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Construction Law/Payment of Insurance Claim

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QUESTION: Contract for construction of Irrigation Canal under the FIDIC Conditions of Contract is under execution in Pakistan. There were damages to the Works due to floods. As per FIDIC Conditions of Contract, Clause 21.2, the Works were insured by the Contractor in the joint names of the Contractor and the Employer. The Contractor lodged the claim with Insurance company. The Insurance company appointed Surveyors to assess the loss. The Contractor then restored the damages at his own cost.

Para 5 on page 73, Clause 21.2 of Guide to the use of FIDIC Conditions of Contract for Works of Civil Engineering Construction states that "The Employer will wish to be certain that the Contractor has arranged these insurances, but the Employer would not be in a position to receive the insurance monies himself directly, should there be damage"

The Employer therefore issued "No Objection Certificate" to the Insurance company stating that the damages to the Works due to floods have been restored by the Contractor at his own cost and the Employer has no objection to the payment of Insurance Claim to the Contractor. The Insurance company then paid the claim amount as assessed by the Surveyors to the Contractor.

Is this the correct procedure for payment of Insurance Claim?
Or should the Insurance Claim be paid in the joint names of the Contractor & the Employer as the Insurance Policies are in the joint names of the Contractor and the Employer?
FIDIC Guidelines quoted above say that the Employer would not be in a position to receive the insurance monies directly, should there be damage. What does the word "directly" here indicate?

ANSWER: Dear Gian,
Thank you for your interesting question
The normally adopted system for receipt of joint payments is opening  of an escrow account which is jointly operated by one representative of both parties to the contract. The insurance company can deposit the cheque into this account and later money can be withdrawn by the contractor after signature of both signatories. This bypass the procedure adopted and formalities are also completed as per banking procedures. I adopted this method about two decades back on SLIC head office building in Peshawar.
Regarding your specific question on "directly", in fact appear to be in line with procedure suggested above as the employer do not deal with the receipt directly but through a joint account
Regards
Liaqat Hayat

---------- FOLLOW-UP ----------

QUESTION: Sorry, I think I have not been able to explain my question correctly, So I have reworded my question as under:

"Contract for construction of Irrigation Canal under the FIDIC Conditions of Contract(1987 Edition) is under execution in Pakistan. There were damages to the Works due to floods. As per FIDIC Conditions of Contract, Clause 21.2, the Works were insured by the Contractor in the joint names of the Contractor and the Employer. The Contractor lodged the claim with Insurance company. The Insurance company appointed Surveyors to assess the loss. The Contractor then restored the damages at his own cost.

There after the Insurance company approved the loss assessed by the Surveyors and notified the Contractor of the amount approved for payment of the loss and asked the Contractor to provide "No Objection Certificate" from the Employer stating that the damages to the Works have been restored by the Contractor at his own cost and the Employer has no objection to the payment of loss amount by the Insurer to the Contractor.

Para 5 on page 73, Clause 21.2 of Guide to the use of FIDIC Conditions of Contract for Works of Civil Engineering Construction states that "The Employer will wish to be certain that the Contractor has arranged these insurances, but the Employer would not be in a position to receive the insurance monies himself directly, should there be damage"

The Employer therefore issued "No Objection Certificate" to the Insurance company stating that the damages to the Works due to floods have been restored by the Contractor at his own cost and the Employer has no objection to the payment of Insurance Claim to the Contractor. The Insurance company then paid the claim amount as assessed by the Surveyors and approved by the Insurance Company to the Contractor under intimation to the Employer. This procedure of payment of Insurance Claims is adopted by Insurance Companies in Pakistan since last 40 years.

Is this the correct procedure for payment of Insurance Claim?
Or should the Insurance Claim be paid in the joint names of the Contractor & the Employer as the Insurance Policies are in the joint names of the Contractor and the Employer?"

Answer
Dear Gian,
Thanks for the elaboration of your question.
The correct procedure is to pay in the joint name but parties involved to a deed can mutually agree for a new procedure as long as it is not against local applicable.It appears that that the procedure adopted is consented by all parties and hence should be acceptable.If such a point is raised by audit,then duly signed amendment to the original  policy may be prepared and provided to them.
Regards-liaqat hayat

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Liaqat Hayat

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I can answer questions based on FIDIC 4 and FIDIC 1999 [design-build] with particular reference to time extension , price adjustment and disputes. I am in particular more inclined for response to points pertaining to how claims should be framed and put up in case of technical or other contractual shortcomings. Regarding procurement matters I have spent over 5 years as procurement specialist for highway authority and dealt with numerous claims and disputes in the capacity of "The Engineer" .

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