Liga Asuransi – Dear readers, how are you? I hope your businesses are running well as planned.
Let’s continue our discussion about risk management and insurance, and we will discuss the insurance that needs to be purchased by every contractor, which is Professional Liability insurance.
A contractor is a professional responsible for managing and overseeing construction projects. Their primary role is to ensure the project is completed on time, within budget, and to the client’s satisfaction.
The key roles that a contractor typically plays in the construction industry include project management, hiring and managing workers, procurement and logistics, quality control, and communication.
Overall, a contractor plays a critical role in the construction industry by managing and overseeing all aspects of a construction project, from start to finish.
THE RISKS OF CONTRACTORS
Construction contractors face a variety of risks related to their work, including:
- Safety risks
Construction sites can be hazardous places to work, with risks including falls from heights, electrical hazards, and heavy equipment accidents. Contractors must ensure their workers are adequately trained and equipped with appropriate safety gear.
- Financial risks
Construction projects are often complex and involve large sums of money. Contractors may face financial risks related to cost overruns, delays, or unexpected work scope changes. They may also face risks associated with non-payment by clients or suppliers.
- Legal risks
Contractors must comply with various legal and regulatory requirements, such as building codes, zoning laws, and environmental regulations. Failure to comply with these requirements can result in fines, legal action, or damage to the contractor’s reputation.
- Reputation risks
Contractors rely on their reputation to win new business and retain clients. Any safety, quality, or financial performance issues can damage a contractor’s reputation and make it harder to win new business.
- Supply chain risks
Contractors rely on a network of suppliers and subcontractors to complete their projects. Any disruption to this network, such as a supplier going out of business or a subcontractor failing to meet their obligations, can significantly impact the contractor’s ability to deliver the project on time and on budget.
- Market risks
Construction contractors are subject to the economy’s and real estate market’s ups and downs. A downturn in the market can lead to a slowdown in new projects and increased competition for existing work. This can put pressure on contractors’ margins and profitability.
THE TYPES OF LIABILITY OF THE CONTRACTORS
Contracts can be exposed to several types of liability, including:
- Breach of contract liability
This occurs when one party fails to fulfill its obligations under the contract. For example, if a contractor fails to complete work within the agreed-upon timeline or fails to meet the quality standards specified in the contract, they may be liable for breach of contract.
- Negligence liability
This liability arises when a party fails to exercise reasonable care in performing their obligations under the contract. For example, if a contractor fails to secure a construction site, injuring a third party properly, they may be liable for negligence.
- Strict liability
This type of liability arises when a party is held liable for damages regardless of whether they were negligent or breached the contract. This is typically applied in cases involving inherently dangerous activities or defective products.
- Joint and several liabilities
This type of liability arises when multiple parties are jointly responsible for damages resulting from a breach of contract or other wrongdoing. Each party can be held individually liable for the entire number of damages.
- Liquidated damages
This refers to damages specified in the contract as a predetermined amount in case of a breach. These damages are intended to compensate the non-breaching party for losses resulting from the breach and can be enforced by a court.
It is essential for parties to carefully review and negotiate the terms of the contract to ensure that they understand and are protected from potential liability.
Can you explain more about the breach of contract liability of the contractors?
Certainly! Breach of contract liability is a common type of liability that contractors can face if they fail to fulfill their obligations under the terms of the contract.
UNDERSTANDING A BREACH OF CONTRACT
A breach of contract occurs when one party fails to perform its obligations under the contract, either partially or entirely. For example, a contractor may breach the contract by failing to complete the work on time, meeting quality standards, or providing materials or services as specified in the contract.
When a breach of contract occurs, the non-breaching party has the right to seek damages to compensate for any losses. The type and number of damages that can be sought depend on the nature and extent of the breach and the specific terms of the contract.
Common remedies for breach of contract include:
- Damages
This refers to monetary compensation for losses suffered due to the breach. The damages can be compensatory, intended to cover actual losses, or consequential, designed to cover losses directly resulting from the breach.
- Specific performance
This court order requires the breaching party to perform its obligations under the contract. This remedy is typically used when the subject matter of the contract is unique or when monetary damages are insufficient to compensate for the breach.
- Termination
The non-breaching party may have the right to terminate the contract if the breach is significant. In this case, the non-breaching party may seek damages for any losses from the breach.
To avoid breach of contract liability, contractors should carefully review the contract terms, ensure they understand their obligations, and take steps to fulfill them within the agreed-upon timeline and to the expected standard of care. If there are any issues or changes to the contract, the contractor should communicate with the other party to address them promptly.
UNDERSTANDING NEGLIGENCE LIABILITY
Negligence liability is another type of liability that contractors can face if they fail to exercise reasonable care in performing their obligations under the contract.
Negligence liability arises when a contractor fails to meet the standard of care that a reasonable and prudent contractor in the same field would exercise in similar circumstances. For example, a contractor may be found negligent if they fail to properly secure a construction site, resulting in an injury to a third party.
To avoid negligence liability, contractors should take reasonable steps to ensure their work environment’s safety and comply with industry standards and regulations. This may include providing appropriate safety equipment and training, properly securing construction sites, and ensuring that work is performed safely and competently.
