CAR / EAR scope of cover
Peter Woysch
Engineering CAR / EAR
Dubai, October 25-26, 2015
Sunday, October 25, 2015
Content
CAR / EAR Scope of cover(s) :
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Timing
10:00 – 11:30
Context
Scope of cover and exclusions
Design Error and Manufacturer Risk cover during works
Extensions
Third Party Liability
DSU/ALOP
Campus CAR / EAR – Dubai, October 25-26, 2015
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CAR / EAR Scope of cover
1
Context
2
Scope of cover and exclusions
3
Design Error and Manufacturer risk during works
4
Extensions
5
Third Party Liability (TPL)
6
DSU / ALOP
Campus CAR / EAR – Dubai, October 25-26, 2015
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Period of Insurance
Provisional acceptance
Take Over
Start
Construction / Erection
Testing
Final acceptance
Defect liability
Design
Manufacturing
Shipment
CAR / EAR
Maintenance
Operational cover
IDI
Campus CAR / EAR – Dubai, October 25-26, 2015
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CAR vs. EAR
 Building
 Civil works:
CAR
EAR





Roads
Bridges
Pipelines
Tunnels
Dams
 Power Plants
 Petrochemical Plants and Other
Industrial Plants
Campus CAR / EAR – Dubai, October 25-26, 2015
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The EAR / CAR Policy
The policy includes 1 to 3 Sections :
 Section 1: Works Material Damage
 Section 2: Third Party Liability
 Section 3: ALOP (Advance Loss of Profits) or DSU (Delay in Start-up)
One contract, one policy : Project policy
Open policy : One policy covering the activity of one contractor
Campus CAR / EAR – Dubai, October 25-26, 2015
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Insured world
Suppliers
Eng.
(2)
ITC
(3)
S/C
Main
contractor
P (1)
S/C
Execution of the
works – Main
contractor and
subcontractor
(s/c)
Banks and
Finance
S/C
Architect
Eng.
(2)
Eng.
(2)
1. Principal – Owner
2. Engineering: Soil, structure, (..)
3. Independent Technical Control
(Optional)
Engineering
Campus CAR / EAR – Dubai, October 25-26, 2015
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The Insured
For « Project » policies, the Insured usually comprises all parties involved in the
Project :
 The Employer (or Owner, or Principal):
CAR + TPL + DSU
 The Main Contractor:
CAR + TPL
 The Sub-Contractors:
CAR + TPL
 The Suppliers (on-site activities only):
CAR + TPL
 The Consulting Engineers (on-site activities only): CAR + TPL
 The Banks / Lenders (if involved):
CAR + TPL + DSU
Always intend to preserve rights of subrogation…
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Sum Insured for works
Contract Value (TCV) – reconstruction/reinstatement cost:
INCLUDED
EXCLUDED
 Land Acquisition
 Site preparation
 Training
 Engineering
 Spare parts
 Works
 Financial costs
 Suppliers
Preserve Average Rule
When starting TCV is PROVISONAL => Adjustment on FINAL TCV (GWP …)
PROVISIONAL => “Uncertainty” => “Leeway clause” (AVOID > 15%)
Campus CAR / EAR – Dubai, October 25-26, 2015
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CAR / EAR Scope of cover
1
Context
2
Scope of cover and exclusions
3
Design Error and Manufacturer risk during works
4
Extensions
5
Third Party Liability (TPL)
6
DSU / ALOP
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Scope of Cover
Operative Clause
The Policy indemnifies the Insured in the event of unforeseen and
sudden physical loss or physical damage to the Property Insured
arising:
 during the period of Insurance
 whilst at the Project Site (or in storage)
The Scope of Cover can be :
 limited by Exclusions (e.g. Wear & Tear, Cash)
 widened by Extensions / Memoranda (e.g. Debris Removal)
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Scope of Cover
Insured Perils include (unless specifically excluded) :
 Natural Hazards (rainfall, storm, earthquake)
 Fire, Explosion
 Collapse
 Machinery Breakdown (during testing)
 Damage resulting from faulty design, workmanship and material
 Theft
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Exclusions
The following general exclusions cannot be bought back:
 War and Civil War
 Nuclear risk – ionising radiations
 Wilful act by the Insured (being a member of the Management)
 Cessation of work (temporary « silent risk » cover can be provided)
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Exclusions
Additional exclusions, some of which provide limited coverage include :
 Air / Sea transit
 Vessels / Aircraft
 Cash / Cheques
 Liquidated damages / penalties (i.e. contractual losses)
 Wear & Tear (gradual deterioration)
 Corrosion / Erosion
 CPE (Construction Plant & Equipment)
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Exclusions
…/…
 Insured Property taken into use (construction vs. operational risk)
 Unexplained Shortages
 Existing Property (cover possible subject to sub-limit)
 SRCC – Strikes, Riots, Civil Commotion (cover possible depending on
local conditions and subject to sub-limit)
 Terrorism
 Defects (DE 1- 5, LEG 1–3)
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Principle of indemnification
Cost of repair or replacement in the situation just before the loss
 Cost of material or supply
 Cost of transportation on site as per tender
 Workmanship at the price as per tender
 Extra expenses, like acceleration cost extension is accepted only if
appropriate extension of cover has been written
 Removal of debris. Usual practise give allowance to a maximum
percentage (<10%) of the loss with a maximum amount (<5% of TCV)
Cost of improvements or consecutive alterations to the damage are not covered.
Maintenance measures are not covered – except if « Sue and Labour » extension
included
Average rule to apply if necessary.
Campus CAR / EAR – Dubai, October 25-26, 2015
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CAR / EAR Scope of cover
1
Context
2
Scope of cover and exclusions
3
Design Error and Manufacturer risk during works
4
Extensions
5
Third Party Liability (TPL)
6
DSU / ALOP
Campus CAR / EAR – Dubai, October 25-26, 2015
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Defects
The CAR/EAR section covers PHYSICAL LOSS OR DAMAGE. So it does not
cover works that are defective in design plan specification material or
workmanship. DEFECTIVE doesn’t mean DAMAGED,
the loss
The defective part can often lead
to a damage, reasons for which
DE and LEG clauses are an
answer
The Pilkington case concerned the glass roof of the
Eurostar Terminal at Waterloo Station, which was found
upon technical investigation to be prone to fracture and
therefore too risky for use by the public without additional
precautions being taken. Investigation and remedial work
was carried out , and a claim was brought against
Pilkington to recover the expense incurred. Pilkington could
only recover under their liability policy if they could show
there had been physical damage to property. The Court of
Appeal held that the risk of future damage and reduction in
design life and the need for repair did not mean that the
glass panes were damaged. Damage required some
