December 17, 2014

Operating Phase – an overview

Once the construction phase has finished and the project is operational the CAR insurance will come to an end and operational insurance must be purchased. There is no standard wording for operational insurance in the offshore energy industry, but it is common to purchase a package policy combining all risks cover for property damage, control of well insurance, general liabilities and business interruption.

Frequent issues:

  • Interface with CAR Insurance – When a loss occurs soon after an operating policy commences it will be important to see whether the operational or the construction policy will respond. CAR policies, including WELCAR, have a maintenance period (typically 12 to 18 months) during which time a limited cover is provided for certain named perils. In cases of overlap the ‘Other Insurance’ clause of the operational policy may provide guidance on which policy should respond.
  • All risks – Traditionally this term means that cover is provided for damage occurring during the policy period and resulting from an accidental external event also occurring during the policy period. Damage resulting from a design error occurring earlier, before the policy period, resulting in a defective condition is not covered even when it leads to damage unless there is specific additional wording to that effect, which is commonly the case.
  • Faulty design/defects – The scope of insurance for defective property and/or design and any damage that may result differs greatly. The London Engineering Group (LEG) has a number of standard clauses (LEG1 to LEG3) which handle defects in different ways. For example LEG1 excludes both the defective equipment and any resultant damage, whilst LEG3 covers both damage to the defect equipment and resultant damage but excludes any costs associated with an improvement in the design of the equipment.
  • Inherent vice – Inherent vice is damage resulting from the nature of the thing itself. The loss or failure essentially occurs without a specific initiating event and so is not covered, but if the loss was contributed to by a fortuitous external event then the policy will respond even if the damage would not have resulted but for the inherent nature of the insured object.
  • Attachment/apportionment – It is often the case that damage is not discovered immediately, and may have been getting worse for many years. As operational policies are usually written on a yearly basis this raises the question of which policy year should respond. Generally a loss will fall to the policy in place at the time that the damage happened, rather than the policy in place at the time the damage is discovered. If the damage is progressive in nature and developed over a number of years following an event not known at the time, it may be appropriate to apportion any insurance loss across several policy years always assuming that the damage is not itself caught by a commonly applicable exclusion for “gradual deterioration”.