The procurement of insurance is a mandatory obligation aimed at ensuring the safety of both the construction works and the labor force. The responsibility for supervising and requiring the contractor to duly perform all its obligations lies with the project owner (employer). Accordingly, negligence in oversight may subject the employer to administrative sanctions. However, in the event that the contractor commits a breach, would the employer be held jointly liable, and what should be noted regarding insurance clauses in construction contracts?
1. Legal Provisions on the Obligation to Procure Construction Insurance
Insurance serves as a risk management instrument throughout the course of construction activities. Under prevailing laws, construction insurance in investment and construction activities can be classified into two categories: mandatory insurance and non-mandatory insurance, including:
- Construction works insurance during the construction period;
- Professional liability insurance for construction investment consultancy services;
- Insurance for construction materials, equipment, machinery, and workers;
- Civil liability insurance for third-party damages;
- Warranty insurance for construction works.
The obligation to purchase construction works insurance during the construction period is imposed on the employer in relation to works that may impact public safety or the environment, as well as works with particular technical requirements or complex construction conditions. Contractors, on the other hand, are mandatorily required to procure professional liability insurance for survey and design consultancy services for works of Grade II or higher; along with insurance for on-site workers and civil liability insurance for third parties in relation to construction activities.
It is essential to note that the terms, premiums, and minimum insured amounts for each type of insurance must comply with the relevant legal provisions.
2. Penalties for Breach of Insurance Obligations in Construction
Failure to comply with or inadequate fulfillment of mandatory insurance obligations in construction investment activities constitutes a violation of law and may result in administrative penalties, depending on the severity and nature of the breach. Specific penalty provisions are as follows:
3. Types of Violations
a. Violation of Construction Works Insurance During the Construction Period
The obligation to procure construction works insurance by the employer is determined based on the specific characteristics and complexity of the construction project. Non-compliance, or inadequate compliance with the requirement, may subject the employer to a fine ranging from VND 40,000,000 to VND 60,000,000 and a mandatory requirement to procure the relevant insurance if the work is still under construction (pursuant to Article 17 of Decree No. 16/2022/ND-CP).
b. Violation of Professional Liability Insurance
For construction surveys, a consultancy contractor who fails to procure the required professional liability insurance may be fined between VND 40,000,000 and VND 50,000,000, and will also be required to obtain such insurance if the survey results have not yet been accepted by the employer (pursuant to Article 27 of Decree No. 16/2022/ND-CP).
For construction design services, a fine ranging from VND 50,000,000 to VND 70,000,000 may be imposed. The contractor will also be required to procure the insurance if the work has not yet commenced or is under construction (pursuant to Article 30 of Decree No. 16/2022/ND-CP).
c. Violation of Insurance for Construction Workers and Third-Party Liability Insurance
Failure to procure insurance for workers engaged in on-site construction or civil liability insurance for third parties may result in administrative fines ranging from VND 50,000,000 to VND 70,000,000, together with a requirement to obtain the applicable insurance (pursuant to Article 32 of Decree No. 16/2022/ND-CP).
4. Employer’s Liability for Breaches Committed by the Contractor
Pursuant to the aforementioned legal provisions, penalties are imposed on the specific party committing the violation—either the employer or the contractor—without extending liability to the other party by default.
Therefore, the employer must fulfill its own obligations to procure construction insurance where required by law. In cases where the breach falls within the scope of the contractor’s responsibility, the employer may only seek remedial action or impose sanctions in accordance with the construction contract or applicable legal provisions. Administrative penalties, in such cases, fall within the jurisdiction of competent authorities.
5. Notes on Insurance Responsibilities in Construction Contracts
The responsibility to arrange and maintain effective insurance coverage is a critical provision in construction contracts, yet it is often overlooked by the contracting parties.
Depending on the nature and requirements of a specific project, the employer and contractor may mutually agree on the allocation of insurance responsibilities in the contract, either in accordance with or in excess of legal requirements. Key elements to consider in insurance clauses may include the allocation of responsibility for arranging and maintaining specific types of construction insurance; the duration of insurance coverage tailored to the project’s characteristics; the scope of insured risks and losses; minimum coverage amounts; and applicable deductibles.
In practice, the employer may require the contractor to submit documentary evidence of insurance compliance as a condition for progress payment. Remedies available to the employer in the event of breach may include contractual penalties, claims for damages, suspension of contract performance, or replacement of the non-compliant contractor.
If you have any related questions or concerns, please do not hesitate to contact TLA for timely and effective legal consultation and support.
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