altered state which was absent in this particular case.
Campus CAR / EAR – Dubai, October 25-26, 2015
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Why to cover Design Error in a CAR ?
It’s more risky to cover DE today than before
For example CAR for Buildings…
 The rarity of the urban land lead
property developer or principal to
build in places where they won’t
have even thought 10 years ago.
 Profit margin have always been tight and
competition is more fierce.
Musée des confluences Lyon (Fr)
 Qualification has not improved - and
construction technology is more and more
sophisticated:
New
material,
New
Construction process (Going faster) – New
challenge:
Building
“green”
(Wind
farms/solar panels on building)
Campus CAR / EAR – Dubai, October 25-26, 2015
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Why to cover Manufacturer’s risk in EAR ?
Manufacturer’s risk is more exposed today
Manufacturing today means more assembling than before.
Complexity of supply chain, makes ultimate assembler work more hazardous. It’s
more and more problematic to have a perfect control of suppliers.
Fierce competition with pressure on net margins are constraining to subcontract
more works or supplies from multi-country multi-source very changing (price
driven).
Requirements for increase of outputs keep
technology on pressure of a continuous
movement of improving technology not
having all the time all the elements to
sustain it – Energy sector in particular.
Campus CAR / EAR – Dubai, October 25-26, 2015
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A progressive risk transfer
 Evolution from an original cover which was limited to external causes.
 Adaptation of wordings to respond to the typical contractual forms such as
FIDIC (International Federation of Consulting Engineers)
 Broader covers under pressure from brokers, one being to add to CAR/EAR
Engineer’s and Manufacturer’s risk
 It’s seems for them the easiest solution: The Principal wants to discharge himself to
sue Engineers, and Manufacturers
 It’s a price advantage for Engineers and Manufacturers that often would pay
more for a given project through their Product Liability (PL) insurance,
(Manufacturer’s risk) and Professional Indemnity (PI) (Engineers)
 This transfer of risk COMPLICATES the global assessment of the CAR/EAR
underwriter: How can one know about every technology ? Construction methods ?
(…) And how to know, without having in most cases the PL or PI loss history ?....
Campus CAR / EAR – Dubai, October 25-26, 2015
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Usual extension of cover for Design for CAR
Original exclusion
c) Loss or damage due to faulty design
d) The cost of replacement, repair or rectification of defective material and/or workmanship,
but this exclusion shall be limited to the items immediately affected and shall not be
deemed to exclude loss of or damage to correctly executed items resulting from an
accident due to such defective material and/or workmanship;
Endorsement 115
Cover for designer’s risk
It is agreed and understood that otherwise subject to the term, exclusions, provisions and
conditions contained in the Policy or endorsed thereon and subject to the Insured having
paid the agreed extra premium, exclusion c) under special exclusions to Section 1 of the
Policy shall be deleted and exclusion d) replaced by the following wording.
“d) The cost of replacement, repair or rectification of loss of or damage to items due to
defective material and/or workmanship and/or faulty design, but this exclusion shall be limited
to the items immediately affected and shall not be deemed to exclude loss of or damage to
correctly executed items resulting from an accident due to such defective material and/or
workmanship and/or faulty design.”
Extra premium:
This endorsement is an amendment
changing the text of the exclusions
of the Basic cover
Campus CAR / EAR – Dubai, October 25-26, 2015
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“Equivalent” of End. 115 for EAR is End. 200
Original exclusion
Endorsement 200
Cover for Manufacturer’s
risk
Modified exclusion
c) Loss or damage due to faulty design
It is agreed and understood that otherwise subject to the term, exclusions, provisions and
conditions contained in the Policy or endorsed thereon and subject to the Insured having
paid the agreed extra premium, lit c) under “Special Exclusions to Section 1” shall be
replaced by the following wording:
“c) all costs related to repair and/or replacement of parts and/or items directly affected by
faulty design, defective material or casting, bad workmanship other than faults in erection,
which the Insured would have incurred for rectifying the original fault had such fault been
discovered before the loss occurred.”
This Endorsement does, however, not apply to parts and items of civil engineering sections.
Extra premium:
Campus CAR / EAR – Dubai, October 25-26, 2015
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Other form for Design clauses
 DE 1: It excludes everything
 LEG 1: It excludes everything
 DE 2 : It cover some
consequences of loss of the
defective part
 LEG 2 : Covers consequences
 LEG 3 : Covers everything
except improvement
 DE 3 : It covers all the
consequences of loss of the
defective part
 DE 4 : It covers all the
consequences of loss of the
faulty part
DE 4 or LEG 5 are known also as
“Full Design” clauses and LEG 3
“improvement consequences
clause”
 DE 5 : covers everything and
excludes improvements
Difference between clauses, are
subtle “Faulty item” versus “Faulty
part”
Campus CAR / EAR – Dubai, October 25-26, 2015
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DE 1 – DE 5 illustration
Case : Total collapse due to defective bolts. At the moment of collapse
inside partition walls were done
 DE 1: All damage excluded
 DE 2: All damaged items excluded
except partition walls
 DE 3: Steel framework excluded but
roof, cladding and partition paid for
 DE 4: only nuts and bolts excluded
The difference between the “item” and the
“property which content the default
 DE 5: all damage paid for,
improvements costs excluded
Campus CAR / EAR – Dubai, October 25-26, 2015
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So, … what to choose ?
 Trend is to LEG over DE
 Munich Re Endorsements 115 (for CAR) and 200 (for EAR) are respectively
close to DE3, LEG2 in their application
 Improvement defect or “Full Design” cover must be prudent
 Each intention of cover must be appreciated to its own merit and objectives.
It’s not rare to have for the same works two memoranda applying, one for
equipment and one for contract works (Power for example)
Campus CAR / EAR – Dubai, October 25-26, 2015
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CAR / EAR Scope of cover
1
Context
2
Scope of cover and exclusions
3
Design Error and Manufacturer risk during works
4
Extensions
5
Third Party Liability (TPL)
6
DSU / ALOP
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Memoranda / Extensions
 The following extensions of cover can be provided :

