Insuring Large Construction Projects.pptx

A Knowledge Sharing:
Insuring Large
Construction Projects
Anwar Ahmadabidin
www.twitter.com/liferiskmentor

Outline
1. Risk assessment and treatment.
2. Characteristics and legal principles of insurable risks.
3. Marketing of risks to the insurance market.
4. General obligations of the insured and insured.
5. Owner-Control Project Insurance
6. Insuring clause and basis of indemnity.
7. Special insurance clauses and case studies.

A project’s works, materials and people are exposed to risks
with different likelihoods and impact assessment
Low likelihood
x Low Impact
Accept
High likelihood
x Low Impact
Reduce or
mitigate
Low likelihood
x High Impact
Share with
insurer,
transfer or
pass-on
High likelihood
x High Impact
Avoid or
Terminate

Risks with the following characteristics can be shared with the
insurance market.
Fortuitous:
•The loss must be accidental
and unintentional. Insurers
cannot insure against losses
that are certain to occur, such
as death or depreciation.
Definite:
•The loss must be capable of
being measured in financial
terms. This means there must
be a clear understanding of
what the policyholder will lose
if the insured event occurs.
Large number of
exposure units:
•Many similar but not identical
exposure units must exist.
This allows insurers to spread
the risk over a large pool of
policyholders, making it more
manageable and affordable.
Calculable:
• The probability of the loss
occurring must be
calculable. This allows
insurers to set premiums
that are fair and adequate.
Affordable
premium:
• The premium must be
affordable for
policyholders. Insurance is
not a financially viable
tool if the premium is too
high.

Sharing of risks in the insurance market also involve several
legal principles
Indemnity:
• Insurance is a contract
between the insured and
the insurer, where the
insurer agrees to indemnify
the insured for a specified
amount in exchange for a
premium, in case of a loss
or damage caused by an
insured event.
Insurable interest:
• The insured must have a
legitimate interest in
preserving the life or
property insured.
• It must stand to suffer a
financial loss or legal liability
if the insured event occurs.
Utmost good faith:
• The insured and the insurer
must act honestly and
disclose all material facts
that may affect the contract.
• A material fact is any fact
that would influence the
judgment of a prudent
insurer in deciding whether
to accept the risk and if so,
on what terms and
conditions.
Subrogation:
• After the insurer pays the
insured for a loss, the
insurer acquires the right to
sue the third party who
caused or contributed to the
loss, to recover the amount
paid.
• The insurer steps into the
shoes of the insured and
exercises the legal rights of
the insured against the third
party
Contribution:
• If the insured has more than
one policy covering the
same risk and the same
interest, the insured can
claim from any of the
insurers, but the total
amount recovered cannot
exceed the actual loss.
• The insurers who have paid
the claim can then seek
contributions from the other
insurers liable for the same
loss, in proportion to their
respective risk shares.

Project risks are distributed in the insurance market based on
the risk characteristics based on insurable risk’s legal principles.
Comprehensive
coverage:
•Policies typically
cover many risks,
including property
damage, liability,
and business
interruption, as the
owner or contract’s
conditions require.
High limits of
liability:
•Project insurance
policies typically
have high limits of
liability to cover the
potential cost of
large claims.
Long policy terms:
policies typically
have long terms to
cover the duration
of the construction
period and
warranty.
Tailored to the
specific project:
policies are typically
tailored to the
specific project,
considering the
project's location,
size, complexity, and
risks.
Underwritten by an
experienced
insurance broker:
•Experienced
insurance brokers
typically underwrite
insurance policies
with a strong track
record in insuring
large capital
construction
projects.
Insurance Brokers drafted insurance policy wordings based on the (1) capacity and appetite of the insurance
market, (2) the requirement of the project’s contracts and (3) financing terms

Insurance policies impose obligations to both the Insured and
the Insurer
Obligation of the Insured
•Disclose all
material
information:
•The insured must disclose all material information to
the insurer when applying for the policy. This includes
information about the project’s stakeholders,
geological findings and engineering details
•Cooperate
with the
insurer:
•The insured is obligated to cooperate with the insurer
in the event of a claim. This includes providing the
insurer with all relevant information and
documentation.
•Take
reasonable
steps to
prevent
losses:
•The insured is obligated to take reasonable steps to
prevent losses from occurring. This may include
implementing safety procedures, maintaining the
property in good condition, and having adequate
security measures in place.
Obligation of the Insurer
Provide the
coverage
agreed
upon:
The insurer is obligated to provide the coverage that is
agreed upon in the policy. This includes paying for
covered losses by the terms of the policy.
Defend the
insured
against
lawsuits:
The insurer must defend the insured against lawsuits
arising from covered events. This includes paying for
the insured's legal fees and defence costs.
Pay
covered
losses
promptly:
The insurer is obligated to pay covered losses in a
timely manner. This means that the insurer should
investigate the claim promptly and pay the insured
within a reasonable time.

