Risk Management in Civil Engineering LNEC 19 11

Risk Management in Civil Engineering – LNEC 19. 11. 2008 Risks and Insurance policies José Luis Montull

Risk and Insurance § Risk: it is not only the contingency or proximity of a damage (hazard), but also each and every contingency that can be subject of an insurance contract (Risk ) ¿quantifiable ? the mathematical product of the probability of a damage taking place, multiplied by the consequences of such damage: R=Px. C where: P = Probability of an event C = Consequences of that event Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 2

Risk and Insurance § The Insurance is nothing else than a financial transaction by which a party, the policyholder (Insured), through a remuneration (the premium), promises to himself or to a third party a payment or a reparation in case of risk producing damages. The other party (the Insurer) who makes this payment, takes a set of risks, and is able to compensate them according to the statistical laws. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 3

Risks-Matrix The Risks-Matrix: Major Risks. (Example) Probability Intensity Risk Control Absenteeism and productivity decrease Almost sure Moderate Not adequate Extreme investment's shortage in I+D, TI, RRHH Possible Severe Not adequate Extreme Political inestability Rare Catastrophic Not adequate High Theft of goods or money Almost sure Moderate Not adequate Extreme Yes No Manpower costs explosion Probable Moderate Not adequate Extreme No No Specific sectorial risks: manipulation of materials, stress, . . Almost sure Moderate Adequate Key Executives travelling together Unlikely Catastrophic Risks and Insurance policies Not adequate Clasification No Extreme High Insurable Insurance Policy No No No Yes Yes Risk Management in Civil Engineering – LNEC - 19. 11. 2008 4

Risks-Matrix Risks Matrix: Major risks. INTENSITY PROBABILITY negligible Light Moderate Severe Catastrophic Almost sure M H E E E Probable M M H E E Possible L M H H E Unlikely L L M H E Rare L L M H H L Low Risk Controlled by skilled workers and surveyors. Risks and Insurance policies M Moderate Risk Managed by middle staff. H High Risk General Managers attention is required E Extreme Risk The Board must be informed, and a permanent follow up is required. Risk Management in Civil Engineering – LNEC - 19. 11. 2008 5

INTENSITY Risks hierarchy EXTREME RISK HIGH RISK MODERATE RISK LOW RISK FREQUENCY Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 6

¿how do we face the Risk? § Retention: establishing enough reserves to overcome the possible losses n tio 1 op Risk op tio n 2 § Transfer: negotiating a specific insurance in order to give external coverage to the possible occurrence of a loss. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 7

Retention or Risk Transfer ¿Retention? § Risks with high probability and low consequences. (Risks have to be taken or "self-insured" if they don't affect the financial stability of the company). ¿Risk Transfer? § Risk with low probability and severe consequences (it is necessary to establish the limits of “significancy of a risk” for the company, individually and combined). Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 8

The Cost of the Risk Expected Loss Ratio Costs of the Risk Control Costs of the Financing of Risk Costs of Risk Reduction Unexpected Costs Ø % on Incomes Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 9

What happens actually? Feb 2005 “A high number of companies never overcome a major loss, because of not beeing forewarned” “The important thing is not to find out who will pay (usually an insurance company), but to ensure that your business will not be forced to stop, that you will not loose either clients or suppliers and, even, that your competitors will not take advantage of the circumstance to finish off your business. ” Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 10

Risks clasification Ø Identified and Known assessable. Ø Identified and Unknown because it's difficult to evaluate its consequences. Ø Unidentified and Unknown surely we will be surprised (development risks). Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 11

Particularities of Civil Engineering Ø Risks are often 'Unknown' (identified or not), due to: ü Each project is different from the previous, always showing different elements (ground conditions, climate, workmanship…) ü Technological development and innovation are steady, both in machinery and in materials ü Frequently there is non-skilled labour in the lowest levels of the chain ü Use and maintenance are sometimes not as careful as they should. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 12

The Risk in Civil Engineering RISK FACTORS (material damages): what do they depend on? a) of Internal origin: SOURCE Project b) of External origin: CONSEQUENCES Works performance (incl. materiales) Risks and Insurance policies Natural hazards (Acts of God) Acts of third parties Risk Management in Civil Engineering – LNEC - 19. 11. 2008 13