Removal of Debris (RoD) (sub-limited to 10% of the loss with a maximum
monetary amount)

Professional Fees (per scale)

Expediting Expenses (sub-limited to 10-20% of the loss with a maximum
monetary amount)

Additional cost of working (to be avoided)

Additional cost of unbuilt portion (to be avoided)
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Memoranda / Extensions
 CPME: Contractor Plant Machinery and Equipment – Cover of CPME under
CAR/EAR is limited to operational risk, and external event - MACHINERY
BREAKDOWN or the like electrical failure is always excluded. CPME are
covered on site only. Premium is the sum of individual annual rates x
individual new replacement value (NRV). Rates are generally given on
annual basis. Indemnification is always on actual basis – i.e. after
depreciation.
 Plans and documents (sub-limited)
 Offsite storage (limit per location) – Typical clause Munich Re 013
 Escalation (limited to 10-15% of S.I)
 Inland transportation – Munich Re 113
 Marine 50 / 50
 Automatic Reinstatement
 Maintenance (visits, extended, guarantee)
Campus CAR / EAR – Dubai, October 25-26, 2015
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Extension … of time
Work rate is valid for the anticipated duration of works
EXTENSION => Additional premium
AVOID automatic extension – and worst for free
 Extension is generally at pro-rata temporis - Subject to