Owner-Controlled Insurance Program (OCIP)
OCIP is a type of insurance that covers the risks involved in a construction project, for all the parties
involved, such as the owner, the contractor, the subcontractors, and the consultants.
• An OCIP combines the benefits of several insurance policies, such as general liability, construction
risks, and logistic risks, into a policy issued by a single insurer.
• An OCIP is purchased by the owner of the project, who pays the premium and controls the coverage and
claims.
• Cost savings: An OCIP can reduce the overall cost of insurance for the project, as the owner can
negotiate better rates and terms with the insurer and avoid duplication or gaps in coverage.
• An OCIP can also reduce administrative costs and disputes among the parties, as there is only one policy and
insurer to deal with.
• Risk management: An OCIP can improve the project’s risk management, as the owner can ensure
that all the parties have adequate and consistent coverage and that the safety and quality
standards are followed.
• An OCIP can also facilitate loss prevention, control measures, claims handling, and settlement processes.
• Coverage enhancement: An OCIP can provide broader coverage for the project, as the owner can
customise the policy to suit the specific needs and risks of the project.
• An OCIP can also cover the parties that may not have their insurance, or have insufficient or inadequate
insurance, such as the subcontractors or the suppliers.

Key Insurance Policies with Internal Project Financing
1. Construction erection all-risk policy covers the risks involved in the erection
and installation of electrical or mechanical plants and machinery.
• It protects the contractor or the owner from the loss or damage caused by accidents, defects,
errors, or failures during the erection, installation, testing and commissioning stages.
• It also covers the liability for any injury or damage to third parties due to the erection and
installation activities.
2. Marine open cargo policy covers the risks of transporting goods or materials by
sea, air, or land.
• It protects the contractor or the owner from the loss or damage caused by perils of the sea,
fire, theft, collision, or other hazards during the transit.
• It also covers the liability for any injury or damage to third parties due to the transit activities.
3. Both policies are designed to protect the contractor or the owner from
financial losses or legal liabilities that may arise during construction.

Key Insurance Policies with Non-Recourse Project Financing
1. Construction erection all-risk policy (CEAR) covers the risks involved in the
erection and installation of electrical or mechanical plants and machinery.
• It protects the contractor or the owner from the loss or damage caused by accidents, defects,
errors, or failures during the erection, installation, testing and commissioning stages.
• It also covers the liability for any injury or damage to third parties due to the erection and
installation activities.
2. Marine open cargo policy (MOC) covers the risks of transporting goods or
materials by sea, air, or land.
• It protects the contractor or the owner from the loss or damage caused by perils of the sea,
fire, theft, collision, or other hazards during the transit.
• It also covers the liability for any injury or damage to third parties due to the transit activities.
3. Delay in Start-Up (DSU) insurance, also known as Advance Loss of
Profits (ALOP) insurance, protects project owners from financial losses
caused by a delay in commercial operations due to an insured physical
damage event covered by CEAR or MOC.

Construction/ Erection All Risks: Insuring Clause
All construction risks
except:
• Excluded.
• Below deductible.
• Above specified limits.
Risk suffered by the
insured must be:
• Fortuitous in nature,
accidental or happens by
chance.
• Proven to have happened
suddenly, unforeseen and
involve physical loss.

Period of insurance
Construction
Erection All Risks
• Full coverage for works,
material and equipment from
NTP to COD.
• Limited coverage during DLP.
Marine Open
Cargo.
• Transportation from the
factory to the port/airport
and the site.
• Temporary storage before
arriving at the site.

Basis of indemnity when a loss happens to the insured in a
construction project:
1. To restore the insured to the same financial position before
the loss occurred.
2. The basis of indemnity may be:
a) Repair cost, if repair is possible to the condition before the loss
happens.
b) Replacement cost of similar kind and quality.
c) Cash value for replacing damaged property with depreciated property
of similar kind and quality.
3. The insurer may pay for related financial losses that the
insured incurs due to the loss.

