cannot be physically completed within the agreed time. Due to lack of time, if the construction work is done in a fast-track manner, there is the likelihood of quality problems arising out of the construction. Therefore, in this case the level of risks is higher for possible disputes on design and quality of construction.

Project nature relates to various attributes of the project in terms of type, size, complexity, location and completeness of design plans which go to define the overall scope of the proposed project. The chances of problems arising out of commercial buildings designed to meet normal specifications are much less as compared to the construction of industrial process plants which are built to unique and specialized designs. However, each risk factor affects the progress of the construction in varying degrees of intensity based on the circumstances. For instance, the construction of an office block in a new geographical area with an incomplete design specification may also pose larger issues to resolve.

‘Approvals’ is another area which might cause hindrance to the timely completion of the construction projects. In a construction project approvals are required at various stages of completion and even before the construction starts. Especially, construction projects that are supposed to meet stricter environmental regulations are likely to result in more time delays and cost overruns than other normal projects. This is because of the fact that the provisions in the construction to meet the environmental standards are to be reviewed by different government agencies at various levels. Similarly projects which are opposed to general public perception of better living like nuclear plants are prone to delays due to problems in approval than the construction of a park or other recreational facility for public use.

In respect ‘ownership’ a construction project is subjected to several risks on the consideration of the type and experience of the owners. All the future problems in a proposed construction project are closely associated with the ownership. It is always the case that an ownership organization having only limited experience and which has not appointed professionally qualified construction management professionals is prone to innumerable risks than an organization which engages defined set of procedures and professional controls over its working. Owners who have the knowledge and skill on running the construction business normally understand the repercussions of changing the scope of work as to the cost and risks involved. Therefore they try to complete the work on schedule so that the construction contractors are not put to losses. In addition those owners who do not plan the work ahead with the backing of adequate contingent funds face significant hazards to the progress of the construction activity.

The category of risks under project delivery is concerned with the type of contractual relationship that exists between the parties and the organizational structure designed to oversee the progress of the project. Oftentimes it is found that fixed-price or lump sum contracts are less risky than the fast-track construction contracts where the mode of working is cost-plus type of arrangement. Similarly, under circumstance where the owner himself takes up the responsibility of fulfilling the contract by subcontracting the whole or substantially whole of the project work is likely to face severe risks with regard to the completion of the project on schedule.

Project management control is one of the areas that have significant impact on the completion of the construction project. With proper project management controls in place it is possible to discover the likely problems in the construction before they lead to significant cash outflows. Lack of efficient and effective project management control lead to a number of operational risks in the progress of construction projects of any size (Palmer, 1999).

In addition when the parties involved discuss and settle the cost of change orders up-front during the continuance of the project instead of arriving at the amount of settlement after the project is completed, it would avoid exposure of the project to a number of potential risks. In the matter of assessing the project risks, it is essential that all the risk factors are critically evaluated in advance so that any uncertainty relating to the project is detected before the commencement of the project. For instance areas such as ownership structure and project management controls are likely to be associated with more risks than others. Once the risk factors are identified and evaluated it becomes easier to deal with them individually by developing appropriate course of action including insuring the possible risks. This way the risk associated with the project are reduced to manageable levels to ensure the unhindered continuance of the project.

Alternatively, the risks associated with the construction project can be grouped as

1. internal factors,
2. external factors, and
3. management aspects.

The internal risk factors include the presence of a number of stakeholders and huge capital outlay. There are also other elements like great diversity of end users of construction projects and varied work sites using large and mobile equipment. The fact that works and locations are fixed having long gestation period and are of high monetary values increase the risks involved in the projects. Natural hazards like flood, lightning, earthquakes and storms and varying site conditions including the characters of soil pose significant risks to the progress of the projects. The structures surrounding the location and the risks of theft of materials at site are some of the additional factors that determine the level of risks associated with the project. War, unproductive labor and strikes also contribute to the slow pace of work in any construction project. Certain management aspects like contractual obligations between the parties involved, cost control and time control add to the risks of construction projects. The time span of a construction project is usually a lengthier one involving various phases such as planning, investigation, design, construction and completion of the construction. The formation of temporary project teams for completion of the contracts is yet another source of risk disrupting the progress of the construction. There are other areas like environmental issues, health and safety management at the work sites and political risk management which need to be considered while planning the schedule of completion of any construction project. Because of the presence of a number of stakeholders such as clients, suppliers, manufacturers, contractors and subcontractors the construction projects are often found to be inundated with several hazards and risks. The unique characteristics of each project lead to significant probability of risks and claims during or after the completion of the construction. Therefore there is the need for according special treatment to the construction projects. Although a number of techniques and processes exist to identify and assess the risks associated with construction projects there are no standard techniques or processes that are earmarked for specific project assessments (Walewski et al., 2002). It is shown that there is a gap between existing risk management techniques and their application and use by the contractors and owners (Han & Dickmann, 2001).

Risk Pricing in the Construction Sector

The unique nature of the industry and the projects within make the industry prone to higher degree of risks. The peculiarity of these factors necessitates the pricing of the construction project before production by a proper and careful assessment of the risks involved in the completion of the projects. Competitive tendering as a means of awarding the contracts, low-fixed capital requirements, higher preliminary expenses, possible delays in realizing the cash flows, tendency of the owners to operate within low working capital means, seasonal effects on the completion schedule, governmental regulations and interventions, uncertain soil conditions, impact of unpredictable weather on the construction activities and lack of performance liability or long-term guarantees are some of the other peculiar characters associated with the construction industry (Calvert et al., 1995, p 53). Construction projects are categorized by long production cycle, involving the input from a number of participants and the projects are also expected to meet complex regulatory requirements and standards (Kwakye, 1997, p 6). The higher rate of business failures in the construction industry goes to prove that the industry is yet to master the mitigation of risks associated with the industry.

For a considerable period of time the industry practitioners have adopted unsystematic mechanisms like depending on their intuition and unsophisticated in-house techniques in the evaluation of risks while estimating the cost of the projects. Mochtar & Arditi, (2001) out of a study of the pricing strategies of 400 top US contractors observe that the contractors mainly relied on their intuition in setting up the mark-ups for their projects after a subjective evaluation of the competitors and their moves.

It is the usual practice of the contractors and other players in the construction industry to apportion the risks based on a fixed percentage or as a lump sum amount to the base estimate of the project cost to allow for any escalation due to uncertainties in the project. In order to mitigate the issues involved in the arbitrary allowances for contingencies, the Hong Kong government has implemented the Estimating using Risk Analysis (ERA) technique as the logical way of apportioning the value of contingent risks in the project estimates (Mak & Picken, 2000). In general the construction industry has no systematic way of analyzing and evaluating project risks and safeguard against such risks.

Risk in construction projects represents the events that have an impact on the traditional project objectives of time, cost and performance including quality. Risk can be defined as the chances of occurrence of certain events affecting the project performance either positively or negatively with such occurrences emanating as a consequence of uncertainties associated with the project. Risk event is represented by the probable happening to the detriment or in favor of the project (Al-Bahar & Crandall, 1990). According to Aqua Group, (1990) risk is the possible loss arising from the difference in what was expected to happen and what actually happened. Cost overruns, time delays, poor quality of construction and design and disputes among the parties to a construction contract are some of the common problems arising in a construction project. Risk therefore is a major factor for consideration by the contractors as well as the clients and consultants in the construction industry. However because of the complexity of risk assessment they have been poorly understood by people in practice.

Ways of Tackling Risks in Construction Industry

Research report of RICS, (2004) has identified five different ways in which the practitioners in the construction industry tackle the risks against the completion of construction projects. They are

1. Umbrella approach – under this approach the owner allows for every possible eventuality and therefore adds a large amount of risk premium to the contract estimate,
2. Ostrich approach – under this approach the practice is to bury the head in sand with the assumption that everything is in place with the project and the project will somehow be completed within the time and cost schedule,
3. Intuitive approach – wherein the owner or the managers do not believe in any systematic risk analysis for evaluation of the associated risks but depend on their intuitions for managing the risks,
4. Brute force approach which focuses only on those risks which remain uncontrollable with the decision to force things for achieving the project objectives and
5. Snowboard approach in which it is assumed that the owner or manager is placed on a snowboard on the downhill on their run.

This approach envisages a preplanning and analysis of all possible risks recognized as pitfalls on the way and providing for corrective actions as and when the projects encounter those risks, by having a record of the risks in mind. It is also recognized that it is possible to control certain things like speed and route but not other things like weather and competition. The focus under this approach is therefore centralized on the possible corrective actions needed to control the risks and make the project successful. It may be observed that with the present economic situation the first four approaches can be effectively adopted only by very few organizations which also explain the reasons for a number of business failures in the construction industry.

The absence of systematic analytical models however, cannot be said to indicate a poor approach by the contractors in dealing with the risks associated with different projects. It is observed that from the beginning of the 19^th century when the contractors resorted to forms of general contracting, they have put in use different mechanisms to tackle the risks and survived the repercussions of such risks. However insurance has not been found to be one of the important tools in mitigating the construction business risks. Most of the contractors have resorted to other methods like speculative house building during the 19^th and 20^th centuries in order to sustain the available labor force and overhead costs of the business. By adopting speculative house building the contractors were able to sail through the peaks and troughs of construction sector. In the modern times, there is a marked change in the approach in which the contractors use their positive cash flows to invest in other projects rather than on house building. Few successful contractors have entered other business areas with shorter cycles so that such businesses supplement their construction activities (The Oxford Encyclopedia of Economic History, 2003, p 1: 511). There are other ways by which the contractors reduce the risks involved in the business. Some of these ways are not accepting works which are considered too risky, subcontracting a large portion of the construction works involved to other parties and apportioning large amounts in wage structures to take care of eventualities. By resorting to these practices, the contractors are able to pass on the risk to other parties. Still insurance has not been looked at a possible option for risk avoidance by the contractors. Although there is no systematic way by the contractors are able to provide for pricing risks in construction contracts, the contractors use their intuition to make adjustments either in quantities or per unit rates or both so that the uncertainties resulting from the associated risks to the business are taken care of. On the other hand there are several insurance plans that may be applied to the construction industry to mitigate the risks which can be favorably looked into by the contractors.

