CONTRACTOR’S FAILURE TO PURCHASE CONSTRUCTION INSURANCE, WILL THE EMPLOYER BE LIABLE?

The procurement of insurance in construction investment activities is not merely a risk management tool but, in certain circumstances, also constitutes a mandatory legal obligation. Depending on the type of construction works and the role of each party involved in the project, current laws impose compulsory construction insurance requirements on the employer, consulting contractors, and construction contractors. However, in the event of a breach by the contractor, a key legal question arises as will the employer be held jointly liable? This highlights the importance of careful attention to the insurance provisions in construction contracts, particularly in delineating responsibilities and liabilities among the parties.

Legal provisions on the obligation to purchase construction insurance

Insurance serves as a financial risk management tool during the execution of construction activities. Under current legal regulations, insurance in construction investment activities (construction insurance) is classified into two categories of mandatory insurance and non-mandatory insurance, including: (i) insurance for construction works during the construction period; (ii) professional liability insurance for construction consultancy services; (iii) insurance for materials, equipment, construction vehicles, and on-site workers; (iv) third-party liability insurance; and (v) insurance for construction warranty obligations.

The legal obligation to purchase construction works insurance during the construction period is imposed on the project owner (employer) in cases where the construction works may affect public safety, the environment, or involve special technical requirements or complex construction conditions. As for contractors, the law requires, professional liability insurance for construction consultancy contractors engaging in construction surveying or design for works of grade II or higher; insurance for on-site workers and third-party liability insurance procured by the construction contractor.

It should be noted that the terms, premium rates, and minimum insured amounts for each type of insurance must also comply with statutory requirements.

Sanctions for violation of mandatory construction insurance obligations

The failure to comply with, or the incomplete or improper fulfillment of, the obligation to procure mandatory insurance in construction investment activities constitutes a violation of the law. Such violations may be subject to administrative penalties, depending on the nature and severity of the specific breach. The applicable penalty levels are prescribed as follows:

Violations concerning insurance for construction works during the construction period

The obligation for the employer to purchase construction works insurance is determined based on the specific characteristics and complexity of the construction project. A failure to comply with, or incomplete or improper compliance with, this requirement may result in an administrative fine ranging from VND 40,000,000 to VND 60,000,000. In addition, the employer shall be required to procure the corresponding insurance if the construction work is still in progress (pursuant to Article 17 of Decree No. 16/2022/ND-CP).

Violations concerning professional liability insurance

For construction surveying activities, if the consulting contractor fails to procure professional liability insurance as required, they may be subject to a fine ranging from VND 40,000,000 to VND 50,000,000, and shall be compelled to purchase the insurance if the employer has not yet accepted the survey results (pursuant to Article 27 of Decree No. 16/2022/ND-CP).

For construction design activities, the applicable fine ranges from VND 50,000,000 to VND 70,000,000. The contractor is also required to procure the insurance if the construction work has not yet commenced or is still ongoing (pursuant to Article 30 of Decree No. 16/2022/ND-CP).

Violations concerning insurance for on-site workers and third-party liability

In cases where the construction contractor fails to purchase insurance for on-site workers or third-party liability insurance as required by law, they may be subject to an administrative fine ranging from VND 50,000,000 to VND 70,000,000, and shall be obligated to procure the relevant insurance (pursuant to Article 32 of Decree No. 16/2022/ND-CP).

Liability of the employer for violation of the contractor on construction insurance obligations

Under current legal provisions, sanctions are imposed directly on the party committing the violation, either the employer or the contractor. There is no express provision holding the employer liable for breaches committed by the contractor, or vice versa.

Accordingly, the employer is responsible for fulfilling its own statutory obligations to procure construction insurance where required by law. In cases where the breach arises from the contractor’s scope of responsibility, the employer may only request that the contractor remedy the violation or apply contractual remedies as specifically agreed in the contract or provided under applicable law. Administrative sanctions in such cases fall within the authority and discretion of the competent regulatory bodies.

Considerations regarding provisions of insurance liability in construction contracts

The obligation to arrange and maintain valid insurance coverage is a critical clause in construction contracts, though it is sometimes overlooked by contracting parties.

Depending on the nature and specific requirements of a given project, the employer and contractor may agree upon insurance responsibilities within the contract, either in alignment with or exceeding statutory requirements. Key elements that should be considered in the insurance clause include: allocation of responsibilities for procuring and maintaining each type of construction insurance; duration of coverage tailored to the project’s characteristics; scope of insured risks and losses; minimum insured values; and applicable deductibles or excess amounts…

In practice, the employer may require the contractor to submit documentary evidence proving compliance with insurance obligations as a condition for payment at certain project milestones. In the event of a breach, the employer may implement measures such as contractual penalties, claims for damages, suspension of the contract, or replacement of the contractor for the relevant scope of work.

It is essential that all such terms be clearly and comprehensively defined in the contract to provide a sound legal basis for contract execution, mitigate risks, and prevent potential disputes or misunderstandings between the parties.