IC-77

ENGINEERING INSURANCE
(WITH KEYNOTES)

ACKNOWLEDGEMENT

This course based on revised syllabus has been prepared with the assistance of

Mr. Mihir Vora

G – Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.

i
ENGINEERING INSURANCE

IC-77

Revised Edition - 2023

ALL RIGHTS RESERVED

This course material is the copyright of Insurance Institute of India (III).

This course is designed for providing academic inputs for students appearing for
the examinations of Insurance Institute of India. This course content may
not be reproduced for any commercial purpose, in part or whole, without prior
express written permission of the Institute.

The contents are based on prevailing best practices and not intended to give
interpretations or solutions in case of disputes, legal or otherwise.

This is only an indicative study material. Please note that the questions in
the examination shall not be confined to this study material.

Published by: Secretary General, Insurance Institute of India, G- Block, Plot C-46,
Bandra Kurla Complex, Bandra (E) Mumbai – 400 051 and Printed at Mahalaxmi Prints,
Andheri (E), Mumbai-72.

Any communication regarding this study material may be addressed to

[email protected]

ii
PREFACE

This course is designed for the use of candidates appearing for the Associateship
examination of the Insurance Institute of India.

The course is revised and rewritten keeping in mind the contemporary

developments within the domestic and the international insurance and
reinsurance markets. Aimed at maintaining relevance with newly emerging
concepts, trends and practice at the market place, the contents of the course
exhaustively deal with various classes of engineering insurance business transact
by Indian insurance companies, as also special types of cover available in
international markets.

The course is rewritten in line with the revised syllabus and reader would find
the contents meaningful in better understanding as well as gaining knowledge of
the subject. The course should also prove useful not only to those appearing for
the Associateship examination, but also to the general interested in the subject.

Although the course gives detailed knowledge of the subject, it is recommended

that the candidates should read the additional literature on the subjects.

iii
CONTENTS
Chapter no. Title Page no.
Section 1 The Engineering Insurance Business
Development of Engineering Insurance and
1 1
Relevant Legislation
Engineering Insurance: Classes of Business,
2 15
Principles and Practice
Type of Plant/Machinery and Equipment and
3 27
Associated Hazards
Section 2 Construction Phase Insurances
Project Stages, Work Contract and Other
4 43
Contracts
5 Contractors All Risk Insurance 56
Erection All Risks (EAR) Insurance and Marine
6 77
Cum Erection (MCE) Insurance
7 Contracts Works (CW) Insurance 100

8 Contractor’s Plant and Machinery Insurance 115

Advance Loss of Profit / Delay In Start-Up
9 130
Insurance
A. Endorsements – Including Supplementary
Covers (Car, Ear, Cw)
10 B. Information Required For Framing 150
Construction Phase Insurance Programme for
A Project
Section 3 Operational Phase Insurances

11 Machinery Insurance 170

12 Boiler and Pressure Plant Insurance 189

13 Machinery Loss Of Profits Insurance 204

14 Electronic Equipment Insurance 223

15 Other Annual Policies 236

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Chapter no. Title Page no.
Section 4 Other related Topics
16 Reinsurance 252
Risk Management, Risk Inspections and Loss
17 263
Prevention
Special Types of Engineering Insurance Covers
18 285
in International Markets

v
CHAPTER 1

DEVELOPMENT OF ENGINEERING INSURANCE AND

RELEVANT LEGISLATION
Chapter Introduction

This chapter discusses the historical background and development of

engineering insurance in the Indian and international market.

The chapter also discusses the important statutes and regulations that affect
the conduct of engineering insurance business in India.

Learning Outcomes

A. Engineering insurance – History and development

B. Engineering insurance - Statutes and regulations

1
A. Engineering insurance - History and development

1. Development of engineering insurance in the United Kingdom, the U.S.A.

and Germany

The origin of engineering Insurance dates back to the 19th Century. Great
Britain was in the forefront of industrialization on large scale made possible by
James Watt’s invention of the steam engine. As many as 500 steam engines of
modest output capacity were already in operation at the beginning of the 19th
century.

Nevertheless many teething troubles were experienced with this new energy
production machinery. An alarming situation was created due to explosions in
steam boilers resulting into heavy losses to property and personal injury.

An independent organisation called the “Manchester Steam Users Association

(M.S.U.A.)” was founded by a group of engineers in 1854 for the purpose of
inspection and revision of steam engines and boilers. Members were entitled to
use the services of boiler inspectors who were employed by the association. This
organization not only gave advice on how to prevent explosions but also
undertook to guide its members in the most advantageous and economical
method of using the plant. This principle is still maintained today. Plant owners
can call upon the engineer-surveyor for advice and suggestions on plant
operation and maintenance. Though the Manchester Steam Users' Association
rendered valuable services, it was not an insurance company.

It was soon realised that inspection with insurance would provide a

comprehensive service to the users of steam. With this idea the first
engineering Insurance Company viz. The Steam Boiler Assurance Company was
formed in 1858. This was followed by formation of other similar companies.

These companies offered insurance policies to cover:

 Material damage,
 Personal injury and
 Third party liability resulting from explosion of boilers and other
pressure vessels.

The Boiler Explosion Act was passed in Great Britain in 1882 and provided for
compulsory periodical inspections of steam boilers by Government authorities.
Around the same time, a number of engineers of the “Polytechnic Club” in the
United States of America decided to establish a company to effect boiler
inspection service and to provide insurance in the event of a boiler explosion.

The “Hartford Steam Boiler Inspection and Insurance Company” was formed
for this purpose and its first policy was written in 1867.

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The Factory and Workshop Act 1901 in the U. K. made it compulsory for all
steam boilers in factories to be thoroughly inspected once in 14 months by a
competent person and for a copy of the inspection report in prescribed from to
be attached to the factory register.

The Coal Mines Act of 1911 extended similar regulations to steam boilers
working in and around mines in the U. K. Both these Acts have since been
repealed, the former by Factories Act 1961 and the later by Mines and Quarries
Act 1954.

It may be clearly noted that the various Acts related only to compulsory
inspections and not insurance. However insurance companies have tailored
policies to meet the needs of factory owners by combining insurance and
inspection services.

The developments in Germany regarding inspections were similar to that in the

U.K. and U.S.A. Statutory regulations were enforced as early as 1856 for the
construction, maintenance and revision of steam boilers and pressure vessels.
The first Boiler Inspection Authority (DUV) was founded in 1866 in Mannheim on
the same principles as the British organisation.

The Central Association of the Prussian DUV was founded in 1884 and was the
predecessor of the Association of the Technical Inspection Authorities. These
institutions, known under the abbreviation “TUV” have taken up multiple
inspection tasks not only in Germany but also in many European and Overseas
countries. However, contrary to the tradition in the U. K. and the U. S. A., the
German “TUV” was never associated with any insurance company.

In addition to boilers, many other types of machines (such as turbines, electric

generators, motors, pumps, compressors etc. etc.) were invented during the
rapid technological developments that took place towards the end of the 19th
century.

At first only boilers were insured, but covers were gradually extended to
pressure vessels of various kinds. Engine Insurance (known today as Machinery
Breakdown insurance) began in 1872, and both boiler explosion and engine
covers rapidly spread to other industrialised countries. By the beginning of the
twentieth century, the first insurance policies for loss of profits following
machinery breakdown were being issued. At the same time, erection insurance
(covering the on-site erection and assembly of machines) appeared. The policy
was on a "named perils" basis and did not cover fire, but it offered reasonable
protection for small and medium-sized erection project. From 1920 to 1930,
some German and British companies introduced a contractors' policy providing
insurance cover for buildings and civil works during the course of construction.
Based on this policy, Contractors' and Erection All Risks policies were
developed. However, neither of these types of policies reached any great

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importance until after World War II when postwar reconstruction and
development brought these covers to their present standing.

The period after the Second World War saw urgent need for development of
larger and more efficient machines and technical installations. Up to the early
seventies, technical developments concentrated mainly on increasing the
efficiency of the machines which could be achieved only by increasing the
operating parameters like temperature, pressure, speed etc.

However, since this increased the vulnerability to accidents and damages, the
manufacturing trend had to be aimed at achieving more reliability than
productivity.

With the advancement of technology, other engineering policies such as

Computer All Risks, Low Voltage and Electronic Equipment All Risks, and
Deterioration of Stock following Machinery Breakdown were developed, along
with business income protection covers such as Advance Loss of Profits, written
in conjunction with Contractors' All Risks and Erection All Risks policies.

The engineering insurance industry will undoubtedly have to remain flexible

needs as a result of the huge technological advances which the world is facing.

(Swiss Re: “Engineering insurance and reinsurance – an introduction”)

2. Engineering insurance in India

a) Need for engineering insurance

Post Independence period has seen rapid industrialisation in India with ever
increasing use of machinery for various purposes. Machines reduce human
drudgery and increase production capacities, while they are potential
sources of damage.

Though accidents and damages can be minimised by proper care and

maintenance of machinery, it is not possible to eliminate such accidents
altogether. With technological developments achieved by the country the
use of most modern and complex machinery is very wide in all Indian
industries.

b) Economic significance

In addition to the protection against accidental damage, the insurance of

plant, machinery, equipment etc., during construction/ erection and
operation phases has an important economic significance. It is practically
impossible for any industrial organisation to provide enough reserves for
replacement of costly machinery, which may be damaged by an accidental
breakdown.

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Insurance replaces need for providing such capital reserves. Moreover,
insurance provided the required guarantee for the creditors / banks to
extend loan to the industrial organisations.

Wide ranges of engineering insurance policies are today available from

general insurance companies in India.

c) Development of engineering insurance business in India

Development of engineering Insurance is of comparatively recent origin in

our country.

i. The New India Assurance Co. ltd.

The New India Assurance Co. Ltd. started transacting engineering Insurance
on a modest scale in 1953 with the technical assistance of Munich
Reinsurance Co.

ii. The Oriental Fire and General Insurance Co. Ltd.

Around the same time, The Oriental Fire and General Insurance Co. Ltd. had
set up their own engineering Insurance Department in Bombay under the
guidance of one Mr. Michael Taylor.

iii. Syndicate

In the Eastern part of the country a Syndicate of five Companies viz. the
‘London and Lancashire’, the ‘Concord’, ‘Atlas, ‘Yorkshire’, and ‘British
India General’ was formed in the year 1954 with a view to pool their
resources and expertise and come to a sharing agreement for transaction of
engineering and Allied risks in India.

The risks were underwritten by the Syndicate through a Technical Cell under
the supervision of experienced Engineers.

Up to 1959 the ‘flag’ office of the Syndicate was the Chief Office of the
‘London and Lancashire’ in Calcutta, but later on the headquarters was
shifted to Bombay and the Engineer-in-charge of the Syndicate was
stationed in the office of ‘Yorkshire’, Bombay.

Engineering Insurance as practised in India differs from that in U.K. in one

significant aspect. In U.K. certain types of engineering Insurance Policies
besides offering indemnification in case of accident or damage, also render
an inspection service during currency of the policy.

5
This enables clients to comply with various statutory requirements, which
make periodical inspection of certain plant and machinery obligatory. In
India, on account of the fact that the inspections necessary under various
enactments are carried out by the Government Inspectors, the engineering
insurance policy provides only for insurance coverage and not inspection
service.