Special Clauses
Description and case study

Multiple Insured & Cross Liability Clause
• A “multiple insured” clause allows more than one party to be covered under the same
insurance policy, such as the owner, the contractor, the subcontractors, the consultants,
and the suppliers of a construction project.
• A “multiple insured” clause ensures that all the parties involved in the project have the same level
of protection and can benefit from the same policy terms and conditions.
• A cross liability clause is a clause that allows one insured party to make a claim against
another insured party under the same insurance policy, in case of a loss or damage
caused by the other party’s negligence or fault.
• A cross liability clause treats each insured party as if they have their separate policy, and does not
affect the rights and obligations of the insurer or the total limit of liability.
• A “multiple insured” clause and a “cross liability” clause are often included in a
construction insurance policy, such as a contract works or a public liability policy, to
protect the interests and liabilities of the various parties involved in the construction
project.
• These clauses help to avoid disputes, conflicts, or litigation among the insured parties, and to
facilitate the settlement of claims fairly and efficiently.

Case Study: Multiple Insured & Cross Liability Clause
• A contractor was hired to build a hydropower plant on a river, using a design provided by
a consultant. The owner, the contractor, the consultant, and the subcontractors were all
covered under the same construction insurance policy, which had a multiple-insured
clause and a cross-liability clause.
• During the construction, a subcontractor was responsible for installing the turbines and
generators in the powerhouse. However, the subcontractor used faulty materials and
equipment and did not follow the proper installation and testing procedures. As a result,
the turbines and generators malfunctioned and caused a fire in the powerhouse, which
spread to the other parts of the project and damaged them.
• The owner and the contractor filed a claim against the insurance policy for the loss or
damage caused by the fire. The insurer conducted an investigation and found that the
negligence and fault of the subcontractor caused the fire. The insurer then paid the owner
and the contractor for repairing or replacing the damaged parts of the project, under the
multiple insured clause.
• However, under the cross-liability clause, the insurer also exercised the right of
subrogation and sued the subcontractor for the recovery of the amount paid. The
subcontractor then filed a counterclaim against the consultant, alleging that the design
was defective and contributed to the fire. The consultant then filed a cross-claim against
the contractor, alleging that the contractor failed to supervise and monitor the
subcontractor’s work.

LEG2/96
• Design exclusion: The policy does not cover the cost of fixing or
replacing any part of the project with a defect in its material,
workmanship, design, plan, or specification.
• Consequence cover: However, if the defect causes damage to
another part of the project or a third party, the insurer will cover the
cost of repairing or replacing the damaged part or the third party’s
claim.
• Indemnity basis: The cost of fixing or replacing the damaged part is
calculated based on the price that would have been paid if the work
had been done before the damage occurred.
• Damage Trigger: The insurer does not consider a part of the project
damaged by a defect. An external event or force must cause the
damage.

LEG2/96: Examples
• If a defect in the design of a dam causes a crack in the concrete wall, the
insurance will cover the cost of repairing the crack and any damage caused by the
water leakage, but not the cost of redesigning the dam or replacing the defective
concrete wall1.
• If a defect in the material of a turbine blade causes it to break during operation,
the insurance will cover the cost of replacing the blade and any damage caused
by the blade fragments, but not the cost of replacing the defective material or the
entire turbine2.
• If a defect in the workmanship of a pipe joint causes it to leak during testing, the
insurance will cover the cost of fixing the leak and any damage caused by the
water, but not the cost of redoing the pipe joint or replacing the defective pipe3.

LEG2/96: Case Study 1
• A contractor was hired to perform soil-nailing works on a slope adjacent to a road, as part of a slope stabilisation
project. The contractor used a design provided by the Owner’s Engineer, which specified the type, size, length,
and spacing of the soil nails, as well as the method of installation and testing. The contractor followed the design
and completed the work according to the contract.
• However, after heavy rain, the slope collapsed and caused damage to the road and the vehicles on it. The
owner and the third parties filed a claim against the contractor for the loss or damage caused by the slope
failure. The contractor then filed a claim against the owner for the indemnity under the construction insurance
policy.
• The insurance policy had a LEG2/96 clause, which excluded the coverage for losses or damages caused by
defects in the project's workmanship, materials, or design. The insurer conducted an investigation and found
that the slope failure was caused by a defect in the design, which underestimated the soil parameters and the
water pressure on the slope. The insurer then denied the contractor’s claim, stating that the policy did not cover
the cost of fixing or replacing the defective design.
• However, the insurer also found that the slope failure caused damage to the other parts of the project, such as
the road and the vehicles, which were not defective. The insurer then agreed to pay for the cost of repairing or
replacing the other parts of the project and the liability for the injury or damage to the third parties, under the
LEG2/96 clause. The insurer then subrogated the right to sue the Owner and the Engineer, to recover the
amount paid, based on the Owner’s Engineer liability for the defective design.

