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Mitigating The Risks Associated With Standstill Period Under Projects

Posted on: November 7th, 2019 by shiv No Comments

The aim of this article is to bring to light the ways of mitigating the risks prevalent during standstill period and whether the insurance policies cover those risks or not

It is not uncommon to find an ongoing construction project being interrupted. The reasons for the interruptions could be manifold and many a times beyond the control of the Principal or the owner of the project. It is critical for every stakeholder to understand the risk exposures which might continue to haunt them, irrespective of whether the project is running or not.

Some of the causes of interruptions are

  • Dynamic risks like the changing economic environment which might make the project unviable or might require some changes in the nature of the project
  • Temporary liquidity problems
  • Disputes between the principal and the contractor over contract conditions / payment tocontractors etc
  • Investors not able to fulfil their obligations
  • Delay on account of late delivery or shortage of construction materials / project machinery resulting in interruptions.

The effects are

  • The Principal abandons the project
  • The Contractor goes away without completing the project and the Principal has to look for another vendor to complete the unfinished job.
  • Both the Principal and contractor mutually decide that the project needs a temporary suspension.
  • The Investor decides to stop financing the project

Each of the above would leave an unfinished / partially constructed structure / works , which could be a building(s) of hospital, school, office, factory, residence or roads / bridges / flyovers / any other civil works or power plants / manufacturing risks.

How will the underwriters view the situation ?

Contractor’s All Risk as well as the Erection All Risk policy under the General Exclusion excludes any liability, loss or damage arising out of or aggravated by (directly or indirectly) cessation of work total or partial. This means that the policy ceases to cover any loss which might have arisen due to the cessation of work / work stoppage.

In addition to this condition no. 4 (b) of the policies also stipulate that any material change in the risk needs to be intimated to the insurers by the insured. No material alteration shall be made or admitted by the insured whereby the risk is increased unless the continuance of the insurance is confirmed in writing by the Insurer.

Stoppage of work / standstill period can be seen as a material alteration which increases the risk.

Thus as per the terms and conditions of the project insurance policies, the coverage gets restricted if there is a cessation of work and the continuation of the policy also depends on the underwriters.

Any Advance Loss of Profit cover ( ALOP ) if taken as an extension to the project policies also ceases to exist, if there is partial or total stoppage of work.

Identification Of Risks During The Standstill Period

PERIL RISK
Water The exposure to the water is maximum in civil constructions involving basements, particularly where
the basement constructions are partially completed. Even in case of partially constructed buildings
where the basements are completed, if the standstill period starts during monsoon, the structure
may remain under water for a long time and the water pressure may cause the sheet pile wall to get
deformed. This might eventually lead to collapse
Fire The riskof fire peril affecting the partially constructed buildings would be the highest when the
superstructure is under construction (particularly towards the end of the construction, when
interior works have started). The scaffoldings, shuttering, combustible materials like wood, varnishes,
paints increase the fire load to a great extent ( as compared to piling stage or when the basements
are under construction)
Theft, Burglary,
Malicious Acts
A silent risk may not be as well guarded as it would have been before abandonment. It would be
extremely prone to the malicious acts of human beings.The stealing/ breaking of windows and doors,
cutting of cables/ pipes/ electric wires have high probability of occurrence.
Third Party Liability Not only the building under question is at risk, but the surroundings too. Weakening of the partially
completed structure due to flood / storm etc. posesserious threat to the surrounding buildings.
Settlement damages, collapse of the under construction structure , strong winds blowing away parts
of the unguarded building , glass panes breaking and falling on passerbys are some of the threats.
Storm, Cyclone,
Strong Winds
Breakage of glass, blowing of not too strong roof (due to partial completion) is possible primarily
during the construction of the superstructure.

Principal / Owner of the partially constructed assets is certainly exposed to many risks during the standstill period for which his existing insurance policy may not assist. The risks require mitigation and possibly after the suitable loss prevention steps are in place the insurers may view the risk favorably and provide cover.