Inspection Service at present rendered by the Insurers in India is by way of

goodwill gesture only and is not obligatory under an insurance contract.
Such inspections are carried out mainly to assess the risk from underwriting
angle and also to recommend loss minimisation and risk improvement
measures.

Test Yourself 1

In India, which of the following is not obligatory under an engineering insurance

contract?

I. Indemnification in case of accident or damage

II. Inspection service
III. Assessment of risk from underwriting perspective
IV. Recommendation of loss minimizing measures

6
B. Engineering insurance - Statutes and regulations

1. Statutes and regulations that affect conduct of insurance business in India:

The primary legislation that deals with insurance business in India are:

 The Insurance Act 1938 and

 The Insurance Regulatory and Developing Authority Act 1999.

Though not directly connected with conduct of Insurance Business, some other
statues are equally important as they impose certain obligations on the owners
/operators to protect their machinery to ensure safety and security of employee
/ workmen, other personnel.

Some of the relevant Statutes are:

 Indian Factories Act 1948.

 Safety Rules of Plant and Machinery
 The Indian Boiler Act 1923
 The Indian Mines Act 1923

a) Indian Factories Act 1948

Under this Act, the government has provided for Inspectors who have powers
to:

i. Enter any factory

ii.Make examination of plant and machinery
iii.
Make examination of premises
iv.Request for any prescribed information or any other document
relating to the factory and
v. Even call for on the spot or otherwise a statement of any person
which he may consider necessary.

This is all with a view to ensure safety, security within the factory. In fact,
there are 4 sections which stipulate certain additional responsibilities to Factory
or Industrial Establishment coming under the purview of Factories Act, on
maintenance and adherence of certain rules and regulations.

These provisions are applicable only to industrial units, which come under the
meaning of “Factory” as provided in Factories Act. Mines, however, do not
come under the purview of this definition.

7
Definition
Section 2 (m) of the Factories Act defines ‘Factory’ as any premises including
precincts thereof, where ten or more workers are working, or were working on
any day of the preceding 12 months and in any part of which a manufacturing
process is being carried on with or without the aid of power, or is ordinarily so
carried on.

b) Safety rules of plant and machinery

The provision of safety for various types of plant and machinery are specific
and include:

i. Rules of hoists or lifts

ii. Rules for lifting machines, chains / ropes and lifting tackles
iii. Rules for revolving machinery
iv. Rules for pressure plant

c) Indian Boiler Act 1923

Definition

Boiler has been defined under the Act as any closed vessel exceeding 22.75
litres capacity which is used expressly for generating steam under pressure and
includes any mounting or other fitting attached to such vessel which is wholly
under pressure when steam is shut off.

The Act also provides for registration of Boiler before it can be used for
industrial purpose.

The Chief Inspector of Boilers on registering shall order the issue of a certificate
in the prescribed form authorising its use of a period not exceeding twenty-four
months.

The owner of the boiler / economiser may apply to the Inspector for renewal of
the Certificate and on completion of inspection and certain formalities such
renewal certificates in prescribed forms are generally issued from the Office of
the Chief Inspector. This is done following thorough examination by the Boiler
Inspector.

Such inspection includes:

 Examination of corrosion
 Examination of seam
 Sign of any leakage, as well as
 Amount of scales inside the boiler

8
All fittings are examined. A further survey is carried out when the boiler is
back in service and under steam.

Section 18 of the Act stipulates compulsory reporting of accident to

appropriate authority (Inspector) within 24 hours of accident. Report must
contain a true description and nature of accident and of the injury to enable
the Inspector to judge the gravity of the situation.

d) The Mines Act 1952

The basic objective of the Act is to ensure safety and security in Mines. The Act
ensures these through active supervision of Inspectors and other officials.

Mine has been defined under Section 2 (i) of the Act as follows:

Definition

Mines refer to any excavation whereby operation for the purpose of searching
for or obtaining minerals has been or is being carried on, and includes:

i. All boring, bore holes and oil wells

ii. All shafts or adjacent to / belonging to a mine whether in the course of

being sunk or not

iii. All levels and inclined planes in the course of being driven

iv. All open cast workings

v. All conveyors or aerial ropeways used in mines

vi. All adits, machinery, works, railways, tramways and sidings in / adjacent
to / belonging to a mine

vii. All workshops situated within the precincts of a mine under the same
management and used solely for the purpose connected with that mine
or a number of mines under the same management

viii. All power stations for supplying electricity solely for the purpose of
working the mine or a number of mines under the same management

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2. De-tariffing of engineering insurance business

Until liberalisation of the Indian General Insurance market, Tariff Advisory

Committee, a statutory body formed by Government of India under The
Insurance Act to control and regulate the rates and terms of cover for general
insurance business in India, issued directives from time to time regarding policy
wordings, proposal forms, rates and terms as well as underwriting guidelines for
various classes of engineering Insurance.

These directives were compulsorily applicable to all insurers. Any breach of the
directives was considered ‘breach of tariff’ and carried penal provisions.

The process of liberalisation necessitated de-tariffing of business. As a first step

towards total tariff free regime, IRDA decided to abolish rating tables from the
tariffs but the policy wordings are to be used by all general insurance
companies until further directions. Any variations in these wordings have to be
filed by the insurers for approval of IRDA.

Test Yourself 2

Which of the following will not be classified as ‘Mine’ as per the definition
under the Mine Act 1952?

I. All boring, bore holes and oil wells

II. All open cast workings
III. Premises, where ten or more workers are working, in any part of which a
manufacturing process is being carried on with or without the aid of power
IV. Any excavation whereby operation for the purpose of searching for or
obtaining minerals has been or is being carried on.

10
Summary

a) In India, development of engineering Insurance is of comparatively recent

origin, when The New India Assurance Co. Ltd. started transacting
engineering Insurance in 1953 with the technical assistance of Munich
Reinsurance Co.

b) In India, as the inspections necessary under various enactments are carried

out by the Government Inspectors, the engineering Insurance policy provides
only for insurance coverage and not inspection service.

c) Under the Indian Factories Act 1948, the government has provided for
inspectors who have powers to enter any factory and examine Plant and
Machinery and the premises.

d) Rules of Hoists or Lifts, Rules for Lifting machines, chains / ropes and lifting
tackles, Rules for Revolving Machinery and Rules for Pressure Plant are
covered under Safety Rules of Plant and Machinery.

e) The Indian Boiler Act, 1923 provides for registration of Boiler before it can
be used for industrial purposes.

f) The basic objectives of the Mines Act, 1952, are to ensure safety and
security in Mines.

g) The process of liberalisation necessitated de-tariffing of business and as a

first step towards this, the IRDA abolished the rating tables from the tariffs.

11
Answers to Test Yourself

Answer 1

The correct answer is II.

In India, inspection service is provided as a goodwill gesture by insurance

companies and is not obligatory under an engineering insurance contract.

Answer 2

The correct option is III.

Premises where ten or more workers are working, in any part of which a
manufacturing process is being carried on with or without the aid of power,
refers to factory and not ‘Mine’. Hence option III is incorrect.

Self-Examination Questions

Question 1

Under which of the following Acts does the government provide for inspectors
who have powers to enter any factory and examine the plant and machinery?

I. The Indian Factories Act 1948

II. The Safety Rules of Plant and Machinery
III. The Indian Boiler Act 1923
IV. The Indian Mines Act 1923

Question 2

ABC Ltd is an industrial unit which has purchased a closed vessel exceeding
22.75 litres of capacity used expressly for generating steam under pressure.
Under which of the following Acts can ABC Ltd obtain registration of such vessel
before it can be used for industrial purposes?

I. The Indian Factories Act 1948

II. The Safety Rules of Plant and Machinery
III. The Indian Boiler Act 1923
IV. The Indian Mines Act 1923

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Question 3

What is the maximum period for which registration can be obtained for
industrial use of a boiler?

I. Six months
II. 12 months
III. 24 months
IV. 36 months

Question 4

Which of the following rules are not included under “Safety Rules of Plant and
Machinery”?

I. Rules of Hoists or Lifts

II. Rules for examining the premises
III. Rules for Revolving Machinery
IV. Rules for Pressure Plant

Question 5

Who issues a certificate for registration of a Boiler, authorising its use in an

industrial unit?

I. Chief inspector of boilers

II. Chief Engineer
III. Engineer Surveyor
IV. Registrar

Answers to Self-Examination Questions

Answer 1

The correct option is I.

Under the Indian Factories Act 1948, the government has provided for
Inspectors who have the powers to enter any factory and examine the plant and
machinery.

Answer 2

The correct option is III.

A closed vessel exceeding 22.75 litres of capacity which is used expressly for
generating steam under pressure refers to a boiler and its registration needs to

13
be obtained from The Indian Boiler Act 1923, before it can be used for industrial
purposes.

Answer 3

The correct option is III.

Maximum period for which registration can be obtained for industrial use of a
boiler is 24 months.

Answer 4

The correct option is II.

Rules for the examination of premises by inspectors are included in the Indian
Factories Act 1948 and not under Safety Rules of Plant and Machinery. Hence,
option II is incorrect.

Answer 5

The correct option is I.

Chief Inspector of boilers issues a certificate for registration of a Boiler,

authorizing its use in an industrial unit.

14
Chapter 2

ENGINEERING INSURANCE: CLASSES OF BUSINESS,

PRINCIPLES AND PRACTICE
Chapter Introduction

In this chapter, you will learn about the different classes of engineering
insurance. The chapter also discusses the principles and modern practices in
Engineering insurance.

Learning Outcomes

A. Classes of engineering insurance

B. Principles and practices of engineering insurance

15
A. Classes of engineering insurance

1. Introduction

Engineering Insurance traditionally forms part of the Miscellaneous branch of

insurance in the Indian insurance market. However, in most companies, it is
managed alongside Property Insurance.

In India there is no insurance company dealing only in Engineering Insurance

business, but each of the General Insurance Companies has Engineering
department to look after development, marketing, administration and conduct
of the business.

Each company is equipped with a team of qualified, trained and experienced

engineers to actively support underwriting philosophy of the company with a
sound technical base. It is important however, to note that an engineering
underwriter need not necessarily be an engineer, it is only important to have a
scientific bent of mind and ability to understand the field issues related to
Engineering.

2. Classes of engineering insurance

Various insurance policies issued by Indian insurance companies in the

Engineering department, can be broadly classified into the following groups:

a) Construction phase insurance

The Construction Phase Insurance policies are normally “Period” or “one

time” policies, i.e. they are issued for the period of the project.

i. Contractor’s All Risks (CAR) insurance

ii. Erection All Risks (EAR) insurance also known as Storage-cum-Erection

(SCE) insurance

iii. Marine cum Erection (MCE) insurance

iv. Contract Works (CW) insurance

v. Contractor’s Plant and Machinery (CPM) insurance

vi. Advance Loss of Profits (ALOP) OR Delay in Start-Up (DSU) insurance

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b) Operational Phase insurances

The Operational Phase Insurances are “annual” policies renewable at each

anniversary. Policies combining both Construction and Operation Phase
interests are presently not allowed.

i. Machinery Insurance (MI) - also known as Machinery Breakdown (MB)

Insurance

ii. Boiler and Pressure Plant insurance (BPP)

iii. Electronic Equipment insurance (EEI)

iv. Deterioration of Stocks insurance (DOS)

v. Civil Engineering Completed Risks (CECR) insurance

vi. Machinery Loss of Profits (following Machinery Breakdown and/or Boiler

Explosion) insurance. (MLOP)

The Industrial All Risks Insurance (IAR) policy introduced in the market effective
1st July 1997 also covers Machinery Breakdown and MLOP Insurances along with
Fire, Fire Loss of Profits and Burglary Insurances. However the coverage
provided by IAR policy is on “All Risk” basis wherein the scope of cover is
decided as “what is not excluded is covered”. This IAR policy is issued by
insurance companies in Fire Department.

