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. Last Updated: 07/27/2016

Mandatory Insurance to Replace Licensing?

Construction is booming across the country, but upcoming deregulation of the sector, combined with public attention on the industry after a series of fatal building collapses, has prompted calls for improvement.

Major changes are coming on Jan. 1, when construction licensing is set to be scrapped. Ahead of this deadline, State Duma Deputy Viktor Pleskachevsky has proposed introducing mandatory liability insurance for developers as a part of a larger effort to improve the regulation of the construction industry.

The liability mechanisms now available in the construction industry offer inadequate protection, Pleskachevsky, the head of the Duma's Property Committee, said at a round table held to present the proposal to the industry. Currently, liability insurance is optional, and civil liability is limited to the amount of a contractor's charter capital, frequently registered to be no more than the required 10,000 rubles ($363), he said.

Negligent construction companies also run the risk of losing their license, but only 103 of the industry's more than 240,000 licenses were annulled between 2004 and 2006, Pleskachevsky said, adding that the government's licensing agencies were simply too short-staffed to efficiently monitor builders.

At present, licenses are required for construction, planning and engineering. A law eliminating construction licensing was passed in 2005. The Economic Development and Trade Ministry had argued that the licensing process offered too much opportunity for corruption.

A proposed industry self-regulation law is not yet ready, however, and some industry players expect that licensing will be extended for another year.

Highly prominent accidents such as the collapse of the Transvaal water park and the Basmanny market have played a role in focusing public attention on liability insurance for builders, said Vladimir Karyukin, deputy general director at Gefest insurance company.

In both cases, the victims' families received compensation from Moscow city authorities, which provided it as an act of good will.

Karyukin said no more than 7 percent of all construction projects are insured in Russia, compared with nearly 100 percent internationally.

Demand for liability insurance has been growing in the industry, but the insurance remains largely unpopular outside of Moscow and St. Petersburg, insurers say. The cost, which can add from 0.5 to 2 percent onto a project's budget, is not taken on willingly in an industry that frequently complains about other costs going up.

Pleskachevsky's proposal is to insure the liability of various professionals involved in the construction process, such as architects, designers, builders, contractors, owners, managers, maintainers and manufacturers of construction materials, covering all possible risks.

Currently, the most popular types of such insurance cover the risks associated with the cost of construction, such as accidents that might lead to financial damages or injuries to third parties.

Such insurance policies, however, do not last beyond the construction stage and do not insure against the risk of design flaws, which may be discovered much later.