Hazard Possible Risk Mitigation Steps
Water Damages Sufficient pumping facilities should be available for dewatering purpose. In case of water entering thepremises, pumps should be able to remove the water

Provision of an outward slope and embankments/ barriers to prevent water entering the premise
and maintain a higher level as compared to the adjoining road

Adequate drainage facility within the premises

Fire Damages Removal of flammable and combustible substances along with the combustible wastes

Adequate fire fighting facilities (as per norm) throughout the premises need to be installed, inspected
periodically and monitored.

Sufficient water storage exclusively for fire fighting

Contact with nearest fire brigade

Safety nets installed around semi completed superstructures protects the installations against
strong wind force

Theft, Burglary,
Malicious Act
Fencing all around, round the clock exclusive security, patrolling of the site at regular intervals ,
adequate lighting during nightCurtain wall and safety net around the semi completed building
Third Party Liability Safety net around the building prevents falling objects injuring passer by

Entry to the premises should be restricted, so that unauthorised visitors do not enter and get
exposed to falling objects

Possible Insurance Coverage

There is a provision of “Work Stoppage” extension under the guidelines for project insurance. However the same is entirely at the discretion of the underwriters and for a maximum period of 6 months. The underwriters after satisfying themselves on the minimum safety provisions available on site can agree to at . This would be possible after a proper risk survey. The mitigating steps as mentioned above, if implemented can lead to favourable response from the insurers. Alternatively, the underwriters might also agree to restrict the cover to NAMED PERILS as against the all risk coverage available under CAR and EAR policies after incorporating suitable deductibles and pricing the risk appropriately. Certain
factors which the underwriters might consider before accepting and pricing the risk would be as under:

  • Status of completion of the basements and number of basements
  • Percentage of completion, whether interior work is in progress, quantum of combustible substances at site etc.
  • Whether the start of the standstill period is close to onset of monsoon
  • In case of completed basements, whether any storage is being done therein
  • Fire fighting installations and availability of water for fire fighting
  • Availability of round the clock security, drainage facility, level of the premises as against adjoining road, availability of
    pumping facilities at site.
  • Surroundings and exposure to third party damages
  • Wind storm exposure and precautions taken
  • Estimated value of the completed portions


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Free Covers in C.A.R. Insurance

Posted on: November 6th, 2019 by shiv No Comments

Insurers give certain free covers in the C.A.R. policy if the sum insured is more than Rs 100 crores (INR 1 billion). Recently some insurers have started offering these covers even if the sum insured is more than Rs 50 crores (INR 500 million)

The important free covers and there description are given below for the insurance buyers’ easy understanding:

Waiver of Subrogation

This clause means that insurers will not be proceeding against any of the parties who are associated with the project and covered under policy, for recovery. e.g. If sub contractor’s negligence has resulted in loss, insurance company can normally proceed against them for recovery following payment to Principal. But if this waiver has been agreed, they will not

50:50 Clause

This clause comes into play, when there is a doubt whether the claim will fall under marine or erection. Under such circumstances, loss is contributed 50:50 by both the policies.

Waiver of Contribution

This clause provides for waiver of applicability of contribution clause between Principal and the Contractor (only) i.e. if there are more than one project policies covering the same interest, then the policy carrying this waiver would become the primary policy and in case of any loss, would pay up without waiting for contribution from the other policies.

Loss Minimization Expenses

Upto the limit specified on the face of the policy, the policy pays for all expenses incurred to reduce/ minimize the loss (over and above the main loss payable under the policy) e.g. there is water inundation in the project site, the client will incur expenses for removing sound equipment to a safer location. The policy will pay such expenses because if the equipment were allowed to remain on site then they would have suffered higher losses.