Test Yourself 1

Which of the following is a ‘one time’ policy (i.e. issued for the period of the
project)?

I. Contractor’s All Risks (CAR) Insurance

II. Boiler and Pressure Plant Insurance (BPP)
III. Electronic Equipment Insurance (EEI)
IV. Deterioration of Stocks Insurance (DOS)

17
B. Principles and practices of engineering insurance

1. Principles applicable to engineering insurance

The following basic principles of General Insurance equally apply to all classes
of Engineering Insurance business:

a) Utmost good faith

b) Insurable interest
c) Indemnity
d) Subrogation and contribution
e) Proximate cause

2. Practice and procedures

Any student or practitioner of engineering insurance should obtain a full

understanding of the following three forms related to an engineering product :

a) Proposal form
b) Policy wording
c) Claim form

Indian Engineering Tariff (available on https://iib.gov.in/tac) provides all the

above three forms that’re crucial to understanding the practices of different
products under engineering insurance. It is strongly recommended to download
these documents from the website of the Insurance Information Bureau of India,
as it forms the basis of discussions of different products provided in this book. A
practitioner would need to master these documents to be a good engineering
underwriter or a practitioner. It is also strongly recommended to use the web
resources of reputed international association of engineering insurers to have a
comprehensive understanding of international best practices in engineering
insurance: https://www.imia.com/

Engineering Insurance business is conducted by the operating offices of each

company, viz. Branch office, Divisional Office and Regional Office. Normally
Engineering Department at the Head Office deals with guidelines for conducting
business in a professional and prudent manner.

These departments are supported by qualified technical staff for inspections,

development staff, and accounts department etc.

a) Proposal forms

For each class of Engineering Insurance Business, there is a Proposal Form

and Questionnaire to be filled in and signed by the client.

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The Proposal Form normally deals with common types of information like:

i. Name
ii. Address
iii. Locational details
iv. Sum-insured etc.

The Questionnaire deals with specific information about the:

i. Type of project
ii. Machinery
iii. Plant and equipments

Such Proposal Form and Questionnaire are always considered to form a part
of the insurance policy.

b) Cover notes and policies

Acceptance of any new business proposal is dependent upon satisfactory

examination by the company engineers. When it is found technically
acceptable and the corresponding premium is paid, it is customary to issue a
cover note.

Such cover notes can be issued only by the authorised representative of the
company and operate only for a limited period pending replacement by a
proper policy.

c) Policies

The policy is a stamped document which provides evidence of the insurance

contract, and therefore it must be carefully drafted and issued in the
appropriate form.

d) Sectionalised policy wordings

A typical engineering insurance policy contains distinct sections as follows:

i. “The heading” giving name and address of the policy issuing office.

ii. “Operative or insuring clause”

iii. “The preamble or recital clause” indicating the parties to the contract
i.e. the insurer and the insured, Terms, conditions, warranties etc. A
reference is also made to sum insured or other limits of liability.

iv. “Schedule” containing information applicable to the particular contract

e.g. policy number, name of the insured, address and business, period of

19
insurance, sum insured for each item if separately insured against the
description of such item, amount of excess (deductible, premium etc.)

v. “Attestation or Signature Clause” where the policy is signed by an

authorised official of the insurer giving the company’s seal and date of
issue of the policy.

vi. “Conditions” may be of general nature or specific usually printed in the

policy.

e) Endorsements

As in the case of Fire and Miscellaneous accident departments,

endorsements on engineering insurance policies are normally used when the
terms of an insurance contract are to be varied.

Endorsements are attached to the policy document and the two together
constitute evidence of insurance contract.

Endorsements may be issued:

i. At the time of issue of original policy to provide specific extension to

include an additional peril.
ii. During currency of the policy i.e. when alterations in the risks are to be
issued,

Endorsements are issued on standard forms and must be carefully drafted to

make the intention quite clear.

The policies may be accepted 100% by a single insurer or, by more than one
insurer as a co-insurer, each for an agreed proportion of the total amount.

All policies issued in the Engineering department are on annual basis except
those issued for major projects where it may run for the entire period of the
project and hence long-term policies will be issued.

f) Claims under engineering insurance policies

Engineering Insurance policies prescribe the procedures to be adopted in the

event of a claim arising out of an accidental damage. These procedures
relate to:

 Notification of claim, Obligations of the insured

 Duties following an accident
 Position after a claim and
 Arbitration procedure

20
In addition the policies normally provide for “Basis of Indemnity” for both
partial and total or constructive total loss claims.

Immediate notification of loss is an important condition of the Engineering

Insurance Policies, because the Company will appoint an independent loss
adjuster to survey the damages and assess the loss on behalf of the insurers.

The policy coverage is checked and extent of liability assessed. An

important aspect of the Engineering loss survey report is the investigation
into the cause of failure, which may lead to specific recommendations on
loss prevention and risk improvement measures.
An early visit by the Surveyor / Loss Adjuster is of great advantage for the
following reasons:

i. If liability exists under the policy the company may wish to dictate the
extent and type of repair and will often decide which firm of repairers
should be engaged.

ii. It is important that the insured should be told as soon as possible

whether or not liability is accepted, as this avoids misunderstandings
regarding who is to pay for the repairs, which are very costly in many
cases.

iii. Often during the course of a repair, a considerable amount of

maintenance work is carried out. An early visit by the surveyor enables
him to report on the parts damaged and the company is then in a
position to agree a suitable apportionment of costs.

iv. Whether or not there is liability under the policy, the company must
approve the type of repair from a safety and also future risk aspect.

v. It often happens that an insured will notify the company of a failure and
then wait for an inspection by the surveyor in order to obtain his
assistance. An immediate visit is, therefore, essential in order to avoid
delay in the commencement of the repair, particularly where
consequential loss due to the non-operation of the plant is involved.

g) Deductible or Excess

Deductible is a common feature of the Engineering Insurance policies and

they are specifically mentioned in the Policy schedules as applicable for
different perils or different property.

Where the policies are issued to cover consequential loss such deductibles
are expressed in terms of time viz. number of days or months etc. and
termed as Time Excess or Time Exclusion.

21
Test Yourself 2

Which information is not collected via a questionnaire provided by insurance

companies in engineering insurance business?

I. Type of project
II. Locational details
III. Machinery
IV. Plant and equipment

22
Summary

a) Engineering Insurance forms part of miscellaneous branch of insurance in the

Indian insurance market.

b) The Construction Phase Insurance policies are normally “period” or “one

time” policies, i.e. they are issued for the period of the project.

c) Operational Phase Insurance consists of “annual” policies renewable at each

anniversary.

d) For each class of Engineering Insurance Business, there is a Proposal Form

and Questionnaire to be filled in and signed by the client. The Proposal Form
normally deals with common types of information like name, address,
locational details and sum-insured etc.

e) Cover notes can be issued only by an authorised representative of the

company and operate only for a limited period pending replacement by a
proper policy.

f) The policy is a stamped document which provides evidence of the insurance

contract and therefore it must be carefully drafted and issued in the
appropriate form.

g) Endorsements are used when the terms of an insurance contract are to be

varied. They are attached to the policy document and the two together
constitute the evidence of the insurance contract.

h) Deductible is a common feature of the Engineering insurance policies and it

is specifically mentioned in the policy schedules as applicable for different
perils or different properties.

23
Answers to Test Yourself

Answer 1

The correct option is I.

Contractor’s All Risks (CAR) Insurance is a one-time policy, i.e. issued for the
period of the project.

Answer 2

The correct option is II.

Information on locational details is collected via the proposal form and not a
questionnaire.

Self-Examination Questions

Question 1

_________ is a stamped document which provides evidence of the insurance

contract.

I. Proposal form
II. Cover note
III. Policy
IV. Endorsement

Question 2

Information on ‘Exemptions’ is generally provided in which section of an

insurance policy?

I. Heading
II. Preamble
III. Schedule
IV. Conditions

Question 3

In which section of the insurance policy is the policy number mentioned?

I. Heading
II. Preamble
III. Schedule
IV. Conditions

24
Question 4

When policies are issued to cover consequential loss, deductibles are expressed
in terms of time viz. number of days or months etc., they are known as
______________.

I. Period excess
II. Schedule Excess
III. Period exclusion
IV. Time Excess

Question 5

__________ is normally used when the terms of an insurance contract are to be

varied, and is attached to the policy document - the two together constitute
evidence of the insurance contract.

I. Proposal form
II. Cover note
III. Policy
IV. Endorsement

Answers to Self-Examination Questions

Answer 1

The correct option is III.

Policy is a stamped document which provides evidence of the insurance

contract.

Answer 2

The correct option is II.

Information on Exemptions is generally provided in the preamble section of an

insurance policy.

Answer 3

The correct option is III.

Policy number is mentioned under ‘Schedule’ in an insurance policy.

25
Answer 4

The correct option is IV.

When policies are issued to cover consequential loss, the deductibles are
expressed in terms of time, viz. the number of days or months etc., they are
known as time excess.

Answer 5

The correct option is IV.

Endorsement is normally used when the terms of an insurance contract are to

be varied, and is attached to the policy document - the two together constitute
the evidence of the insurance contract.

26
Chapter 3

TYPE OF PLANT/MACHINERY AND EQUIPMENT AND

ASSOCIATED HAZARDS

Chapter Introduction

In this chapter, you will learn about the various types of plant, machinery and
equipment used in industries and the hazards associated with them.

The chapter also includes information on the various kinds of power plants and
the risk that these plants are exposed to during their construction and
operation.

Learning Outcomes

A. Types of plant, machinery and equipment

B. Hazards related to plant, machinery and equipment

Look at this Scenario

In one of the biggest insurance claim ever paid, the insurance company had to
pay $200 million (approx) as compensation due to the collapse of ‘Sayano-
Shushenskaya’, one of the world’s biggest hydro power plants in Russia.

On 17 August 2009, three hydro electric generators were destroyed and seven
other hydroelectric generators were damaged in the ‘Sayano-Shushenskaya’
power plant, as a turbine unit was torn out of its anchorage by fluctuating
water pressure, and catapulted into the air.

The turbine (weight approx. 2000 tonnes) destroyed the 27 m high roof of
turbine hall along with some nearby structures. Propelled by water pressure,
360 cubic meters of water per second shot through the entire turbine hall,
including the lower floor, which resulted into numerous short circuits and
immediate failure of the power plant. Various other units of the plant sustained
several mechanical and electrical damage. 75 people lost their lives in the
accident and many others were severely injured.

27
A. Types of plant, machinery and equipment

1. Introduction

Rapid industrial growth leads to invention of machines of different types, size

and construction. Accompanied with this the technological advancements
resulted into product / process specific machine designs aimed at larger
production capacities, compact designs and computer aided automatic
controlled environments, which were drastically different from the ones found
at early stages of industrialisation.

Today we find a number of plant, machinery and processes which are highly
sophisticated in design, complicated in construction and automatically
controlled from a remote control room.