Risk Management in Construction Industry

A number of uncertain factors pose challenge to the different parties involved in a construction project. All these factors are categorized as risks. Arriving at decisions based on assumptions, expectations, estimates and forecasts of the likely future events gives rise to risks associated with any construction project. In risk and uncertain situations the actual outcomes for a particular event would deviate from the anticipated outcomes causing disturbances to the progress of the event (Rafetery, 1994, p 9). The nature of activities involved, processes, and external environment relating to the construction industry makes it more dynamic, risky and challenging venture. However the construction industry has been identified to possess poor risk management skills leading to delay in completion and cost escalation in various construction projects. This in the past has resulted in significant losses to clients, contractors and the public (Edwards, 1995). Construction risks are considered to be events that have a profound effect on the cost, time of completion and quality of construction. While it is possible to predict and easily identify some of the risks associated with the construction processes, there are other risks which are totally unforeseen and unpredictable (Ahmed & Azhar, 2004). The level and scope of the risks associated with the construction industry varies with the size and nature of different projects. In general these risks are directly related to the context of the contract implying the environment in which the project will be built such as the geographical location and regulations governing the construction. They are also dependent on the scope of physical elements of the project such as scope, budget and materials representing the content of the project (Davis & Prichard, 2000).

It is usual that with the construction project becoming more technical and complex, that there would be an increase in the risks associated with the contracts. This ultimately leads to the increase of negative impacts to the execution of the project itself. Therefore, for managing risk efficiently there is the need to identify the risk in time and analyze them for mitigating them.

Gray and Lars observe the risk management as a proactive approach undertaken to control the level of risk and to offset the impact of such risks. Risk management enables the project manager to face the risks with the possible advantage of time, cost and technical issues connected with the project. Efficient risk management assists the project manager to have better control over the future events and in achieving the project objectives of meeting the time and the expected standards of technical and functional performance (Gray & Larson, 2008, p 4).

The figure 2.1 illustrates the steps involved in the risk management process.

Risk Identification

The first step in the risk management process is the identification of the risks. This step involves generation of a list of all possible risks that could influence the performance of a project. The risks associated with a construction project may take the form of

1. natural disasters like flood, hurricane,
2. physical challenges such as injuries onsite to workers, fire, damage to machinery, equipments and materials,
3. financial and economic challenges such as inflation, paucity of funds,
4. political and environmental issues such as changes in regulations, political regime,
5. design-related issues like defective or incomplete design,
6. construction –related issues like change orders, variation in productivity (Al-Bahar, 1990).

There are various techniques available for identifying the risks associated with construction projects. Hillson, (2002) has identified processes like brainstorming, workshops, checklists, questionnaires and interviews as the possible tools available for risk identification. Delphi groups and other diagrammatic approaches such as Cause-Effect diagrams, Systems Dynamics, Influence Diagrams are some of the other techniques considered suitable for risk identification. However, no single technique or combination techniques have been identified to be suitable for risk identification (Hillson, 2002).

Risk Assessment

Risk assessment is the process which helps the project management in estimating the potential impact of risks. This assessment helps the manger to arrive at the decisions regarding the risks that may be retained with the business and segregating those risks which need to be transferred to other parties. Risk assessment can be carried out by employing quantitative and qualitative techniques. When the data available are strong enough and are reliable, the project manager can use quantitative methods. The quantitative methods in these cases provide accurate results by relying on probability distribution of risks. Contrastingly, personal judgment and past experiences of the analyst form the basis for qualitative techniques. The results out of qualitative techniques may vary for assessments conducted by different persons. Therefore, when both quantitative and qualitative techniques can be used, it is advisable to use quantitative techniques in preference to qualitative techniques (Chapman & Ward, 1997, p 14).

Risk Response Development

Responding to risks identified in a construction project is a critical step in the process of risk management. This step can be completed by four typical ways in response to the risks identified in a construction project. They are

1. Risk elimination – this is achieved by placing suitable preconditions in the bid,
2. Risk transfer – which involves hiring subcontractors or arranging for suitable insurance coverage,
3. Risk retention – this process involves reducing the impact of risks through strategies developed in advance,
4. Risk reduction – which is accomplished by training the staff about different perceptions of risk and ways in which risks can be managed (Panthi et al., 2007; (Thompson & perry, 1992, p 23).

Risk Response Control

The last step in the process of risk management is the risk response control. This step involves the elements of executing the risk response strategies, monitoring triggering events, initiating contingency plans and watching out for new risks to emerge. Establishment of a change management system to take care of the risk response control process is one of the essential elements of this step. This is required to deal with events requiring formal changes in the scope of the project, altering the budget and/or schedule of the project (Gray & Larson, 2008, p 35).

Gnerally the construction project managements do not use the risk management processes extensively due to many reasons. Lack of knowledge about risk management techniques and sophisticatied nature of these tehcniques and doubts about the suitability of the techniques are some of the barriers identified to have impeded the use of the risk management techniques by the projects. However, an incrased use of sophisticated risk management techniques would result in improved profitability, reduced costs, better time management and improved customer relationships which are vital for the success of any construction project.

Risk Transfer and Insurance

A construction project is surrounded by a number of uncertainties in the completion. Managing these uncertainties involves managing the risks associated with the projects. Risk management system outlined in the previous section is designed to manage the risks faced by the construction projects. Various definitions of risk management have been evolved based on different perspectives of risks identified with the construction projects. Generally, the focus of risk management centers round managing the adverse impacts of risks. Flanagan & Normann, (1993) defines risk management as a discipline structured to live with the possibility of the future events causing adverse impact on the progress of any project. Other definitions describe risk management as the process leading the management to arrive at decisions to reduce the likelihood and/or impact of the possible occurrences of risks (Broome, 2002; Bunni, 2003; Treceno et al., 2003).

Any risk management process has to recognize that it involves both positive and negative outomes. Risk management has to be carried as a continuous process during which the sources of uncertainties are identified in a systematic way and the impact of such uncertainties are assessed and qualified. It also involves the assessment of the imact of the uncertainties and mangement of the likelihood of such uncertainties to arrive at an accepable balance of the risks and opportunities (Dawson, 1997; Williams et al., 1998). Smith, (1999) defines the risk managemnt as the process of understanding a project and arriving at a better decision to manage the project in the future.

Although different definitions have attributed different connotations to the term ‘risk management’ Dawson (1997) has summarized the essential similarities among the definitions and has listed the following as the common characteristics of risk management as identified by these definitions. Risk management has a formal process and it employs systematic and scientific methods to assess and manage risks. The objective of risk management is to identify the risks in any business including a construction project and to evaluate the impact of the risks on the conduct of the business or completion of the project. Risk management also provides mechanisms for monitoring and controlling the individual risks with a view to reach an acceptable level of overall exposure. Risk management is a continuous process and cannot be considered as a one-off event.

As observed in the previous section the objective of risk identification is to identify all the possible sources, events and causes that cause risks while progressing with a project. Risk assessment deals with the technical evaluation of risks with a view to find out the possible impact on the progress of the project. Risk analysis enables the project manager to analyze the different aspects of risk including the risk dependency chains. This process would enable the project manager to evaluate the impact of the risks on the completion of the project (Tah & Carr, 2001).

Effective risk control enables the project to reduce the exposure to different types of risks and thereby helps the project management to mitigate possible adverse impacts and losses. Essential elements of risk control involves

1. risk retention or absorption,
2. risk reduction or mitigation involving education and training of the project staff to identify potential risks affecting the progress of the project, physical protection to the equipments and machinery to reduce the possibility of physical losses to property, systems to ensure consistency in the approaches dealing with potential risk situations,
3. risk transfer including the processes of insuring against the consequences of possible losses occurring as a result of an event, sub-contracting to different parties and modifying the conditions of the contract to ensure that there is suitable modification in the risks and
4. risk avoidance.

The important consideration in transferring the risk is to make an assessment of whether the receiving party has the competence of making a fair assessment of the risk and is having the necessary expertise to minimize or reduce the impact (Kangari, 1995). The traditional objective of entering into a contract is to use it as a tool for risk sharing and allocation. There might be changes in the nature and extent of risks as the project progresses with new risks emerging and existing risks changing in their scope and importance. Such changes might also have the effect of aggravating or easing other risks associated with the project (Rahman & Kumaraswamy, 2002). However, with the contract conditions alone, it is not possible to ensure that there is an efficient and exhaustive allocation of risks (Rahman & Kumaraswamy, 2002). Basic risk management behavior adopted by the management can exhibit the risk management solutions implemented by it. The different dimensions of risk management are expressed by the level of risk management adopted and the strategic consciousness of the management. For instance, the application of an insurance-weighted transfer strategy or a deliberate control strategy would imply a high level of risk management. On the other hand, a risk-aware strategy or a shift strategy would imply lower level of risk management and this would lead to a higher level of risk-taking by the organizations.

When the organization is not following a practice of managing the risk through insurance, it implies that the level of risk management and the strategic consciousness of the management both exist at low levels in the organization. Alternatively when the risk management level is high and the strategic consciousness of the management is low, the management indulges in pursuing insurance as a frequent option to control risks. However insurance has not been considered as the best option for risk management on all occasions. With the increase in the strategic consciousness the management tends to look for alternative avenues of risk management.

The following figure illustrates the level of risk management and risk control strategies of the organizations at various levels.

Conclusion

Construction projects inevitably involve a number of complicated and onerous risks causing loss or damage to properties. In the present day’s economic climate, the risks associated with construction projects are compounded by changes in legislation. The efforts of public authorities in recovering claims from the personnel managing the projects, the adoption of non-standard building contracts and increased activity in design and build projects and the problems arising out of projects put on hold or suspended also add to the risks in construction projects. All these additional risks make it compulsory for the professionals concerned with the construction industry to review and update their knowledge about various insurance programs available to cover such risks. Traditional construction risks such as liabilities arising out of loss or damage to contract works, public liability, loss or damage to plant and equipment of the contractor, delay or inability to complete the construction still continue to have relevance to the projects. However construction industry professionals need to extend their risk management practices covering liquidated damages, pollution liability, project-specific professional indemnity and contingent contractual liabilities. In this context the review of literature dealt with by this chapter has enriched the knowledge on risk identification and risk assessment in the construction industry including a discussion on different types of insurance coverage available to the construction industry.

Review of Contract Insurance Concepts

Insurable Risks

In order to understand the implications of insurance on managing construction project risks, it is important the concept of insurable risks is understood in its proper perspective. Insurable risk in general is a risk that can be covered by insurance. If a risk is to be accepted by the insurer as an insurable risk, it should be a ‘pure risk’ having a downside effect only with the possible opportunity for loss. Traditionally insurers do not cover speculative risks. The risk in order to be covered by the insurers should possess the characters of being sudden and accidental. In addition the risks should have statistics so that the insurer will be able to simulate the past events occurred and arrive at a premium that is creditable and accurate.

