A study of the Cambodian construction market shows that many developers and builders still forget to take out construction insurance policies before starting any construction work and are therefore in breach of the applicable law. In such a case, the financial risks for owners and builders are very high and can significantly affect the construction project.
We have seen this year a real boom in the construction sector in Cambodia. Indeed, the Ministry of Land Management, Urban Planning and Construction stated in January 2017 that 2,636 projects were approved in 2016 with a total investment valued at USD 8.5 billion which is more than the double compared to total project investments approved in 2015 (USD 3.3 billion).
Further to this strong growth in the construction sector, the construction insurance sector has also significantly increased in 2016.
According to the Law on Insurance dated 4 August 2014 and the Sub-Decree No. 06 dated 22 October 2001, the individual or legal entity who is the owner or the operator of a construction site in Cambodia must take out a construction liability insurance policy before starting any construction work.
A construction liability insurance policy is mandatory in case of construction including building, repairing or erecting anything on construction site. However, the Sub-Decree No.06 provides also that owner and builder may seek an exemption from the Ministry of Economy and Finance of this obligation for any small-scale construction or repair, which does not require an approval of design project from a competent institution.
In practice, despite this legal obligation, there are still many owners and builders who operate in Cambodia without any insurance policies.
In such a case, and subject to control of the competent authority, an owner or builder can receive a fine which amount will be set between KHR 1,500,000 and KHR 150,000,000 (approximately between USD 375 and USD 37,500) and (ii) will have to take out the required insurance policy.
In addition to these legal sanctions, the financial risk for owners and builders can be significant in case of damages caused to third parties. Indeed, we have seen in recent years a number of accidents on construction sites which have caused damages to third parties. In these instances, the owners and the builders will have to be responsible for the damages.
This can significantly impact a construction project’s budget and profitability for both owners and builders, and even worse jeopardize the project altogether.
Therefore, it is highly recommended for owners and builders to take out this construction liability insurance policy in order to be covered for such damages, injuries or losses caused to third parties. Indeed, if the owners and builders are duly insured, the insurance company will pay for the damages related to these risks.
However, this construction liability insurance policy does not cover all damages, in particular the damages caused to the building and the construction during the construction period and after their completion. In such a case, if the builders or the owners want to cover these additional risks, they will have to take out additional insurance policies which can be tailored to the needs of their project.
In this respect, various insurance companies (Forte Insurance, Infinity Insurance, Asia Insurance, Cambodia Vietnam Insurance, Caminco Insurance and People & Partners Insurance Plc) propose to owners, builders and sub-contractors to take out additional insurance policies such as the contractor’s all risk insurance policy or the erection all risks insurance policy. These insurances policies, which are not compulsory, include the mandatory civil liability insurance policy.
The contractor’s all risk insurance policy is a comprehensive insurance policy which covers, during the whole duration of the construction project, the losses and damages involved in the construction (damages to the property and third party injury).
There is also the erection all risks insurance policy which covers the risks arising from the installation and erection of engineering project (such as power plants, electrical generators stations, cranes and more generally machinery and equipment)
The cost of these additional insurance policies will depend in particular on the location, the nature and the amount of the construction project and it will generally correspond to less than 1% of the construction price of the construction project.
By taking these insurance policies, owners and builders will better handle their obligations and it will help them to cover unexpected events that can happen on the work site during the construction period.
Therefore, the roles of the insurer brokers, consultants and lawyers will be essential in order to help their clients to choose the appropriate insurance policy to cover a construction project.
Note that generally these insurance policies cover the damages which occur only until the end of the construction project (i.e. the completion date) which can be extended in case of a delay on the delivery date.
Therefore, if damages occur after the completion of the work, such damages will not be covered by the insurance policies except if an extension of the insurance policy has been taken out for what is called the “maintenance period” and which term is generally between six and eighteen months after the completion of the work. In such case, the insurance policy will cover certain damages appearing during this maintenance period.
In order that the insurance policy is fully effective, it is also recommended to extend it to all parties involved in the construction project in order that they all benefit from the insurance policy.
These construction insurance policies are really important in case of carrying out a construction project in Cambodia as there is no legal warranty granted by the builders to the owners after the completion of the work according to the laws and regulations currently in force in Cambodia.
The Royal Government of Cambodia understood the interest of protecting owners and investors who decide to carry out construction works in Cambodia.
Indeed, the Royal Government of Cambodia is currently working on the drafting of a construction code which will provide the owners with legal warranty granted by the builders. However, as at this stage, the construction code has not yet been implemented, it is only possible to cover these risks by contractual warranty mentioned in the construction agreement and by insurance policies.
In conclusion, it is recommended before starting any construction work to choose the appropriate insurance policy tailored for the construction project and to review it in details as well as the provisions of the construction agreement. The assistance of an insurance broker, consultant and lawyer will be in this respect very helpful.
For further information, please contact us at:
Bun & Associates
#29, Street 294, Phnom Penh, Cambodia, P.O. Box 2326
T: +855 23 999 567 | F: +855 23 999 566
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