It would be essential for an Engineering insurance underwriter to keep pace

with these developments to be able to understand and adequately assess the
exposures in order to arrive at proper underwriting decisions.

Product and/or process specific machine designs will vary from industry to
industry. Though such machines may not be available for insurance in large
numbers, they involve high values, pose high risk exposures / accident
susceptibilities. An underwriter may require support from technically qualified
people for exposure assessment tasks in respect of such machinery and
equipment.

However, it is considered desirable that the marketing and underwriting teams

are broadly familiar with types of and hazards associated with those plant,
machinery and equipment which offer a huge business potential and contribute
a major share of premium for Engineering insurance. These areas relate to:

a) Plant, machinery and equipment commonly found in industries

Plant, machinery and equipment commonly found in practically all types of

industries and processes. These relate to:

i. Boilers and associated equipment,

ii. Pressure plant,
iii. Steam turbines,
iv. Engines such as steam, gas, diesel or petrol engines,
v. Material handling machinery and equipment such as cranes – both mobile
and fixed, lifts, conveyors, fork lifts and the like,
vi. Pumps

28
vii. Compressors
viii. Refrigerating and Air Conditioning Plants
ix. Power presses used for mass production of a wide variety of small
stamped components or profiled metal parts like a car door,
x. Electrical plant and machinery

Electrical Motor

A reciprocating compressor

Industrial Steam boiler

29
Electrical Power Transformer

b) System for generation, transmission, distribution and supply of

electricity

System for generation, transmission, distribution and supply of electricity is

one important sector without which no industrial, commercial or residential
activity can sustain its activities. Installation of any new factory always
presupposes availability of electrical power.

Schematic diagram of the power generation, transmission and distribution

infrastructure

Different types of power plants and the machinery / associated equipment

installed therein are of special interest to insurers and reinsurers the world over
for their business potentials, typical exposures and continuing innovation to tap
new sources of energy.

Given the above background, we will now briefly look at the intended use and
various hazards associated with the plant, machinery and equipment commonly

30
found in industries and subsequently deal in little more details with electricity
generation, transmission, distribution and supply systems.

Test Yourself 1

Which of the following statements is incorrect?

I. Product and/or process specific machines have standard designs and are
commonly found in all industries.
II. Installation of any new factory always presupposes availability of electrical
power.
III. Steam turbine is an example of ‘machinery and equipment’ commonly found
in practically all types of industries and processes.
IV. An underwriter may require support from technically qualified people for
exposure assessment tasks in respect of machinery and equipment used in
industries.

B. Principles and practices of engineering insurance

1. Usage and hazards of plant, machinery and equipment commonly found

in all industries

a) Boilers and associated equipment

Boilers and associated equipment used for generation of steam at pressure

for the purpose of some industrial processes or for driving electricity
generating and other machines,

Associated hazards: The major risk in Boilers is generally that of explosion

and collapse. In addition, boilers and other ancillary plants are susceptible
to damage from overheating due to shortage of water or the presence of
grease or scale forming impurities in the feed water.

b) Pressure plant

Pressure plant for storage of steam, liquids and gases under pressure

Associated hazards: The major risk in pressure plants is generally that of

explosion due to internal pressure and collapse.

c) Steam turbines

Steam Turbines are primarily used as prime movers (driving machine) to run
electricity generators, heavy duty rotary pumps and compressors,

31
Associated hazards: This presents a catastrophe risk in that the speed and
weight of the revolving parts can create a complete disruption of the entire
turbine due to centrifugal forces. Heavy claims have been met by Insurers
in connection with this risk.

Vibration brought about by the disturbed balance of the rotor or by gearing

becoming defective may result in the stripping of several rows of blades.
Such breakdowns are, therefore, expensive.

d) Engines such as steam, gas, diesel or petrol engines

Engines such as steam, gas, diesel or petrol engines used for driving
machines,

Associated hazards: These often suffer from overheating caused due to leak
of cooling water or failure of water circulation system. Overheating leads to
cracking of cylinder heads and seizure of pistons.

Excessive wear in bearing produces irregular running and vibration, which

can cause distortion or breakage of the crankshaft.

e) Material handling machinery and equipment such as cranes – both

mobile and fixed, lifts, conveyors, fork lifts and the like

Material handling machinery and equipment such as cranes – both mobile

and fixed, lifts, conveyors, fork lifts and the like, used for movement of
materials, men and machines etc.

Associated hazards: All lifts, cranes and handling plant and contractors’
plant are subject to the risk of mechanical and electrical breakdown.
Burning out of driving motors is common. Gearing, shafts and bearings can
unless a careful control is kept on the maintenance and operation.

Cranes are liable to topple over due to overloading, storm, unstable ground
conditions and errors in operation. Toppling over of cranes is usually a
serious matter involving major repairs.

Surrounding property of owners or third party may be involved and accidents

causing injuries to employees and third parties are common. Damage to
goods being lifted is a constant hazard.

f) Pumps

Pumps used for conveying liquids and / gases from one machine to another
or from one place to another,

32
Associated hazards: Failure of mechanical components like bearings,
impeller blades, vibration, careless operation, misalignment, faulty design,
faulty casting, lack of maintenance.

g) Compressors

Compressors are used for reducing volume and increasing pressure of liquids
and gases.

Associated hazards: Failure of mechanical components like bearings,

impeller blades, vibration, careless operation, misalignment, faulty design,
faulty casting, lack of maintenance

h) Refrigerating and air conditioning plants

Refrigerating and Air Conditioning Plants used for cooling of storage

chambers, reducing temperatures in buildings or materials in process. The
major equipment in the system is a compressor (either rotary or
reciprocating) coupled with a driving motor, air ducts, evaporators and
blowers.

Associated hazards: These mainly relate to the compressor and motor and
are as mentioned elsewhere for these two machines.

i) Power presses used for mass production of a wide variety of small

stamped components or profiled metal parts like a car door

The presses are mainly operated on hydraulic pressure and run by electric
motors.

Associated hazards: Failure of hydraulic pipes, defective casting, defective

design, lack maintenance. The hazards of electric motors are mentioned
elsewhere.

j) Electrical plant and machinery

Electrical plant and machinery including Diesel generator sets:

i. For generation of electricity such as generators, alternators,

ii. For transmission of electricity such as transmission towers, power lines,
sub stations equipped with transformers, circuit breakers and isolating
switches,
iii. For distribution and supply of electricity such as sub stations equipped
with transformers, circuit breakers and isolating switches,
iv. For driving other machinery such as electric motors,
v. For motor control centres,

33
vi. For isolation and control such as cables, switches, meters etc.
vii. Diesel Generator Sets (also known as DG set), comprises of a diesel
engine coupled to an alternator for producing electricity. These can be
found as mobile sets on construction sites or fixed installations.

2. Associated hazards

a) Electric motors and generators

The most common hazards are Insulation break-down and Failure of

mechanical components like bearings, foundation bolts, terminal box etc.
Insulation break-down can occur due to:

i. Over voltage,
ii. Over current,
iii. High temperature.
iv. Lack of ventilation.
v. Absorption of moisture.

Failure of mechanical components can occur due to:

i. Lack of lubrication
ii. Misalignment
iii. Vibration
iv. Poor termination
v. Open circuiting / short circuiting
vi. Faulty design / material / casting / construction /erection,
vii. Failure of safety device
viii. Careless operation, sabotage, entry of foreign objects, failure of
connected machinery.

b) Transmission towers and lines

A windstorm is a major hazard for both the towers and lines during
construction and operation. Theft of conductors is of great concern during
storage and construction.

c) Transformers

Since there are no moving parts as in motors or generators, transformers are

normally trouble free equipment. However, the quality of oil in the
transformer free from moisture and contaminants is a very important
criteria to maintain its insulation and cooling properties.
Failure/breakdown/fire in transformers are normally transformer oil
oriented.

34
d) Sub Stations

Sub stations include transformers, circuit breakers and isolating switches of

varying capacities. These are as mentioned for transformers, switchgear,
circuit breakers/isolating switches, elsewhere.

e) Switchgear or circuit break

The problems in switchgear mainly arise in the contactors and the oil if they
are not properly maintained

f) Motor control centres

One of the greatest causes of failure of control system is the presence of

dust, grease, oil which must be removed periodically. If they are not
cleaned properly flashing takes place damaging the contractors and other
parts.

g) Diesel generator sets

A Diesel Engine is high maintenance prime equipment as lubrication and

cooling has to be properly and continuously maintained. It has got a large
number of small parts likely to become loose and resultant vibration.

They should be periodically fixed up. If not properly maintained and

operated, the crankshaft and connecting rods may crack and even break.
Bearing failures are common.

h) Cables, switches etc.

Overheating, insulation failures are the main hazards associated with cables
whereas loose contacts, overheating etc. relate to the switches.

3. Power plants and associated hazards

Depending on the availability of sources of energy for conversion into

electricity, various types of power plants are in use in different parts of the
world. These are:

a) Conventional power plants

These plants use steam for driving turbine which is prime mover for the
electricity generator. Majority of the power plants use coal as fuel in the
boiler furnace and are called coal fired power stations. Fuel oil and gas are
other fuels for burning in boiler furnace.

35
Some industries produce incinerating waste (e.g. saw dust in a wood
processing plant, bagasse in a sugar mill) and burn such waste in the boiler,
whereas some industries recover the unused heat produced during another
process for generating steam at pressure.

The steam so produced is used for driving turbines. This is called

cogeneration. The power produced by cogeneration is of small capacity and
normally used in house.

b) Hydro electric power plants

These plants use potential energy from water courses like rivers or lakes to
drive turbine coupled to an alternator. These plants are generally classified
on the basis of available water head.

High head plants bring water from the dam to the power house through
tunnels or pressure conduits (pen stocks); the difference in altitude of the
dam and the power house exceeding 200 metres. In a medium head plant
the pressure head varies between 40 and 200 metres. Low head plants are
located on the lower reaches of a river and may not have a dam as the
effective head is around 10 metres.

The civil works involved in construction of a dam power house are heavy
including lengthy tunnels in mountains and underground power house
building. Equally heavy machinery (both mechanical and electrical)
installations are involved.

c) Nuclear power plants

A nuclear power plant consists of two distinct sections; one relating to

nuclear/radioactive reactions and the other a conventional steam power
plant. Heat generated by nuclear reactions is used for converting water into
steam at pressure which in turn rotates the turbine generator.

An Engineering insurer can insure only the conventional power plant of a

nuclear facility; the nuclear section is insured by separate international
arrangements like a Nuclear Pool.

d) Other types of power plants

In addition to the above three major types of power plants, there are
number of various types of power plants based on different sources of
energy such as wind energy, solar energy, geothermal energy, wave energy,
tidal energy, ocean thermal energy, ocean current energy, biomass energy
etc.

36
However, since the conventional and hydro-electric power plants offer the
largest business volume, it is intended to look at the hazards associated with
only these power plants.