The Risk in Civil Engineering RISK FACTORS (material damages): what do they depend on? a) of Internal origin: on the quality of the project itself (its conception and design), not only regarding the future service's stresses, but also concerning the stresses during the construction phase, as well as the construction method chosen on the approach to the construction works: quality and adequacy of the resources (personnel, machinery, measurement instruments, etc), and on the planning, choice and supply materials and their control, etc. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 14

The Risk in Civil Engineering RISK FACTORS (material damages): what do they depend on? b) of External origin: They DO NOT depend, in their origin, on the project and construction works (although in some cases they DO depend with regard to their probability of occurrence -example: acts of third parties-) and, in all cases, they also DO depend regarding the severity of their consequencies –example: flood, earthquake, etc. -) Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 15

Construction All Risk Example: Risks distribution Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 16

Construction All Risk Example: Risks distribution 'insurable' Risks 'not insurable' Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 17

Risk's analysis Deterministic analysis Based on scientific theories or empiric formulations: identical result if you take the same assumptions for the process (ex. : rust) Probabilistic analysis Based on occurrence probability of different risk's scenarios, estimating their consequences (ex. : flood) Statistical analysis Based on previous experience on existing statistics of losses (ex. : personal accidents at work) Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 18

Pilars of insurance activity § Sufficient statistical base § Financial stability § Risks heterogeneity § Geographical compensation Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 19

Statistical base for the analisys Study of historical losses Very difficult to apply to Civil Engineering, due to the analyzed particularities: - projects are all different , - climate conditions influence in each and every case, - heterogeneous coverages - etc. Risks and Insurance policies ü ü ü ü Number of losses. Date of occurrence and close date. Insured. Location. Description. Branch, guarantee, policy number and insurer. Split of losses's amount: - total losses, - insured losses, - not covered losses. - deductibles. - pay back from other insurers, - pay back from third parties, - fees. Risk Management in Civil Engineering – LNEC - 19. 11. 2008 20

Exemple: Construction All Risks distribution Risks and Insurance policies Losses >180. 000€ (period 1990 – 2001) SOURCE: Münchener Rück Risk Management in Civil Engineering – LNEC - 19. 11. 2008 21

Engineering Insurance Policies 1. Annual policies § (MB) – Machinery Breakdown § (BI-MB) – Business Interruption, resulting from a loss covered under the MB policy § (DOS) – Deterioration of Goods § (EEI) – Electronic Equipment § (CPM) – Contractors Plants & Machinery § (CECR) – Civil Engineering Completed Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 22

Engineering Insurance Policies 2. Temporary policies § (CAR) – Construction All Risk § (EAR) – Erection All Risks § (CAR-ALo. P) – Advanced Loss of Profit in CAR § (EAR-ALo. P) – Advanced Loss of Profit in EAR § Comprehensive policies (BOT, BOO, . . ) Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 23

Engineering Insurance Policies 3. Multi-annual policies § Decennial (10 years cover) § Inherent Defects (2, 3 or more years cover) §. . Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 24

Engineering Insurance Policies 4. Special policies § Off-shore Risks (Oil-Platforms, Undersea-Pipelines, . . . ) § Technological Risks (Manufacturer's Guarantee, . . . ) § Space Risks (Moon Shots, Space Stations, . . . ) Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 25

Civil Engineering Insurance Policies Construction All Risk (CAR) Target policyholder? each and every company taking part in the construction process (having interests on the construction itself) § Owner / Promoter § Main Contractor § Subcontractors Policyholders [actually, the 'insured' is the Construction itself] Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 26

Civil Engineering Insurance Policies Construction All Risk (CAR) what types of works can be insured? All kinds of works and facilities § Housing and buildings: residential, offices, hospitals, schools, industrial buildings, car parks, shopping centers, stadiums, power stations, etc. § Civil works, infrastructures: tracks (motorways, railways, pipelines, tunnels, . . . ), bridges, hydraulic works (dams, water treatment plants, . . . ), weet risks (breakwater, harbours, . . . ), etc. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 27

