Project Insurance

Project Insurance: Mitigating Risks in Construction Projects

Project insurance is a necessity for construction projects like manufacturing plants, buildings, roads, bridges due to the high risks involved.

The need for insurance stems from the unpredictable nature of construction, which can be adversely affected by factors such as weather, bad material, and accidents. Without adequate insurance coverage, project owners may face financial loss and legal liabilities in the event of unexpected disruptions or damages. However, you need to remember project insurance will never pay a claim for a loss or damage, which is gradual-like rusting or losses without a fortuity-like material shortage.

Considering the implications of future construction projects, there has to be a proactive measure to mitigate such potentially high construction risks. Effective risk management through insurance enables project stakeholders to safeguard their investments and ensure successful project completion and go into smooth operation phase.


Green-Field Projects Vs Brown-Field Projects

Green-field projects are those which come up on barren (“Green”) land afresh. Example is a new pharma plant with a capacity of 10,000 Tons per annum. In these projects, the risks are created by the projects themselves. Brown-Field projects are those which are expansion projects on an already-operating plant-for e.g. a pharma plant that produces 10,000 Tons p.a of a generic drug is expanding to produce 5,000 Tons of additional drug formulation. In this case there are many common processes which are retained with only certain parts being expanded.

The risks of a Brown-Field project are bigger than in a Green-Field project, as the surrounding plants are exposed to construction risks and hence required increased care.   


What is covered in Project Insurance

Marine Cargo risks of project equipment & materials-normal cargo insurances cannot cover project cargo risks

Construction insurance policies typically cover storage as well as property damage and liability claim, arising from accidental events and natural calamities during construction.

There are additional insurance covers for loss of profit due to delay in completion of a project, arising from accidents at Vendor premises or in transit to site or at project site. There are also special covers for Contractors-like professional indemnity and defects liability period covers.

Project insurance covers start-up & commissioning risks as well, if you know what to cover and escape from policy exclusions!

Project Insurance is sometimes extended by contractors to operation phase, if they have extended warranty liability after completion. This is called Defects Liability insurance


Project Insurance for entire eco-system!

Apart from protecting the owners and investors, Project insurance plays a crucial role in protecting all contractors and third parties involved in construction projects and minimizing financial losses. For example, a smaller contractor’s construction equipment at project site could be involved in an accident. Insurer could be asked to meet both Owner’s property loss and Contractor’s!  The policy could also ensure that the Insurers do not go after the contractor for his mistakes that caused the accident. The problem is many do not know these aspects and do not ask for these provisions in the project insurance policy. These do not cost extra too!

Similarly, Project insurance could cover third party liabilities arising from accidents-e.g. a pollution incident or an explosion affecting general public, provided you, as an Owner, asked your Insurer for coverage of right amounts of such risk coverage.     


Project Risk Management & connection with Insurance

Embracing a proactive approach towards risk management with the right insurance coverage-in extent of cover and amount of coverage is essential for ensuring smooth project delivery within budget and schedule constraints.

If risk management steps help you produce a project risk register, you could then design the right Project Insurance cover to suit your budget.


Beware of omissions!

Insurance is essential to mitigate potential risks that may arise during the course of a project, but most of the Owners/Lenders/Investors jump& get a cover, without a risk review and risk register. One of the main risks involved in project insurance is the possibility of unexpected events or circumstances that could lead to financial loss, as there is no adequate coverage for protecting you from that risk. By identifying and assessing these risks, project managers can determine the type and level of insurance coverage needed to protect the project from potential liabilities.

Many who create risk register omit to cover operational risks you would face soon after commissioning, without a proper-hand-over. Hence many a successful project perish while commissioning!

Effective risk management strategies are crucial in reducing the likelihood of catastrophic events impacting a project. Such documented strategies also help insurers to reduce your premium! Insurance plays a key role in providing financial protection against losses resulting from unforeseen events such as natural disasters, accidents, or equipment failures. It is imperative for project managers to carefully review and understand their insurance policies to ensure they have adequate coverage for all potential risks.

Quite a few important aspects many Project Owners & Managers forget while arranging Project insurance are:

  • Project Owners/Contractors provide inadequate information to Insurers, leading to denial of claim by Insurers later. For example, you take a project liability insurance for Rs 250 Cr and later, make a claim for Rs 200 Cr, after a sudden accident resulting in a fire that spread to adjacent factories. Insurers could deny the claim on the ground that the proposal form did not explain of the surrounding factories in the beginning.
  • They do not foresee start-up & commissioning risks adequately and cover them
  • They fail to take right operational cover to address the operation risks before the project is complete!
  • Engineering, Procurement & Construction (EPC) Contractors do not take insurance (e.g Liquidated Damages, Defects Liability) to protect themselves and could perish
  • Do not take project insurance too early before commencing materials despatch to site or site construction. If you wait, you will have better idea of schedule and cover could cover full risks
  • Do not delay the project insurance after site construction starts and materials are despatched to site, as some risks would be uncovered
  • Non-extension of an expiring project insurance after due date is crossed, but project is not over
  • Insureds do not know many times that Brown-field project insurance requires approval from the existing parent plan insurers

            Essential Safety Net

In conclusion, we could safely say Project Insurance is an essential tool in managing and mitigating risks that could impact the success and completion of a project. It provides a safety net against unforeseen events that have the potential to derail progress and cause financial harm. By proactively addressing risk through comprehensive insurance coverage, project managers can safeguard their projects and ensure successful outcomes. Many a times, project insurance is mandated by Lenders. Owners insist on Contractors covering their construction risks in contracts.