4. Associated hazards for power plants during construction and operation

a) Conventional power plants

i. Main hazards during construction/erection

 Transportation, offsite storage and handling of heavy and/or odd size

project machinery,
 Accumulation of substantial values on construction sites,
 Inadequate safety and protection,
 Exposure to fires, flash floods and inundation due to improper
storage arrangements,
 Inadequate precautions against corrosion,
 Exposure to natural perils
 Third Party Liability due to transportation and site accidents ALOP
and DSU exposures as a result of delay in commencement of
commercial operations due to accidents.

ii. Main hazards during operation

 Mechanical/electrical breakdowns,
 Explosion or collapse of boilers,
 Rupture of steam and fuel pipes,
 Fires in cable galleries, switching rooms, transformers etc.
 Disintegration of turbines due to centrifugal forces
 Exposure to natural perils
 Third Party Liability due to leakage and pollution.
 Long interruption periods after an accident

b) Hydro electric power plants

i. Main hazards during construction/erection

 Transportation, offsite storage and handling of heavy and/or odd size

project machinery,
 Accidents to heavy duty construction plant, machinery and
equipment
 Inadequate fire safety and protection. Remote location of site and
difficult access create problems in mobilizing help in case of
emergencies,
 Exposure to fires, flash floods and inundation due to improper
storage arrangements,
 Inadequate precautions against corrosion,

37
 Exposure to natural perils of earthquake, flood, landslide/rockslide,
 Third Party Liability due to transportation and site accidents.
 Long delay periods after an accident

ii. Main hazards during operation

 Mechanical/electrical breakdowns,
 Bursting of dams, collapse of tunnels, floods, landslides/rockslides
leading to catastrophic losses,
 Defective design, material, specification and/or workmanship,
 Fires in cable galleries, switching rooms, transformers etc.
 Disintegration of turbines due to centrifugal forces
 Exposure to natural perils of earthquake, flood, landslide/rockslide
 Third Party Liability due to leakage and pollution.
 Long interruption periods after an accident

Test Yourself 2

Which of the following risks is a pressure plant exposed to?

I. Distortion or breakage of the crankshaft

II. Explosion due to internal pressure and collapse
III. Mechanical and electrical breakdown
IV. Cracking of cylinder heads due to overheating

38
Summary

a) Product and process specific machine designs will vary from industry to
industry. Various hazards are associated with these plants, machinery and
equipment.

b) An underwriter may require support from technically qualified people for

exposure assessment tasks in respect of such machinery and equipment.

c) System for generation, transmission, distribution and supply of electricity is

one important sector without which no industrial, commercial or residential
activity can sustain itself.

d) Different types of power plants and the machinery / associated equipment

installed therein are of special interest to insurers and reinsurers the world
over for their business potentials, typical exposures and continuing
innovation to tap new sources of energy.

e) There are various types of power plants, such as:

i. Conventional power plants use steam for driving turbine which is the
prime mover for the electricity generator

ii. Hydro electric power plants: these plants use potential energy from
water courses like rivers or lakes to drive turbines coupled to an
alternator.

iii. A nuclear power plant consists of two distinct sections; one relating to
nuclear/radioactive reactions and the other a conventional steam power
plant.

f) There are various hazards associated with these power plants during
construction and operation.

39
Answers to Test Yourself

Answer 1

The correct option is I.

Product and/or process specific machine designs will vary from industry to
industry. Hence, statement I is incorrect.

Answer 2

The correct option is II.

A pressure plant is exposed to the risk of explosion due to internal pressure and
collapse.

Self-Examination Questions

Question 1

Which of the following risks is not associated with boilers that are used for
generation of steam in industries?

I. Explosion and collapse

II. Damage from overheating due to shortage of water
III. Damage due to presence of grease or scale forming impurities in the feed
water
IV. Overheating caused due to leak of cooling water

Question 2

What is the major hazard associated with transmission towers and lines during
construction and operation?

I. Fire
II. Overheating
III. Windstorm
IV. Flashing

Question 3

Which of the following is not included in substations?

I. Transformers
II. Boilers
III. Circuit breakers
IV. Isolating switches of varying capacities
40
Question 4

Which of these power plants use steam for driving a turbine, which is the prime
mover for the electricity generator?

I. Conventional power plants

II. Hydroelectric power plant
III. Nuclear power plants
IV. Solar power plant

Question 5

Which of the following hazard is not associated with a hydro electricl power
plant during construction?

I. Mechanical/electrical breakdown
II. Explosion or collapse of boilers
III. Fires in cable galleries, switching rooms, transformers, etc.
IV. Exposure to fires, flash floods and inundation due to improper storage
arrangements

Answers to Self-Examination Questions

Answer 1

The correct option is IV.

Overheating caused due to leak of cooling water is a risk associated with

engines such as steam, gas, diesel or petrol engines used for driving machines.
Hence, option IV is not a risk associated with boilers.

Answer 2

The correct option is III.

Windstorm is the major hazard associated with the transmission towers and
lines during construction and operation.

Answer 3

The correct option is II.

Substations include transformers, circuit breakers and isolating switches of

varying capacities, and not boilers.

41
Answer 4

The correct option is I.

Conventional power plants use steam for driving a turbine, which is the prime
mover for the electricity generator.

Answer 5

The correct option is II.

Hydro electric power plants do not involve use of boilers.

42
CHAPTER 4

PROJECT STAGES, WORK CONTRACT AND OTHER

CONTRACTS

Chapter Introduction

In this chapter, we will discuss various project stages and different activities
involved in these stages. The chapter also highlights importance of work
contract and other contracts.

Learning Outcomes

A. Project stages
B. Work contract and other contracts

43
A. Project stages

1. Introduction

The Construction Phase Insurances are also known as “Project Insurances”.

Before going into the details of individual types of insurance falling under this
category, it will be desirable to look into:

a) The various stages and other factors that are involved in planning and
implementation of a large project

b) The works contract and

c) Other contracts

Though the following information focuses on large projects, the procedure for
smaller projects may follow the same pattern.

2. Project stages

Diagram 1: Project stages

44
a) Need for the project

A project is normally born as an idea:

 To introduce new production facilities

 Improve existing production capacities
 To improve infrastructure aimed at socio-economic development

At this stage the needs to be considered and the objectives to be achieved

from the project get clearly defined.

Infrastructure projects hold great importance and priority for both the Govt.
and the people, involve huge investments and tremendous business potential
for Engineering insurers.

They encompass:

i. Power Generation, Distribution

ii. Resources / Mining
iii. Oil and Gas + Pipelines
iv. Telecom / IT / Industrial / Knowledge Parks
v. SEZ (Special Economic Zone) and EPZ (Export Promotion Zone)
vi. Rail/Road and Port Facilities
vii. Airport / Aviation
viii. Water and Waste Management
ix. Healthcare / Hospitals
x. Education etc.
.
b) Feasibility study

Feasibility study is carried out to decide workability of the project from

various factors relating to physical, economical, environmental, political
aspects.

Such a feasibility study is normally undertaken with the help of a group of

consultants / experts in various fields. This study gives answers to questions
related to following major areas among others:

i. Size of the project , scope for future expansions

ii. Selection of sites
iii. Environmental and political reactions
iv. Selection of designs and materials
v. Approximate project cost, cost benefit analysis
vi. Economics of the project , prospective operating cost and returns on
investments
vii. Ways and means of financing the project

45
c) Detailed project planning

If the study shows the project to be feasible, detailed planning of the

project will be initiated by the principal with the help of his own staff and
engineering consultants.

The insurers will be able to provide a valuable service in making risk analysis
and recommendations for loss prevention and protection measures at such
an early stage.

Such Risk Management inputs by the insurer will be beneficial to the project
in achieving improved working methods, prevention of accidents and better
insurance terms during operational phase of the project.

Example

A fire protection system incorporated in the original design of the project will
give lifelong benefits of reduced premium and better insurance terms during the
operational phase after successful commissioning.

During this stage the principal will initiate the process of acquiring land for
the project site and obtaining clearances from various government
authorities.

d) Call for tender

With the detailed project report (DPR) in hand the project authority may
invite tenders .A private company will most likely invite offer directly from
a selected group of contractors/suppliers .

The tender documents would comprise of:

i. The wordings specifying detailed conditions and specifications

ii. The full specifications
iii. Bill of quantities to be completed
iv. Insurance, indemnity, liability and force majeure conditions etc.

Insurance costs have to be included in the tender as a part of the project

budget. The information from insurer regarding insurance possibilities and
indicative premium budget is always considered important by both the
principals and the contractors.

e) Award of contract

The Tenders would normally be in two broad sections viz.

 Technical and
46
 Commercial
The tenders received from different contractors are evaluated and the
principal will award the contract to the contractor who offers the best
combination of:

i. Price
ii. Know-how
iii. Experience
iv. Financial and
v. Technical guarantees

Normally, the care and custody of the site and the activities thereon remain
with the contractor until the project is taken over by the principal.

Nevertheless, the exact situation will depend on the provisions of the actual
contracts between the parties.

f) Land acquisition and site preparation

Acquisition of land becomes a major landmark in movement of a project.

The preparatory work on site includes:

i. Site leveling /grading

ii. Preparation of site offices
iii. Accommodation
iv. Access roads
v. Fencing
vi. Temporary structures
vii. Unloading and storage facilities
viii. Security arrangements etc.

g) Transportation of project property

This involves the stage from loading in conveyance of the project property
at the suppliers premises, during its normal course of transit up to the
construction site including:

i. Transshipments
ii. Storage at the ports of discharge
iii. Bonded warehouses of customs department
iv. Inland transit
v. Intermediate storages
vi. Off-site storages etc.

47
h) Site activities

Receipt of project property on site, its storage, handling, construction /

installation / erection, testing and commissioning and performance tests to
achieve readiness for commercial production and or use. These primarily
and broadly cover the spectrum of activities on the site. On completion of
these activities, the principal takes over the works from the contractor.

During this period, the principal will pay the contract price to the contractor
in installments at predetermined intervals in accordance with the progress
of the work as per provisions of the works contract.

i) Defects – Liability or the maintenance period

The last phase for contractual responsibilities and liabilities of the

contractor in relation to the project continue during the defects liability
/maintenance period, which commences from the date of issue of
provisional certificate of completion by the principal.

Such maintenance period is defined in the contract. It is normally twelve

months, however, may be less or more depending on the type and duration
of the contract.

Test Yourself 1

If the initial study shows the project to be feasible, which of the following
stages will be initiated by the company?

I. Detailed project planning

II. Call for tender
III. Award of contract
IV. Land acquisition and site preparation

48
B. Work contract and other contracts

1. The Works contract

The Works Contract is the legal instrument that divides the financial risk and
responsibilities between the principal and the contractor. Among many other
stipulations the Works Contracts will have clauses which describe the
responsibilities of:

i. The principal and the contractor to arrange different types of

insurances for the project property

ii. The people involved in execution of the project and

iii. The third party liability that may arise due to activities carried out in
connection with the project.

All such provisions are covered under the Insurance, Indemnity and liability
provisions of the contract.

Standard forms of contracts have been proposed by professional associations

and institutions like:

a) Federation Internationale des Ingenieurs Conseils ( FIDIC )

b) Joint Contracts Tribunal (JCT )

c) Institution of Chemical Engineers ( IchemE )

d) Institution of Mechanical Engineers ( IME )

e) Institution of Electrical Engineers ( IEE )

Such standard forms mostly serve as the base model draft for any particular
contract and get modified to meet specific needs of that contract.