Civil Engineering Insurance Policies Construction All Risk (CAR) what is/can be included under the coverage? All works, goods and tools which take part in the construction process or which are adjacent to the construction site: § CONST. WORKS: stored goods & materials, works brought on-site as part of the contract (earthworks, foundations, structures and finishing, . . ) temporary works erected or constructed on-site, . . . § MACHINNERY: cranes, bull-dozers, dumpers, pave-machinery. . . § EQUIPMENT: hand machine tools, scaffolding, frames, pumps, . . . § EXISTING PROPERTY: Risks and Insurance policies in property or in custody of the insured (susceptible to suffer damages arising from the insured works) Risk Management in Civil Engineering – LNEC - 19. 11. 2008 28

Civil Engineering Insurance Policies Construction All Risk (CAR) SUMS INSURED: Ø The construction work itself (main coverage): § total contract value § at the completion date to regularize § a margin should be foreseen (long time works) Ø Machinery (optional guarantee): List with following data: § individual values (“new replacement”) § identification, technical features § manufacture year Risks and Insurance policies internal elechtrical and/ormmechanical damage are excluded Risk Management in Civil Engineering – LNEC - 19. 11. 2008 29

Civil Engineering Insurance Policies Construction All Risk (CAR) SUMS INSURED Ø Construction Equipment (optional guarantee): § § total value of set (“new replacement value”) (a list should be attached) no heavy machinery Ø Existing Property (optional guarantee): § "first risk value" (it should be sufficient for the reconstruction or replacement of the damaged goods) Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 30

Civil Engineering Insurance Policies Construction All Risk (CAR) SCOPE OF COVER Ø It is an "all-less" policy (all damages are included, but the damages which are specifically excluded) Condition: Risks and Insurance policies Sudden and unforeseen physical loss or damage to the property insured, occurred during the period of insurance, in the construction site, due to any accidental cause not specifically excluded Risk Management in Civil Engineering – LNEC - 19. 11. 2008 31

Civil Engineering Insurance Policies Construction All Risk (CAR) SCOPE OF COVER Ø ¿which Risks are actually covered? Natural hazars ("Acts of God", based on a defined threshold) CONTRACT WORKS (basic cover) Risks arising in connection with the execution of the project (unless that ones excluded) CONSTRUCTION MACHINERY (optional cover) CONSTRUCTION PLANT&EQUIP. (optional cover) Risks arising from acts of third parties (unless that ones excluded) EXISTING PROPERTY (opcional cover) THIRD PARTY LIABILITY (optional cover) G O O D S to be C O V E R E D against D A M A G E S Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 32

Civil Engineering Insurance Policies Construction All Risk (CAR) PERIOD OF COVER Main (basic) Cover Before Maintenance cover (optional) During construction works After const. w. construction works guarantees previous storage completion of works inception of works Dowloading material on-site Risks and Insurance policies order of commitments with the works (for the main Contractor) Risk Management in Civil Engineering – LNEC - 19. 11. 2008 33

Civil Engineering Insurance Policies Construction All Risk (CAR) PERIOD OF COVER Main (basic) Cover Before During construction works Natural hazars ("Acts of God", based on a defined threshold) Risks and Insurance policies Risks arising in connection with the execution of the project (unless that ones excluded) Maintenance cover (optional) After const. w. Risks arising from acts of third parties (unless that ones excluded) Risk Management in Civil Engineering – LNEC - 19. 11. 2008 34

Civil Engineering Insurance Policies Construction All Risk (CAR) PERIOD OF COVER Special cases (information required) : § advanced works (status of works: progress, . . . ) § extensions / delay (reasons, occurred losses) § interruptions, suspensions (reasons, status of works, security measures, . . . ) § early termination § phased handover Risks and Insurance policies (status of works, occurred losses) (situation, delimitations) Risk Management in Civil Engineering – LNEC - 19. 11. 2008 35

Civil Engineering Insurance Policies Construction All Risk (CAR) MAIN EXCLUSIONS (1) Ø Conventional exclusions § war, armed conflicts § nuclear risks § expropiation, confiscation § penalties (contractual or not) § willful misconduct of the insureds or of the technical which are responsibles for the construction works § consecuencial losses (indirect losses) § documents, cash values Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 36