Project Risk Management – An insider approach to the most challenging Industry

Elite EPC Companies have executed many complex engineering projects around the world and some have perished. Main reason for survival of successful EPC

Companies is inhouse risk management. One example of Contractor failure is errors in engineering, resulting in an accident claim from the owner. Many Engineering

contractors do not cover this risk, though big and insurance product does exist!

Lasting success-track-record is not an easy thing to achieve even for the companies with great track record. Every project is a challenge for the chief EPC contractor. Managing various risks involved in the project is mammoth task for the Project Director. Here, risk management comes into play which is performed during each level of the project execution by the same executing leaders.


Potential impact of Risks in Major project objectives

Project risks are associated with activities that could impact one or more of the major project objectives – schedule, budget, scope, and technical/quality. Project teams typically prioritize these objectives in their own particular way, usually in accordance with key stakeholder expectations. Ultimately, at some time (during planning or after starting the project) the project team will likely identify risks that need to be addressed with some kind of proactive response. Typically, the larger, more strategic and complex the projects is, the more risks need to be addressed.

In some circumstances, the team does not have all of the information and/or resources readily available to address all risks at one time. Trade-off that factor into project priorities and relative risk-severity ratings are typically required. The outcome of this important activity can have repercussions on the project risk management process and on project performance on a whole. Thus, it is important to understand the major project objectives (and their priorities), and how to objectively evaluate and compare project risks to facilitate sound project trade-off decisions. Insurance decisions need to synchronise with these objectives.


Risks affecting Major Project Objectives

As previously mentioned, all projects have certain common features (i.e., the project life cycle structure and the major project objectives). The super-set of major project objectives includes: project schedule (i.e., the length of time required to complete the project and fulfil deliverable requirements), project costs (i.e., the amount of funds required to pay the resources necessary to complete the project and fulfil deliverable requirements), project scope (i.e., the interrelated activities and tasks, which must be completed to meet project objectives), Plant Reliability and Product Quality (i.e, the technical end product requirements, which must be met to satisfy project delivery requirements). Given their inherent interdependence, an impact to one of these project objectives will impact (or add risk to) one or more of the others. Below are some general examples:

  • Quality (or technical) issues typically impose scope changes, which in turn can result in schedule risk, especially if the scope change is on or near the project critical path.
  • Speed of project execution compromises safety invariably all the time
  • Lack of adequate funding (or failure of an insurance policy to pay the owner after a claim) also force owners to compromise the integrity/safety of the project
  • Required scope changes typically result in project cost adjustments, or risk.
  • Schedule issues can also result in cost risk-e.g keeping a 500 + project management team for 5 years results in a whopping impact (called “Marching Army” impact) on project cost!. On larger projects, there is likely going to be a “marching-army” impact associated with schedule- i.e., the impact relative to funding schedule dependent activities or trying out a new prototype equipment or process that was not tested before

Such is the overhead cost of “indirect” project manpower impact on project management and administration that project becomes unviable soon.

Why should an Insurance executive know these aspects? To ensure these are addressed in risk register and insurance program is effective to address these issues. In addition, Insurance Underwriters respect project managements & contractors who manage these risks effectively.


Types of Project Insurance

There are various types of project insurance available in both the London Market and Indian Market. In the London Market, project insurance includes coverage for construction projects, infrastructure development, and energy-related ventures. This type of insurance is often purchased by contractors, developers, and project owners to protect against risks such as delays, cost overruns, and unforeseen events.

On the other hand, in the Indian Market, Project Insurance is gaining popularity for its role in mitigating risks associated with large-scale projects. It covers a wide range of sectors including EPC sector, Real estate, Manufacturing, and Infrastructure. Indian insurers offer customized solutions tailored to the specific needs of small to medium projects, providing protection against political risks, natural disasters, and other potential threats. Indian Insurers are not able to cover major projects on their own of sizes, say, Rs 2,000 Cr and more at a single location, due to its complications and level of risks. Hence, they rope-in overseas Insurers-mainly London, which is a big & matured market.

Both Indian & London markets offer variations of professional indemnity insurance or defects liability insurance to protect EPC consultants and advisors involved in project planning and management. Overall, project insurance plays a crucial role in ensuring the successful completion of complex ventures by minimizing financial exposure and promoting risk management practices across different industries.

