IMUA 2012
San Diego
Faulty Workmanship and Ensuing Losses
Paul Barnett
Vice President
Commercial Inland Marine Manager
European Zone
Chubb Insurance Company of Europe SE
It’s very simple…….
…..of course until it
goes wrong !
…. somewhere in Italy !
….Empire State Building
……and bringing us up to date
….and bringing us up to date
Ensuing Loss
We will consider it from
- Faulty Design
- Faulty Materials
- Faulty Workmanship
Lets see why its always a hot topic !
percentage of loss amount
CAR - 1,295 major losses
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
buildings
fire
silos
roads
events of nature
wet risks
tunnels
construction method
bridges
design
sewers
CAR total
other causes
With kind permission of Swiss Re
EAR - 1975 major losses
percentage of loss amount
With kind permission
of Swiss Re
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
10
10Year
YearAvg
Avg
EAR - 1975 major losses
Percentage of loss amount
With kind permission
of Swiss Re
10 0 %
90%
80%
70%
60%
50%
40%
30%
20%
10 %
0%
Y ear Avg
1010Year
Avg
Contractual responsibilities
Firstly we need to establish the
1.
Contractors liability for loss of or damage to the Contract Works
(and other insured property)
2.
Contractors obligations to insure the Contract Works
during both the Construction and Maintenance periods
Design, Plan or Specification
Definition
(a) The assessment of the criteria necessary to ensure that the
Property Insured will fulfil its intended function
(b) The preparation and provision of necessary calculations,
drawings and specifications incorporating such criteria
(c) The detailing of essential construction techniques and
procedures
Workmanship
It is the skill required to convert the design, plan and
specification into an object
First duty of good workmanship is to follow such design,
plan and specification
General design leaves wide discretion to the workforce,
more detailed it is, the better chance of achieving what
was contemplated
Faulty Workmanship and Ensuing Losses
• Workmanship is a vital component of any project to be
undertaken
• ‘Faultless work’ can not be guaranteed
• Standards and competencies vary hugely from ‘Contractor to
Contractor’ & ‘Territory to Territory’
• Faulty Workmanship accounts for around ???? % of all losses
paid under Insurance contracts
•
Whatever the amount ….it’s enough for us to consider today!
….lets take a look at this
HSBC Bank
• ECV $ 800,000,000
• 41 storeys
• 5 basements
so far
so good
….when it goes wrong!
• BANKING giant HSBC forced to delay its move to Canary Wharf
• A burst pipe high up in the building caused substantial damage
• The new headquarters was designed by architect Norman Foster
• HSBC planned to start moving its 8,000 employees in June 2002
• They started going in 12 weeks later at the end of August 2002
Why it went wrong?
• Basic wrong interpretation of design by Contractors
• Nothing wrong with the design
• Pipe was fixed rigidly
• It did not allow for any movement
• Poor checking and sign off
• Pipe burst under pressure
• Loss amount paid about US$ 8,800,000
• Happened over the weekend
Evaluation of Workmanship
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What is the project all about?
Hone in on physical and technical characteristics
Read background/feasibility study information
Understand activities/ exposures v Time Line
Profile of Main Parties involved Contractors / Architects &
Engineers
Type of Contract & Contract Conditions
Responsibility for design
Competency of Contractor(s) for type, nature and parts of the
project for that territory
What codes and standards does the work or materials have to
conform to?
Evaluation of Workmanship
• What site investigation information is available, soil report /
conclusions?
• Are there any challenging temporary works?
• Are there any challenging foundations / deep excavations /
basements, coffer dams?
• Extent of critical lifts / positioning & control of it
• What modelling has been carried out for this project?
• Quality Assurance
• Checking / Sign off / Independent or Own
• Control and supervision of work / On & Off site
• Selection of sub contractors
Evaluation of Workmanship
• Method statements
• Are there any aspects which are not proven or untried?
• Testing and commissioning
• Training of operatives
• Special Risks contained within project
• Special Risks flowing from outside the project
• Risk Assessment / Risk Management / Loss Control
• Known loss history
• Different stages of the Tendering and Award means more or
less information…method of procurement as well
Does our insurance challenge rise as well?
Birds Nest Stadium - Beijing
Birds Nest Stadium - Beijing
Welding
• 70,000 tonnes of high quality steel
• Very innovative design
• Welds critical due to the range of temperatures involved &
thermal expansion
• Temperature range…..– 27 to + 40 degrees Celsius
• Welding had to be done at night
• Each weld needs to be checked by Ultra Sonic and Magnetic
Particle scanning system
• Looking for flaws in the welding process
It can be quite dramatic of course
Poor welding material was responsible for the
failure of a temporary clamp connection.
