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Offshore construction – an overview

  • 30 October 2014 30 October 2014
  • UK & Europe

  • Insurance & Reinsurance

Offshore construction – an overview

The construction phase of any project carries with it considerable risk and expense, even more so when it is offshore. The Construction All Risks (CAR) wordings used in the offshore market have developed to take account of the particular risks associated with such projects and to ensure that all parties, including contractors and subcontractors, are adequately protected. A CAR policy may range in scope from a single pipeline installation right through to the construction of a complete offshore field. For larger operators it is not uncommon for an annual CAR policy to be issued covering all construction activities performed in that period. Although such policies are written on an all risks basis, they are subject to a number of important exceptions. In addition, certain market practices have arisen which may not be clear from the wording itself.

Key terms:

  • The pre-eminent CAR policy in the offshore energy section is the WELCAR 2001 form.
  • A standard WELCAR 2001 policy provides cover for the following:
    • All risks of physical loss and/or physical damage to the project works, which includes materials destined to become part of the completed project
    • The project works and their insured values are set out in Schedule B of the policy, and insurer’ total liability for any single physical damage claim will be capped at 125% of the latest Schedule B values
    • Cover is provided on a new for old basis, but the policy will also respond where damage is not repaired
    • Cover is provided for damage caused by defective parts, but not for the defective part itself. Cover for the defective part can be purchased as an additional option
    • Where there is an imminent risk of a loss, the policy will cover the costs of preventative actions, known as sue and labour costs, up to a maximum of 25% of the value of the relevant item in Schedule B
    • Where there is a covered physical damage claim, the policy will cover the costs of removing any associated wrecks or debris where this is required, up to a limit of 25% of the value of the relevant item in Schedule B
    • Section II of the policy provides cover for liability for bodily injury or property damage caused by an event insured under the physical damage section.
    • The WELCAR 2001 policy contains the following notable exclusions:
      • Damage to any vessel or floating materials employed as part of the construction process, unless they are destined to become a permanent part of the completed project
      • The cost of repairing wear and tear, rust and oxidisation and fluctuations in temperature
      • The cost of repairing faulty welds
  • The WELCAR policy is designed to provide cover for all those involved in the project and as such includes not just named insureds but also ‘other assureds’. These are defined as “Any other company, firm, person or party (including contractors and/or subcontractors and/ or manufacturers and/ or suppliers) with whom the Assured(s) named…have entered into written contract(s) directly in connection with the project”. The benefits passed to the other assured are said to be “no greater than such contract allows”.
  • Insurers agree to waive subrogation against both named and other assureds, meaning that there is little risk of insurers commencing proceedings against parties involved in the project following an incident
  • Following the completion of the construction phase, limited (“maintenance”) cover is provided for a short period (typically 12 to 18 months). Cover is provided on a named perils basis, covering risks including physical damage attributable to faulty or defective workmanship during the construction phase. The intention is to provide cover only for losses which relate back to a cause occurring during the construction. New occurrences will be covered by the Operating Policy.

Extensions of cover available to assureds:

  • It is possible to purchase a defective part buy-back covering the costs of repairing or replacing any defective part which have suffered physical damage

Frequent issues:

  • Defective part – As set out above, the standard WELCAR wording distinguishes between damage caused by a defective part (which is covered) and damage to the defective part itself (which is not). This raises the thorny issue of what constitutes a ‘part’ and how it should be distinguished from the remainder of the insured property. There is no easy answer to this question and it must be determined based on the nature of the defect in each instance
  • Schedule B values – The way in which policy limits are linked back to the schedule of property values can often generate problems. There can be uncertainty about what is the ‘latest agreed’ Schedule B, and where cover such as sue and labour and wreck removal is linked to a percentage of the relevant Schedule B entry there can be disagreement about which entry should apply to the property in question.
  • QA/QC – The WELCAR wording includes a clause making it a condition precedent to recovery that in order to qualify as an “other assured” the party must perform their works in accordance with QA/QC provisions which are equivalent to those employed by the named insureds. This controversial clause is now almost always deleted.
  • Damage to existing property – It has long been recognised that there is a risk of damage to existing property in the vicinity of new construction works, and as liability for such damage is excluded under section II of WELCAR. A Damage to Existing Property endorsement is offered which removes this exclusion. This system works perfectly in relation to existing property owned by third parties, but problems can arise where it is owned by the same parties as the works under construction. New wording is being developed in order to ensure that cover for such property is given on the right basis so as to avoid coverage issues.
  • New WELCAR – The Lloyd’s Joint Rig Committee is currently in the process of producing a new version of the WELCAR policy, which is due to be unveiled early next year.

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