The Law Firm of Hazim Al Madani Attorneys and Legal Consultants
Saudi Arabia introduces new norms on the Construction Contractors to provide insurance cover against hidden defects in construction.
On 3/5/2020 AD corresponding to 11 Ramadan 1441 AH, the Ministry of Municipal and Rural Affairs (Ministry) issued a decision following the decision of the Saudi Arabia’s Cabinet, which obligates a contractor to indemnify against hidden defects of buildings which may appear or may be detected after the usage for a certain duration.
This decision was issued upon the powers vested to the Ministry, as the competent authority empowered with organizing and regulating all aspects and matters related to the construction of buildings in the Kingdom.
Furthermore, the implementation of this decision will come into effect gradually in 4 stages. In the first stage, it will be implemented in the city of Riyadh in 6 months, followed by which it will be implemented in all regions of the Kingdom gradually until the fourth stage is reached. This decision will be applicable for new construction projects and ongoing construction projects; however, it will not be applicable for buildings which were under construction before this decision was issued.
The decision states that the Saudi Arabian Monetary Agency (SAMA) shall issue a model draft of Insurance Policy (Policy) against hidden defects. The Policy grants the right of protection to the insured against any hidden defects in construction, which may lead to weakening the strength and stability of buildings because of the deficit building design or materials used in construction.
The Policy shall be effective from the Gregorian date as mentioned in the schedule of the Policy. Further, the Insurance Company will issue an appendix to the Policy, which shall confirm the effective date, the details of insurance coverage and its application, and the validity of 10 years. The annexes shall comply with the provisions of the Ministerial Decision and SAMA.
The Policy shall have the terms and conditions that will be bound by the executing contractor who constructed the building can be held liable including the architect or building designer and the supervisor for any hidden defects that may appear on the building during ten years from the date of delivery of the constructed building. The aim of setting the aforesaid period is that the insured will be guaranteed for the structural integrity of the building and protection against weakness and collapse of the building, and against any potential risks which may appear in the future.
The procedures for obtaining the Policy:
- An agreement shall be established with the construction contractor through an online platform (Baladi) on the Ministry’s website.
- Attaching the Policy draft.
- Obtaining a building occupancy permit certificate from the Insurance Company.
Conditions for activating the Policy:
- After paying the insurance premium due to the Insurance Company.
- After the Insurance Company receives a safety confirmation certificate from the competent authorities.
- After issuing the annexure by the Insurance Company stipulating the Policy’s confirmation, validity and effective date.
- After issuing the building permit certificate by the Insurance Company to confirm the actual completion of the construction.
The importance of this Policy is that in any construction project as a prerequisite, it is mandatory to obtain a building permit certificate, and it also enables the Insurance Company to review and inspect all stages of construction of new buildings of all types that are included in the decision.
The most prominent features of this Policy are:
- Set a minimum value for insurance.
- Stipulating any exceptions that the insurance will not be covered for any risks.
- Prior written approval should be obtained from the SAMA for amending the insurance period.
- Set a maximum value for insurance if the Policy includes more than one insured party. In such cases, the Insurance Company will pay the insurance claim based on an individual basis, not by several bases.
- The Policy will specify certain exceptions regarding the liability of the Insurance Company for compensation and the period of insurance, which be optimistic for the insured.
The exceptions where Insurance Companies will not be liable to pay compensation:
- If the insurance coverage period had been completed ten years as stipulated in the Policy.
- Any additional premiums paid by the insured which are not specified in the Policy.
The compensation in the Policy:
The amount of compensation is determined from the agreement between the Insurance Company and the insured, and the compensation shall include the following:
- Compensation for hidden defects towards any defect in the structural integrity of the building which might cause building weakness or affect its strength and threaten its stability.
- The details of costs and fees paid by the insured.
- The details of compensation that shall be paid during the insurance coverage period, and the model insurance policy which is issued by the SAMA including the exceptions to liability of the Insurance Company.
- Details of any additional compensation amount that shall be paid to the insured, if any, as stated below:
First: The compensation for the excess financial amounts paid by the insured:
If the insured has spent more than the specified and agreed compensation amount stated in the Policy in order to repair any material damage to the constructed building to prevent any threats that might lead to collapse or spent funds for reconstruction of the entire building and whereas the costs of reconstructing the building are higher than the specified insurance value as stated in the Policy, in such circumstances the Insurance Company shall compensate the insured.
Second: The compensation for any excess costs or fees paid by the insured:
The insured shall be compensated for any costs or fees paid in excess other than the specified and agreed compensation amount in the Policy, such as:
- Legal and professional fees.
- The fees of consultants specialized in the fields related to designing and construction.
- The costs of repairing, replacing, or reinforcing the building.
Further, the Insurance Company shall not be bound to pay any other costs or fees to the insured that are not stipulated in the Policy.
The costs paid by insured for claiming compensation from the Insurance Company:
If the Insurance Company fails to pay insurance compensation to the insured for the hidden defects during the validity of the Policy, the insured has the right to take the dispute to the competent authority to file the claim. The insured shall bear and pay any costs or fees to be paid by the insured to Competent Authority (Insurance Dispute Committee) for claiming the insurance compensation from the Insurance Company during the insurance coverage period. Such costs or fees paid by the insured will be reimbursed by the Insurance Company, which shall be stipulated in the Policy.
Further, if the insured has claimed multiple claims and the Insurance Company has identified that there is only one type of hidden defect. In such cases, multiple claims will not be accepted, and the identified single defect will be considered as one claim. However, if the Insurance Company has identified that there are multiple and several hidden defects, then multiple claims are permissible and the insured can claim compensation for each defect separately.
Invalidation of Insured’s right towards the Insurance Company:
After the expiry of Policy, the insured shall not have the right to claim compensation for any hidden defects from the Insurance Company nor the right to extend the insurance period, nor to claim the full amount of the insurance or even part of it after completion of the insurance period.
Cancellation of the Policy:
Neither the Insurance Company nor the insured are allowed to cancel the Policy during the Terms of Policy except on the following grounds:
- If there are one or more claims and the insured has paid the fees or costs for filing the dispute before the Competent Authority to cancel the Policy provided that where the insured has not claimed for reimbursement of the insurance value from the Insurance Company.
- If the insured building has been subjected to any violation of the law and has been demolished by the force of law or has been damaged or collapsed by an act of God (Force Majuro).
We believe the decision of the Ministry will bring the best practice in the construction sector, where the Construction companies including their contractors, designers, and supervisors will be obligated to maintain good quality and standards in construction and comply with the pertaining laws and regulations. The building owners will have a guarantee towards the quality of construction by way of the insurance policy and get protection against any hidden defects/faults.