The “Insurance, Indemnity and Liability” provisions of a Works Contract are of

special importance to the insurer as they relate to many important features
like:

i. General obligations and responsibilities of the principal and the

contractor

ii. The obligations to insure

iii. Information relevant to risk assessment i.e. specifications, work time

schedule, force majeure, expected risks etc.
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2. Other contracts

In addition to the Works Contract, the principal enters into other contracts with
different parties such as:

a) Suppliers of machinery / equipments

b) Suppliers of various services

c) Shippers and transporters

d) Purchasers of production of the project (e.g. Power purchase

agreement)

e) Supplier of fuel (e.g. Fuel supply agreement for a power project)

f) Finance agreement with financiers of the project etc.

All such project documents will have some or the other stipulations which have
direct bearing on the insurance programme for the project. The Works Contract
and the other contracts provide important risk information to the insurers.

Proper risk analysis from careful study of the project reports and contracts will
enable an insurer to:

i. Assess the exposures of the project to natural, technical and human

hazards and

ii. Prepare an insurance programme to meet the specific needs of the

project.

A good number of projects are, nowadays “privately financed” and project

insurance policies become one of the strongest requirement for the financiers
against the loans given by them to the project owners.

Under these situations, the financiers require certain specific coverage’s and
conditions to protect their interests.

Test Yourself 2

Works contracts will have clauses which describe the responsibilities of:

I. The principal
II. The contractor
III. Parties involved in the project
IV. All above

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Summary

a) The first project stage is the ‘Need of project’. At this stage, the needs to
be considered and the objectives to be achieved from the project are
clearly defined.

b) The second stage is ‘Feasibility study’, which is carried out to decide

workability of the project from various factors relating to physical,
economical, environmental and political aspects.

c) If the study shows the project to be feasible, ‘detailed planning of the

project’ stage will be initiated by the principal with the help of his own
staff and engineering consultants.

d) With the detailed project report (DPR) in hand, the project authority may
invite tenders. A private company will most likely invite an offer directly
from a selected group of contractors/suppliers.

e) The tenders received from different contractors are evaluated and the
principal will award the contract to the contractor who offers the best
combination of price, know-how, experience, financial and technical
guarantees.

f) Once tenders are finalised, the next stage is the Land acquisition and site
preparation stage. Acquisition of land becomes a major landmark in the
movement of a project.

g) Transportation of project property stage involves loading in conveyance of

the project property at the supplier’s premises, during its normal course of
transit up to the construction site. Once site activities are completed, the
principal takes over the works from the contractor.

h) The last phase for contractual responsibilities and liabilities of the

contractor in relation to the project continue during the defects liability
/maintenance period, which commences from the date of issue of
provisional certificate of completion by the principal.

i) The Works Contract is the legal instrument that divides the financial risk and
responsibilities between the principal and the contractor.

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j) An exhibit that explains the practice of project execution (site activities) is
given in the diagram below that can be referred to understand CAR and EAR
insurances :

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Answers to Test Yourself

Answer 1

The correct option is I.

If the initial study shows the project to be feasible, then detailed project
planning will be initiated by the company.

Answer 2

The correct option is II.

Work contract describe the responsibilities of the principal, contractors & all
other parties involved.

Self-Examination Questions

Question 1

What is the purpose of conducting a feasibility study of the project?

I. To determine estimated project time

II. To decide workability of the project from various factors relating to
physical, economical, environmental and political aspects
III. To determine employment potential to employees
IV. To decide about the purchase of machinery and equipment to be used in the
project

Question 2

Who can conduct the feasibility study of a project?

I. Students interested in pursuing a career in the related field

II. Economists
III. Experts in the field
IV. The project manager

Question 3

At which of the following stages will the principal initiate the process of
acquiring land for the project site and obtaining clearance from various
government authorities?

I. Feasibility study
II. Detailed project planning

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III. Award of contract
IV. Land acquisition and site preparation

Question 4

Which of the following steps will be initiated once the DPR is complete?

I. Feasibility study
II. Detailed project planning
III. Call for tender
IV. Land acquisition and site preparation

Question 5

From what period does the duration of defects liability/maintenance period

commence?

I. From the date of issue of the completion certificate by the principal

II. From the end date of project completion as per the contract
III. From the date of completion of site activities
IV. From the date of issue of provisional certificate of completion by the
principal

Answers to Self-Examination Questions

Answer 1

The correct option is II.

The purpose of conducting a feasibility study of the project is to decide

workability of the project from various factors relating to physical, economical,
environmental and political aspects.

Answer 2

The correct option is III.

Experts in the field can conduct the feasibility study of a project.

Answer 3

The correct option is II.

During the detailed project planning stage, the principal initiates the process of
acquiring land for the project site and obtaining clearance from various
government authorities.

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Answer 4

The correct option is III.

Call for tender is the next step which will be initiated once the DPR is
complete.

Answer 5

The correct option is IV.

Defects liability/maintenance commences from the date of issue of provisional

certificate of completion by the principal.

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CHAPTER 5

CONTRACTORS ALL RISK INSURANCE

Chapter Introduction

This chapter discusses Contractors All risk insurance, popularly known as CAR
and the main characteristics of CAR polices in terms of risk covered, sum
insured, pattern of premium payment etc.

This chapter also discusses the information that is collected by insurers for
assessment of risk in civil engineering projects and different aspects of
technical controls related to these risks.

Learning Outcomes

A. CAR insurance
B. Assessment of risk and technical control

Look at this Scenario

An under construction flyover partially collapsed in which was built by a leading

civil contractor.

The company had taken CAR Insurance policies. Which were ‘All risk’ covers
polices that covered all physical damage to civil work such as:

 Risks involved in construction of over bridge; and

 Risks associated with use of machinery.

The policy also covered third party extension that covered loss of life.

In this chapter we will learn about the features of Contractors All Risk (CAR)
insurance policy.

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A. CAR insurance

1. Introduction

Definition

Contractor’s All Risks Insurance, more popularly known as CAR insurance is a

specially designed insurance policy to protect the interests of the principals and
contractors engaged in civil engineering projects like construction of –

 Residential/commercial buildings,
 Warehouses,
 Hospitals,
 Schools,
 Factories,
 Cinema house/theatres,
 Roads,
 Bridges,
 Flyovers,
 Dams,
 Jetties,
 Canals,
 Tunnels,
 Water reservoirs,
 Ports,
 Drainage and sewerage systems,
 Pipelines,
 Airports,
 Aircraft hangers,
 Power house buildings, etc.

For a long time CAR business was underwritten by Property underwriters and it
may not be uncommon to find a Fire insurance policy covering a “building under
construction”. Nevertheless, considering the complexities involved in many
construction projects, newer construction methods and novel designs, the need
for creating a special policy had to be recognised by the insurers.

The first CAR policy is said to have been issued in 1929 to cover the construction
of Lambeth Bridge across river Thames in London. A special CAR policy was
created in Germany in 1934. However the real development took place after the
Second World War.

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First CAR policy – Lambeth Bridge, London

The early CAR policies provided an overall cover for accidental physical loss or
damage and ancillary third party liability insurance. The primary intention
behind such policies was and even today is to offer coverage which will respond
to most insurance needs of a construction project.

2. Contract works

This term implies all the operations to be carried out by a contractor and his
subcontractors in compliance with the building contract, including preparatory
work on the site, such as

 Excavation,
 Grading and leveling work,
 Execution of temporary structures like diversion cuts and protective
dams, as well as
 The use of all materials stored on the site which are to be incorporated
in the structure.

CAR policy provides virtually a comprehensive cover for the entire civil
engineering projects from the time of arrival of the first lot of materials at site
and continues whilst the work is in progress and during the maintenance period
thereafter.

The cover provided is on an ‘All Risks’ basis i.e. every hazard is covered which
is not specifically excluded. This means that sudden and unforeseen loss or
damage occurring during the period of insurance to the property insured on the
construction site will be indemnified.

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The interests of the principal may be included under the terms of the contract
but during the maintenance period the cover is restricted to loss or damage for
which the contractors are liable according to contract conditions.

3. Car scope of cover

a) Section I - Material damage

As mentioned earlier the policy coverage is on an ‘All Risks’ basis. CAR

insurance provides comprehensive cover. Any sudden and unforeseen loss or
damage occurring during the period of insurance to the property insured will
be indemnified unless the loss or damage is due to the exclusions indicated
explicitly in the policy.

Normally, the CAR Insurance Policy covers following perils:

i. Fire and allied perils,Accidental damage during construction e.g. due to

dropping or falling or defective workmanship and material, lack of skill,
negligence, malicious act or human error.
ii. Acts of God i.e. Earthquake(fire and shock), Landslide
/Rockslide/Subsidence, Water damage, flood, inundation , storm,
tempest, hurricane, tornado ,typhoon ,cyclone & other convulsions of
nature,
iii. Collapse, Collision, Impact.
iv. Theft & Burglary, Malicious Damage.

b) Section II - Third party liability

The legal liability to third parties for property damage or personal injury can
be covered in conjunction with the Material Damage cover under CAR
insurance policy. The Third Party Liability is covered under a separate
section of the policy so titled.

4. Exclusions

The cover provided by CAR insurance is only subject to a few exclusions which
International insurance market usually applies. There are normally termed as
uninsurable risks. These exclusions were named in the policy and essentially
comprise of the following:

a) General exclusions (applicable to all sections):

These Exclusions, common to all Sections of the policy, are as under:

i. Loss or damage due to war or warlike operations, civil commotion, etc.

ii. Loss or damage due nuclear reaction, radiation or radioactive

contamination.
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iii. Loss or damage due to willful act or willful negligence of the insured or
of his representative.

iv. Cessation of work whether total or partial.

b) Exclusions to Section I – Material damage

These Exclusions are especially applicable to Section I of the policy.

i. An amount prescribed as Excess in the policy, which is to be borne by

the insured in respect of each and every claim

ii. Loss discovered only at the time of taking an inventory.

iii. Loss or damage due to normal wear and tear, gradual deterioration due
to atmospheric conditions or lack of use, rust, scratching of painted or
polished surface or breakage of glass

iv. Loss or damage due to faulty design.

v. 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 exclude loss of or damage to
correctly executed items as a consequence of an accident due to such
defective material and/or workmanship.

vi. The cost necessary for rectification or correction of any error during
construction unless resulting in physical loss or damage.

vii. Loss of or damage to files, drawings, accounts, bills, currency, stamps,

deeds, notes, securities, cheques and the like.

viii. Packing materials such as cases, boxes, crates.

ix. Consequential loss of any kind or description, penalties, lack of

performance.

x. Loss of or damage to vehicles licensed for general road use, waterborne

vessels or machinery / equipment mounted or operated or fixed on
floating vessel / barge / craft or aircraft.

c) Exclusions to Section – II (T.P.L.)

i. The amount of excess mentioned in the Schedule of the policy to be

borne by the insured per property damage claims.

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ii. Expenditure incurred in doing or redoing or making good or repairing
replacing anything covered or coverable in Section-I of the policy.

iii. Liability consequent upon :

 Bodily injury or illness of employees or workmen of the insured or

members of their families
 Property belonging to or held in care by the insured or his employees

 Any accident caused by vehicles licensed for general road use or by

waterborne vessel or aircraft

 Any agreement by the insured to pay any sum by way of an indemnity

or otherwise, unless such liability would have attached in absence of
such agreement.

