When I read the editorial published on this newspaper on February 25, 2017, headlined, “Construction Regulations, Quality Control Falling Through the Cracks” [Volume 17, Number 877], I become very eager to write on the legal framework dealing with construction insurance and the cracks in the system.
In Addis Abeba Bole District in an area known as “Summit”, a three-storey building collapsed on April 26 2016 due to improper work completion and defective construction.
One of the most lingering problems the newspaper observed throughout the city is that most of the new buildings commence services before formal completion despite the practice being illegal.
Meager quality control and construction permit procedures caused the ubiquitous problem to reach a breaking point. Still, it is possible to avert the problem, through the instrumentality of effective construction insurance and other proactive works including stern permit approval and supervision.
Weeks after the incident cited above, the Addis Abeba City Administration Construction Permit & Control Authority responded by organizing a small circular to extinguish the existed fire and also reintroduced mandatory construction insurance to solve the problem.
The building collapse was a watershed moment for the city administration. It started enforcing the preexisting law through circulars. However, mandatory insurance for construction was officially heralded in Ethiopia since 2009.
It was done through building proclamation despite not being tested practically and except on already existing property and liability insurance for construction related works since 1960.
The Ethiopian building proclamation obliges the owner of the building to take precautionary measures to ensure the safety and stability of any property or service, including the safety of workers and people in the community.
Particularly, the owner is responsible for taking all necessary measures before any demolition or erection works begins where danger or serious inconvenience to the public may take place from the erection or demolition of a building on a site.
The urban administration or designated organ may monitor whether the owner of the site is fulfilling the obligations under the proclamation.
To achieve the goals of the proclamation, the 2011 Council of Ministers regulation thoroughly dealt with precautionary measures to be taken during construction and provides stringent liability for contravention of such obligations.
After the proactive measures are taken, the proclamation also formulated another reactive mechanism to reduce further risks. Thus, it has introduced mandatory insurance since 2009 yet the wording mentions a guarantee. Among other things, the law says any registered professional who has contracted to carry out the design work of category “A” and “B” buildings to produce guarantee for any damage resulting from any defective work due to the design and the form and the amount of the guarantee to be produced for each category of building shall be determined by regulation.
The regulation, on the other hand, made it clear that each category of buildings except category A must have a valid insurance policy. Principally, the mandatory insurance package only applies to category “B” and “C” buildings.
The Ethiopian building code classifies buildings based on structural height and not on their purpose or materials used to build them. Based on the structural span, they have been placed in categories.
Category “A” buildings are one storey with a span of seven meters or less between two reinforced concrete, steel or other structural frames or any dwelling house not exceeding two storeys while Category “B” buildings are buildings with a span of more than seven meters between two reinforced concrete, steel or other structural frames or of two or more storeys not covered in category ‘C’ or a real estate development of category “A.” And finally, category “C” buildings includes any public or institutional building, factory or workshop building or any building with a height of 12 meters.
Coming back to specific obligations that each category of buildings owe, among other things, category “B” buildings excluding real estates, where its project cost is 10 million Br, and the contractor should produce 20pc of the project cost as guarantee and buy two million Birr premium insurance before commencement of the project which will serve at least for one year after the completion of the project works. Meanwhile, for Category “C” buildings and real estates, the regulation further classified it based on the amount of project cost it made mandatory insurance ranging from 20-30pc guaranty and 500,000 to three million Birr insurance coverage.
The regulation also states the project cost estimate for guarantee shall be calculated by multiplying the total area of the project and the construction price for each square meter of the category of building. Which will be prepared by the building officer and approved by the urban administration or the designated organ and the amount of insurance coverage will be calculated by the findings of the building officer.
The May 2016 Addis Abeba City Construction Permit Authority circular is a direct replica of the regulation.
The importance of construction insurance is uncontested since it is a means of protection from life, financial and property losses. Construction insurance comprises all contracts of indemnity within the activities of the construction industry where insurance is chosen as the medium through which liabilities are shifted and risks are averted.
It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss or hazards.
Besides, it is a major method of managing risks in the construction industry. Its primary function is to transfer certain risks from owners (clients), contractors, subcontractors and other parties involved in the construction project to an insurance company (insurers) to provide contingent funding in a time of difficulty.
Construction insurance plays an increasingly important role in guaranteeing the success of projects, with insurers sharing losses resulting from natural disasters and other contingencies.
However, in Ethiopia construction insurance does not receive the attention it deserves because of lack of understanding on the sides of practitioners. They do not have a clear know how of risk allocation and the strategy of risk management through insurance.
There is also a prevalent misconception that construction insurance is part and subject to the ordinary provisions of the 1960 commercial code.
It is fair and just to have mandatory construction insurance only for contractors. For the moment it is, but in the long run, the scope of construction insurance should be expanded. It should include not only property insurance for the damage to the building and borne by contractors but also liability insurance to protect third parties and the public at large at owner’s cost.
The Ethiopian mandatory construction insurance regime should take further advancement in terms of scope to include owners’ liability insurance to make the owner/employer on board. The amount of insurance coverage should also be revisited along with the market value of the insurance industry.
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