An Insurance Perspective

It will involve an activity or decision

which will result in a consequence
which is less than certain
Jumping out of an aeroplane without a
parachute is not a risky decision.

But jumping with a parachute can be risky

 PROBABILITY

RISK X

CONSEQUENCE
 PROBABILITY

Is the likelihood
that the
Consequence
will occur
 CONSEQUENCE

Is the effect of
An unsatisfactory
outcome
 L 2

risk exposure

Likelihood X Loss
 Risk Management
A general procedure for
resolving risks.
When it is applied to any instance,
the possible consequences are all
acceptable.
Acceptable risk means : we can
live with the worst-case outcome.
To begin Risk Management one
need not know what the risks are
It is normal to start the Risk Management
Process with :
 Fuzzy issues
 Concerns
 Doubts
 Unknown
The process of Risk Management
Transforms this uncertainty into
Acceptable risk.
 R
I
S
K

M
RISK A
N RISK
ASSESSMENT CONTROL
A
G
E
M
E
N
T
 RISK ASSESSMENT
It defines the risk
It is a discovery process of :

• identifying sources of risk

• evaluating their potential

effects
 RISK CONTROL
It resolves the risk
It is a process of developing :
 Risk resolution plans
 Monitoring risk status
 Implementing risk
resolution plans
 Correcting for deviations
from the plan
Risk Management Goals

Maximise Asset Protection

Minimise Cost of Risk
Ensure Commercial Viability
Maintain Ease of
Administration
 Risk Management Goals

Minimise Cost of Risk

 Cost of Assumed Risk (e.g. Self-
Insurance, Deductibles)
 Cost of Risk Transfer
 Cost of Measures to Reduce or Avoid
Risk (e.g. Loss Control)
 Cost of Program Administration
 Cost of Uninsured, Underinsured or
Uncollectible Claims
 Insurance is Only One
Component of the Risk
Management Process
&
It is an important Risk
Allocation Tool
P 2 I 2
 Process People

RM
Capability

Infrastructure Implementation
 People
Participation
Ability
Management Verbal

Customer Written
Education
Team
Communication
Involvement
Motivation Training

Averse Support
Experience

Seeking
Rewards
Neutral
External
Internal RM
Capability
 Process

Definition
Execution
Reviewed
Identify Plan

Analyze Tailored
Track
Documented
Resolve
Assess

Control
RM
Capability
 RM
Capability
Resources

Requirements
Staff Schedule Budget

Contractual Standards
Organization
Results
Culture Policy

Costs Benefits

Infrastructure
 RM
Capability
Risk Management Plant

Proactive
Responsibility

Methodology
Integrated

Systematic Authority

Principles
Disciplined Methods
Tools

Approach Project

Implementation
 Project Resources
Project Requirements
Risk Management Plan

Risk action
Plan Plan Resolve
Identify
Risk Risk
Risk
Uncertainty
Knowledge Acceptable Risk
Concerns Risk List Reduced Rework
Scenarios
Issues Risk Statement Corrective Action
Thresholds
Risk Context Problem
Prevention

Analyze Track
Risk Risk

Risk Status
Measures, Metrics, Triggers
Define Scenarios and rate
each Risk
 Employees
Stakeholders Business
Partners

Suppliers
Customers

Sources
Regulators Competitors
Of
Risk
Contractors Technology

Local Pressure
Communities Groups

Public Media
 Project Risk Categories
 Material Damage / Physical Damage
 Third Party Liability
 Consequential Losses (Delay in Start-up)
 Force Majeure
 Political Risks
 Professional Liabilities
 Contractual Liabilities
 Workman’s Compensation / Employer’s Liability
 Automobile Liability
 Types of Project Risks
 Contractual Risks
– Arise from contracts. Risks increase with decreased contract clarity, one
sided/imperfect contract provisions and untimely contract administration
– High benefit-to-cost ratio for dealing them effectively