5. Period of insurance

a) Period of insurance

CAR policy provides cover from the time of arrival of the first consignment
of materials at the site or from the commencement of work, whichever shall
be the first, and shall remain in force until the date specified in the policy
or the construction work is completed/ taken over by the principal, which
ever shall occur first.

b) Phased handing over

However phased handing over is quite common in civil engineering

projects. The liability of the insurer ceases for that section of the work
taken over/put into use by the principal, whereas the cover continues for
balance of the work remaining to be completed.

c) Defects liability period

In CAR insurance it is quite common for the contractors to take out cover
during the maintenance period or defects liability period to fulfil their
obligations under the contract. Such maintenance period is usually 12
months but may vary depending on the type of contract work. It will be
necessary to separately show the construction and maintenance period in
the policy.

This will enable the insured to more readily realise the need for requesting
an extension of the policy period in the event of non-completion of the
contract in time.

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6. Sum insured and under-insurance

The provisions are as under:

a) The Material Damage sum insured must be equal to the estimated

completely erected value of the contract works inclusive of materials,
wages, supervision costs, freight, customs duties and items supplied by
the Principal.

The sum insured should represent the current new replacement value. The
insured can increase or decrease the sum-insured in the event of any
material fluctuation in the level of wages or prices

b) In respect of construction plant, machinery and equipments the sum

insured should represent the new replacement value of each item to be
covered.

c) In the event of loss or damage, if it is found that the sum insured is less
than the amount required to be insured, then the amount recoverable by
the insured gets reduced in such proportion as the sum insured bears to
the amount required to be insured. This condition applies separately for
each and every item.

d) A separate limit of liability has to be selected by the insured for the

Third Party Liability Section of the policy.

7. Adjustment of sum-insured

The sum-insured under the policy is adjustable at the end of the policy period /
completion of construction on the basis of actual values to be declared by the
insured in respect of freight and handling charges, custom dues and
construction costs and difference in premium to be suitably adjusted. It is
pertinent to note that as a practice, such an adjustment usually doesn’t
happen. It is also a common practice to enhance the sum insured mid term, if
the project cost increases.

However any increase or decrease in the prime cost of materials is not subject
to premium adjustment.

8. Supplementary covers

In addition to basic cover mentioned above the following supplementary covers

may be included, if required by insured:

a) Construction machinery, plant and equipment required for the project

(such as cranes ,winches, welding machines, concrete mixing machines,
compressors, etc. etc)

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b) Cost incurred in the clearance and removal of debris of the insured
property following a loss.

c) Damage to existing property of the insured at the site.

d) Additional expenses incurred for overtime, work on public holidays as

well as express freight, air freight etc.

e) Legal liability for property damage or bodily injury suffered by Third

Parties caused by accidents at the project site and connected with
construction work being carried on.

f) A provision for escalation in value to take care of inflationary trends.

g) Temporary works or temporary structures at the project site.

h) Additional expenses incurred for air freight in connection with an

indemnifiable loss.

i) Additional custom duty incurred for replacements over and above the
custom duty taken into account in arriving at the sum insured of the
affected item.

j) Maintenance cover.

All the above supplementary covers are included as extensions of the policy by
way of specific endorsements. An individual ‘limit of indemnity’ has to be
selected-either in amounts or in percentage –against each extension and the
insurers will charge suitable additional premium for the same.

It may be noted that all the above extensions get automatically terminated
upon taking over of completed works by the principal and do not continue
during the maintenance period. Endorsements for each of these supplementary
covers are included in subsequent Chapter for better understanding of the
coverage and terms & conditions under each of them.

9. Maintenance cover

Maintenance Visits Cover or Extended Maintenance Cover are the two

alternatives which can be obtained by the insured to cover loss or damage to
the permanent contract works occurring during the maintenance period. The
details of these two coverages are as under:

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a) Maintenance visits cover

This is also known as ‘Limited Maintenance’ cover. It covers loss or damage

to the contract works solely caused by the insured contractor in the course
of operations carried out for the purpose of complying with his obligations
under the maintenance provisions of the contract.

b) Extended maintenance cover

In addition to the maintenance visits cover, the extended maintenance

provides cover for loss or damage occurring during the maintenance period
provided such loss or damage was caused on the site during the construction
period. This cover in Indian market is usually given for “defect liability”
period specified in the contract.

10. Extension of period of insurance

The period of insurance under the CAR policy terminates at the latest on the
expiry date specified in the policy scheduled but at the request of the Insured,
the Insurer may extend the period of insurance on payment of appropriate
additional premium.

However, before granting any extension a detailed investigation as to the cause

of the delay in completion of contract is made by the Insurers.

11. Basis of indemnification

In case of any damage which can be repaired the Insurers’ Liability will be the
cost of repairs necessary to restore the property to its condition before the
occurrence of the damage less the value of salvage.

In case an item is a total loss the basis of settlement will be limited to the
actual value of the property immediately before the occurrence of the loss less
the value of the salvage.

All damage which can be repaired shall be repaired, but if the cost of repairing
any damage equals or exceeds the value of the property immediately prior to
occurrence of the damage, the basis of loss settlement shall be as outlined
above.

The cost of any provisional repairs carried out shall also be reimbursable
provided such repairs constitute a part of the final repairs and do not increase
the cost of the total repairs expenses.

Upon a claim being settled the total sum insured under the policy will stand
reduced to that extent. It is, therefore, in the insured’s own interest to
reinstate the sum insured back to its original level by paying additional premium

64
on the amount of the claim from the date of the claim till the expiry of the
policy .

12. Excess (Deductible)

It is very common on a work site that numerous small incidents take place,
which cause loss or damage. Claiming indemnity for each such small loss may
unduly increase the administrative costs for the insurer and the insured. Also,
since occurrence of such small accidents is incidental to handling the contract,
the contractors often leave some margin in the contract price for the same.

The insurer in turn desires that the contractor will be more loss prevention
minded if a reasonable proportion of their losses remain self-insured. From their
own experience of insuring comparable contracts, the insurer would prescribe
certain minimum level of excess amounts for different types of perils or losses.

As per the prevailing practice in writing CAR insurance, separate excess

amounts are prescribed for

a) Storage and construction claims,

b) Acts of God Perils ,
c) Fire claims,
d) Collapse and Works in water,
e) Maintenance period claims.

The minimum excess amounts prescribed by the insurer are generally termed as
normal excess and discounts in premium will be available for the insured
selecting excess amounts higher than the normal.

13. Car policy composition

The CAR policy is composed of the following:

a) The Material Damage section, covering accidental physical damage to

the works and stored materials and to the contractor’s plant.

b) The Third Liability section, covering material damage and personal

injury to third parties.

c) The Schedule ,listing all policy data relevant to the two sections

d) The General Conditions and Exclusions found in almost all property

insurance policies

e) Endorsements for selected supplementary covers.

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Test Yourself 1

Which of the following is incorrect with respect to the CAR policy?

I. CAR policy provides a virtually comprehensive cover for the entire civil
engineering projects whilst the work is in progress and also during the
maintenance period thereafter.
II. CAR policy cover is provided on an ‘All Risks’ basis, i.e. every hazard which
is not specifically excluded is covered.
III. Sudden and unforeseen loss or damage occurring during the period of
insurance to the property insured on the construction site is not indemnified
in a CAR policy.
IV. In a CAR policy, during the maintenance period, the cover is restricted to
loss or damage for which the contractors are liable according to the contract
conditions.

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B. Assessment of risk and technical control

1. Assessment of risks and technical control

In order to assess the risk that is proposed for “CAR” insurance the insurers
information is collected through the standard Proposal Form and special
questionnaires relating to specific information which can vary but be more
appropriate to different types of civil engineering contracts.

The following description of assessment of different risk factors in relation to

civil engineering works is given as illustrative examples. Needless to mention
the list is not exhaustive.

a) Tall buildings

There are many factors which increase the risk of construction of tall
buildings, such as:

i. Foundations will generally be of considerable depth and complexity.

ii. All materials to be installed or erected in the higher floors are to be
lifted or transported by hoist to their final position, generally.
iii. The construction plant in use involves several large items.
iv. Collapse of scaffolding can cause considerable damage to the works and
result in third party liability claims.
v. A fire in upper stories could prove to be extremely difficult to fight.
Timber and other inflammable materials increase fire hazards to
partially completed structures.

b) Airport Works

This work is generally divided into two categories, i.e.

i. Landside: Landside work includes:

 The construction, alteration and repair of buildings,

 The installation and servicing of machinery and
 Any other work not in direct contact with aircraft operations.

This work can be assessed in the same way as general building work.

ii. Airside: Airside contracts, are concerned with such work as

 The construction or extension of runways and aprons ,

 The installation lighting and the provision of refueling facilities

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Primarily in each case the potential third party exposure requires special
consideration. By their very nature airports are mostly built on flat, open
ground and are exposed to storm, tempest and water damage .Experience of
the contractor for those types of work is invariably importance.

c) Underground risks

Satisfactory geological and other site investigation reports are invariably

called for. Collapse and flooding hazards are special aspects of the risks.

d) Pipeline construction

The work of construction of pipelines of varying diameter for conveying

water ,oil, gas, and chemical products has increased enormously .A close
study of the terrain is carried out involving geological ,hydrological, and
environmental investigations .

Hazards are involved all most at every stage viz. excavation, welding,
coating and wrapping, placing, back filling and testing .Different techniques
are used for offshore pipeline projects.

e) Tunneling

Tunnels may be major Civil engineering projects or a comparatively small

part of larger project e.g. diversion tunnel for dams. Basically, there are
three methods by which tunnel is constructed viz.

i. Bored tunnel constructed under ground,

ii. Cut and cover tunnel constructed from ground surface and
iii. Immersed tubes tunnel on sea or river bed.

Regardless of the method of construction for bored tunnel or cut and cover
tunnel there are the ever present risks of:

 Collapse,
 Inundation by heavy rain or flood water ,
 Failure of dewatering system ,
 Rock burst or rock fall ,
 Ignition of under ground gas pockets, etc.

The third party/hazards in built up area could be considerable .The hazards

of immersed tube tunnel under water is somewhat different. Joining of
section of tunnels involves the use of divers and complicated system of air
locks.

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f) Trenching

The main hazards are collapse of sides or inundation of the trench.

Seriousness of the hazard much depends upon the length of trench which is
to be left open at any one time and climatic conditions during the period of
work.

g) Hydro electric

Most hydro power stations are constructed in remote and inaccessible

situation and the plant normally installed in a power house situated either
at the foot of the dam under construction or in an underground cavern.
These types of stations may be subject to serious risks of rock fall, landslip
or flooding.

h) Road construction

Most major road buildings project will involve construction of a number of

bridges, crossing roads, railways and water ways. The type of road
construction largely depends on the territory. Flash flooding is the major
hazard .Water and frost damage to partially completed road surface are a
source of danger.

i) Reservoirs

The construction of water reservoirs may be by the closing of a natural

valley with a dam, or formation of artificial lake, a construction of concrete
container above or below ground.

The main problem with all reservoirs is that of adequate sealing to prevent
water losses, seepage, erosion, and loss of content.

j) Bridge construction

Basically, almost every structure designed to cross a gap comes within this
category. The main types of structures are:

i. Single span of piers or abutments,

ii. Multi span on piers ,
iii. Multi arched ,
iv. Cantilever
v. Suspension
vi. Box girder

The materials used may be steel, reinforced concrete, prestressed concrete

or a combination of all three with decking generally of reinforced concrete,
welded steel or light alloy.