A 24-m section of this rotary tubular kiln at a cement
works crashed to the ground.
Two of the versions of Policy Coverage
used in the UK & International markets
1.
DE Clauses….Construction / Building Projects
2.
LEG Clauses…. Machinery and Engineering biased
Both provide coverage from within an exclusion
Insurance Coverage
…..where cover is provided
• The mere existence of a DEFECT is not sufficient
• There MUST be DAMAGE for the Policy to respond
• Until it has actually ‘broken/failed’ there is NO DAMAGE
• Our Policy is not considered to be a substitute for a
Professional Liability policy
DE WORDINGS (1995)
1. OUTRIGHT DEFECT EXCLUSION DE1(1995)
This policy excludes loss of or damage to the Property Insured
due to defective design plan specification materials or
workmanship
DE WORDINGS (1995)
2. EXTENDED DEFECTIVE CONDITION EXCLUSION DE2 (1995)
This policy excludes loss of or damage to and the cost necessary to replace repair or rectify
(a) Property Insured which is in a defective condition due to a defect in design plan
specification materials or workmanship of such Property Insured or any part thereof
(b) Property Insured which relies for its support or stability on (a) above
(c) Property insured lost or damaged to enable the replacement repair or rectification of
Property Insured excluded by (a) and (b) above
Exclusion (a) and (b) above shall not apply to to Property Insured which is free of the
defective condition but is damaged in consequence thereof
For the purpose of the Policy and not merely this Exclusion the Property insured shall not be
regarded as lost or damaged solely by virtue of the existence of any defect in design plan
specification materials or workmanship in the Property Insured or any part thereof.
DE WORDINGS (1995)
3. LIMITED DEFECTIVE CONDITION EXCLUSION
DE3 (1995)
This policy excludes Loss of or damage to and the
Cost necessary to replace repair or rectify
(a) Property Insured which is in a defective condition due
to a defect in design plan specification materials or
workmanship of such Property Insured or any part
thereof
(b) Property Insured lost or damaged to enable the
replacement repair or rectification of Property Insured
excluded by (a) above
Exclusion (a) above shall not apply to other Property
Insured which is free of the defective condition but is
damaged in consequence thereof
For the purpose of the Policy
and not merely this Exclusion
the Property Insured shall not
be regarded as lost or
damaged solely by virtue of the
existence of any defect in
design plan specification
materials or workmanship in
the Property Insured or any
part thereof.
DE WORDINGS (1995)
4. DEFECTIVE PART EXCLUSION DE4 (1995)
This policy excludes loss of or damage to and the cost
necessary to replace repair or rectify:
(a) Any component part or individual item of the Property
Insured which is defective in design plan specification
materials or workmanship
(b) Property Insured lost or damaged to enable the replacement
repair or rectification of Property Insured excluded by (a)
above
Exclusion (a) above shall not apply to other parts or items
of Property Insured which are free from defect but are
damaged in consequence thereof
For the purpose of the
Policy and not merely
this Exclusion the
Property Insured shall
not be regarded as lost
or damaged solely by
virtue of the existence of
any defect in design plan
specification materials or
workmanship in the
Property Insured or any
part thereof.
DE WORDINGS (1995)
5. DESIGN IMPROVEMENT EXCLUSION
DE5 (1995)
This policy excludes
(a) The cost necessary to replace repair or rectify any
Property Insured which is defective in design plan
specification materials or workmanship
(b) Loss or damage to the Property Insured caused to
enable replacement repair or rectification of such
defective Property Insured
But should damage to the Property Insured other than
damage as defined in (b) above) result from such a
defect this exclusion shall be limited to the costs of
additional work resulting from and the additional costs
of improvement to the original design plan
specification materials or workmanship
For the purpose of the
Policy and not merely
this Exclusion the
Property Insured shall
not be regarded as lost
or damaged solely by
virtue of the existence of
any defect in design plan
specification materials or
workmanship in the
Property Ensured or any
part thereof.
Summary of DE Wordings
DE 1. Total Exclusion
DE2..... Excludes – a. The Defective PART itself
b. Anything which depends upon a. for support
Does Not Exclude - Consequent Damage
DE 3.... Excludes - a. The Defective PART itself
b. Enabling costs
Does Not Exclude - Consequent Damage
DE 4...:Excludes - a. Any component part Defective itself
b. Enabling costs
Does Not Exclude - Consequent Damage
DE 5.... Excludes - a. The Defective PART itself UNLESS
b. Enabling costs IF THAT’S the Only DAMAGE
But should damage to the property insured (other than access damage)
IF VALID DAMAGE - ALL Covered apart from BETTERMENT ie Additional Work
The application of design, workmanship and
materials exclusions … DE 1 - DE 5
The example shown is a steel
portal framed building,
assembled with defective bolts
with a roof and cladding.