For covering the physical damages to properties used in construction, project managements use Contractors’ All Risks policies. These policies cover all materials whether in transit or in storage or forming part of the contract works. Irrespective of the fact that a risk is insurable, there are various other factors such as the insurance limits, cost of insurance and premium payable, period of coverage, negotiations and flexibility of the insurance contract and limitations and exclusions under the policy are some of the issues relating to the policy that need consideration to extend the coverage for any risk. Sharing risks with the insurers in terms of deductibles, market standing of the insurer, ability and reputation of the insurer in settling claims implied as the security of the insurance contract and insurance gaps and overlaps are some of the other factors which determine the insurable nature of a risk.

The deductibles are one of the sensible things to be considered in arranging the insurance coverage. Howard, (1997) identifies two possible reasons to include the deductibles in an insurance contract. These are (i) to reduce the number of small claims where there is a possibility of the administrative costs exceeding the claim amounts, and (ii) to ensure that the insured complies with all their obligations in terms of taking the precautions and steps necessary to prevent the loss or damage to the insured property. Therefore, it can reasonably be stated that insurance encourages managing the risk in a better way especially through the process of risk reduction.

Insurance has been identified to be an effective tool for mitigation of risks at the country, market or project level (Wang et al., 2004). For instance risks arising due to changes in legislations, expropriation and political instability can be mitigated by resorting to political insurance coverage. Liabilities arising out of improper designs can be managed through design liability insurance and claims payable to public and third parties can be managed by taking coverage under third party insurance. However it has to be remembered that it is not possible to transfer all the risks through insurance mode. Risk assessment checklists function as one of the effective means of identifying the insurable risks (Williams et al., 1998). Similarly insurance surveys and questionnaires can serve the purpose of identifying insurable risks.

Contract Insurance – an Overview

From a legal perspective, the purpose of insurance is to allocate the risks to which the project is exposed between the parties involved in the project. From an insurance point of view, risk becomes the basis of insurability and calculation of premium amounts (Bunni, 2003). According to Dickson, (1983) insurance can be regarded as a mechanism used to transfer the business operations from a state of uncertainty to a state of certainty at a cost which is known as the premium. Insurance is a cost-smoothing exercise employed by the contractor to substitute an unknown potential loss with a regular known amount of premium.

FIDIC (1986) and CII (1993) have defined insurable risks having the following characteristics. They are:

1. an insurable risk should be capable of being measured in quantitative terms. It should also be possible that the theories of probability and law of inertia of large numbers can be applied to the measurement of the quantitative terms.
2. the insurable risk should contain a large number exposure units which are homogenous and are relatively independent,
3. the risk should contain losses which are determinable and measurable and also are accidental and unintentional,
4. the insurable risk should be capable of being covered by an economically feasible risk charge or premium and in respect of which there are reliable estimates of past frequency of claims and severity available,
5. there must be an insurable interest present for the insured on the object which he proposes to insure.

From these essential characteristics of insurable risk it follows that, in order to use insurance as a tool for mitigating the associated risks depend on the elements like

1. the insurability of the risk,
2. the adequacy and suitability of the policy,
3. a comparison of the cost of insurance (premium) and the potential losses occurring out of the risks,
4. trust and confidence of the insurers in connection with their solvency and servicing of the claims,
5. non-availability of other risk transfer solutions.

Generally a typical construction project would consider covering insurance in respect of damages to materials, liability to third parties, damages to materials in transit, damages to equipments and plant at construction sites, liabilities on account of consequential losses and non-negligent indemnity. Insurance may cover employer’s liability on account of workmen compensation, auto insurance, professional indemnity for the negligence of architects and consulting engineers, contract performance guarantee bonds and liabilities for inherent defects in construction.

Perspectives on Risks from Parties to Construction Contract

Risk management involves a process in which decisions are made to accept a risk identified and find ways to eliminate or mitigate such risks (Treceno et al., 2003). However, the issue concerned with contract insurance is to fix the responsibility on a party for carrying the risks and the cost at which the risk is to be carried. There are varied parties involved in a construction contract like clients, contractors, subcontractors, insurers and suppliers. According to Chapman & Ward, (1997) the different parties involved in a construction contract have different perspectives on risks based on the background of the parties and the benefits accruing to the respective parties. Clients consider the risk of the project not being completed within the scheduled time and within the budgeted costs. On the other hand the contractors are concerned with the cost of the contract and the margin that they can earn out of the project and this is considered as the risk arising out of the construction project. The workers of the project perceives the risk as ensuring health and safety in the workplace and the risk of meeting with accidents and suffering from diseases incidental to working in the project (Anderson, 2000). In addition some of the risks are peculiar to one party and some other risks are shared among different parties. This phenomenon gives rise to a number of conflicts among the parties to a construction contract and consequent claims against each other. Because of different degrees of knowledge and perceptions of risks of different parties interacting with the individual objectives and priorities, the risk sharing among the parties under an insurance contract becomes a complex affair. It is to be noted that the risks associated with the project are carried efficiently by the party which is involved in the management of the project and who is able to best manage the factor giving rise to the particular risks (Flanagan & Normann, 1993). For instance the clients should cover the political risks, while the contractors can be made responsible for risks concerning safety of the project. Similarly design consultants can assume the responsibility for risks arising from design defects. Thus contract insurance can cover the interests of clients, financiers, contractors, subcontractors, architects, engineers and suppliers.

Clients

Since the clients of the construction project are the parties ultimately responsible for settling the bills, it becomes important to understand the needs and expectations of this category of stakeholders. From the perspective of the clients, the risk management encompasses the total process starting from briefing the project details until the handing over of the project to the users. Clients are the first party responsible for conducting the risk management process. They are the ones to involve contractors during the starting stage of the contract or at other stages according to the procurement method fixed for the contract. For example in construction and design contacts, contractors are to be involved even from the design stage of the contract. Clients are keen in achieving their desired objectives in terms of cost, time and quality of construction.

According to Edwards, (1995, p 39) the major concern of the promoter or the financier who happens to be the client is to obtain a reasonable rate of return for the risks undertaken. The clients are equally concerned with the likely impact of changes in estimated costs, benefits and timings on the rate of return on investment in the construction project. According to the traditional approach to construction insurance the more the client transfers the risk to other parties, the more are the chances that the project budget would remain safe and secure (Boothroyd & Emmett, 1996). However, it is important that an overall analysis of costs and benefits of the construction insurance proposals is undertaken to balance the risk transfer.

Failure to mobilize the necessary funds, failure to make payments to contractors/subcontractors at different stages of the progress of construction, additional administrative costs incurred due to governmental action, risks associated with acquisition of land, non-availability of materials furnished by the client, major changes in contract requirements, interference among the parties and delays in project are some of the main risks faced by the clients. These risk factors may lead to adverse consequences such as escalation in cost, faulty project completion, frequent maintenance issues, abandonment of projects in incomplete stages resulting in wastage of huge investments.

Contractors

Contractors are the set of stakeholders who carry the major responsibility to carry the risks associated with the construction sites. They are the people responsible for successful completion of the project within the time and cost and within acceptable quality standards. The project performance entirely depends on the capabilities of the contractors to efficiently manage the risks associated with construction (Wang & Chou, 2003). In the recent past the trend is to transfer the majority of risks in respect of construction contracts to the contractors under various clauses included in the contracts between contractors and clients (Lynch, 2003). The contracts provide that in cases where there is no specific allocation of any risk, then it becomes the responsibility of the contractor to undertake such risks. These types of risks normally include risks arising from unexpected disturbances to the progress of construction by third parties like illegal waste disposal, threats to construction by local gangs and requests for contribution by the local communal outfits. Therefore it becomes important that the contract should provide clear allocation of risks among the parties. When the contract does not contain specific directions on the allocation, it may lead to misunderstanding resulting in disputes with the other parties. Such misunderstanding may sometimes result in the failure or stoppage of the project.

It is to be appreciated that risks to be assumed by the contractor may arise at any stage of the project starting from the bid agreement through the completion of the construction and may extend even through the follow up maintenance contract. However it may not be possible for the contractor to carry all the risks associated with the project, as the costs may not justify such assumption. Therefore it becomes inevitable that the ability of the contractor to control and bear different types of risks is considered before allocating the risks (Boothroyd & Emmett, 1996). Better understanding of the risks and their impact on the construction process enables an efficient allocation of risks among the parties who are in a position to control them efficiently.

In any construction contract while some of the risks may be predicted easily, some of the risks may arise surprisingly. Palmer et al enumerates the risks that may arise from the perspectives of the contractors. The risks include damages or delay due to bad weather conditions, delays in availability of suitable sites, present site conditions, inadequate details in drawings related to construction, delay in delivery of materials, unexpected price variations, failure on the part of the subcontractors to deliver in time and in the required quality, labor strikes and lower labor productivity due to other factors, delays and damages due to labor strikes, risks relating to design and defects in construction, damages, penalties and costs resulting from the delays in completion of the project and many others which have a likely adverse impact on the completion of the project in time. In order to mitigate or eliminate these risks, contractors should consider various contract insurance and transferring the risks to other parties like subcontractors, insurers or consultants. Risk responsibilities, risk pattern, risk management capabilities are some of the important elements that a contractor should consider while deciding on any suitable risk management strategy (Wang & Chou, 2003).

There are certain risks which are insurable like fire, theft and other physical risks. Certain other risks like quality of materials, workmanship and quality of construction can be transferred to subcontractors. There are risks like bureaucratic delays which may be shared with the clients. Risk management thus can be seen as one of the important decision-making process to be undertaken by the contractors. The decision of the contractors centers round the direction of retaining, reducing, transferring or avoiding risks depending on the circumstances of each case. By adopting a systematic strategy of risk management the contractor would be able to improve the probability of mitigating or avoiding the adverse impact of risks associated with the project.