UNDERSTANDING THE BREACH OF STRICT LIABILITY
Strict liability is a type of liability that can apply to contractors when they are engaged in inherently dangerous activities or involved in producing or distributing defective products.
In the context of a contractor’s work, strict liability can arise if the work being performed involves inherently dangerous activities, such as working with hazardous materials or explosives. In these cases, the contractor may be held strictly liable for any injuries or damages that result from the activity, regardless of whether the contractor was negligent.
For example, suppose a contractor is hired to demolish a building, and adjacent property is damaged due to falling debris. In that case, the contractor may be held strictly liable for the damages, even if they took all reasonable precautions to prevent such an occurrence.
Strict liability can also apply in cases where a contractor is involved in producing or distributing defective products. For example, if a contractor supplies defective building materials that later cause property damage, the contractor may be held strictly liable for the damages caused by the defective product.
To avoid strict liability, contractors should take reasonable precautions to prevent harm and comply with relevant regulations and industry standards. They should also ensure that any products they supply meet applicable safety standards.
SAMPLE OF LEGAL CASES BETWEEN CONTRACTORS AND PROJECT OWNERS IN INDONESIA
There have been numerous cases where contractors have been sued for various types of liability, including breach of contract, negligence, and strict liability. These cases can result in significant financial damages and harm a contractor’s reputation and future business opportunities.
Here are a few examples of well-known cases involving disputes between contractors and project owners in Indonesia:
- Jakarta MRT Project: In 2019, a dispute arose between the project owner of the Jakarta Mass Rapid Transit (MRT) project and the project’s main contractor, Shimizu-Obayashi Joint Operation, over alleged delays and cost overruns. The project owner, PT MRT Jakarta, accused the contractor of failing to complete the project on time and demanded compensation. The case is still ongoing.
- Bali Mandara Toll Road Project: In 2017, the project owner of the Bali Mandara Toll Road project, PT Jasamarga Bali Toll, filed a lawsuit against the project’s contractor, PT Wijaya Karya, alleging that the contractor had failed to complete the project on time and to the required standard of quality. The case was settled out of court for an undisclosed sum.
- Medan-Binjai Toll Road Project: In 2019, a dispute arose between the project owner of the Medan-Binjai Toll Road project and the project’s contractor, PT Waskita Karya, over alleged delays and cost overruns. The project owner, PT Jasamarga Tollroad Development, accused the contractor of failing to complete the project on time and demanded compensation. The case is still ongoing.
WHY ARE ALL CONTRACTORS REQUIRED TO HAVE PROFESSIONAL LIABILITY INSURANCE?
By looking at the above explanation, it is clear that the contractor is exposed to several liabilities while performing their work. And therefore, they must protect themselves from being legally sued by project owners or other parties.
To protect from legal liabilities, contractors must have professional liability insurance to protect themselves and their clients against financial losses arising from their professional services. This type of insurance is also known as errors and omissions insurance (E&O) or professional indemnity insurance.
Professional liability insurance covers contractors against claims made by their clients for errors or omissions in their work or for failing to perform their duties as promised.
For example, if a contractor makes a mistake in building design or fails to complete a project on time, their client could suffer financial losses. In such cases, the client could sue the contractor for damages, and professional liability insurance would provide the necessary coverage to protect the contractor from financial ruin.
Professional liability insurance is typically required by law or contract in many industries, especially in construction, engineering, and consulting. It is also a requirement for obtaining professional licenses and certifications, as it ensures that contractors have the necessary financial resources to compensate their clients in case of errors or omissions.
WHY DO CONTRACTORS NEED THE SERVICE OF AN INSURANCE BROKER?
Arranging insurance by contacting insurance companies directly or through agents is not recommended because it can lead to limited insurance coverage, uncompetitive premium costs, the use of less secure companies, and the absence of claim settlement assistance.
Contractors need an insurance broker to arrange professional liability insurance because insurance can be complex and specialized.
A professional insurance broker understands the ins and outs of the insurance industry and can help contractors find the right coverage for their needs. Here are a few reasons why contractors need an insurance broker to arrange professional liability insurance:
- Knowledge and expertise
Insurance brokers have the knowledge and expertise to navigate the complex insurance world. They can help contractors understand the different types of coverage available and which policies are best suited for their specific business needs.
- Customized coverage
A professional liability insurance broker can help contractors tailor their coverage to meet their needs. They can work with contractors to identify potential risks and exposures and recommend appropriate coverage options.
- Access to multiple insurance carriers
Insurance brokers typically have access to multiple insurance carriers, which means they can shop around to find the best coverage and pricing options for their clients.
- Claims management.
If a claim is filed against a contractor, an insurance broker can help manage the claims process and advocate on behalf of the contractor to ensure they receive the coverage they are entitled to.
An insurance broker can provide valuable expertise, guidance, and support to contractors seeking professional liability insurance, helping them navigate the insurance industry’s complexities and find the coverage they need to protect their business.
One of the leading insurance brokers in Indonesia focusing on construction insurance is L&G Insurance Broker.
For all your insurance needs, please call L&G now!
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24-HOUR L&G HOTLINE: 0811-8507-773 (CALL – WHATSAPP – SMS)
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