What are the Benefits and Types of Insurance in Construction Contracts?
Introduction
Construction projects are capital-intensive and inherently risky. From project delays and property damage to third-party injuries and unforeseen accidents, stakeholders in the construction industry face numerous liabilities that can disrupt or ruin entire projects. To manage these risks effectively, insurance is an indispensable part of every construction contract.
In Nigeria and globally, insurance in construction contracts serves as a legal and financial buffer, ensuring that parties are protected from unpredictable events and can continue operations or be compensated without bearing the full brunt of a loss. This article explores the different types of construction insurance, their benefits, how they are applied within construction contracts, and includes a real-life case study from the Nigerian construction sector.
1. Understanding Construction Insurance
1.1 What is Construction Insurance?
Construction insurance is a contractual risk transfer mechanism designed to protect contractors, clients, subcontractors, consultants, and other parties involved in construction projects from financial losses due to unforeseen events.
1.2 Why It Is Vital
Construction involves workers, machinery, materials, timelines, and legal obligations.
Without insurance, a single accident could bankrupt a contractor or stall a multi-million-naira project.
2. Legal Framework for Construction Insurance in Nigeria
2.1 Nigerian Laws and Regulations
Insurance Act 2003
Factories Act
Employees Compensation Act 2010
National Building Code
Public Procurement Act
Standard Forms of Contracts (FIDIC, JCT, PPRA templates)
2.2 Mandatory Insurance Requirements
All employers must obtain Employee Compensation Insurance
Buildings above two storeys require Builders’ Liability Insurance under the National Building Code
3. Benefits of Insurance in Construction Contracts
3.1 Risk Transfer
Transfers risk from the contractor/employer to the insurer, reducing liability exposure.
3.2 Legal Compliance
Ensures the contractor complies with laws and statutory provisions.
3.3 Project Continuity
Insurance enables project continuation after damages or loss.
3.4 Third-Party Protection
Protects the contractor and employer against claims from third parties.
3.5 Financial Stability
Ensures that losses are not carried directly by any single party—enhancing liquidity and investor confidence.
3.6 Protection Against Employee Claims
Coverage for injuries, death, or accidents under workers’ compensation laws.
3.7 Enhances Reputation
Well-insured firms are viewed as credible and responsible, attracting more clients.
4. Types of Insurance in Construction Contracts
4.1 Contractor’s All Risks (CAR) Insurance
Coverage:
Damage to property
Theft of materials
Temporary structures
Third-party liability
Beneficiaries: Contractor, Employer, Subcontractors
4.2 Employers’ Liability Insurance
Coverage:
Work-related injuries or illnesses
Death benefits
Required by: All employers under Nigerian law
4.3 Public Liability Insurance
Coverage:
Injury or damage to third parties (visitors, passersby, nearby properties)
Beneficiaries: Public and affected third parties
4.4 Plant and Equipment Insurance
Coverage:
Damage to owned or hired machinery and tools (e.g., bulldozers, cranes)
4.5 Professional Indemnity Insurance
Coverage:
Liability arising from professional negligence of consultants or engineers
Mandatory for: Architects, engineers, and consultants
4.6 Delay in Start-Up (DSU) / Business Interruption Insurance
Coverage:
Losses incurred due to delays in project delivery
Lost income and fixed costs
4.7 Surety Bonds and Performance Bonds
Purpose:
Financial guarantee that the contractor will fulfill contractual obligations
Types:
Bid bond
Performance bond
Advance payment bond
4.8 Fire and Special Perils Insurance
Coverage:
Fire, lightning, flood, storm damage during construction
5. Insurance Clauses in Construction Contracts
5.1 Typical Contractual Provisions Include:
Type of insurance required
Minimum sum insured
Duration of coverage
Parties responsible for procurement
Proof of insurance and premium payment
Waiver of subrogation
5.2 Standard Form Contracts
FIDIC (Red Book) includes detailed insurance obligations in Clauses 18 and 20
Nigerian PPRA Contract Templates outline minimum insurances required on public projects
6. Insurance Policy Lifecycle in Construction
Pre-contractual stage – Risk assessment and quote
Contract execution – Insertion of insurance obligations
Mid-construction – Premium payment and updates
Claims stage – Incident notification, loss assessment, and compensation
7. Case Study: Insurance Impact on Lagos Flyover Project
Background:
A private construction firm undertook a ₦3.5 billion flyover bridge in Lagos. Midway into the project, a fuel tanker explosion near the site damaged machinery, scaffolding, and led to injury of workers and locals.
Insurance Coverage:
Contractor’s All Risk: Covered material damage
Public Liability: Covered hospital bills for third parties
Employers’ Liability: Covered staff injuries
Plant Insurance: Replaced damaged cranes and loaders
Result:
The contractor received ₦610 million in claims within 60 days, allowing project continuation. Legal liabilities were resolved quickly with insurer support.
Lesson:
Without adequate insurance, the company would have suffered severe losses and litigation.
8. Challenges Facing Insurance in Nigerian Construction Sector
8.1 Low Awareness
Many small-to-mid-size contractors are unaware of mandatory insurances.
8.2 Non-Enforcement of Laws
Government agencies often fail to enforce mandatory insurance under building codes.
8.3 Delays in Claims Processing
Lengthy claims assessment discourages compliance.
8.4 Underinsurance and Fraud
Contractors sometimes misrepresent asset values to reduce premiums.
9. Recommendations for Stakeholders
Contractors:
Insure all projects and personnel
Work with certified insurance brokers
Keep records of claims and premiums
Employers/Developers:
Include insurance provisions in contracts
Request proof of insurance before mobilization
Lawyers and Consultants:
Draft and review contracts to reflect insurance obligations
Ensure compliance with regulatory standards
Government:
Enforce building insurance laws
Make insurance a condition for project approval and funding
10. Role of Lawyers in Construction Insurance
Lawyers play a critical role in:
Drafting insurance clauses
Reviewing insurance certificates
Negotiating liability limits
Litigating and resolving insurance-related disputes
11. Best Practices for Construction Insurance in Nigeria
Always use licensed insurance brokers
Review and update policies annually
Ensure that contract scope and insurance coverage align
Document all incidents for claims processing
Avoid cost-cutting on essential coverages
Conclusion
Insurance in construction contracts is not just a precaution—it is a strategic necessity. From covering equipment damage to third-party liabilities and construction delays, insurance provides the financial and legal backbone that supports successful project delivery.
To protect investments, comply with regulations, and avoid devastating losses, stakeholders in Nigeria’s construction industry must prioritize and integrate comprehensive insurance policies into every project.
Building Big? Don’t Let Risks Bring It All Down—Insure Your Construction Projects the Right Way.
Construction sites are full of surprises—accidents, delays, equipment damage, legal claims, and unforeseen events that can derail your project and finances. The smartest builders and developers don’t just plan—they protect with the right insurance.
At Chaman Law Firm, we help you secure your projects from start to finish by ensuring your construction contracts are backed with comprehensive, enforceable, and industry-compliant insurance coverage.
We Provide Legal Support For:
✅ Drafting and reviewing insurance clauses in construction contracts
✅ Ensuring compliance with Nigerian laws and building codes
✅ Structuring liability protection for contractors, employers, and consultants
✅ Resolving insurance-related disputes and claims
✅ Project risk assessment and advisory
📞Phone: 08065553671, 08096888818
✉ Email: chamanlawfirm@gmail.com
📍 Address: 115, Obafemi Awolowo Way, Allen Junction, Ikeja, Lagos, Nigeria
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