According to Boothroyd & Emmett, (1996) the contractor should be provided with an adequate compensation for any risks that he undertakes on behalf of the client. This can be considered as the most cost-effective route for a client from the insurer’s perspective. Traditionally the contractor is motivated to follow the route of adequately insuring the works so that he would be able to meet the expectations of the client satisfactorily. For instance a ‘contractors’ all risk insurance’ policy is one of the ways the contractor ensures the client’s satisfaction. This route is mostly adopted by the contractors since the clients expect the contractor to make good the loss or damage to the contract works during the continuance of the project by repairing or replacing the works in the event of any such loss or damage for which the contractor has undertaken the responsibility. In addition, the client expects to be indemnified by the contractor against the possible claims from the employees of the contractor or from third parties and the contractor is under obligation to indemnify the client in such cases. The contractor usually arranges for employer’s liability and public liability insurance in such cases to mitigate the risks.

By entering into an insurance contract the contractor would be able to achieve a proper allocation of risks and responsibilities arising under the contract. Therefore insurance can be considered as a major risk transfer tool and insurance therefore needs to be considered as a critical part of an integrated risk management program. The process involves three major steps:

Assessment of Risks

It is critically important that the contractor assess and segregate the risks that need to be insured and those to be retained. In cases where the insurance policies are not issued properly based on the risks assessed, it might lead to situations where the contractor would find himself without cover in respect of claims arising from the contract. It is for the contractor to design the policies more specifically in accordance with the needs of individual circumstances. Therefore it follows that an insurance policy should be carefully designed based on nature of the project undertaken, the type of procurement method followed, and the provisions of the construction contract defining the responsibilities of the contractor under the contract. Innovative insurance ideas meeting the specific needs of the circumstances must be evolved by the contractor and the contractor should also be able to obtain reduced premiums by implementing improved loss control and risk management techniques with the help of his experienced team members.

Selection of Insurer and Policies

The contractor should possess an extensive knowledge on a wide range of construction insurance policies available to meet his needs. It is also vitally important that the contractor makes an assessment of the financial strengths, claims paying ability and market standing of the insurers offering those policies. It would be possible for the contractor to assess the exact nature and quality of an insurer only when the insurer is presented with a claim to settle.

Underwriting and Settlement of Claims

The contractors have an important role to play in the matter of deciding on the value of items to be insured and the negotiation of premiums to be paid on the insurance policies. However the contractor cannot decide on taking the cover under an insurance policy purely based on the price factor. There are other aspects like the quality of the insurers in settling the claim and support in the management of risks which need to be considered while deciding on the insurance coverage. The following are some of the factors that a contractor should keep in view while employing any construction insurance. The contractor should

1. understand the perceptions of the insurers on the construction industry in general including the development of latest technologies,
2. develop and maintain a good rapport with an insurer who has the expertise and is qualified in the field of selling construction insurance products,
3. ensure that effective risk management systems, safety management programs and quality control measures are installed so that there would be an efficient control over the risks,
4. follow the track record of the performance of the insurer over the period and
5. educate the workers and staff to improve their understanding on the current insurance trends.

Insurers

While it is for the contractors to identify the risks and place their mitigation in the hands of right insurers, the insurers are the people responsible for the successful risk management related to a construction project. The insurers are in a position to provide a better risk management with the help of their expertise to recognize potential risks associated with the project and reducing the probability of occurrence of such risks. By undertaking to provide an insurance coverage, the insurer acknowledges the intensity of the efforts of an insured to maintain work place safety and health control and environment (Williams et al., 1998).

Construction risks are perceived to be highly complex and hazardous in nature preventing an efficient assessment with respect to their pricing and control. Therefore, the insurer has to render an utmost efficient insurance service with the highest quality facilitated by constant training, research and up to-date engineering knowledge and information technology (Heidenhain, 2001). In view of certain inherent elements contract insurance more particularly the Contractors All Risks Policies is not liked by all the insurers. These elements are described below:

1. According to Costner, (2002) construction projects are more vulnerable to losses. As against ordinary construction projects, those projects which employ many new technologies (most of which have not been proven yet), or which require massive organization and control are likely to meet with failure and result in both insurable and non-insurable losses.
2. There are too many parties including owner/principal, contractor, sub-contractors, financiers and suppliers to be covered by insurance.
3. The risks associated with construction projects are often complex and are interrelated with each other. There are also a number of objects or subjects to be covered by insurance including construction/erection risks, loss or damage to third parties, personal injury risks to workers, loss or damage to plant and equipment in premise, loss or theft of materials in storage.
4. Construction insurance, unlike property insurance is only a one-time business without any scope for renewal thus limiting the interests of the insurers.

Thus, a construction project comprises of many parties and subjects of risk coverage. The ability of the construction insurer to make the insurance contracts profitable lies in proper drafting, negotiating and concluding the insurance arrangements which are bearable, long-term and covering multi-insurance agreements. In some cases the coverage may extend to periods of more than ten years (Heidenhain, 2001). The complexity of the construction contracts provides a number of opportunities to the insurer and at the same time expose the insurer to huge risks and losses.

Relationship of Insurer with Contractor

The complexity and severity of risks, the probability of their occurrence and the appropriateness of the risk management system being followed by the contractor significantly influence the insurance premium and the acceptance of the risk by the insurer. Therefore it becomes important that all the parties to a construction insurance contract cooperate with each other since it is the objective of all concerned to accomplish the completion of the project successfully within the cost budgets and within the allotted time (Treceno et al., 2003).

Insurers can be of great help to the contractor by advising him the means to reduce the probability of risk occurrence, reducing the size of a claim when there is an event necessitating the claim, provide a better understanding of the risks to the contractor during the process of underwriting and increasing certainty on financial exposure. The insurer undertaking contract risks would be provided with the opportunity of keeping in close touch with the risk by engaging himself from the early stages of the project and throughout the different stages of construction, erection, testing, commissioning and during the initial operating years (Heidenhain, 2001).

Role of Insurer in Risk Management

With their knowledge and expertise the insurers will be able to provide guidance to the contractors on the risk management practices. The insurers work based on their experience on the historical events and the claims processed by them in the past (Anderson, 2000). However there is a potential danger that the management of construction firms would become complacent and may not be prepared to face the hazards in cases where there were only few losses have occurred in the past. The experience of the insurers based on the surveys could help the insured to organize their risk management program and enable the insured to recognize the potential hazard and reduce the probability of such hazards (Treceno et al., 2003). It is to be noted that the efficiency of the risk management system being followed by the insured has a significant bearing on the amount of insurance premium. The availability of skilled staff and adequate resources with the insured is definitely an added aid for the construction insurer to provide an expert service in insurance and risk management.

Involvement of Insurer in Loss Prevention

It is for the insurer to take an active involvement in the risk management efforts of the insured so that the risk incidents can be reduced leading to reduction in the number of claims. For achieving this, the professional appointed by the insurer should have familiarity with the type and nature of projects and experienced with risk identification. The professional should also have the ability to analyze the risk management processes and the ability to recommend better solutions for an effective risk management. The insurance survey should be carried out by a meaningful cooperation between the professional of the insurance company and the contractor. This survey will enable the insured to have a clear understanding of the past, present and future risk situations of the project and will assist the insured to compile a list of weaknesses that may lead to potential risks. Based on this analysis the contractor would be able to work out the necessary measures for improvement and increase the awareness of the parties involved.

Review of Key Types of Construction-related Insurance

Construction projects are characterized by inherent risks with accidents or unexpected events taking place in the worksites resulting in significant losses to the owner or the contractor. Such incidents might also enlarge the liabilities of the owner/contractor to third parties. Construction insurance policies are the best protection available to the parties involved in construction projects against such risks. Construction insurance also ensures that the benefits of undertaking a project are not overweighed with the potential costs resulting from the associated risks. Even though knowledge exists that construction risks are covered by insurance, there is little knowledge on the areas which are covered by insurance. It is also important that one should know the different aspects of a construction activity that is not covered by insurance so that care may be exercised while undertaking such activities. However it is to be noted that construction insurance is not ‘one size fits all’ as different construction insurance policies cover different aspects of construction projects allowing a party to build an insurance framework of insurance to cover the specific requirements of the particular project undertaken to be performed.

Globally there are a large number of insurance policies available that provide coverage to different aspects of the construction industry. The key types of coverage include

1. Commercial General Liability Insurance,
2. Property Insurance,
3. Builders’ Risk Insurance,
4. Professional Liability Insurance and
5. Wrap-Up Insurance (Vetsch, 2009).

Commercial General Liability Insurance

This insurance covers liabilities resulting from damages caused by the insured to third parties. This policy is designed to cover the claims made by third parties against insured as a result of some event occurred for which the insured can be made responsible. However the commercial general liability insurance does not cover loss or damage to the person or property of the insured. In order for this insurance to become effective, the liability event should have arisen as a result of occurrence of an event which can be designated as an ‘accident’. An accident is defined to include the happening of an unexpected event or mishap which has not been designed or anticipated to happen. The term includes liability events occurring because of the negligence of the insured.

Commercial general liability insurance normally covers the legal obligation of the insured to pay compensation to any third party for loss or damage resulting from the following categories of events.

1. Property Damage to include the physical injury to any tangible property including the loss of such property,
2. Bodily Injury – covering the physical injury or distress to a person; in order to fall within this category, the injury must have been caused by any external force and it covers the associated medical expenses,
3. Personal injury as distinct from bodily injury extending to a number of offences such as malicious prosecution, libel, slander and false imprisonment that do not represent any direct physical harm. Personal injury covers intangible injuries.

The scope of an insurance policy is greatly narrowed down by exclusions included in the standard commercial general insurance policy. The exclusions to the commercial general policy include the liability events which prevent coverage for acts done intentionally by the insured and injuries that are related to employment which are covered under Workers’ Compensation. Exclusions also include liability arising out of the use of the motor vehicle of the owner and liability arising out of pollution related issues. There are other specific exclusions which are prescribed by different insurance companies in respect of individual policies. However there are three exclusions which are most critical in Commercial General Liability insurance. These exclusions prevent the recovery of claims from the insurer for damages to the insured’s own products, property and work.

Property Insurance

While the commercial general liability insurance covers the claims on account of loss or damage to the property or person of third parties, property insurance is designed to cover physical loss or damage to the own property of the insured resulting from an insured event. Commercial property insurance policies cover the damages to the own property of insured arising from a number of risks. The policy includes coverage of intentional damage caused to the property of the insured by third parties but not by the insured itself. There must be a physical alteration to the property of the insured in order to get the coverage under the policy. The alteration to the property or physical damage must have been caused by a peril falling under the scope of the policy. It is also essential that the loss or damage should be fortuitous, implying that the loss or damage must have arisen out of an event which was unexpected or accidental. Unlike commercial general liability insurance which covers both loss and physical damage to the property of third parties, property insurance covers only direct physical loss or damage to the insured property. This implies that in the absence of any physical injury or destruction to property, mere loss or use of the property as well as any other tangible, indirect, or strictly economic losses would not give rise to insurance coverage under the policy (Vetsch, 2009).