Automatic Reinstatement Of Sum Insured

Subsequent to the payment of a claim the insured is supposed to reinstate the sum insured to the extent of loss paid else it may suffer under insurance for future losses .Under this clause, upto the limit specified the sum insured is automatically reinstated , following settlement of a claim, without any additional premium being paid .


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Dewatering Warranties & Exclusions

Posted on: November 6th, 2019 by shiv No Comments

A dewatering warranty or exclusion is commonly added to the C.A.R. policy – especially if the policy concerns a civil or infrastructure project. This article sets out to explain the reasons behind this provision and provides a clear illustration of the term “dewatering”.

What is dewatering?

Dewatering can be defined in two ways. It is the process of lowering the water table level at and around a particular contract site. Dewatering also refers to the removal of groundwater usually by pumping or evaporation, which then allows the contractor to carry out the works specified in a relatively dry environment.

Dewatering is not, as some believe, removing water from a hole that has been dug as part of the construction process or from the construction site now filled with rainwater.

To illustrate this, consider an example. Sharma Contractors have been employed to construct a five level building which incorporates two basement levels. The two basement levels will be constructed six meters below ground level, however the site borders a river and the water table is only one meter below ground level.

If Sharma Contractors excavate to six meters, this will result in a six meter hole filled with water to five meters. This water can enter the hole in a number of ways but primarily by leaching through the walls of the excavation and perimeter piling installed to hold back the earth. The piling is not intended to be waterproof, so a dewatering system is required. Independent project engineers design a pump system to continually pump water out of the site to allow the basement to be constructed. By taking the water out of the hole, the water level in the surrounding ground will also be reduced to varying levels depending on soil type and distance from the hole. This process is called “dewatering” and lasts until construction is completed to above ground level where dewatering ceases and, in the majority of cases, the water table naturally returns to normal.

How does this apply to contract works insurance?

A contract works policy principally provides cover for sudden and unforeseen loss or damage to the works being constructed. It does not guarantee the accuracy of project engineers’ assumptions and/or subsequent work. In the example above, if the engineer miscalculated the number of pumps needed to continually pump the water out of the construction area of the basement levels, resulting in damage and delay to construction, then the responsibility lies with that engineer. Due to the dewatering warranty or exclusion there will be no cover for such loss under the contract works policy. However if, for example, water damage was incurred to the site or building as a result of the dewatering pumps being stolen or faulty, the contract works policy may provide cover because this loss was sudden and unforeseen.

What if there is an influx of water for example, in the case of a rain storm?

A contract works policy will usually respond to this situation. The C.A.R. excludes the additional expenses incurred in dewatering. However, this does not include “dewatering” costs directly caused by insured perils. In other words if the engineer anticipated that two pumps were needed instead of five to dewater, due to this being a professional miscalculation, the policy would not provide cover for the additional cost associated with this. However, a storm is not related to assumptions made by the engineer so if the site is flooded the policy will normally respond.

What about getting water out of a hole?

In the example outlined above, part of the contract may be to dig footings for veranda posts just 500 millimeters below the original ground level. Once the footings have been dug, the hole will fill with water if it rains overnight. In order for construction to continue this water will need to be extracted. This process is getting water out of a hole – and not classed as dewatering. Other provisions of the policy would then come into play in the normal manner.


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Design Defect Cover in C.A.R.

Posted on: November 6th, 2019 by shiv No Comments

There are five DE exclusions and they fall in three categories; Outright Exclusion, Cover for Consequential Damage, Exclusion for Betterment & Improvement

  • Table has a design defect in one of its leg The defective table leg buckles and the table falls on the computer. The table, vase, phone and the computer are damaged.
  • Flower Vase is placed on the table
  • Computer is installed next to the table
  • Leg is the defective item
  • Table is the defective property

The defective table leg buckles and the table falls on the computer. The table, vase, phone and the computer are damaged.

DE1

Excludes all damages due to design defect. Any damage to table leg, table, flower vase as well as the computer is excluded if these items were damaged due to design defect of the table legs.