No change in risk

No delay due to unforeseen technical complications

Acceptable loss record (Not more than 2 losses – and L/R <40%)

Update of the planning of the remaining task to complete

Update of SI variation (highly recommended ) -> Reinsurance impact
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Maintenance extensions
Visit
Extended
Full/Guarantee
CAR - EAR
CAR - EAR
EAR
MRe 03
MRe 04
MRe 201
Damage to work
during maintenance
period due to
contractors back to
site for their
contractual duties
Visit Maintenance
plus damages to work
due to bad
workmanship, or bad
erection
ON SITE
Extended
Maintenance plus
faulty design and
error in fabrication
AVOID Maintenance period > 2 YEAR – There is NO justification for that
Maintenance covers exclude FLEX, and Nat Perils
AVOID TPL coverage during Maintenance period
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Exclusions specific to particular
projects
 Dewatering (tunnelling / deep excavation works)
 Overbreak (tunnels)
 Piling (deep foundation works)
 Normal action of the sea (sea works)
 Overtopping of cofferdams (dams)
 Dredging / re-dredging (underwater works)
 Hydrocarbons (petrochemical plants)
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 1 : Special Conditions & Warranties
 Fire prevention (Fire Code of Practice)
 Flood or Inundation prevention
 Tunnelling Code of Practice
 Road works (maximum length of unpaved area)
 Pipeline construction (maximum length of open trench, maximum testing
pressure etc…)
 Time schedule (maximum deviation from original time schedule)
 Series loss or defect rectification clause (for projects involving new
technology)
 (…)
Warranties are contributing to the RISK NORMALIZATION
Warranty clauses are part of the underwriting – these are not
close part of a commercial negotiation
Campus CAR / EAR – Dubai, October 25-26, 2015
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CAR / EAR Scope of cover
1
Context
2
Scope of cover and exclusions
3
Design Error and Manufacturer risk during works
4
Extensions
5
Third Party Liability (TPL)
6
DSU / ALOP
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 2 : Third Party Liability
 Coverage:
 Accidental loss or damage to property belonging to third parties (including
consequential financial loss)
 Accidental bodily injury / illness to third parties
 Work period only
 Limit of indemnity:
 Usually maximum USD 5m for medium size projects (primary basis)
 Includes costs of litigation recovered from the Insured by claimant
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 2 : Third Party Liability
Exclusions :
 Pure financial loss
 Loss or damage to property insured or insurable
 Bodily injury / illness of employees or workmen of the Insured (Employers Liability
(EL), Workmen Compensation (WC))
 Loss or damage to property caused by vibration or by removal or weakening of
support (unless agreed by endorsement: Munich Re 120)
 Loss or damage to underground networks (cables, pipes and other facilities) – unless
agreed under special endorsement type Munich Re 102: Due precaution prior to start
of works. CONSEQUENTIAL LOSS NOT COVERED
 Pollution
 Airside and marine liability
 Damage caused to crops (Unless agreed by endorsement: Munich Re 103)
 Goods under care, custody and control (Insurable under Section I – Material
Damage)
Campus CAR / EAR – Dubai, October 25-26, 2015
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Section 2 : Cross Liability
This Clause states that each Party is considered a Third Party to other insured
Parties
 Exclusions:

Loss or damage to insured or insurable items (e.g. CPE)