Generally property insurance policies cover a variety of perils. It is also possible that the insured selects a policy that protects only certain types of perils such as fire or hail. The insured can also opt for a policy that covers ‘all-risks’ coverage. An ‘all-risks’ policy covers physical loss or injury arising to the property of the insured caused by any external sources unless such peril is specifically excluded in the policy conditions. In such a policy if the loss to the insured’s property occurs due to the intervention or negligence or by an adverse or unusual condition, such loss would be compensated under the policy by the insurer, subject however to the policy exclusions. It must be noted that these exclusions might be having far reaching effects on the coverage under the policy which will result in restricting the scope of an ‘all-risks’ policy.

Exclusions to the property insurance may be imposed limiting the coverage of damages to the insured’s property arising from a variety of sources. These sources may include pollution, arson, moulds, and act of vandalism, change to the temperature, settlement and earth movement among several other factors. In addition to these exclusions which results in external damages to the properties, the property insurance policies may also include several internal factors which preclude the coverage to the defects in the property of the insured. However the exclusions from the internal factors are to be treated differently from the warranties against manufacturing defects attached at the time of purchase by the insured to the property. Examples of internal defect exclusions may be found in property insurance policies having exclusions on account of faulty materials, faulty design or workmanship or any other latent defect or inherent vice in the product or material affecting its use and functionality.

Builder’s Risk Insurance

This is a specialized insurance coverage in the form of property insurance obtained by the contractors to protect against the claims arising on account of liabilities for physical loss or damage to a structure or project which the contractor has undertaken to build. These policies are often arranged to cover specific projects. The necessity for such policies arises due to the fact that the commercial general liability insurance policies generally contain exclusions preventing the coverage of damages to the own work of the insured. Builders’ Risk Insurance policies are also known as ‘course of construction’ policies as the currency of these policies is limited to the duration of specific construction projects. These types of policies remain in force while a project or structure is in the process of being constructed and the policy expires when the construction is completed and handed over to the client. The coverage of the policy extends to all properties located in a construction site during the course of construction, installation or repair including temporary property such as scaffolding or forms (Vetsch, 2009).

In order that a builders’ risk policy takes effect the liability to the insured must occur out of the insured’s work on a project. It is also necessary that the liability must relate to the direct physical and fortuitous loss or damage to the insured property. Damages resulting to the project out of accidents occurring in the project site of the insured are covered under the policy, whereas willful violations or accidents happening out of violations knowingly undertaken by the insured are not protected by this insurance. The concept of ‘direct physical damage’ to the property extends to cases even where there are no tangible structural damages to the property. For example when the construction site is flooded or filled with mud requiring restoration of the working conditions of the project, then such events are covered under this type of policy. However economic losses arising out of delays in completing the project or losses on account of poor quality of construction are not covered under the scope of this policy. Builders’ Risk insurance also extends to the loss or damage to the equipments of the insured kept on site.

Exclusions to Builders’ Risk Insurance are substantially the same as they apply to other property insurance in that they prevent coverage for loss or damage on account of faulty materials, workmanship or design, latent defects and/or other inherent vices. Damages on account of wear and tear to the property, gradual deterioration and extreme weather conditions or temperature changes are also excluded to be covered under the policy. In the case of certain course of construction policies, losses arising out of collapse of a building due to excavation or shoring activities or theft happened at the project site are excluded. Narrow construction of exclusions having exceptions to manufacturing warranties has in many cases prevented the insured to lodge claims which are otherwise allowable under the policy because of the fact that the exceptions apply to a small portion of the overall structure. Therefore, the exclusions to the Builders’ Risk Insurance policies have been found to have far reaching effects in restricting the scope of such policies in the matter of admitting claims of the insured.

Professional Liability Insurance

As the name implies professional liability insurance covers the insured against liabilities arising from the loss on account of errors in the professional services rendered by the insured. These types of policies normally are highly specialized in nature and are tailored to meet the specific needs of the profession. These policies are also referred to as Errors and Omissions (E&O) insurance policies and they possess distinctive features as compared to other commercial and general liability policies. This is because of the fact such policies cover specific risks against liabilities arising out of the failure of professionals to exercise the required degree of care and skill while delivering the professional services expected from them. These risks are different from the standard risks covered under commercial general liability insurance. For this reason insurance companies exclude the liabilities arising out of professional negligence from the coverage under commercial general liability insurance policies.

In the context of construction industry, professional liability insurance is usually opted by professionals like architects or engineers who act as consultants on a project to protect them from any liability arising out of their negligent acts or omissions in rendering services in their professional capacity. However, a professional liability policy does not cover every act of error or omission of the professionals. It is a precondition for an act to be covered under professional liability insurance such act must be a ‘professional service’. An act in order to be considered as a professional service must be a service provided that constitutes a mental or intellectual exercise within a recognized professional discipline. The act must also require the application of specialized skill, training or knowledge to the situation under analysis. If the professional renders a service which can be performed by any other person who is not a professional, then such act cannot constitute a professional service and will not be covered under the professional liability policy. This analysis of the act as to whether it is of a professional nature is to be undertaken based on the circumstance of individual cases subject however to the condition that such act should have been performed by a professional in his/her professional capacity as a professional service (Vetsch, 2009).

Exclusions from professional liability insurance can be grouped under three different categories.

1. exclusions covering liabilities relating to those activities which are insured separately such as an exclusion of loss or damage resulting from the non-professional activities of the insured,
2. exclusions for liabilities arising out of moral risks such as an exclusion covering dishonest, fraudulent, criminal or malicious acts,
3. exclusion for liabilities arising out of extraordinary causes – for example, exclusion for liabilities arising on account of an express contractual warranty agreed to by the insured.

The third exclusion is generally wider in scope and would be applied without regard to the specific causes of a breach of warranty. Thus for example in cases where the insured has guaranteed the completion of the project within a stipulated cost and the project could not be completed accordingly, then the third exclusion would apply irrespective of any other reasons for the cost overrun.

Wrap-Up Insurance

As an alternative to the individual policies each party to the construction contract has to obtain to cover their liabilities separately or the contractor having to add the owner and professional consultants as additional insured in the commercial general liability policies, the contractor can purchase a project-specific policy that could cover the liabilities of all the parties directly involved and concerned with the construction project. This policy globally covering the liabilities of all parties is referred to as ‘Wrap-up Policy’. This policy provides coverage for all the parties related to the construction project like the owner, contractor, subcontractor, and consultants. Such policies cover commercial general liability, professional liability and employers’ liability among other kinds of liability risks. Wrap-up policies are generally purchased for a period covering the period needed for completion of the construction of the project plus a reasonable additional period to cover the liabilities arising on account of any issues arising during the warranty period.

Standard commercial general liability insurance policies contain a clause that bars the application of the respective policy where there is a wrap-up policy providing coverage for the liabilities of all parties. Therefore, with the presence of one wrap-up policy the individual liability policies will no longer be available for making claims which are subject to coverage under the wrap-up policy. One advantage of wrap-up policy is that since the use of this type of policy extends the opportunity for the contractor to enjoy access to higher insurance policy limits at lower cost. In addition since the policy covers the extended warranty period, the contractor is ensured of some security and stability in coverage (Vetsch, 2009).

One of the major shortcomings of wrap-up policy is that this type of policy usually has an exclusion clause preventing the coverage for damages to the project itself during the construction stage. Despite the fact that the parties can purchase individual policies for protecting the liabilities against various risks, exclusions contained in those policies might create a gap in the overall coverage for a project.

Research Methods

Introduction

Risks present themselves in every business and depending on the uncertainties and their potential impacts, risks are accepted and efforts taken to minimize the risks. However it is not possible to this risk management principles to construction industry because of the complexities involved. The hazardous and complex nature of construction projects coupled with technological advances lead to greater dependence on risk analyses which determine the outcome of a project (Cooper & Chapman, 1989, p 43). Despite the fact that the risk analyses are carried out routinely, no much importance has been attached to the analyses. The analyses are conducted at all the stages of a project life cycle (Buchan 1994). Although there are several major projects come up to existence, no standards have been established to which reference may be made for techniques, factors and approaches to risk analysis. This lack of information about the risk analysis techniques has led to the adoption of questionnaire survey described in this thesis. The current study depends on the quantitative research method of survey through questionnaire for the accomplishment of the research objectives.

Research Philosophy

Social science research follows several research methods to collect information and data relating to the issue under study. Ontology and epistemology enables the formation of the basic framework for many of the social research methods. The term ontology is defined as a branch of philosophy concerned with communicating on the environment and arrangement of the world (Wand & Weber, 1993). Ontology thus is concerned with what is said to be in existence in the real world. The ontological questions always try to find the arrangement of worldly truth and the things that need to be learnt about the real things in the world.

On the other hand, epistemology talks about the nature of human knowledge and understanding (Hirschheim et al., 1995). This philosophy advocates that such knowledge and understanding can be acquired by employing various types of inquiry and alternative methods of investigation (Hirschheim et al., 1995). According to Guba & Lincoln, (1994) the inquiry paradigms can be considered in ontological, epistemological and methodological questions. The methodological questions decide the ways in which the researcher can proceed to find out what he or she believes that can be known about the existing things in the world. The research methods generally follow

1. experimental,
2. correlation,
3. natural observation,
4. survey and
5. case study methods.

The researcher must evolve a suitable research design specifying the research method the researcher intends to follow for completing the study. In choosing the particular research method to be followed, the researcher has to take into account a variety of variables like the subject matter under research, and the range of interests of the researcher, difficulties involved in accumulating the time and resources and other funding issues. The major classification of the research methods takes the form of qualitative and quantitative research methods.

Considering the subjective nature of the current research to assess the impact of insurance application in covering risks in construction industry, use of epistemology was considered appropriate. Since epistemology is concerned about the ways in which the human actors would act to inquire and acquire knowledge on things, which really exist in the world, this research proposes to follow an epistemological approach. Moreover according to Hirschheim et al., (1995) since epistemology talks about the nature of human knowledge and understanding and that such knowledge and understanding can be acquired by employing various types of inquiry and alternative methods of investigation this research proposes to use an epistemological approach.