 Construction Risks
– Are inherent and arises from diverse factors like
weather, site conditions, design defects and
changes, resource availability etc.
– Risks are managed than reduced

 Risks differ for contractor / owner / financial institution

Build the Risk Profile
 CONSEQUENCES

SAFE MARGINAL CRITICAL CATASTROPHIC

PROBABLE
At least 1 per year

REASONABLY PROBABLE
At least 1 per 10 years

REMOTE
At least 1 per 100 years

EXTREMELY REMOTE
Less frequently than
1 per 100 years

TOLERABLE CANNOT
TOLERATE

TOLERANCE LEVEL
 Project Risk Profile
Project Risk Financial
Delay
Risks

Construction O&M
Risk Risk
Service
Quality

Design
Traffic
Ground volume
Cost Real
Conditions
Overrun tolling

Time
Political / Force Majeure
The Risk Mitigation Process
 Widely recognised principles of
Risk Allocation and Management
 Risks belong to those parties who are best
able to evaluate, control, bear the cost and
benefit from the assumptions
 Many risks and liabilities are best shared
 Every risk has an associated and unavoidable
cost which must be assumed somewhere in
the process

(*4) American Society of Civil Engineers: Construction Risks and Liability

 Risk Mitigation Process
Elimination

Reduction
Transfer
TOTAL RISK

or Share

Retained
Risk

Strategic Planning, Technical Contract Terms, Loss funding :-

Business Focus Improvements, Alliance, Earnings
Re-structure Systems & Traditional Reserves,
Procedures Insurance Debt Finance
• Developmental Risk

• OPERATING RISK

• PARTICIPANT RISK

• COMPLETION RISK

• SUPPLY RISK

• MARKET RISK
• INFRASTRUCTURE RISK
( TRANSPORTATION RISK )

• ENVIRONMENTAL RISK

• POLITICAL RISK

• FORCE MAJEURE RISK

• FOREGN EXCHANGE RISK

• ENGINEERING RISK
( DESIGN RISK )

• SYNDICATION RISK

• INTEREST RISK

•FUNDING RISK

• LEGAL RISK
From the perspective of investors :

• PROJECT COMPLETION RISK

• MARKET RISK

• FOREIGN CURRENCY RISK

• SUPPLY OF INPUTS RISK

The objective is to allocate these risks

to those parties who are in the best

position to control particular risk

factors.

This reduces the “moral hazard” problem

and minimises the costs of bearing risks

 PROJECT COMPLETION
RISK
It is usually mitigated by :

• fixed price
• firm date
• turnkey construction contract with LD for
delay supported by performance bonds
• specifying performance parameters and
warranty period for defects

• lenders require sponsors to provide a guarantee

to fund cost overruns. In addition a standby
credit facility may also be employed.
 MARKET RISK
This risk is mitigated by having long-term
quantity and price agreements.

In case power plants this is achieved

through a “ take or pay” PPA.

By this certain payments have to be made

irrespective of the actual offtake so long
as the company makes available the
capacity.
In India there is a system of two part tariffs:

The first part ensures recovery of fixed costs

based on performance at normative parameters

This part of the tariff is paid irrespective of the

amount of power actually taken.

The second part covers variable expenses based

on the units of electricity actually supplied

apart from PPA, as additional security, payments

may be made to a trustee, usually an international
bank, in an ESCROW account which then directly
makes payments to creditors and suppliers.
In transport projects lenders cannot rely on a
fixed revenue over the life of the project.

