Who Pays When Something Fails? A Worked Example of Construction Cover

Five illustrative incidents on one project, traced through works insurance, liability cover, professional indemnity and the owner uninsured exposure.

Owners ask whether a project is insured. The useful question is which policy answers which failure, and what falls between them. This worked example takes one illustrative project, puts five different things wrong, and follows each one through the cover to the amount the owner ends up paying. The gaps are the point of the exercise.

The situation

An owner is building an apartment block with a contract sum of SAR 9,000,000. The works are insured under a contract works policy, there is third party liability cover, the contractor carries its statutory obligations for its workforce, and the design office holds professional indemnity cover. During and after construction, five separate incidents occur. All policy values and amounts below are illustrative.

Assumptions (illustrative)

• Contract works policy covering the works, with a deductible of SAR 75,000 per event.
• Third party liability cover with a deductible of SAR 25,000 per event.
• Design office professional indemnity limit of SAR 2,000,000 in the aggregate.
• No delay in start-up or advance loss of profits cover purchased.
• Owner cost of delay: SAR 120,000 per month in finance and delayed rent.
• Defects liability period of 12 months from practical completion.

Step 1: Fire damages part of the completed structure

Reinstatement cost SAR 900,000. The works policy responds, less the deductible of 75,000. Reinstatement takes two months, at an owner delay cost of 2 times 120,000 equals SAR 240,000, which no policy covers. Owner exposure: 75,000 plus 240,000 equals SAR 315,000.

The physical damage is insured and the consequence of the delay is not. This is the single largest gap on most projects, and it is the reason delay in start-up cover exists as a separate product worth pricing.

Step 2: Excavation damages a neighbour boundary wall

Repair and settlement SAR 180,000. Third party liability responds, less the deductible of 25,000. Owner exposure: SAR 25,000, assuming the policy covers the party who caused it and the owner is a named insured.

Whether you are covered here depends on whose policy it is and whether you are named on it. An owner relying on a contractor policy without being a named insured can find itself outside the cover it thought it had.

Step 3: A worker is injured on site

Handled through the contractor obligations and the relevant statutory arrangements for its workforce, rather than through the works policy. Owner direct exposure in this illustration: nil, though any site stoppage carries its own delay cost.

Workforce obligations, including registration and contributions, sit with the employer. Your protection is to verify that the contractor is compliant before mobilisation rather than to insure the risk yourself, and to confirm the current requirements with the relevant authority.

Step 4: A design error is discovered six months after completion

Remedial works SAR 420,000. The works policy does not cover design, and the defects liability period covers workmanship rather than design. The design office professional indemnity may respond within its SAR 2,000,000 limit, subject to its own terms, and the owner funds the works meanwhile.

Design liability is a different route entirely, and it is capped by a limit that may be small relative to your project. Check the indemnity limit against the value of what the designer is responsible for, not against its fee.

Step 5: Water ingress appears after the defects period

Remedial cost SAR 260,000, discovered 18 months after completion, beyond the 12 month defects liability period. Recovery then depends on any longer-term warranty obligation and on the legal position, which is a question for a licensed adviser.

The end of the defects period is not the end of all liability, but pursuing anything afterwards is slower, less certain and more expensive. This is why the quality of waterproofing and the inspection of it before covering up are worth disproportionate attention.

Step 6: Total the uninsured exposure

Deductibles 75,000 plus 25,000 equals 100,000. Uninsured delay cost 240,000. Funding the design remedy pending recovery 420,000. Post-defects remedy at risk 260,000. Worst case owner exposure across these events: SAR 1,020,000, which is about 11.3% of the contract sum.

The project was insured throughout, and the owner is still exposed to more than a tenth of the contract sum across five plausible events. Insurance reduces exposure, it does not remove it, and the residual is what your contingency is for.

What changes the answer

• Whether delay in start-up cover is purchased, which addresses the largest single gap here.
• Whether the owner is a named insured on the works and liability policies.
• The professional indemnity limit relative to the value of the design responsibility.
• The length of the defects liability period and any longer-term warranty obligations.
• Deductible levels, which trade premium against exposure on every event.

What the numbers tell you

• Insurance covers damage and liability, not the cost of the time an incident consumes.
• Being a named insured matters as much as the policy existing.
• Design failures follow a different route from physical damage, with a hard limit attached.
• Verify contractor workforce compliance before mobilisation rather than insuring around it.
• Size your contingency against the uninsured residual, not against the insured sum.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.