During the process of this examination, the research will also extend to analyzing the perceptions of the contractors and professionals on risk identification and risk assessment in the construction industry. This includes the study of the risk transfer techniques including insurance applications in the construction industry. In the present business models of major construction projects professionals and managers functioning in the industry need to have sufficient knowledge and understanding of the risks facing the industry and the ways in which they can protect against losses arising out of such risks. Therefore it is proposed to use a quantitative research method of questionnaire survey among major contractors and construction industry professionals to gather the necessary primary data for completing the study.

Research Design

For any research in the realm of social science, research design provides the bondage that keeps the research project together (Webcenter for Research Methods, 2006). The objective of research design is to provide a structure to the research, by showing the way in which the important parts of the research project namely, the samples or groups, measures, treatments or programs, and methods of assignment function together to attempt to address the central research question. The research design may take the form of a randomized or true experiment, quasi experiment or non-experiment (Webcenter for Research Methods, 2006). It is necessary to have this three-fold classification for describing the research design with respect to internal validity. In general, although the randomized experimental basis is the strongest for establishing a cause and effect relationship, since the research adopts a quantitative research method and is non-experimental in nature it adopts a non- experiment research design for conducting the research.

Quantitative Research Methods

Quantitative research methods have their root in natural sciences. In the realm of natural sciences the quantitative methods involve themselves in diagnosing and analyzing natural issues. There are certain generally adopted quantitative methods. These methods include questionnaire surveys, laboratory experiments, econometrics and mathematical modelling. According to White, (2000), there are various investigative processes which will provide the results of the research in quantitative and numerical values form part of the quantitative research method. The quantitative expressions represent the results of the research. Such quantitative results are put under a variety of statistical analysis so that the findings of the research can be reported in a comprehensive way. Quantitative research is rooted on positivism supporting measurements made in researches considered attaining precision and exactness (White, 2000). A quantitative research is said to be well conducted when objectivity in the treatment of results and the process used to generate the results is attained (Cavana et al, 2001).

Qualitative Research Methods

Qualitative research methods of employed to help the researchers to make an extensive study into various aspects covering social and cultural issues. The qualitative research methods make use of research tools like action research, case study and ethnography. According to Creswel, (1994) qualitative research is an enquiry process which is undertaken to analyse the issues connected with the social or human behaviour. The success of the enquiry process under qualitative method depends on the viewpoints of various informants to the research who express their views in a natural setting. Observation and participant observation (fieldwork), structured and semi structured interviews, focus groups and questionnaires, documents and texts form the data sources for employing quantitative research method. The impressions, viewpoints and expressions of the researcher would also be a part of the data source. Byrne (2001) believes that defining qualitative research using a single definition is not at all practical because the term qualitative itself a broad term. In addition, inferential statistics that is usually applied to data that are generated from quantitative researches is not used for qualitative research.

Since the research aims to examine the role and importance of insurance applications in construction industry, it is considered appropriate to employ the quantitative research method for completing the research. The study of the insurance applications in the construction industry involves the expression of viewpoints and perceptions by the industry professionals and managers without any numerical values it was considered appropriate that the perceptions of the respondents are observed through a set of pre-designed questions contained in a questionnaire and for this purpose the quantitative research method was considered suitable. In view of the decision to adopt the quantitative research method of questionnaire survey among the employees and its suitability the qualitative method was not considered necessary.

Research Methodology

The process of this research engages the methodology primarily involving collection of the required information and data. The collection process is followed by the activities of organizing and integrating the data collected. The major step in the process of this research is the collection of data from the informants and the success of the research depends largely on the data collection process. Efficient data collection process ensures and leads the researcher to valid and credible findings from the research. This research will be founded on a quantitative study on the role of insurance in mitigating risks in the construction industry. Collection of primary data using the information and data collected from a number of participants based on questionnaire will provide the base for a firsthand experience of the researcher. Therefore this research uses the research technique of questionnaire survey method for conducting the research. The questionnaires containing closed ended questions were distributed to respondent organizations chosen from the yellow pages and construction industry directory of UAE through email. The respondents were requested to send back the completed questionnaire by email to the researcher for further analysis.

The subject matter of study as such can invariably be supported by primary data collected through quantitative research method of questionnaire survey. The researcher also considered using a qualitative method of face-to-face interviews in the place of survey. However, since the samples would be having the opportunity to express their views more freely when they were asked to respond to survey questionnaire, the survey method was considered more appropriate. This would enhance the credibility of the study. Further, since the interview method is a time consuming process and there is the likelihood that the industry professionals and managers may not find time to answer the interview questions. Since the topic of insurance applications in the construction industry being a subjective one it was considered better to have frank opinions and viewpoints expressed as answers to the survey questionnaire to add value to the findings.

Research Approach

In order to collect the required information and data for conducting the study it was necessary to conduct the survey through a questionnaire distributed to a certain number of construction organizations. 150 such organizations were chosen as respondents to the survey, from the industry database collected from construction industry directory and yellow pages. Out of the 150 respondents to whom questionnaires were sent, only 31 of them returned the questionnaire duly filled with their views. The questionnaires were sent to the samples through email along with a covering note explaining the background and the purpose of the survey. The sampling method that was used for this research is by choosing the organizations based on the sizes of construction firms operating in the industry. Through the process of distributing the questionnaire containing close ended questions, the researcher was able to collect the information and data from the chosen samples. The distribution of samples is of paramount importance, as the sample should represent the total population. Therefore, the researcher took maximum care in the selection of samples for the survey.

Construction of the Research Instrument

The research instrument in the form of a questionnaire (as exhibited in Appendix 1) contained three different sections with questions in a broader in perspective on the risk management in the construction industry in general and with respect to insurance coverage in the individual firms in particular.

Section 1of the questionnaire contained questions on the general information relating to the respondent companies such as nature of business, construction activity undertaken by them, volume of business and the status of the respondent in their respective organizations. This information is required to analyze the homogeneity of the samples. Section 2 of the questionnaire contained questions on the general perceptions of the samples towards risk management and risk assessment. Questions on the specific context of insurance coverage with respect to the individual firms were contained in Part C of the questionnaire.

The objective in preparing the questionnaire was to keep the respondents answering the questions quickly and efficiently. The questionnaire has utilized simple questions with numbered ranking scale and yes or no type questions which will make the answering easier. One question was left as open ended question requesting respondents to make suggestions for better insurance coverage in the construction industry. The questions at the beginning of the questionnaire were introductory in nature to assist the respondents to get a ‘feel’ for the answering style and the sections have been ordered with more taxing questions placed in the later parts of the questionnaire. The questions contained in the questionnaire might have required the collection of additional information before answering the questions on risk management, estimation, evaluation, response and monitoring of risks in the individual organizations. However this was not found to be a problem as all the respondents have completed the entire questionnaire. The layout and question sequence and even the wordings of some of the questions of the final version of the questionnaire were subjected to many changes before it was finally sent out to the samples.

Summary

This chapter presents a descriptive account of the research design, research process and the data collection techniques followed for completing this research. The chapter also contained a discussion on the survey method followed for gathering the information and data from the chosen samples. A detailed analysis of the findings of this study and an analysis of the findings is presented in the next chapter.

Data Collection and Analysis

Responses to the Questionnaires

The questionnaires were completed by top management in the organizations comprising mainly of vice presidents and senior managers having the responsibility or risk management in their respective organizations. Almost all of them have more number of years of experience in the industry. Based on the information of their positions in their respective organizations it can be inferred that the respondents have adequate knowledge on the activities associated with construction industry and risk management in the industry. The response rate for completed questionnaire is shown in the following table:

Table: Breakdown of Responses

This response rate can be considered as a typical of a construction industry questionnaire survey. In the past for similar types of surveys Panthi et al., (2007) have received a response rate of 19.4%. Ahmed & Azhar, (2004) reported that the response rate for their study was 30.4% and Wang et al., (2004) received responses from only 7.75% of the respondents. Baker, (1997) suggested that it is possible to obtain statistically reliable conclusion from a sample population of 20 or more. However it is a fact to be remembered that the relative response rates do not guarantee the reliability of the survey results as representing the viewpoints of the population. It is the content and reliability of the information that add up to the value of the findings of any social science research.

Characteristics of Respondent Organizations

From the answers to section 1 of the questionnaire, the information on the characteristics of the respondent organizations has been compiled for presentation. Based on the number of employees the size of the organization has been categorized into small, medium and large companies. Organizations with less than 50 employees were classified as small, with 51 to 250 employees as medium and organizations having more than 250 employees as large. The results indicate that a majority of the firms were falling under medium and large sized organizations. 72% of the organizations were having turnover between AED 5 million and above AED 10 million (USD 1.2 million and above USD 3 million). The following figures represent type and size of the organizations responded to the survey questionnaire.

Perceptions towards Risk Management

Section 2 of the questionnaire contained questions on the perceptions of the respondents on various aspects of risk management practices being followed in their organizations.

Risk Tolerance

The question on risk tolerance character of the organization evoked the following response from the samples.

Table: Levels of Risk Tolerance

It is clear from the table that a majority of the respondent organizations are either risk averse or risk neutral with only 2 organizations responded as risk takers. From the standpoint of the researcher this tendency of the organizations are normal to the construction industry and UAE cannot be an exception to the general trend. It is normal that organizations that are risk averse or risk neutral are less likely to be effective in their responses to unexpected events resulting in loss or damage to property or business. This attitude towards risk is one of the major factors that have made the construction industry less motivated towards efficient risk management through adequate insurance or other risk transfer mechanisms as compared to other industries. Any construction organization having a risk-averse attitude will not be motivated to look into innovative construction practices where improvements in delivery of the projects can be achieved through increased use of advanced technology and processes. Even though as a country, UAE possesses a conducive atmosphere for the import and use of latest technology and equipment, because of the very nature of the industry professionals the construction industry is often made to face significant difficulties on account of loss or damage arising out of unexpected occurrences. This also leaves room for an increased number of disputes among the parties to the construction contracts. It is to be noted that risk-averse nature, whether it is organizational or embedded in the managers will sure act as a barrier for an effective implementation of better risk management practices in the industry. It is imperative that the academicians and industry professionals should take an active part in changing the mind set in the construction industry so that there would be drastic improvements in finding ways to mitigate the risks associated with the industry.

84% of the respondents have indicated that their organizations are medium and low risk takers implying that the industry still believes in the traditional ways of meeting the risk following either the ostrich approach or the intuitive approach. However, almost all of the respondents agree that risk assessment is of great importance to the construction industry.

