Contractors’ Claims Insurance: A Risk Retention Approach
Publication: Journal of Construction Engineering and Management
Volume 135, Issue 9
Abstract
The negative effects of claims and disputes have serious negative impacts on contracting parties, their projects, the construction industry as a whole, and consequently on the nation’s economy. This paper explores a method for mitigating the negative effects associated with contractors’ claims and disputes using a risk retention approach. This method can help contractors in getting early relief from the financial and economic burdens of construction claims. To meet the goals and objectives of this study, the writers have: (1) investigated the feasibility of pricing insurance premiums using the options pricing theory; (2) explored the applicability of modeling the options pricing theory using Monte Carlo simulation; (3) set up the principles required for optimal design of a risk retention group for construction claims; and (4) tested the possible impact of the newly developed risk retention group using historic data of 10,193 construction projects spanning over 12 different California districts. Pursuant to this study, it was verified that construction claims satisfy the required principles for insurance. Also, based on the used testing framework, the developed risk retention group for construction claims has been proved a success from the insured and insurer sides. It is the writers’ hope that this study will lay the basis for a leading risk management technique that could be extended over the nation for the benefit of relieving the negative consequences associated with lengthy claims and disputes resolution in the construction industry.
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Acknowledgments
This work would have never been completed without the sincere and genuine guidance provided by Dr. Dermot Hayes, Pioneer Chair, Professor of Economics, and Professor of Finance at Iowa State University as well as by Dr. Mark Power, University Professor, Principal Financial Group Finance Fellow, and Professor of Finance at Iowa State University. This study is supported by the National Science Foundation (NSF) under NSF Award No. NSFNSF-CMMI-0700363. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the writers and do not necessarily reflect the views of the National Science Foundation.
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Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 135 • Issue 9 • September 2009
Pages: 819 - 825
Copyright
© 2009 ASCE.
History
Received: Mar 23, 2008
Accepted: Jan 26, 2009
Published online: Aug 14, 2009
Published in print: Sep 2009
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