Construction is a risky business and susceptible to uncertainty and have financial implications. However, such risk can be managed, minimized, shared, or transferred trough insurance. By the case standard contracts for construction projects demand that contractors indemnify all works associated with a project and the people involved in it through having insurance cover. Even though the consensus that insurance as a primary means of managing risk has expanded significantly, few contractors have adopted it in developing countries especially in our country. The aim of the study is to evaluate the Effectiveness and factors affecting construction insurance practices in Bahir Dar construction projects. Qualitative and quantitative methods were implemented through the primary data of the project. A total of 49 questionnaires were distributed to contractors and insurance companies and the 42 questionnaires were collected back in Bahir Dar town. Then the data were analyzed by relative importance index and percentage analysis. Based on research findings insurance is efficient at managing construction external risk, financial challenge, time and cost overruns. But it is not practiced widely by contractors due to less attitude of contractors to insurance (contractors does not give attention to insurance they consider as extra cost rather than risk transfer tool), lack of enforcement by government, complex nature of construction, raising cost of premium and relation gap between the two industries (construction and insurance industry) and by other factors. To improve the habit of using insurance as risk transfer vehicle government, insurance companies and contractors should play their role. Key words: contractor, construction industry, construction insurance, risk management, insurance company