Risk Management Process Elements

The question on the degree of utilization of risk management process elements have evoked a mixed responses with medium and large sized companies trying to use all risk management process elements in evaluating the risks associated with their projects. It appears that small sized companies are either unaware of the practices or they do not possess the expertise to adopt the use of risk management process elements. In some of the respondent organizations systematic risk identification and risk assessment procedures are followed in precedence to taking risk response and risk analysis measures. According to Ulher and Toakley (1999) it is vitally important that risk identification process is undertaken prior to involving the organization in any risk management programs. This is because of the fact the identification process is an essential prerequisite for an efficient and accurate risk analysis. The main benefits of risk management can be derived from the identification process rather than from the risk assessment practices. Based on the mean values of the respondents the relative responses for degree of utilization of risk management process elements are represented in the following diagram.

Risk Identification Techniques

On the utilization of various risk identification techniques large sized companies have indicated that they employ more checklists/prompt lists for identifying the risks associated with their construction projects. Some of the organizations use questionnaires and flow charts. Use of other improved techniques such as influence diagrams or scenario analysis are not being used by most of the respondent organizations. Checklist is the obviously popular risk identification technique among the medium sized companies in preference to other techniques given as options. The relevant results obtained out of the survey have been tabulated based on the mean values of responses and presented in the following figure.

In the matter of evaluation of the results for the question of degree of utilization of risk identification techniques it was inferred that the mean value below 3.0 indicates that the frequency of practicing these techniques is from ‘occasional to never’. Out of the 8 techniques listed only two practices have mean values more than 3.0. Checklists/prompt lists and questionnaire have been reported to be the most used risk identification techniques in the respondent organization irrespective of their sizes. Ahmed and Azhar (2004) found similar trends in the construction companies of Florida and Georgia in respect of risk assessment techniques where most of the respondent organizations followed intuition/judgment/experience for assessing the risks leaving other scientific techniques. This indicates the nature of the industry professionals and managers towards identifying and assessing the risks with their traditional approaches without using any of the modern assessment tools available. These results are in conformity with the view of Byrne and Cadman (1984) according to which the measurement of probability is alien to most decision makers in construction who are comfortable with the traditional approaches in identifying or assessing the risks ignoring procedures which would be able to provide more precise results based on formal analysis methods. This attitude may be due to either ignorance of the improved and scientific methods or a sense of complacency resulting from years of experience in the industry.

Risk Response Practices

Utilization of risk response practices is one of the important factors in assessing the role and importance of insurance as the means for risk transfer or reduction. Therefore the question concerning the degree of utilization of various risk response practices assumes greater significance in the context of construction industry and the application of insurance practices in the industry. Risk reduction appears to be the most popular and widely used risk response practice for most of the participant organizations with a mean value of 3.72. Following the risk reduction, risk elimination is the favored method among the respondents for meeting the risks associated with the industry. The mean value for this method is 3.26. Risk retention and risk transfers are the least favored methods with a mean value of 3.3 and 3.22 respectively.

An evaluation of the results from the individual groups indicates that risk transfer is the most preferred method by large construction companies closely followed by risk retention. This is probably due to the reason that it is the usual practice of large construction companies to subcontract most of their works, as they normally deal in large sized construction projects.

The diagrammatic representation of the results is presented below:

The large organizations adopt risk transfer techniques either by appointing specialized subcontractors for major part of their works or transfer the risks through financial means such as insurance, immediately after obtaining the contracts. On the other hand, the medium and small sized companies use risk reduction methods frequently which appears to be consistent with industry practice. Risk reduction can be accomplished by these organizations by adopting brain storming technique for identifying new risks, by providing onsite training to workers, by offering physical protection to reduce the incidence of risks, by frequently updating the schedules and by maintaining proper safety protocols.

The next favored method by all groups of respondents is risk elimination with a mean value of 3.45. The strategies that might be followed by the contractors include

1. by not participating in risky ventures,
2. by bidding at a high price that includes contingent provisions for unforeseen losses, or
3. by entering into pre-contract negotiations as to the determination of the parties responsible for undertaking certain types of risks.

However one drawback of employing the risk elimination technique is that there is the likelihood that the contractor may lose potential opportunities and resultant gains which might have resulted by undertaking the risk which the contractor eliminated. With frequent use of risk elimination technique, the opportunity to make profits and to achieve the organizational objectives may be decreased. It must be remembered that ‘risks’ by definition may result in positive or negative effects upon the completion of a project. Therefore, by undertaking calculated risks the organizations are provided with opportunities to pursue events or conditions that could lead to positive consequences and result in enhanced profitability for them. On the other hand if they avoid or eliminate risks they stand to lose potential gains that might result from undertaking the risk.

Risk Management Practices

An assessment of the responses of the samples to the question of the extent of use of risk management practices indicate that none of the respondent organizations have the practice of using any of the modern tools of risk assessment/management. This perhaps may be due to lack of training or expertise in using the modern techniques of risk assessment. Construction organizations never have the practice of using mathematical models of probability analysis or sensitivity analysis in determining the extent of their exposure to various industry risks. Almost all the firms use intuitions/judgment/experience in assessing the risks associated with the construction projects. This result is in conformity with the results obtained in some of the earlier studies conducted in the construction industry of United States. Construction industry professionals seem to have failed in updating their knowledge in the advanced techniques of risk assessment/management and rely more on their intuition/judgment for meeting the risks associated with the industry. The industry professionals fail to understand the fact that the complicated nature of construction industry risks does need some scientific and sophisticated tools and techniques for a proper assessment of the impact of various risks. The results obtained are tabulated for a better understanding.

Barriers to Implementation of Risk Management Techniques

The objective of this question is to gather information from the participants on the barriers that prevent the organizations from implementing effective risk management techniques. The data collected is presented in the table appended below.

Table: Barriers for Implementing Risk Management Techniques

From the response the major barriers for implementing risk management techniques can be identified as

1. lack of knowledge and doubts about the suitability of risk management techniques,
2. sophisticated nature of the techniques compared to the project sizes, and
3. human/organizational resistance.

These views from the respondents are not unexpected considering the lack of formal training in risk management techniques to the construction industry professionals. Many a times, large construction projects are stopped or abandoned by not estimating the associated risks properly. In addition to those major barriers identified by the respondents, other barriers listed in the question such as lack of time and adequate resources, lack of sound data to ensure confidence and lack of expertise in using the risk management techniques also act as barriers for an effective implementation of risk management techniques in the construction organizations.

Insurance Coverage

For the question on the kind of insurance coverage being used by the respondent organizations, the responses received are tabulated and presented below.

From the table it is clear that General Liability insurance is the most sought after insurance coverage by the construction companies irrespective of the size of the organization. Professional liability insurance has become popular in recent times and mainly large organizations and consultancy firms follow the practice of using this type of insurance for covering the risks involved.

Table: Insurance Coverage by Respondent Companies

Builders’ risk is another coverage which is preferred mostly by medium and small sized companies for transferring their risks to the insurers. Large construction companies having more number of employees find it convenient to cover the injuries to the workers onsite by covering workmen’s compensation insurance. Insurance covering escalation in project costs has not become popular among the construction companies mostly because of the excessive premium amounts. Since Builders’ Risk insurance policies cover the loss or damage to the equipments of the contractor no separate policies for covering the losses to equipments are generally preferred by the construction companies. Auto insurance is quite a normal practice and is insisted by legislative provisions and therefore the contracting companies do not have any choice left with these types of insurance policies. There are very few companies that have covered pollution insurance perhaps due to lesser awareness and less priority attributed by the clients. The least priority the construction firms attach to the environmental issues may be the other reason for this policy not becoming popular among construction companies. Wrap-up policies also seem to be less popular among the participants because the insurers may not be keen in selling this type of policy based on the high risk rating of the construction industry and the higher probability of failures in the construction industry.

The attributes that an insurer may consider in extending insurance coverage to a construction company may be grouped under

1. ownership related factors,
2. project performance related factors,
3. key personnel related factors,
4. operation-related factors, and
5. factors related to financial status of the companies.

Most significant attribute identified by the respondents to the survey is the past experience of the insurer with the organization. Bank credit record and market reputation of the owners are the next important attributes identified by the participants as the ones the insurer takes in to account for providing risk coverage. The factors identified as most significant relate to the past performance of the construction firm with respect to the completion of the projects committed by the firm. Following table presents the ranking of the attributes based on the mean values of the choices of respondents.

Table: Attributes considered by Insurer to Extend Insurance Cover to Construction Firms

The factors that are relevant for the insurer to extend the coverage to construction firms may as well include the changing nature of construction projects which increase the challenges to the insurance firms. These changing environments in which the construction companies operate relate to:

• Increasing number of large-scale construction projects that could lead to an increasing shortfall in insurance cover
• The level of premiums and the extent of owners influence on the levels of premiums as the insurance costs on construction projects represent a significant contributor to the overall project costs
• Increasingly complex nature of projects rendering the traditional structure of contracts and risk transfer methodologies obsolete
• Remote locations of the projects and new state of art designs making the job of the underwriters difficult as they have to provide the cover with an insufficient knowledge on the associated risks
• Increase risk developed inherently with the latest designs which otherwise would fall on the owner if the project is undertaken without full knowledge

Summary

The findings of the research report that large and medium sized construction companies moderately use the formal risk management techniques, while small contractors rarely use such techniques because of lack of knowledge and expertise. In most situations contractors pursue the risk situations based on their intuition experience and judgment. Risk reduction appears to be the most popular method for responding to risks and risk elimination, risk retention and risk transfer are pursued as the risk response techniques after risk reduction by the construction firms. Large companies indulge in risk transfer because they possess the capabilities to appoint specialty firms as subcontractors or purchase adequate insurance cover for riskier work packages. The main barrier preventing the implementation of risk management techniques is the lack of knowledge and doubts about the suitability of such techniques in addition to human/organizational resistance and project sizes. It is inferred that formal training of building contractors and managers of contract firms would be a solution to educate them on better risk management practices and techniques. General liability and professional liability insurance are found to be most favorable with the contract firms. Experience of the insurer with the firm has been identified to the main attribute for extending various insurance covers.