Civil Engineering Insurance Policies Construction All Risk (CAR) MAIN EXCLUSIONS (2) Ø Specific exclusions Gradual deteriorations § wear and tear § 'normal' effects of climate § rust or oxidation Defective design and workmanship (rectification) § regarding materials § regarding designs , calculations and drawings Deductibles (always have to be borne by the insured) Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 37

Civil Engineering Insurance Policies Construction All Risk (CAR) MAIN 'PROBLEMS' Ø Exemple 1 'Normal' effects of climat excluded but. . . ¿what is 'normal'? Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 38

Civil Engineering Insurance Policies Construction All Risk (CAR) MAIN 'PROBLEMS' Ø Exemple 2 Rectification of defective design or workmanship excluded but. . . ¿what is the 'defective part'? Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 39

Civil Engineering Insurance Policies Construction All Risk (CAR) RISK ASSESMENT: An individual analysis is required for each construction work: § configuration and exposition of the construction site (natural hazards, acts of third parties, . . ) § type of works and materials § construction method § safety measures in the planning § costs assesment regarding several scenarios of losses Questionnaire and Application for Insurance Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 40

Civil Engineering Insurance Policies Construction All Risk (CAR) SPECIAL ENDORSEMENT (1) Ø To include some additional or extended cover (optional) § 001 : SRCC (strike, riot and civil commotion) § 002 : cross TPL § 003 : maintenance visits § 006 : extra costs of acceleration (overtime, night work, . . ) § 007 : airfreight § 113 : national transport § 116 : contract works taken over or put into service § 119 : existing property Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 41

Civil Engineering Insurance Policies Construction All Risk (CAR) SPECIAL ENDORSEMENT (2) Ø To delimitate some covers and/or exclusions (some examples) § 008 : structures in seismic zones § 101 : tunnels, galeries, subsurface structures § 104 : dams and water reservoirs § 106 : sections § 107 : camps and stores § 109 : construction material § 110 : safety measures (with respect § 112 : fire-fighting facilities and fire safety on site § 121 : piling foundations and retaining wall works Risks and Insurance policies to rain, flood and inundation) Risk Management in Civil Engineering – LNEC - 19. 11. 2008 42

Civil Engineering Insurance Policies Construction All Risk (CAR) SPECIAL ENDORSEMENT (3) Ø To exclude directly some usual coverages § 009 : damages arising from earthquake § 010 : damages arising from flood and inundation § 103 : damages in crops, forest and cultures Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 43

Civil Engineering Insurance Policies Civil Engineering Completed Risks (CECR) Target policyholder? the owner or the operating company What types of works can be insured? civil works, infrastructures, with a low fire risk Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 44

Civil Engineering Insurance Policies Civil Engineering Completed Risks (CECR) SCOPE OF COVER Ø It is a policy that covers "nominated risks" (a risk is covered only if it is referred specifically in the policy): Unforeseen and sudden physical loss or damage caused during the period of insurance by: a. Fire, lightning, explosion, impact of landborne or waterborne vehicles b. Impact of aircraft and other aerial devices or articles dropped therefrom c. Earthquake, volcanism, tsunami d. Storm (air movements stronger than grade 8 on the Beaufort Scale) e. Flood or inundation, wave action or water f. Subsidence, landslide, rockslide or any other earth movement g. Frost, avalanche, ice h. Vandalism of single persons. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 45

Civil Engineering Insurance Policies Civil Engineering Completed Risks (CECR) BASIS OF LOSS SETTLEMENT a) in case of damage wich can be repaired: “the cost of repairs necessary to restore the items to their condition immediately before the occurrence of the damage”(less savage and r. o. d. ) b) in case of a total loss: a) If the loss occurs within the period stated in the schedule the replacement costs b) If the loss occurs after the period stated in the schedule the actual value of the insured items immediately before the occurrence of the loss (less savage) -> [deducting a proper depreciation from a)] Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 46

Civil Engineering Insurance Policies Privately Financed Infrastructure Projects and Their Insurance PFI Privately financed investments Most important models: BOT Build - operate - transfer BOO Build - own – operate Examples of other models: BLT Build - lease - transfer ROT Rehabilitate - operate - transfer ROO Rehabilitate- own - operate DBFO Design - build - finance - operate Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 47