• A contractor was hired to excavate a diversion tunnel for a hydropower plant on a river, using a
design provided by a consultant. The owner, the contractor, the consultant, and the subcontractors
were all covered under the same construction insurance policy, which had a LEG2/96 clause.
• During the excavation, a subcontractor was responsible for drilling and blasting the rock in the
tunnel. However, the subcontractor used improper explosives and techniques and did not follow the
safety and quality standards. As a result, the tunnel collapsed and caused damage to the other
parts of the project and the surrounding environment.
• The owner and the contractor filed a claim against the insurance policy for the loss or damage
caused by the tunnel collapse. The insurer investigated and found that the tunnel collapse was
caused by a defect in the subcontractor’s workmanship. The insurer then denied the contractor’s
claim, stating that the policy did not cover the cost of fixing or replacing the defective workmanship.
• However, the insurer also found that the tunnel collapse caused damage to the other parts of the
project and the environment, which were not defective. The insurer then agreed to pay for the cost
of repairing or replacing the other parts of the project and the environment and the liability for the
injury or damage to the third parties, under the LEG2/96 clause.
• The insurer then subrogated the right to sue the subcontractor for recovering the amount paid,
based on the subcontractor’s liability for the defective workmanship.

• A contractor was hired to construct an RCC dam for a hydropower plant on a river, using a design
provided by a consultant. The owner, the contractor, the consultant, and the subcontractors were all
covered under the same construction insurance policy, which had a LEG2/96 clause.
• During the construction, a subcontractor was responsible for mixing and placing the RCC (roller-
compacted concrete) in the dam. However, the subcontractor used substandard materials and
equipment and did not follow the proper quality control and testing procedures. As a result, the RCC
in the dam was weak and porous and developed cracks and leaks.
• The owner and the contractor filed a claim against the insurance policy for the loss or damage
caused by the RCC defect. The insurer investigated and found that the RCC defect was caused by
a defect in the subcontractor’s workmanship. The insurer then denied the contractor’s claim, stating
that the policy did not cover the cost of fixing or replacing the defective RCC.
• However, the insurer also found that the RCC defect caused damage to the other parts of the
project, such as the turbines, generators, and transformers, which were not defective. The insurer
then agreed to pay for the cost of repairing or replacing the other parts of the project and the liability
for the injury or damage to the third parties, under the LEG2/96 clause. The insurer then subrogated
the right to sue the subcontractor for recovering the amount paid, based on the subcontractor’s
liability for the defective workmanship.

• A contractor was hired to construct and erect the powerhouse equipment for a river hydropower plant,
using a consultant's design. The owner, the contractor, the consultant, and the subcontractors were all
covered under the same construction insurance policy, which had a LEG2/96 clause.
• During the erection, a subcontractor was responsible for installing the transformers and switchgear in the
powerhouse. However, the subcontractor used defective materials and equipment and did not follow the
proper installation and testing procedures. As a result, the transformers and switchgear malfunctioned and
caused a short circuit and a fire in the powerhouse, which damaged the other parts of the project and the
surrounding environment.
• The owner and the contractor filed a claim against the insurance policy for the loss or damage caused by the
fire. The insurer investigated and found that the fire was caused by a defect in the subcontractor’s
workmanship. The insurer then denied the contractor’s claim, stating that the policy did not cover the cost
of fixing or replacing the defective transformers and switchgear.
• However, the insurer also found that the fire caused damage to the other parts of the project and the
environment, which were not defective. The insurer then agreed to pay for the cost of repairing or replacing
the other parts of the project and the environment and the liability for the injury or damage to the third
parties, under the LEG2/96 clause. The insurer then subrogated the right to sue the subcontractor for
recovering the amount paid, based on the subcontractor’s liability for the defective workmanship.

MR101: Case Study
• A contractor was hired to construct a tunnel for a hydro dam project. The contractor used
explosives to create the tunnel.
• However, during the blasting, the explosives caused a crack in the tunnel wall, allowing
underground water to seep. The contractor had to stop the blasting and seal the crack.
This resulted in a delay and an increase in the cost of the project.
• The contractor filed an insurance claim for the additional cost of the tunnelling work and
the loss of revenue due to the delay. However, the insurer rejected the claim based on the
MR101 clause.
• The insurer argued that the MR101 clause excluded the cover for the ground
improvement/stabilisation and measures required to seal against water ingress, unless
necessary to reinstate indemnifiable loss or damage.
• The insurer claimed that the contractor did not have a proper design or plan for the
tunnelling work and that a design defect caused the crack.
• The insurer only agreed to pay for reinstating the damaged part of the dam wall to its
original condition, but not for sealing the crack or completing the tunnel.