Below are the various covers available for Project Insurance:

  1. Contractor’s All Risks Insurance (CAR or BAR)
  2. Erection All Risks Insurance (EAR)
  3. Marine-cum-Erection (MCE)
  4. Machinery Breakdown Insurance, including cover for design defects
  5. Contract Works (CW) Insurance
  6. Contractor’s Plant & Machinery
  7. Advance Loss of profits (ALOP) / Delay in Start-up (DSU) Insurance
  8. Professional Indemnity Insurance
  9. Defects Liability Insurance
  10. Project liability Insurance


Project Information submission

Insurers ask for all project information through their standard proposal form. The Insured needs to furnish this information with utmost caution, erring in favour of insurers while compiling the information. Big projects furnish this information through an Underwriting report, many times, using a specialist broker. Always remember this- an Insurance Underwriter is your partner in this context.


Project Insurance Underwriting by Insurers

The process of decision making whether to cover a project for risks required to be covered by an Insurer is called “Underwriting”. Why is this profession so important? It could make an Insurer earn profit or lose due to Underwriter’s decisions, barring a few calamities.  What is involved in Project Underwriting?

  • Insurer’s philosophy on project risks-certain Insurers do not like project risks and certain insurers take project risks only if they control it fully-i.e. not a co-insurer
  • Owner/Contractor’s past track record-As unlike other insurances like property insurance, you could never get ‘past history’. In India this is relevant only to a degree, but definitely to determine your premium. In international markets this track record does help in premium and sometimes the Underwriters refuse to take a project risk of certain proposers in overseas markets.
  • Past Loss experience of the Insurer/Insured in previously executed projects/Industry, adjusted for current owner/contractor/industry
  • Is the technology or project execution methodologies repeating many times or ‘prototype’-i.e. Being experimented just now
  • Profit expectations of the Underwriter
  • Reinsurance availability & premium
  • Risks associated with the project site
  • Other Project risks-g. Brownfield Vs Green Field, types of construction, start up risks, schedule pressure, project management efficiency, risks associated with the size of equipment/type of materials-e.g. hazardous nature
  • Reputation of Vendors, Contractors involved
  • Spread of the risk-e.g. a road or power distribution project will not involve too much risk in one location
  • Recommendations of Inspection Survey done on the project by Insurer’s surveyor
  • Investment returns in current financial markets
  • Extent of Control Underwriter could have on the project-through warranties, periodical inspections, warranty survey before shipment


Claim Process in Project Insurance

In the Indian market, the claim process in project insurance is a structured procedure designed to address instances where an insured project incurs losses or damages. This process typically begins with the insured party notifying the insurance company of the claim, Insurer appointing an authorised Surveyor and Insured providing all relevant documentation to the Surveyor. The insurance company then conducts a thorough investigation through the Surveyor to assess the validity and extent of the claim.

Surveyor or claims adjuster visits the project site, where the loss occurred and gather additional evidence/information to support the above evaluation process. Once all necessary information has been collected, the Surveyor/insurance company determine whether the claim falls within the policy coverage. The Surveyor calculates the eligible amount for reimbursement and submits this claim amount to insurers in his report. The surveyor establishes the coverage in his report, by quoting policy clauses and details of the loss. If there is no coverage as per the surveyor, again he has to justify this, with reasons, in his report. The Insured, many times, delays the submission of details to the surveyor, resulting in delays in claim settlement.

Upon approval of the claim, the insurance company disburses funds to compensate for the losses documented in the survey report & incurred during the project. It is essential for both parties involved to adhere to all terms and conditions stipulated in the insurance policy to ensure a smooth and efficient claims process in project insurance within the dynamic landscape of the Indian market. Where the project is insured in international market, the Insurers might appoint an international surveyor also.


Project Insurance for Large-Scale Infrastructure Projects: Key Considerations

When considering project insurance for large-scale infrastructure projects in the Indian market, several key considerations must be considered. Firstly, it is essential to assess the specific risks associated with such projects, including potential delays, cost overruns, and regulatory hurdles unique to the Indian context. Additionally, understanding the local legal and regulatory framework is crucial in designing an effective insurance strategy that aligns with Indian laws and practices.

Moreover, engaging with experienced insurance providers familiar with the intricacies of the Indian market can provide valuable insights and tailored solutions. It is also important to carefully review policy terms and conditions to ensure adequate coverage for all potential risks involved in the project. Collaborating closely with project stakeholders and insurers from the initial planning stages can help anticipate challenges and mitigate risks effectively.

Furthermore, considering the socio-political landscape and economic factors impacting infrastructure projects in India is imperative when structuring a comprehensive insurance plan. Finally, regular reviews and adjustments to the insurance strategy throughout the project lifecycle are necessary to adapt to changing circumstances and ensure continued protection against unforeseen events.

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