CHAPTER ONE
INTRODUCTION
1.1                Background to the Study
No construction project is risk free. Every construction project, large or small, involves risks with varying impact. The construction industry is subject to more risk and uncertainty than many other industries (Flanagan and Norman, 1993). The process of taking a project from initial investment appraisal to completion, and into use, is complex. It requires a multitude of people with different skills and interests and the co-ordination of a wide range of disparate, yet interrelated activities. Such complexity moreover, is compounded by many external, uncontrollable factors. Risk may hinder the successful completion of a project by causing time and budget over-run, and/or quality default.
Construction insurance is used as a collective term to describe various types of policies to protect construction works, erection and operation of machinery. Traditionally, it is assumed to be only limited to the construction stage. However, the project is a whole life process, which includes a feasibility study, a call for tender and evaluation of tenders, an award of contract, construction and erection phases, and a take-over and maintenance period. Many researchers (Palmer, 1996; Bunni, 2003) discussed all possible insurance policies during the whole project process to build an overall picture of construction insurance.
The Oxford Advanced Learner‟s Dictionary (1995) defines risk as the “chance of failure or the possibility of meeting danger or of suffering harm or loss”. In construction projects, a risk may be defined as the likelihood of a detrimental event occurring to the project. Since the objectives of construction projects are usually stated as targets established for function, cost, time and quality, the most important risk in construction is failure to meet these targets. Within the scope of management and decision theory, research in construction and project risk management began in 1960‟s (Guilin, 2004). Risk management is defined as a set of methods and activities designed to reduce the disturbances occurring during project delivery (Skorupka, 2003). It can also be defined as the structured set of processes aimed at identifying, analyzing and responding to project risks. It includes maximizing the results of positive events and minimizing the consequences of negative events (PMBOK Guide, 2000). According to Gray (2000), risk management is a proactive approach rather than reactive. It is preventive process designed to ensure that surprises are reduced and negative consequences associated with the undesirable events are minimized. Successful management of project risk gives the project manager better control over the future and can significantly improve chances of reaching project objectives on time, within budget and meeting required technical (functional) performance.
Insurance is a risk transfer technique of passing the responsibility of risks to another party. Risks can be transfer either through contracting or by insurance which changes an uncertain exposure to certain cost. Transferring risk does not necessarily reduce the effect the risk would have or the likelihood of its occurrence but only passes the responsibility to another party. From the legal viewpoint, insurance allocates the risks to which the project is exposed, between the parties. Dickson (1983) highlighted insurance as a risk transfer mechanism that the insured transfer from a state of uncertainty to a state of certainty at the certain cost of the insurance premium. It is a cost-smoothing mechanism, in which contractors exchange a regular known annual premium for an unknown potential loss. This study investigates the appropriateness of insurance as a risk management tool in the construction industry.