Therefore, the project continues to carry

market risk

This is mitigated by :

if the traffic flows are below expectations, the

project has recourse to :

• an adjustment in the revenue sharing proportion

• an increase in tolls
• an extension of the concession periods
• By automatic escalation clauses in the
toll agreement to account inflation
 Foreign Exchange Risk

In India Power Projects , the return on

foreign equity included in the tariff can

be provided in the respective foreign

currency
 Supply of Inputs

Fuel supply agreements

Minimum Off-take agreements

 Material Damage/Physical
Damage
Cover “All Risks” Including
 Prefabrication
 Marine Cargo
 Contract Works - All Plant and Materials
Incorporated or to be Incorporated Into the
Works
 Contractors/Owners Plant and Equipment
 Owners Surrounding Property - Existing
Property
 Property in Care and/or Custody
 Third Party Liability
Cover
 Accidental Death of or Bodily Injury to
or Illness of any Person
 Accidental Loss of or Damage to
Property

Arising out of the Performance of the

Works
 Three Policies
Construction
Insurance

EAR / CAR
SCE
MCE
 PROJECT INSURANCE -MARINE & STORAGE CUM ERECTION
LOCAL
FABRICATOR SUPPLIER

INTERMEDIATE
STORAGE

CIVIL CONST.
STORAGE

SITE ERECTION
TESTING
COMMN.
FOREIGN
SUPPLIER PORT

TRANSPORT INTERMEDIATE CONSTRUCTION OPERATION

MARINE (IMPORTS) OFFSITE MCE FIRE
MARINE (LOCAL) STORAGE EAR (SCE) FLOP OR
MARINE LOP ADDITIONAL CAR MB
TRANSIT TPL BOILER IAR
CPM MLOP
ALOP EEI 6
 Objective

• to offer comprehensive and

appropriate protection
against all site risks involved
in the erection of machinery
and plants as well as steel
structures and industrial
facilities
 Advantage
• avoids overlapping of various
insurances
• avoids complications at the time
of claim :

• Double insurance
• Subrogation procedures

• Total premium to be paid for an

erection projects is much less
 Policy

Two Sections

Section – I Section – II

Material Third Party

Damage Liability
 Insured
• Principal
• Contractors
• Sub-contractors
• Manufacturers or suppliers
if they carryout the erection
work or responsible for it

• Only one EAR policy

• Joint insureds
 Subject Matter Insured
Site erection and testing of :

• All kinds of individual machines

• All kinds of industrial plants
• Civil engineering works
• Temporary
• Permanent
[ if their value is less than 50%
of the total project value ]
 Subject Matter Insured
In addition :
• Construction Plant and Machinery
• Surrounding Property –
• Expenses incurred for debris removal
• Additional expenses – overtime, holidays,
• Air Freight
• Additional Customs duty
• TPL, Cross Liability
• Escalation
• Maintenance Visits Cover
• Extended Maintenance Visits Cover
 Scope of Cover
Any sudden and unforeseen
loss or damage occurring to
the property insured on the
erection site during the period
of insurance will be
indemnified.
“Otherwise not
All Risks Format Excluded”
 Perils Covered
• Location Risks

• FLEXA perils
• STFI perils
• EQ, subsidence, landslide,
rockslide
• Theft, burglary
 Perils Covered
•Human Risks

• Faults in erection

• Negligence, lack of skill, lack of

experience, Malicious acts
 Perils Covered
• Operation Risks :

• Short-circuiting, arcing, excess

voltage etc

• Excess pressure or vacuum, or

tearing apart on account of
centrifugal force
 Perils Covered
• Handling Risks

• Any other sudden and unforeseen

events : such as
• collapse,
• foreign objects,
• on-site transport of items to
be erected etc
 EXCLUSIONS
• Loss or damage due to
• faulty design
• defective material or casting
• bad workmanship
Consequent Physical damage is covered. Rectifying the
original fault is still not covered.
Not related to erection work proper. Falls within the
scope of Manufacturer’s guarantee.
If manufacturer is also involved in erection work, then
it is possible to include as “manufacturer’s risk”- extra
premium
 EXCLUSIONS
• Loss or damage due to :
• Willful act
• Willful negligence
• Of the insured or of
his representatives
•Loss or damage due to :
• War
• Warlike operations
• Civil commotion
• Requisition by order of any public
authority
 EXCLUSIONS
• Nuclear Perils
• Normal wear and tear and gradual
deterioration
• Inventory Losses
• Consequential loss of any kind or
description
Such as :
• Penalties
• Losses due to delay
• Lack of performance
• Loss of contract
 Period of Cover
Commences immediately after the
unloading of the items to be insured at
the site