The Tunneling Works Endorsement (MR101)
Excludes coverage for some risks that are common in tunnelling
projects, such as:
• Change in construction method due to unforeseen ground conditions.
• Ground improvement/stabilisation and measures required to seal against
water ingress.
• Dewatering, unless necessary to reinstate indemnifiable loss/damage.
• Loss/damage caused by breakdown of dewatering systems or if damage
could have been prevented by having standby dewatering facilities.
• Abandonment/recovery of tunnel boring machines.
• Loss of bentonite/suspensions/any media or substance used for
excavation support.

The Dam and Reservoir Clause (MR104)
This is a limitation of coverage clause that excludes coverage for some risks
that are common in dam and reservoir construction projects, such as:
• Grouting of soft rock areas and/or other additional safety measures even if
their necessity arises only during construction.
• Expenses incurred for dewatering.
• Loss/damage caused by the breakdown of dewatering systems or if the
damage could have been prevented by having standby
dewatering facilities
• Expenses incurred for additional sealing or waterproofing and additional
facilities for running-off and/or underground water discharge.
• Loss or damage due to subsidence if caused by insufficient compacting.
• Cracks or leakage.

MR104: Case Study
• A contractor was hired to construct a dam for a hydro dam project. The contractor used a
dewatering system to pump the water from the dam site during construction.
• However, during a heavy rainstorm, the dewatering system broke down and caused the
dam site to be flooded with water. The water damaged the concrete and steel structures
of the dam and delayed the construction.
• The contractor had to repair the dewatering system and the damaged structures. This
increased the cost of the project.
• The contractor filed an insurance claim for the additional cost of the dam work and the
loss of revenue due to the delay. However, the insurer rejected the claim based on the
MR104 clause.
• The insurer argued that the MR104 clause excluded the cover for the loss or damage
caused by the breakdown of dewatering systems or if the damage could have been
prevented by having standby dewatering facilities.
• The insurer claimed that the contractor did not have a reliable dewatering system or a
backup system in place and that the contractor’s negligence caused the damage.
• The insurer only agreed to pay for the cost of reinstating the damaged part of the dam to
its original condition, but not for the cost of repairing the dewatering system or completing
the dam.

The Safety Measures with Respect to Precipitation, Flood
and Inundation Clause (MR110)
• This is a limitation of the coverage clause. It excludes coverage for loss or
damage caused by precipitation, flood, or inundation unless adequate
safety measures have been taken in designing and executing the project
involved.
• Adequate safety measures are defined as allowance for precipitation,
flood, and inundation with a return period of 20 years. This means that the
project must be designed and constructed to withstand precipitation, flood,
or inundation events that have a 5% chance of occurring in any given year.
• The clause also excludes coverage for loss or damage caused by not
immediately removing obstructions (e.g., sand, trees) from watercourses
within the construction site, whether carrying water or not, to maintain free
water flow.

MR110: Case Study
• A contractor was hired to construct a bridge for a road project. The contractor used a pile-driving
method to install the foundations of the bridge.
• However, during a heavy rainstorm, the river near the bridge site overflowed and flooded the
construction site. The water damaged the piles and the equipment and delayed the construction.
The contractor had to replace the piles and the equipment and resume the work. This increased the
cost of the project.
• The contractor filed an insurance claim for the additional cost of the bridge work and the loss of
revenue due to the delay. However, the insurer rejected the claim based on the MR110 clause.
• The insurer argued that the MR110 clause excluded the cover for the loss or damage caused by
inundation if adequate safety measures were not taken in designing and executing the project.
• The insurer claimed that the contractor did not make allowance for the inundation with a return
period of 20 years for the location insured and the entire policy period based on the statistics
prepared by the meteorological agencies. The insurer also claimed that the contractor did not
remove the obstructions from the watercourses within the construction site to maintain free water
flow.
• The insurer only agreed to pay for reinstating the damaged part of the bridge to its original
condition, but not for replacing the piles or the equipment or completing the bridge.