Bodily injury to Employees / Workmen covered by Workmen’s compensation or
Employer’s Liability (i.e. the Insured ‘s own employees / workmen). However
policy will respond if Contractor A is legally liable for bodily injury caused to
Contractor B’s employee.
Campus CAR / EAR – Dubai, October 25-26, 2015
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CAR / EAR Scope of cover
1
Context
2
Scope of cover and exclusions
3
Design Error and Manufacturer risk during works
4
Extensions
5
Third Party Liability (TPL)
6
DSU / ALOP
Campus CAR / EAR – Dubai, October 25-26, 2015
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Purpose
To indemnify the Insured (the Principal) for loss of gross profit actually sustained
and increased cost of working* as a consequence of loss or damage covered
under Section 1 causing an interference in the Construction Schedule and
resulting in a delay to the scheduled date of commencement of the insured
business
* Not exceeding the loss of profit thereby avoided
DSU/ALOP cover only makes sense for large projects with
important financing aspect – DSU/ALOP is not designed for
small and medium size projects.
Campus CAR / EAR – Dubai, October 25-26, 2015
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ALOP / DSU
Period of Insurance vs. Period of indemnity
Anticipated date
of completion
Start
Construction / Erection / Testing
1
2
1: Period of insurance
2: Period of indemnity (12-24 months)
Campus CAR / EAR – Dubai, October 25-26, 2015
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ALOP / DSU : Basis of indemnity
 Gross profit
 Standing charges (or fixed costs)
 Debt service
 Loss of rent
Campus CAR / EAR – Dubai, October 25-26, 2015
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ALOP / DSU – Gross Profit
Gross Sales
Trade discounts
Freight out
Bad debts
Commission
Material
Direct supplies
Outside services
Wages
Energy and utilities
Depreciation and lost equipment
Equipment rent
Indirect supplies
VARIABLE COSTS
FIXED COSTS
Gross Profit
Salaries
Office and adm. Costs
Utilities fixed charges
Depreciation - other
Interest
Other fixed costs
Gross Profit is calculated
exactly the same way as
for Property … except that
for CAR/EAR all figures
are PROSPECTIVE …
…Which means to have a
close eye on the
JUSTIFICATION of ALOP
Sum Insured
NET PROFIT
Net profit
Campus CAR / EAR – Dubai, October 25-26, 2015
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ALOP / DSU: Exclusions
 Earthquake, volcanic eruption, tsunami (unless agreed)
 Loss or damage to surrounding property (unless agreed)
 Loss or damage to CPE (unless agreed)
 Loss or damage or shortage of feedstock or any materials necessary for the
insured business
 Non-availability of funds
 Alterations, improvements, rectification of defects
 Loss or damage to items taken over or taken into use
 Loss of business due to suspension of works
Campus CAR / EAR – Dubai, October 25-26, 2015
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ALOP / DSU: Deductible
 Aggregate
 Deductible applied to the overall delay, whatever the number of losses which
caused the delay are
 Each and Every Loss (EEL)
 Deductible applied individually to the delay caused by each loss
 EEL + Aggregate
 Deductible applied to each loss then erosion of an aggregate
Campus CAR / EAR – Dubai, October 25-26, 2015
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ALOP / DSU: Aggregate Deductible
% Completion
Actual completion
Anticipated completion
100%
3
Uninsured
delay
2
Indemnified
delay
1
deductible
Events:
1
2
3
Time
Campus CAR / EAR – Dubai, October 25-26, 2015
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ALOP / DSU : Progress Monitoring
 Compare actual work progress with anticipated construction schedule
 Assess the potential impact of an insured event on the construction
schedule
 Identify delays caused by uninsured events (e.g. late delivery of materials,
labour shortage, bad weather conditions)
 Seek mitigation measures in case of claim by rescheduling or expediting
some works (Increased Cost of Working Cover
Campus CAR / EAR – Dubai, October 25-26, 2015
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ALOP / DSU: Contingent Cover
 Suppliers’ extension: provides cover for delays resulting from a loss at the
suppliers’ premises
 Denial of access: provides cover for delays resulting from normal access to
the site being impossible
 CPE extension: provides cover for delays resulting from a loss affecting
Construction Plant and Equipment
 Sub-limits (60 days) and limited scope to be imposed
Campus CAR / EAR – Dubai, October 25-26, 2015
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ALOP/DSU – Liquidated Damages
Contractor
Insurance
DSU
Contractor
LDs
Principal
Contractor
If the Contractor is liable for delayed completion, he may have to pay liquidated damages
to the Principal.
Delay LDs should normally be deducted from the DSU indemnity
Campus CAR / EAR – Dubai, October 25-26, 2015
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Important underwriting aspects
 There should be no automatic extension provision for ALOP or DSU
 Any request for an extension of Section III (ALOP) insurance during works
phase of the policy (without any loss having occurred which might lead to an
indemnifiable Delay) would have to be supported by detailed underwriting
information
 A copy of the latest progress report and revised time schedule should be
made available
 The actual progress of works would have to be checked against the
construction time schedule.
Campus CAR / EAR – Dubai, October 25-26, 2015
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Underwriting of ALOP Risks (!)
Not recommendable:
 Prototype machinery
 Second hand plant or machinery
 Foreign machinery without adequate local repair facilities
 ALOP in foreign countries
 No possibility of further business
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Many thanks!
Campus CAR / EAR – Dubai, October 25-26, 2015
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