Adjacent to the building is a free
standing wall.
The bolts fail and the building
collapses onto the wall bringing
it down at the same time.
Claim example for ‘DE’ Clauses
The various Defects Exclusions would pay as follows:
(a) DE1 - Outright exclusion clause - All the damage would be excluded
(b) DE2 - All damaged items on the building are excluded but the Dwarf brick
wall is free standing so therefore covered
(c) DE3 - Steel Framework and bolts – Excluded
Roof, Cladding and Dwarf brick walls - Covered
(d) DE4 - Insurers pay for everything with the exception of the bolts
which were defective
(e) DE5 - Insurers will pay for making good all damage to the Works with the
exception of any additional costs of improvements to the design,
plan or specification
LONDON ENGINEERING GROUP
DEFECTS EXCLUSIONS
LEG 1/96
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The London Engineering Group
Model “Outright” Defects Exclusion
“The Insurer(s) shall not be liable for loss or damage due to
defects of material workmanship design plan or specification”
LEG 2/96
The London Engineering Group
Model “Consequences” Defects Wording
“The Insurer(s) shall not be liable for
All costs rendered necessary by defects of material workmanship design plan or
specification and should damage occur to any portion of the Insured Property
containing any of the said defects the cost of replacement or rectification which is
hereby excluded is that cost which would have been incurred if replacement or
rectification of the Insured Property had been put in hand immediately prior to the
said damage
For the purpose of this policy and not merely this exclusion it is understood and
agreed that any portion of the Insured Property shall not be regarded as damaged
solely by virtue of the existence of any defect of material workmanship design plan
or specification”
LEG 2/96…..put another way…..says…..
• Take a moment in time
• That is the split second immediately before the damage
actually occurs
• If you had been able to ‘Stop Time’ and correct the problem
• How much would that have cost ?
• That’s how much would have been excluded
LEG 3/06 - The London Engineering Group
Model “Improvement” Defects Wording
“The Insurer(s) shall not be liable for
All costs rendered necessary by defects of material workmanship design plan or
specification and should damage (which for the purposes of this exclusion shall
include any patent detrimental change in the physical condition of the Insured
Property) occur to any portion of the Insured Property containing any of the said
defects the cost of replacement or rectification which is hereby excluded is that
cost incurred to improve the original material workmanship design plan or
specification.
For the purpose of the policy and not merely this exclusion it is understood and
agreed that any portion of the Insured Property shall not be regarded as
damaged solely by virtue pf the existence of any defect of material workmanship
design plan or specification”.
Summary of LEG Clauses
LEG 1/96 .... Total Exclusion
LEG 2/96 .... Excludes all Costs which arose as if the rectification
had taken place IMMEDIATELY BEFORE the failure
So the actual consequences are covered
But the Access & ‘Re-closing’ costs are not covered
LEG 3/06 .... Improvements (Betterment) to the Original is Excluded
with everything else is covered.
Deductibles
DE5 / LEG 3 attract much higher deductibles
DE5 - The deductible should be applied to the claim
not the part (LEG refers to that ‘portion of work’)
Can be discussion/dispute over which deductible applies
In the UK some policies give a choice of Defects Exclusions at the
‘time of loss’ whether ‘DE5/DE3’ or ‘LEG 3/06 or LEG 2/96’….. this of
course changes the deductible
Machinery Risks
Machinery….is it ‘Proven or Unproven’
Machinery can breakdown during……
• Installation
• Testing/Commissioning
• Full scale operations
Minimal exposure
Enhanced Risk*
Enhanced Risk
* Significant exposures commence ….why?
Now leading up to full load
Defects in design, manufacture or construction more likely
Fire / Explosion
Road Example
Road Example
Machinery - Access Costs
Opening & Closing up costs
which may be US$ 5m +
…. these are not covered by
LEG 2/96
Defects Exclusions
• This presentation has in the main been from a Material Damage
standpoint
• If there is any Delay In Start Up Insurance included like ….
Advance Loss of Revenue or Advance Loss of Profit
Dependant upon the extent of the defects exclusion within the
Material Damage part of the policy will see how much of the ‘delay
is excluded’ to rectify the defects.
So as an example using LEG 2 /96 consequences….
- the delay to rectify the defect is excluded
- only the delay in excess of above in repairing resultant damage is
covered
Workmanship and Ensuing Loss
Conclusions
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No two construction risks are the same
Risk selection is key - Insure the right parties
Gain as much comfort with the main parties involved
Address coverage issues
Basic reminders …
‘What are we insuring’
‘Who do we insure’
& should we be insuring them or it?
• Provide the right coverage on the right occasions
• Whose wording / Is it clear?