DE2

Permits cover for damage to the property of the insured (which does not rely upon the defective property for support) surrounding the defective property. Hence damage to computer is covered but damages to table, vase and phone are not covered since they rely upon the defective property for support.

DE3

Permits cover for the damage to all the insured’s surrounding property whether relying upon the defective property for support or not. Hence damage to computer, vase and phone is covered. Damages to table are not covered

DE4

It is similar to DE3 but is intended to apply in respect of machinery rather than building work.

DE5

Covers damages to the defective property (table) also alongwith the coverage available in DE2 and DE3. But excludes any cost for betterment of the defective item (table leg) or improvement in the specification of the defective property (table).

For more information on Contractor’s All Risk Policy or other insurance products to cover construction risks, write to us on info@optima.co.in


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Professional Indemnity Insurance for Civil Contractors

Posted on: November 6th, 2019 by shiv No Comments

The exposures faced by contractors have become more complicated as a result of changes in project delivery systems over the past 20 years. This has forced construction executives to examine professional liability coverage—a complex and often misunderstood type of coverage.

While a Public Liability policy covers physical activities that result in bodily injury and physical damage, professional liability claims often come from issues relating to faulty design, cost overruns or a delay in completing the project due to professional negligence.

In construction litigation, professional negligence is usually defined as failure to perform duties according to the rules or standard of care or practice that would have been expected of another professional performing a similar task in the same region or location.

“Professional” Defined

A professional is defined as someone who possesses specialized skills and experience and a higher level of competence resulting from acquired learning. A crane operator may have specialized skills and experience, but operating a crane would not be considered a professional service. It would be considered “means and methods.” Similarly, if a contractor uses detailed design for the temporary foundation of the crane and performs studies of the load bearing or handling capacity of the crane, these activities are considered means and methods. On the other hand, an engineering firm could potentially incur professional liability if the firm designs the supporting structures for the crane or offers opinions about the crane’s operating capacity but do not actually operate the crane as they would be acting within the capacity of a “professional.”

Professional Liability Coverage for Contractors

A professional liability policy broadly covers design claims. To the extent the construction manager acted negligently, they incur professional liability. Construction companies can take the following kinds of insurance coverage for financial protection.

Defensive Coverage

Professional liability policies are defensive in nature. Contractors should purchase protective indemnity coverage if they enter a design-­‐build contract and provide design and construction services while subcontracting the design portion of the work.

Protective Indemnity

If the design firm is at fault and their professional liability insurance is not adequate, protective indemnity coverage will pay the contractor for such a loss in excess of the designer’s availability insurances. Such insurance is essential in design/build as it may be the only recourse available to help the contractor defray the costs of fixing the project. Since protective indemnity only pays for established losses, it typically takes some time to vet out its value.

Mitigation

Mitigating damage is a more proactive insurance coverage for a project, especially for design claims discovered during the course of the construction or warranty period. The coverage looks at the significant project design problems early on. If the problems require immediate attention, the coverage brings all parties to the table without litigation, while potentially providing immediate funds to remedy the design problems.

The issue of fault can be resolved later after the project meets the owner’s satisfaction. Once full design liability has been established through mediation or litigation, the contractor and his or her insurer jointly look to recover mitigation of damage advance payments that have been made from the negligent third-­‐party designer.

A contractor who subcontracts design or provides design-­‐build or construction management services should purchase a professional liability policy. The Public Liability policy does not cover the risks involved in these contracts.

In some cases, design liability is inadvertently assumed on an indirect basis (e.g., fire protection, life safety/lighting, signage, roofing, mechanical, electrical, curtain walls, etc.) when the contractor subcontracts the activity to a non-­‐professional entity. This entity may also subcontract design services. Claims have arisen when a critical part of the job had a design-­‐build component that resulted in a professional liability loss despite the fact that the contract for work was a general construction lump sum agreement.


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