Warranty Concerning Sections (MR106)
• This is a limitation of coverage clause that indemnifies the insured for loss
or damage caused to or by embankments, cuttings and benchings,
ditches, canals, or road works only if they are constructed in sections not
exceeding 500 meters.
• This clause is designed to reduce the risk of catastrophic failure of these
structures. If a structure is constructed in smaller sections, it is less likely
that a failure in one section will cause the entire structure to fail.

MR106: Case Study
• A contractor was hired to construct a road project that involved building a ditch to drain the
rainwater from the road surface. The contractor followed the project's design specifications and
safety standards and took adequate safety measures to prevent water damage due to precipitation,
flood, or inundation. However, during a severe thunderstorm, the ditch was clogged by debris and
mud washed down from the nearby hills.
• The water overflowed from the ditch and flooded the road and the adjacent properties. The water
damaged the road surface, the equipment, and the third-party assets and delayed the project. The
contractor had to clear the ditch, repair the road, and compensate the third-party claims. This
increased the cost of the project.
• The contractor filed an insurance claim for the additional cost of the road work and the third-party
liability. However, the insurer rejected the claim based on the MR110 clause. The insurer argued
that the MR110 clause excluded covering the loss or damage caused by precipitation, flood, or
inundation if adequate safety measures were not taken in designing and executing the project.
• The insurer claimed that the contractor did not make allowance for the precipitation, flood, or
inundation with a return period of 20 years for the location insured and the entire policy period
based on the statistics prepared by the meteorological agencies.
• The insurer also claimed that the contractor did not remove the obstructions from the watercourses
within the construction site to maintain free water flow. The insurer only agreed to pay for reinstating
the damaged property to its original condition, but not for clearing the ditch, repairing the road, or
compensating the third-party claims.

The Slope Protection Warranty (EPI 56)
This is a limitation of coverage clause that excludes coverage for loss or damage caused by
slope failure unless adequate safety measures have been taken in designing and executing
the slope protection. Adequate safety measures are defined as making allowance for:
• Erosion protection to the slope surface caused by precipitation and/or flood and/or inundation
• Measures which become necessary to improve or stabilize ground conditions or to seal against water
ingress/egress
• Filling voids or replacing lost bentonite/soil
• Reinstating profiles or dimensions of the slope surface (e.g. refilling cavities, profiling slope gradient & etc) to
improve or stabilize ground conditions.
• Immediately removing obstructions (e.g. sand, rocks, trees & etc) from watercourses within the construction site
• The clause also excludes coverage for:
• Loss or damage which is foreseeable having regard to the nature of the construction work or the manner of its execution
• Loss or damage caused by subsidence if caused by insufficient compacting
• The costs of loss prevention or minimization measures which become necessary during the period of Takaful
• Loss or damage to shotcrete which is caused by excessive soil pressure due to the saturation of soil caused by
precipitation or rainwater
• Any costs for reinstatement of the soil profile of any slope or embankment

Overtopping of Cofferdam (EPI 56)
• This is an exclusion clause that excludes coverage for loss or
damage caused by the overtopping of a cofferdam caused by a
flood with a return period of less than 20 years.
• The burden of proof is on the insured to prove that the return
period of the flood that overtopped the cofferdam was greater
than 20 years.

EPI56: Case Study
• A contractor built a cofferdam to isolate the work area from the river. The contractor
followed the design specifications and the safety standards for the project and used a
reliable dewatering system to keep the cofferdam dry.
• However, during a rare and extreme flood, the water level rose above the cofferdam and
overtopped it. The water flooded the construction site and damaged the equipment and
the structures. The contractor had to repair the dewatering system and the damaged
property and resume the work. This resulted in a huge increase in the cost of the project.
• The contractor filed an insurance claim for the additional cost of the project and the loss of
revenue due to the delay. However, the insurer rejected the claim based on the EPI56
clause.
• The insurer argued that the EPI56 clause excluded the cover for the overtopping of
cofferdam caused by a flood if the return period of the flood is less than 20 years for the
location insured and the entire policy period based on the statistics prepared by the
meteorological agencies. The insurer claimed that the flood was considered a normal and
foreseeable event and that the return period of the flood was less than 20 years. The
burden was on the contractor to prove otherwise.
• The insurer only agreed to pay for the cost of reinstating the damaged property to its
original condition, but not for the cost of repairing the dewatering system or completing
the project.

