Is your project covered? The complexity created by multiple construction contracts in the same project means that some insurance arrangements in the Gulf risk falling through the holes, as Martin Preston and Peter Hall explain.
Many of the recent projects that have been closed in the region recently have been procured on an Engineering Procurement and Construction Management (or EPCM) basis, rather than an Engineering Procurement and Construction (or EPC) basis. In other words, rather than a single contractor entering into a single turnkey contract for the construction of the whole of the works, a number of different contractors have been employed together with a construction manager whose role is largely limited to design and co-ordination of the works of those contractors. As a result, projects tend to be completed in sections, with different parts of the project being commissioned and tested at different times.
One unintended consequence of this may be that the insurance package for the project does not fully cover the project, as there may be a gap between the time when one of the contractors completes its work and its part of the project is commissioned, tested and taken over and the time when the project as a whole is taken over and is operational.
During the construction phase of a project, which will include testing and commissioning prior to taking over of the works, the Contractor’s All Risks (“CAR”) policy will be in place to cover any damage to the works caused by an insurable event. However, the CAR policy will not cover the works once they have been completed unless the policy is specifically extended to cover this risk. A project developer may therefore inadvertently find that if a project is completed in sections, those sections that are completed prior to completion of the whole of the works and commencement of operations are not covered by either the CAR policy or by those insurances put in place to cover the operation of the project. It should be noted that although EPCM as a method of procurement will always require this gap to be addressed, the problem will arise in any contract with sectional completion (including an EPC contract).
This issue was considered earlier this year in an English case, Mopani Copper Mines plc v Millenium Underwriting Ltd.
This concerned the insurance arrangements in relation to a copper smelter being constructed in Zambia. Due to the requirements of Zambian law, the insurance was placed with a Zambian insurer but was reinsured in the London market. The smelter was to comprise a number of different units, and consequently consideration was given as to whether or not it was appropriate to put in place operational insurance to cover the period between commissioning of the various units comprising the plant and taking over of the plant itself, but this was never resolved.
Part of the plant, which had already been tested and commissioned, was damaged during operation but prior to final taking over of the plant. The project owner made a claim under its CAR policy but the court held that the owner was not entitled to claim under the CAR policy as the part of the plant that was damaged had already been tested and commissioned and was in operation. The court drew a distinction between construction risks and operational risks, stating that a CAR policy would not cover operational risks unless its scope was specifically extended to do so, which extension would attract an increased premium.
It is therefore important that where a project is to be completed in sections, consideration is given to how those parts of the project which are taken over first are insured between the date on which they are taken over and the date on which the project as a whole is taken over. The Mopani case demonstrates that the CAR policy will not, without a specific extension to cover this risk, cover operation of the project or any part of it other than during testing and commissioning (which cover is usually limited to 30 days). Moreover, since Advanced Loss of Profit (“ALOP”) insurance only pays out if the losses suffered are consequent on physical damage covered by the CAR policy, this would not respond if damage is caused to the project during operation and this damage is not covered by the CAR policy.
Martin Preston is an infrastructure partner at Norton Rose, Dubai. Peter Hall is infrastructure partner at Norton Rose, London.