Conclusion and Recommendations

Conclusion

The current research on insurance applications in the construction industry has extended the knowledge on risk transfer in the construction industry where large construction projects are the order of the day accompanied by rapid technological advances that have taken place in the provision of new materials and methods of construction globally. These developments have consolidated the principles of risk, responsibility, liability and indemnity in several areas which have given rise to increased consideration and need for construction insurance. The research has led to the identification of various compelling reasons for increased application of construction insurance which include

1. advances in technology and construction methods which are unproven enlarged the demand for insurance cover,
2. construction contracts invariably contain clauses relating to insurance which made it mandatory and clients who in many cases were banks and financial institutions found it necessary to have their liabilities covered by insurance,
3. safety considerations relating to safety control, health and environmental aspects inherent in the labor intensive construction industry has necessitated adequate protection in the form of insurance,
4. financial consideration to protect the interests of various parties against disruption in the progress, escalation of costs, insolvency and associated costs and reduction of tax burden using the insurance costs to be charged against revenue, and
5. management considerations in transferring risks to exhibit the responsible nature of companies with respect to their risk management policies and to avail services of the insurers in the areas of risk identification, planning safety and loss prevention measures and administration and settlement of claims.

The research was extended to have a deeper insight into the areas of risk identification leading to risk assessment and risk response control techniques which are the components to the whole process of risk management. Unless large construction companies provide adequate training to the senior executives and decision makers in their respective organizations to make use of sophisticated tools to identify the risks associated with the projects proposed to be undertaken by them, they would invariably follow the policy of risk elimination leading to avoidance of all possible opportunities to enhance the profitability of the organizations by losing ventures that are otherwise profitable. A proper identification and assessment of risks is the door opening to the success of construction organizations.

The results of the quantitative research conducted in the form of survey among several construction companies report that almost all construction organizations irrespective of the size have not clearly understood the value and utility of scientific models of risk assessment so that they would be able to manage the risks more efficiently. Despite the availability of advanced information and communication technology tools, the construction industry professionals still use their intuition/judgment/experience in making the assessment of the risk factors. This goes to prove the fact that the construction industry still has not come out of the tendency to use the traditional approaches in the matter of risk management either due to lack of knowledge on the new tools and techniques or due to a sense of complacency based on the number of years spent by the professional in the industry.

Another area covered by the research is the respective roles of the clients, contractors and insurers with respect to assumption of risk. An extensive analysis of the respective roles and responsibilities have led to the conclusion that all the parties involved in a construction project share the responsibility against the risks equally as the failure of one of the parties would have a huge financial impact on the other and would eventually lead to the abandonment of the project which is not a healthy situation. Therefore, it becomes imperative that there is a proper assessment of the risks associated with the projects evaluated by all the parties and covered adequately to protect the individual interests. The role of insures can be seen as more significant as they are the people who based on their past experience are in a position to guide the parties in the matter of risk identification and provide them adequate cover against losses.

Various types of key contract insurance policies were reviewed under the current research to understand the extent of coverage offered by them to the insured. Extension of knowledge on the exclusions being the circumstances where the construction policies become inoperative to lodge any claim for losses was one of the major contribution of this research. Knowledge gained in this direction point out that although it would be ideal to have one insurance policy covering all the risk aspects of a construction contract, it is not possible because of the wide range of contract risks and insurers have specialized in underwriting only certain types of risks. Wrap-up insurance or project insurance may be considered as one of the options in this regard. Wrap-up insurance unlike conventional construction insurance policies which cover the interests of each contractor, allows the client or contractor to purchase one insurance policy extending to cover the risks o most of the parties participating in a given project. This type of policy can best protect the interests of the clients, avoid any possible insurance gap and result in saving in insurance costs. In the long-run wrap-up insurance may emerge as a better option for risk transfer in large construction contracts. However one has to consider the limitations such policies have. In this type of insurance project size is predominantly the deciding factor for deciding the suitability of the project for securing the insurance cover. The project must be of sufficiently large size or it should incur significantly large labor costs in order the cost of wrap-up insurance is justified and would be financially viable to go in for this type of policy. However it cannot be expected that all the construction projects are of the sizes that justify resorting to wrap-up insurance.

The original objectives of this research are

The objectives of the study are:

• To study the salience of risk identification and assessment in the risk management practices in construction projects for ensuring effective risk transfers
• To examine the role and responsibilities of different stakeholders of the construction industry with respect to covering the risks associated with the industry
• To study different types of key construction insurance policies along with their exclusions to assess the risk cover under these policies
• To study the perceptions of construction industry professionals and managers about the risk management and insurance coverage in the construction industry

Through an extensive review of the related literature this research has achieve the objective of studying the salient aspects and techniques of risk identification and assessment in the construction industry. This review has extended the knowledge on various risk identification/assessment techniques enabling the construction industry manager to effectively manage the risks associated with the construction projects. The managers are able to protect the interests of their organizations against claims arising out of loss or damage to the property and person involved in the project by purchasing suitable insurance covers. The relevance of the study of risk assessment/identification is established since such assessment forms the basis for decisions of management for risk transfers through subcontracting or purchasing insurance covers against potential risks.

The review of relevant literature also shed light on the roles and responsibilities of different stakeholders of construction industry such as clients, contractors and insurers in sharing the risks associated with the projects. Detailed discussion on this topic has expanded the knowledge on the relationship of insurer with the contractor and the involvement of insurer in deciding on insurance coverage in large construction projects. It is learnt that the insurer because of his experience on risk situations is in a better position to render suitable advise to the industry professionals on areas where there is the likelihood of potential losses so that such areas are covered by insurance.

Study of the features of key types of construction insurance policies was undertaken as the third theme in the literature review chapter. The coverage and exclusions of different key construction insurance policies was discussed to enhance the knowledge of the reader in the area of construction insurance.

By conducting a questionnaire survey among construction companies chosen as respondents this research report that despite the presence of sophisticated tools and technologies the construction companies largely depend on the traditional ways of assessing the risks through intuition/judgment/experience. The research has identified the lack of knowledge and doubts on the suitability of risk assessment tools as the major barrier for an effective implementation of risk management techniques. The results of the survey indicate that small and most of the medium sized construction companies resort to risk elimination as the risk response practice which restrict their opportunities to maximize their economic gain by undertaking risks which may end with positive business opportunities, while large companies adopt risk transfer techniques such as subcontracting and substantial insurance coverage.

Recommendations

The vastness of the nature of risks associated with construction industry provides scope for further research in many areas.

1. Research on the motives for construction insurance purchase will provide knowledge on different risks relating to construction industry and this may act as a guide for construction companies confronted with similar challenges
2. Further research on special risk considerations which are out of ordinary encountered by large construction undertakings is another area that may prove worthy to pursue to further industry knowledge
3. Research on the impact of insurance on projects undertaken under different types of construction contracts would also provide additional knowledge in the field of construction insurance.

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Appendix 1 Questionnaire

Questionnaire

This questionnaire is presented to you as a part of a research study leading to degree from University. The questionnaire intends to gather information on the insurance application in the construction industry of Dubai UAE. Any information you provide will be kept strictly confidential. Please try to answer all the questions with the options provided against each. A ‘remarks’ column is provided at the end of the questionnaire to provide additional information you would like to add. Thank you for your cooperation.

Section 1

General Information

1. Nature of Business:
   1. Construction Contracting
   2. Construction Consulting
   3. Building Material Supplier
   4. Sub Contractor
   5. Other
2. Construction Activity
   1. Housing
   2. Industrial
   3. Commercial
   4. Other
3. Size of the Organization: Please indicate the turnover of your organization for the year 2008
   1. Less than AED 500,000
   2. Between AED 500,000 – AED 1,000,000
   3. Between AED 1,000,001 – AED 5,000,000
   4. Between AED 5,000,001 – AED 10,000,000
   5. Above AED 10,000,000
4. Number of Employees: Please indicate the number of employees of your organization for the year 2008
   1. Less than 50
   2. Between 51 – 100
   3. Between 101 – 200
   4. Between 201 – 500
   5. Above 501
5. Your Organizational Position
   1. Owner/CEO/MD
   2. General Manager
   3. Manager/Senior Executive
   4. Supervisory

Section 2

Perceptions towards Risk Management and Risk Assessment

1. Please indicate your organization’s stand with respect to risk taking:
   1. Risk Averse
   2. Risk Neutral
   3. Risk Taking
2. Please indicate the risk tolerance attitude of your organization
   1. Aggressive
   2. High Risk
   3. Medium Risk
   4. Low Risk
3. In your opinion how important is risk assessment in the construction industry?
   1. Is of great importance
   2. Is of some importance
   3. Is of no importance
4. What is the degree of utilization of the risk management process elements in your organization. The scale 1 indicates ‘low’ and 5 indicates ‘high’ utilization.
   1. Risk Identification
   2. Risk Assessment
   3. Risk Response
   4. Risk Response Control
5. What is the degree of utilization of various risk identification techniques used in your organization. The scale 1 indicates ‘low’ and 5 indicates ‘high’ utilization.
   1. Brain Storming Sessions
   2. Checklists/prompt lists
   3. Questionnaire
   4. Flow charts
   5. Hazard and Operability Studies
   6. Influence Diagram
   7. Scenario Analysis
   8. Historical Risk Data
6. What is the degree of utilization of various risk response practices used in your organization. The scale 1 indicates ‘low’ and 5 indicates ‘high’ utilization.
   1. Risk Elimination
   2. Risk Transfer
   3. Risk Retention
   4. Risk Reduction
7. What is the degree of utilization of various risk management practices used in your organization. The scale 1 indicates ‘low’ and 5 indicates ‘high’ utilization.
   1. Expert Systems
   2. Probability Analysis
   3. Sensitivity Analysis
   4. Simulation Analysis
   5. Using Intuitions/judgment/Experience
   6. Other
8. Please indicate the factor responsible for non-implementation of Risk Assessment/Management techniques in your organization
   1. Cost effectiveness
   2. Human/Organizational Resistance
   3. Sophisticated nature of techniques compared to project size
   4. Lack of time and adequate resources
   5. Lack of expertise in risk management techniques
   6. Lack of knowledge and doubts about the suitability of risk management
   7. Techniques
   8. Lack of adequate data to ensure confidence
   9. Risk Management is predicting future and hence difficult

Section 3

Insurance Coverage

• What is the kind of insurance applications your organization is currently using?

*Please specify the nature of insurance coverage

• Please rank the following attributes which according to you have been used by the insurers to cover the risks of your organization. Please use the scale from 1 to 5 where 1 means the least important and 5 means the strongest reason:

• What is your suggestion for improvements in the area of insurance for construction industry?
• Remarks: I thank you very much for your time in responding to this questionnaire which will help me complete an important part of my studies.