EPI56: Case Study
• A contractor was hired to construct a cofferdam. The contractor followed the design
specifications and the safety standards for the project and used a reliable dewatering
system to keep the cofferdam dry.
• However, during a rare and extreme flood, the water level rose above the cofferdam and
overtopped it. The water flooded the construction site and damaged the equipment and
the structures. The contractor had to repair the dewatering system and the damaged
property and resume the work. This resulted in a huge increase in the cost of the project.
• The contractor filed an insurance claim for the additional cost of the project and the loss of
revenue due to the delay. However, the insurer rejected the claim based on the EPI56
clause.
• The insurer argued that the EPI56 clause excluded the cover for the overtopping of
cofferdam caused by a flood if the return period of the flood is less than 20 years for the
location insured and the entire policy period based on the statistics prepared by the
meteorological agencies.
• The insurer claimed that the flood was considered a normal and foreseeable event and
that the return period of the flood was less than 20 years. The burden was on the
contractor to prove otherwise. The insurer only agreed to pay for the cost of reinstating
the damaged property to its original condition, but not for the cost of repairing the
dewatering system or completing the project.

The Piling Foundation and Retaining Wall
Works (MR121)
• This is a limitation of coverage clause that excludes coverage for several
risks that are common in piling foundation and retaining wall works,
including:
• Replacing or rectifying piles or retaining wall elements that have become
misplaced/misaligned/jammed, lost/abandoned/damaged during driving or extraction,
or obstructed by jammed or damaged piling equipment or casings.
• Rectifying disconnected or declutched sheet piles.
• Rectifying any leakage or infiltration.
• Filling voids or replacing lost bentonite.
• Loss or damage caused by piles or retaining wall elements failing to pass a load-
bearing test.
• Reinstating profiles or dimensions.

MR121: Case Study
• A contractor was hired to construct a foundation for a building project. The contractor
used a retaining wall method to support the excavation and to prevent soil erosion.
• However, during a heavy rainstorm, the retaining wall elements became disconnected and
de-clutched, causing gaps and instability in the wall. The soil and water from the adjacent
land slid into the excavation and damaged the equipment and the foundation. The
contractor had to remove the soil and water, repair the equipment and the foundation, and
reconnect and re-clutch the retaining wall elements. This resulted in an increase in the
cost of the project.
• The contractor filed an insurance claim for the additional cost of the foundation work.
However, the insurer rejected the claim based on the MR121 clause.
• The insurer argued that the MR121 clause excluded the cover in respect of expenses
incurred for rectifying disconnected or de-clutched sheet piles. The insurer claimed that
the contractor did not use proper materials, equipment, or methods for the retaining wall
works and that the disconnection or de-clutching was caused by faulty workmanship.
• The insurer only agreed to pay for the cost of reinstating the damaged property to its
original condition, but not for the cost of removing the soil and water, repairing the
equipment and the foundation, or reconnecting and re-clutching the retaining wall
elements.

The Fire Fighting Facilities (MR206)
This is a limitation of coverage clause that excludes coverage for loss arising from
fire if the following conditions are not fulfilled:
• Adequate fire-fighting equipment and extinguishing agents of sufficient capacity must always be
available at the site and ready for immediate use.
• A sufficient number of workmen must be fully trained in the use of such equipment and must be
available for immediate intervention at all times.
• If storage of material for the construction or erection of the contract works is necessary, storage
must be subdivided into storage units. The individual storage units must be either at least 50 m
apart or separated by fire-proof walls. All inflammable materials (such as shuttering material not
fitted for concreting, litter, etc.) and especially all inflammable liquids and gases must be stored at
a sufficiently large distance from the property under construction or erection and any hot work.
• Welding, soldering or the use of an open flame in the vicinity of combustible material is only
permitted if at least one workman suitably equipped with extinguishers and well-trained in fire-
fighting is present.
• At the beginning of testing all fire-fighting facilities designed for the operation of the plant must
be installed and serviceable.

MR206: Case Study
• A contractor was hired to construct a turbine hall for a power plant project. The contractor used a
cutting torch to cut the metal beams and plates. However, during the cutting, the sparks from the
torch ignited some oil and grease that was spilt on the floor.
• The fire spread quickly and reached the nearby storage of inflammable materials, such as fuel,
lubricants, and solvents. The fire caused a huge explosion that damaged the turbine hall, the
equipment, and the adjacent buildings. The contractor had to evacuate the site and call the fire
brigade. This resulted in a huge loss and delay of the project.
• The contractor filed an insurance claim for the loss or damage caused by the fire and the explosion.
However, the insurer rejected the claim based on the MR206 clause. The insurer argued that the
MR206 clause excluded the cover on loss arising from fire if the policy requirements were not
fulfilled by the insured.
• The insurer claimed that the contractor did not have adequate fire-fighting equipment and
extinguishing agents of sufficient capacity at the site and ready for immediate use. The insurer also
claimed that the contractor did not have a sufficient number of workmen who were fully trained in
the use of such equipment and who were available for immediate intervention at all times. The
insurer also claimed that the contractor did not store the inflammable materials at a sufficiently large
distance from the property under construction and any hot work, and the contractor did not have a
fire-fighter or a fire guard who was suitably equipped with extinguishers and well-trained in fire-
fighting and who was present during the cutting.
• The insurer only agreed to pay for the cost of reinstating the damaged property to its original
condition, but not for the cost of repairing the turbine hall, the equipment, or the adjacent buildings.