Continues during :
•Storage
•Erection
•Testing and commissioning
Duration of testing operation is usually 4 weeks
Extendable on payment of additional premium
 Sum Insured

• Should be Completely Erected Value of

the Project
• In accordance with the works contract
•Includes :
• Erection machinery and equipment at
new replacement value
• Freight
• Customs Duties
• Erection cost
 Sum Insured
• It is important to declare the full
sum insured as indemnity is
calculated to the extent items
are included in the sum insured

• Average Clause
• Premium Adjustment Clause
Premium Installment
Section 64 VB
 Indemnity

In the event of a loss or damage the

insurers will indemnify the insured
for the expenses necessary to
restore the damaged machinery or
plant to its condition immediately
before the occurrence of the loss or
damage
 Indemnity
Expenditure includes :
• Disassembly
• Freight
• Reassembly costs
• Specialists expenses, if necessary

Less : salavage Less : Deductible

Deductible : eliminates small losses where
administrative expenses exceeds losses and
helps loss minimization
 Scope of Cover [ Section-II ]
Legal Liability arising out of
property damage or bodily injury
suffered by third parties and
occurring in connection with the
erection work on or near the
erection site
However, it is not a replacement for
Principals or Contractors General Liability
Covers.
 Exclusions [ section-II ]

The Insurers will not indemnify any

claims from :
• Employees or
• Workmen
Of the Insured connected with the
erection project

Workmen’s Compensation Policy or Personal

Accident Policy takes care of this
 Subject Matter of Insurance
All Buildings and Civil Engineering Projects :

• Residential,Office Buildings
• Hotels, Schools, Hospitals
• Factories, Power Plants
• Road and Railway facilities, Airports
• Bridges, dams, Tunnels
• Water Supply and Drainage Systems
• Canals, Harbours
Subject Matter of Insurance
The assembly or erection of
machinery, plants and steel
structures may be included under a
CAR policy provided

Their value including erection costs

is less than 50% of the total sum
insured
 Marine-cum-Erection
THE SCOPE OF COVER IS “ALL RISKS ”

1) MARINE VOYAGE FOR IMPORTS

2) OFF-LOADING / STORAGE AT PORTS

3) INLAND TRANSIT TO SITE

4) STORAGE, HANDLING, ERECTION AT SITE

5) TESTING AND COMMISSIONING AT SITE

 PROJECT INSURANCE -MARINE & STORAGE CUM ERECTION
LOCAL
FABRICATOR SUPPLIER

INTERMEDIATE
STORAGE

CIVIL CONST.
STORAGE

SITE ERECTION
TESTING
COMMN.
FOREIGN
SUPPLIER PORT

TRANSPORT INTERMEDIATE CONSTRUCTION OPERATION

MARINE (IMPORTS) OFFSITE MCE FIRE
MARINE (LOCAL) STORAGE EAR (SCE) FLOP OR
MARINE LOP ADDITIONAL CAR MB
TRANSIT TPL BOILER IAR
CPM MLOP
ALOP EEI 6
 Consequential Losses -
Delay in Start-up
Cover Loss of Gross Profit Arising from any
Cause Covered Under the Ocean Transit/
Construction Covers, Including:
 Loss of Revenue
 Standing Charges
 Wages
 Bank Interest on Loans
 Costs of Rearranging/Renegotiating Loans
 Increased Costs of Working/Reworking
 INTERESTS INVOLVED IN A PROJECT

