*3.1.2 Ideal conditions for insurability of a risk*

*Risk Management in Construction Projects*

**3. Insurance contracts facilitating risk transfer**

solutions to the transfer of their financial consequences.

**3.1 What constitutes insurable construction risk?**

characteristics for a construction risk to be insurable.

worksites and transiting between different workplaces.

agreement (leaving no effective way to enforce it).

workers differ from project to project.

*3.1.1 Unique aspects of construction risk*

The primary technique for transferring the financial impact of construction risks to others is through the purchase of various types of insurance. This section considers which types of construction risks are amenable to insurance and the types that are not. We then examine various important construction risks and insurance

Since only some risks are amenable to an insurance transfer solution, we first consider the unique characteristics of construction risk, and then describe the ideal

While construction is a form of manufacturing business (taking raw input materials, capital and labor to create a finished product), the differences between traditional manufacturing risk management and construction risk management are many. Risk management of construction projects is especially challenging and complex due to the unique characteristic that each project brings with it. First, the location of the construction enterprise is not fixed, as there may be several construction projects going on simultaneously resulting in many employees in various

The safety and risk management of each worksite must be evaluated separately (and continuously) as environmental hazards or exposures can differ from site to site (e.g., one site may have flood risk, another fire risk, another vandalism and theft risk, etc.). In international construction firms, liability risk can differ according to country and legal system. The same risk management or insurance plan will not be applicable to all projects due to location differences, beginning state and ending state site differences, differing neighboring buildings and their vulnerability, differing owners, deliverables, and contracting agreements between the owner and contractor.

Each project is also unique in terms of people working at the site. Numerous subcontractors are generally involved on a construction project, all working simultaneously at the same worksite, each subcontractor with their own contract workers, and with varying skill levels and risk culture. Coordination problems regarding safety and attitude toward risk-taking can occur. Additionally, many subcontractors are small and potentially undercapitalized, so that even if they sign a hold harmless agreement, they may not be able to live up to the assumed financial responsibility

Depending on the terms of the contract between owner and contractor, construction projects can become adversarial due to financial pressures and uncertainties. Adversarial relationships may produce negative consequences for cooperation, safety, and the management of other risks. Fixed price contracts can exacerbate ownercontractor conflicts resulting in potential increased losses due to decreased attention to safety and risk management by the contractor (because of financial constrictions). Cost plus pricing can reduce the potential for safety and risk management related losses but increases costs. Many of these issues are also unique to construction

Additionally, construction projects are very labor intensive and often are performed under harsh conditions, adding to the riskiness of contracting. Management of risk becomes more important for construction since clients, specification, and

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contracts [4].

Risks can be dichotomized into pure risks and speculative risks. A pure risk has a chance of loss or no loss, but no chance of a gain (e.g., a motor vehicle or a construction workplace accident). There is no gain in this situation. Speculative risks, such as investment in the stock market or contracting to build a project in the hopes high profitability, either can result in losses or gains. Pure risks are potentially amenable insurable but speculative risk are not.

However, not even all pure risks are insurable. The ideal characteristics of an insurable risk, as delineated by most risk management texts (e.g., [2]) are:


Many risks found in construction are insurable (and discussed below). These include: workers' compensation for workplace injuries; builders risk insurance for damages during construction; general liability insurance; professional liability insurance; delay in completion insurance; insurance covering certain operational risks (such as defective construction or faulty workmanship claims); supply chain risk losses due to interruptions or damages at a supplier upon whom the contractor is depends for their own performance, and other risks like subcontractor default or financial failure.