The Underground Cables, Pipes and
Other Facilities (MR102)
• This is a limitation of coverage clause that excludes coverage for loss or
damage to existing underground cables, pipes, or other underground
facilities unless the insured has inquired with the relevant authorities about
the exact position of such cables, pipes, or other underground facilities
and taken all necessary steps to avoid damage to them.
• The clause also excludes coverage for consequential damage and
penalties.

MR102: Case Study
• A contractor was hired to construct a penstock for a hydroelectric power plant project. The
contractor used a trenching machine to dig a trench for laying the penstock pipes.
• However, during the trenching, the machine accidentally cut an underground cable that
belonged to a telecommunication company. The cable was damaged and caused a
disruption of the phone and internet services in the area. The contractor had to stop the
trenching and call the telecommunication company. This resulted in a delay and a penalty
for the project.
• The contractor filed an insurance claim for the penalty and the loss of revenue due to the
delay. However, the insurer rejected the claim based on the MR102 clause.
• The insurer argued that the MR102 clause only indemnified the insured if the insured had
inquired with the relevant authorities about the exact position of the underground cables,
pipes, or other facilities and took all necessary steps to avoid damage to them. The
insurer claimed that the contractor did not consult with the telecommunication company or
the local government about the location and depth of the underground cable and did not
use appropriate methods and equipment to prevent any contact or interference with it.
The insurer also claimed that the MR102 clause limited the indemnity to the repair costs
of the damaged cable and excluded any consequential damage and penalties.
• The insurer only agreed to pay for the cost of restoring the cable to its original condition,
but not for the penalty or the loss of revenue.

Special Conditions Concerning Vibration,
Removal or Weakening Support
• This is a limitation of coverage clause that extends coverage under
Section 2 of the policy to cover liability consequent upon loss or
damage caused by vibration or by the removal or weakening of
support, provided that:
• The loss or damage results in the total or partial collapse of any
property/land/building;
• The property/land/building is in a sound condition before the commencement
of construction and
• The insured has taken all necessary loss prevention measures.
• The clause also excludes coverage for:
• Loss or damage which is foreseeable having regard to the nature of the
construction work or the manner of its execution;
• Superficial damage which neither impairs the stability of the
property/land/buildings nor endangers their users; and
• The costs of loss prevention or minimisation measures which become
necessary during the period of insurance.

Vibration, Removal or Weakening
Support: Case Study
• A contractor was hired to construct a penstock for a hydroelectric power plant project. The
contractor used a blasting method to create a tunnel for the penstock. However, during the blasting,
the vibration caused by the explosives weakened the support of a nearby bridge that crossed the
river. The bridge collapsed and caused damage to the vehicles and the people on it. The contractor
had to stop the blasting and call the emergency services. This resulted in a huge loss and delay of
the project.
• The contractor filed an insurance claim for the loss or damage caused by the collapse of the bridge.
However, the insurer rejected the claim based on the Special Conditions Concerning Vibration,
Removal or Weakening Support clause.
• The insurer argued that the clause only indemnified the insured if the loss or damage resulted in the
total or partial collapse of any property, land, or building, and if the condition of the property, land, or
building was sound and the necessary loss prevention measures had been taken prior to the
commencement of construction. The insurer claimed that the contractor did not inquire with the
relevant authorities about the exact position of the bridge and did not take all necessary steps to
avoid damage to it. The insurer also claimed that the contractor did not prepare a report on the
condition of the bridge before the commencement of construction and at its own expense. The
insurer also claimed that the clause did not indemnify the insured in respect of liability for any loss
or damage that was foreseeable having regard to the nature of the construction work or the manner
of its execution.
• The insurer only agreed to pay for restoring the bridge to its original condition, but not for repairing
the penstock, the vehicles, or the people.

Insuring Large Construction Projects.pptx

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