FINANCE
CHARGES

MAIN FINANCIAL
CONTRACTOR PRINCIPAL INSTITUTIONS
LOANS

INVESTMENT
GROSS MANAGEMENT
PROFIT

SUB
CONTRACTORS PROJECT
MATERIAL
LABOUR
OBJECT OF “ ALOP ”
INSURANCE

 TO INDEMNIFY THE PRINCIPAL OR OWNER

OF A PROJECT

 FOR THE ACTUAL LOSS SUSTAINED

 DUE TO A DELAY IN COMPLETION OF THE

INSURED WORKS
 THIS DELAY MUST BE CAUSED BY
DIRECT PHYSICAL LOSS OR DAMAGE

 COVERED UNDER THE MATERIAL DAMAGE

SECTION OF SCE POLICY

 NOT EXCLUDED BY “ ALOP ” -

ENDORSEMENT
 ONLY THE PRINCIPAL.

 LENDERS SHOULD NEVER

BE AN INSURED OR CO-INSURED.

 IT IS POSSIBLE TO GRANT A “LOSS PAYEE”

CLAUSE.

 CONTRACTORS, SUBCONTRACTORS
CANNOT BE ACCEPTED AS INSUREDS
UNDER ANY ‘ALOP’ EXTENSION.
S.I. HAS TO BE ARRIVED CONSIDERING
REVENUE GENERATION PROJECTION FROM
SCHEDULED COMMENCEMENT DATE OF
1st UNIT.
S.I. IS ANTICIPATED “ GROSS PROFIT ”
THE DECISION TO INSURE OR NOT TO
INSURE THE “FULL GROSS PROFIT” IS
WITH THE INSURED
INSURED CAN OPT TO INSURE :
STANDING CHARGES ONLY
INTERESTS ONLY
ESPRESSED AS PERCENTAGE OF “ G.P. ”
32
 PROJECT PERIODS
MAXIMUM
INDEMNITY
INSURANCE PERIOD PERIOD

CAR / EAR - ALOP ( ALOP )

TRANSIT

ON SITE STORAGE COLD / HOT

PLANNING COMMERCIAL
PRE - TEST
HANDLING OPERATION
TEST
CONSTRUCTION
ERECTION

SCHEDULED DATE OF
COMMENCEMENT OF
INSURED BUSINESS
WHAT IS CLAIMABLE ?
 LOSS OF NET PROFIT

 STANDING CHARGES PAYABLE

DESPITE THE LACK OF INCOME

 INCREASE IN EXPENDITURE TO REDUCE

OR AVOID THE DELAY TO START-UP

37
 MAXIMUM INDEMNITY PERIOD
ORIGINAL CONTRACT PERIOD
ORIGINAL MD, ALOP-POLICY PERIOD

DELAY

SUPPLY ERECTION AND TESTING

RoD,
ERECTION & MARGIN
RESUPPLY TESTING

ACCIDENT

SCHEDULED BUSINESS
COMMENCEMENT MAXIMUM INDEMNITY PERIOD

45
INSURED AND UNINSURED DELAYS
FIRE, NEGLIGENCE

STRIKE, SHORTAGE OF MATERIALS

INSURED
SCHEDULED DELAY
BUSINESS
UNINSURED
COMMENCEMENT DELAY
46
INDEMNITY PERIO
 Systems Performance
Insurance
 Repair, Replace or Modify

 Pay Continuing Expenses and Debt

Service

 Pay a Proportional Buydown of the Debt

 Force Majeure
Cover Losses/Liquidated damages Sustained
Due to Late Completion or Abandonment
of the Project as a Result of a Force
Majeure Event not Covered Under the
Material Damage Policies, Including:
 Off Site Physical Damage - Denial of Access
 Strikes and Labour Disputes (Other than
Disputes of the Insureds own Work Force)
 Changes in the Law
 Loss of Resource - e.g. feedstocks, fuel
supplies
 Any Other Cause Beyond the Control of the
Owner
 Political Risks

Government Intervention

Currency Failure

Contract Frustration
 Professional Liability

Cover Financial Loss Associated with

 Acts,
 Errors and

 Omissions

of Project Architects and Engineers

 Contractual Liabilities

Coverage Available:
LiquidatedDamages
Performance Guarantee
Bonds