Civil Engineering Insurance Policies Privately Financed Infrastructure Projects and Their Insurance BOT and BOO In both models, a project company builds, owns and operates a plant. BOT: the plant is transferred to a public operator after a period of e. g. 15 years at a low price. BOO: a transfer is not intended. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 48

Civil Engineering Insurance Policies Privately Financed Infrastructure Projects and Their Insurance Typical for private financing of infrastructure projects: ü Sponsors invest only small fraction of the required capital ü Major funds borrowed from banks ü Liability of the sponsors in case of increased cost or delay in completion is limited ü Construction phase particularly critical: Major funds are spent without the project generating cash. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 49

Civil Engineering Insurance Policies PFI: Finance and Contract Structure Host Government (Principal) Banks/ Lenders loan agreement project agreement Contractor construction contract Project Company shareholder s' agreement Sponsors Risks and Insurance policies insurance policy supply contract Suppliers O&M contract Operator Insurers Risk Management in Civil Engineering – LNEC - 19. 11. 2008 50

Civil Engineering Insurance Policies PFI: Finance and Contract Structure ü A Project Company is formed to erect and operate the plant or the infrastruture by means of a network of contract agreements. It often is a stock company. ü Banks will provide the funds necessary beyond the Sponsors' investments. ü The Principal, i. e. the initiator of the project, may be the host government, a licencing governmental agency or a public utility. The Principal agrees the project terms with the Project Company. ü The Contractor and Operator are normally shareholders in the Project Company. ü The Insurers are vital in view of the limited-recourse financing scheme. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 51

Civil Engineering Insurance Policies PFI: Flow of Payments (Operating Phase): Banks Sponsors Interest payments Interest and principal payments Project Co. Payment for fuel, materials and services Suppliers Risks and Insurance policies Price for electricity Principal Risk Management in Civil Engineering – LNEC - 19. 11. 2008 52

Civil Engineering Insurance Policies Typical examples of PFI Projects large and communal: Commercially used buildings or civil works: - Large public buildings, hospitals - Air ports - Bridges, highways, tunnels Power stations (IPPs) and power distribution Water distribution and water treatment Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 plants 53

Civil Engineering Insurance Policies PFI Insurance Requirements: Privately financed projects have a higher need for security. The project partners require a comprehensive insurance cover. The insured for construction and operation is always the project company. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 54

Civil Engineering Insurance Policies Insurance covers of industrial projects Marine Insurance Erection/Contractor`s All Risk Ins. incl. Liability Cover Maintenance Cover Marine. Contractor`s Plant and Machinery Insurance Guarantee Loss of Advance Loss of Profit Insurance Profit Transport Storage. Construction/Erection Works Testing Maintenance Operation Fire Ins. and Fire Loss of Profit Machinery Ins. and MLOP Electronic Equipment Ins. Workmen's Compensation Insurance Risks and Insurance policies Public and Prod. Liability Ins. Risk Management in Civil Engineering – LNEC - 19. 11. 2008 55

Civil Engineering Insurance Policies Staged Erection and Insurance (Example of a combined cycle power plant) Conventional Approach: 1 st gas turbine + 200 MW Erectio Tests n Erection covers 2 nd gas turbine + 200 MW Steam turbine + 200 MW / combined-cycle unit 600 MW total Risks and Insurance policies Commercial operation Operational covers Tests Erectio n Erection covers Erection (All Risks) covers Commercial operation Operational covers Tests Com. op. Op. cov. Risk Management in Civil Engineering – LNEC - 19. 11. 2008 56

Civil Engineering Insurance Policies Staged Erection and Insurance (Example of a combined cycle power plant) Typical PFI Approach: 1 st gas turbine + 200 MW Erection 2 nd gas turbine + 200 MW Steam turbine + 200 MW / combined-cycle unit 600 MW total Commercial operation Test Erection All-Risks cover Risks and Insurance policies Risk Management in Civil Engineering – Com. oper. Tests Com. op. Annual operationa l covers 57 LNEC - 19. 11. 2008

Civil Engineering Insurance Policies Lo. P insurance for a PFI ü Lo. P is an essential cover due to the scarce financial resources of the Project Company ALo. P difficult to monitor: Ø Delays in early project stages may have - full impact - partial impact - no impact on the commencement of operation Ø Ø Ø Requires detailed and updated project schedules Constant follow-up with insured and non-insured delays Suppliers Extension intensifies the problem: The EAR/CAR insurer is normally not the manufacturer's local property insurer Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 58

Civil Engineering Insurance Policies Lo. P insurance for a PFI Time excess: ü ALo. P: 60 days not uncommon, related to the total erection phase ü Operational Lo. P cover: 7 - 30 days, related to each loss event individually. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 59

Civil Engineering Insurance Policies What do the Banks ask for in a PFI ? a) the Project Company shall obtain the widest possible insurance cover from the market, b) the banks' or lenders' interests shall be included, c) payment of indemnity shall be made to the banks or their trustees, d) all rights of recourse against the banks shall be waved, e) disregarding any right to refuse indemnity to the Project Company for any breach of conditions, the indemnity shall be paid to the banks including any loss of profits. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 60

Civil Engineering Insurance Policies In PFI, beware of terms which aim at: ! an invalidation of policy conditions which would release the insured project contractor from the usual obligations, ! a direct claim or direct influence of a party outside the insured project contractors or principal executing the works, ! the imposing of obligations on the insurers towards the banks. Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 61

Civil Engineering Insurance Policies PFI: Breach of Contract / Vitating Act in case of a Multiple Insureds Policy ü No indemnification of the violating party ü Other insureds to be indemnified for their direct loss ü Recourse against violating party not to be waived However, No indemnification of the banks Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 62

Civil Engineering Insurance Policies PFI: Multiple Insureds Clause (London Engineering Group) "In the event of any vitiating act committed by any one or more insured parties, the lenders shall not be entitled to any indemnity under this policy for or arising from loss or damage in respect of which insurers are otherwise no longer liable to indemnify. . . " Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 63

Civil Engineering Insurance Policies PFI: Who has an Interest in Insurance? The Principal Host Government Indirectly The Banks Indirectly The Project Company (manufacturers, site contractors, operators included) Project Insurances Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 64

Civil Engineering Insurance Policies Insurance from a single source ü Desirable for the Project Company ü No interfacing problems from one risk phase to the next ü Comprehensive insurance scheme requested by the banks from the beginning However, ! Covers traditionally underwritten by different markets and branches ! Manufacturers, suppliers, hauliers, operators may engage their own insurers or brokers ! Local insurers normally more engaged in operational than erection covers Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 65

Civil Engineering Insurance Policies Insurance / Reinsurance Arrangement: Project Company Intermediary Project insurance Package Policy Direct Insurer P. Mar. CAR/EAR+BI F op. Bond M-BI MB/CECR+BI F-BI TPL Credit Marine Risks and Insurance policies Engineering Reinsurer Fire Liability Risk Management in Civil Engineering – LNEC - 19. 11. 2008 66

Civil Engineering Insurance Policies Mortgage default Legal protection covers Homeowners Liability (TPL) CAR/EAR A&E Liability Inherent defects Loss of Rent “One-stop shop” Nat. Cat Real estate wrap-up protection Fire Contractor insolvency Residual value insurance Risks and Insurance policies Vandalism Accident covers Bonds Risk Management in Civil Engineering – LNEC - 19. 11. 2008 67

Civil Engineering Insurance Policies Different treatement of damages by inherent defects in buildings in european area Is it necessary an insurance ? ‘Property‘ or ‘Liability‘ insurance ? voluntary or mandatory insurance ? Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 68

Civil Engineering Insurance Policies Decennial insurance in Europe Mandatory Insurance Sweden and Finland ? Voluntary Insurance In developpment U. K. Holland Benelux France Italy Portugal Spain Risks and Insurance policies Greece Turkey Risk Management in Civil Engineering – LNEC - 19. 11. 2008 69

Civil Engineering Insurance Policies Example 1: France => mandatory ‘dual’ insurance system indemnification Prom. /User ‘DO’ Cía. A Perito Experto Recurso ‘DO’ DL Contractor X DL Cía. Aseg. X DL DL Cía. Aseg. Y Liability share on damages between X and Y (CRAC) Contractor Y Risks and Insurance policies Risk Management in Civil Engineering – LNEC - 19. 11. 2008 70

Many thanks for your attention! José Luis Montull Münchener Rück