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In general the location of the site in relation to natural drainage must be
considered. The risks involved may be separately considered under
abutments, foundations, piers and super structures. Also Third party liability
in relation to shipping or any other traffic under the work in progress would
be quite considerable.

k) Off shore structures and equipment

The offshore installation construction industry have expanded rapidly during

the past two to three decades resulting in discovery of new oil fields in
various parts of the world .The off shore structure is the permanent drilling
and producing platform made of steel or concrete .

Separately auxiliary off shore structures may also be used in the way of
living quarters ,control platform ,storage tank, field terminal platform
,pump station platform, pipe line booster platform ,tanker mooring /loading
buoy ,sub-sea well-head system and finally the pipe line system .Special
type of tailor made policies are generally issued for such risks traditionally
in the Marine Department.

The scope of cover for off shore structure is governed by the marine market
and is based on marine conditions and clauses adapted to the particular
projects .It is customary for a “package” policy to be prepared covering as
far as possible all aspects of the projects and all parties involved both in
respect of damage sustained and liabilities incurred .

l) Wet risks

Contracts involving construction in and around water i.e. rivers, lakes or sea
,present many hazards and call for detailed investigation into construction
techniques and methods to be employed in relation to water level and
timetable of activities.

Information should also be sought as to the history and extent of past

flooding in the area, tidal flow, depth of water table as also the site
exposures to storm, tempest, subsidence and other natural perils.

Experience of the contractors in similar type of works is of utmost

importance. Exposure to third party damage must also be carefully
examined.

2. Rating structure

In the opinion of most experienced professional reinsurers who control very

large portfolio of engineering insurance, the overall experience of “CAR”
portfolio as against EAR business has been unsatisfactory and prudent

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underwriting is called for especially in regard to roads, pipelines, all wet risks,
tunneling and contractor’s plant.
It is imperative therefore that adequate premium is charged; excess levels both
for normal and major perils are adequate and that policy conditions and special
warranties are adhered to.

As mentioned earlier in the comments on “detariffing” the CAR proposal and

policy for are standardised. Projects involving values of Rs. 2500 crores and
more are exempted from using these standard wordings & the insurers are
required to make a reference to their facultative reinsurers for special rates,
terms & conditions.

3. Installment premium

As per provisions of The Insurance Act, premium can be collected by insurer in

installments only in respect of long-term policies i.e. policies for a period of
more than twelve months. It is pertinent to note that usually the maximum
project period insured by Indian insurers is 84 months that include maintenance
period also. This limitation is mainly due to reinsurers’ terms. If the insured
contract extends beyond 84 months period, they can request special extension,
which is usually possible if reinsurers agree to allow extension.

Accordingly the facility of payment of premium in installments can be allowed

by insurer for CAR policies with periods more than twelve months.

However, as per the methodology adopted in the market, the first installment
should be larger than the other equated installments (at a frequency not less
than three months) by a percentage prescribed by insurer (usually 5% larger)
and the last installment to be paid at least six months before the expiry of the
policy. Cover commences only after payment of the first instalment.

In order to ensure uninterrupted cover it will be essential for the insured to pay
all subsequent instalments in time. The premium payment schedule is
incorporated by way of an endorsement in the policy.

4. Claims control

a) Claims under this policy may arise due to many causes, e.g. fire, riot,
flood, storm, earthquake, theft, accidental damage to the machinery
and materials at the site including constructional plant and machinery.

b) The loss may occur during the storage, transit from the storage
warehouse near the site to the place of construction, assembling or
during the maintenance period of contract. Appropriate claim form
should be used when processing claims.

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c) In order to maintain efficient claims control, it is essential that all
incidents are notified to insurers immediately so that loss assessment
can be undertaken forthwith and insurers are able to establish a realistic
claim reserves in their books.

d) Following site inspection civil engineer appointed by the insurers can

make effective recommendation regarding safe and economic repairs
and also measures to prevent recurrence.

e) Prospects of recovery must not be overlooked and the insured will be

required to actively pursue the question of recovery from the
manufacturers/suppliers depending on the terms of the contract.

f) All theft claims require careful investigation in conjunction with the

local police authority. Losses discovered only at the time of taking
inventory are not covered under the policy.

g) Salvage materials should be disposed off, preferably on “as is where is”

basis at best available prices and this will minimize the loss to a certain
extent.

h) The insurer is not liable for additional cost incurred for alterations
improvement in the contract works, if for any reason, the original design
is proved to be unsuitable.

i) It is incumbent on insured to forward to the insurer forthwith any notice

of claim received from a third party without admitting a liability. On no
account should the insured offer, admit, compromise or promise any
payment without the consent of the insurer in writing.

j) It is recommended that the insured’s instruction for reinstating the sum

insured should be sought at the time the cheque in settlement of the
claim is forwarded to him.

Test Yourself 2

In a CAR policy, what is the market practice with respect to instalment of

premium?

I. None; all instalment of premium are the same

II. First instalment of premium is the highest
III. Last instalment of premium is the highest
IV. Both first and last instalments are the highest.

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Summary

a) Contractor’s All Risks Insurance, more popularly known as CAR insurance, is

a specially designed insurance policy to protect the interests of the
principals and contractors engaged in civil engineering projects.

b) The first CAR policy is said to have been issued in 1929 to cover the
construction of Lambeth Bridge across river Thames in London.

c) CAR policy provides a virtually comprehensive cover for the entire civil
engineering projects from the time of arrival of the first lot of materials at
site, whilst the work is in progress and also during the maintenance period
thereafter.

d) The cover provided is on an ‘All Risks’ basis, i.e. every hazard which is not
specifically excluded is covered. This means that sudden and unforeseen loss
or damage occurring during the period of insurance to the property insured
on the construction site will be indemnified.

e) CAR policy provides cover from the time of arrival of the first consignment
of materials at the site or from the commencement of work, whichever is
earlier.

f) In case of any damage which can be repaired, the Insurers’ Liability will be
the cost of repairs necessary to restore the property to its condition before
the occurrence of the damage less the value of salvage.

g) As per provisions of The Insurance Act, the facility of payment of premium in

installments can be allowed by the insurer for CAR policies with periods
more than twelve months.

h) As per the methodology adopted in the market, the first premium

installment should be larger than the other equated installments at a
frequency of not less than three months and the last installment to be paid
at least six months before the expiry of the policy.

i) Claims under CAR policy may arise due to many causes, e.g. fire, riot, flood,
theft, accidental damage to the machinery and materials at the site. In
order to maintain efficient claims control, it is essential that all incidents
are notified to the insurers immediately.

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Answers to Test Yourself

Answer 1

The correct answer is III.

In CAR policy, sudden and unforeseen loss or damage occurring during the
period of insurance to the property insured on the construction site are
indemnified as it is on ‘All Risk’ basis. Hence, option III is incorrect.

Answer 2

The correct option is II.

In a CAR policy, as per the market practice, the first installment is the highest.

Self-Examination Questions

Question 1

From when does the period of insurance cover start in a CAR policy?

I. From the time of arrival of the first consignment of materials at the site
II. From the commencement of work
III. From the time of arrival of the first consignment of materials at the site or
from the commencement of work, whichever shall be the first.
IV. From the time the proposal is accepted by the insurer.

Question 2

Which of the following is incorrect with respect to the sum insured in a CAR
policy?

I. In respect of construction, plant, machinery and equipment, the sum

insured should represent the new replacement value of each item to be
covered.
II. In the event of loss or damage, if it is found that the sum insured is less than
the amount required to be insured, then the amount recoverable by the
insured gets reduced in such proportion as the sum insured bears to the
amount required to be insured.
III. The Material Damage sum insured must be equal to the estimated
completely erected value of the contract works inclusive of materials,
wages, supervision costs, freight, customs duties and items supplied by the
Principal.
IV. The insured cannot make changes in the sum insured in the event of any
material fluctuation in the level of wages or prices.

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Question 3

Which of the following maintenance covers can be obtained by the insurer to

cover the loss or damage to the contract works solely caused by the insured
contractor in the course of operations carried out for the purpose of complying
with his obligations under the maintenance provisions of the contract?

I. Maintenance visits cover

II. Extended maintenance cover
III. Operational maintenance cover
IV. Allowance maintenance cover

Question 4

Which of the following maintenance covers can be obtained by the insurer to

cover for loss or damage occurring during the maintenance period provided such
loss or damage was caused on the site during the construction period.

I. Maintenance visits cover

II. Extended maintenance cover
III. Operational maintenance cover
IV. Allowance maintenance cover

Question 5

As per the Insurance Act, what should be duration of the CAR policy for which
‘premium in instalments’ can be collected by the insurer?

I. More than 6 months

II. More than 12 months
III. More than 18 months
IV. More than 5 years

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Answers to Self-Examination Questions

Answer 1

The correct option is III.

The period of insurance cover starts in a CAR policy from the time of arrival of
the first consignment of materials at the site or from the commencement of
work, whichever shall be the first.

Answer 2

The correct option is IV.

The insured can increase or decrease the sum-insured in the event of any
material fluctuation in the level of wages or prices. Hence, statement IV is
incorrect.

Answer 3

The correct option is I.

Maintenance visit cover can be obtained by the insurer to cover loss or damage
to the contract works solely caused by the insured contractor in the course of
operations carried out for the purpose of complying with his obligations under
the maintenance provisions of the contract.

Answer 4

The correct option is II.

Extended maintenance cover can be obtained by the insurer to cover for loss or
damage occurring during the maintenance period provided such loss or damage
was caused on the site during the construction period.

Answer 5

The correct option is II.

As per the Insurance Act, premium can be collected by the insurer in

instalments only in respect of long-term policies, i.e. policies for a period of
more than twelve months.

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CHAPTER 6

ERECTION ALL RISKS (EAR) INSURANCE AND MARINE

CUM ERECTION (MCE) INSURANCE

Chapter Introduction

In this chapter, you will learn about the features of Erection All Risks (EAR)
Insurance and Marine-cum Erection (MCE) Insurance policies.

Learning Outcomes

A. Erection all risks (EAR) insurance

B. Marine–cum erection (MCE) Insurance

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A. Erection all risks insurance

a. Introduction

a) Need for erection all risks (EAR) insurance

The Erection All Risks (EAR) insurance policy was developed from the
Contractor’s All Risks (CAR) insurance policy, taking into account the
specific needs in connection with the installation / erection of electrical and
mechanical plant and machinery, especially related to their testing and
commissioning after installation.

Thus, whereas the CAR insurance caters to the needs of contracts involving
civil engineering works, the EAR insurance caters to the needs of contracts
involving erection of plant, machinery, equipments and structures involving
little civil engineering work like foundations of machines. The EAR insurance
policy was earlier known in India as Storage-cum-Erection (SCE) insurance
policy, but currently, it is a common practice to term it as an EAR policy.

b) Need for marine-cum-erection (MCE) insurance

The contracts for machinery installation are invariably accompanied with

supply of machinery, which involves transportation of machinery from the
manufacturer’s / supplier’s premises to the site of erection. Traditionally,
the transportation risk is covered under marine cargo insurance policy for
both the imported and indigenously procured machinery. However, the need
of the project principals and the contractors is to avail of a continuous
uninterrupted insurance cover including both the Marine and EAR coverages.
The Indian insurers therefore, devised a combined marine-cum-Erection
(MCE) insurance policy to take care of this need. In recent times, a simple
marine policy and EAR policy when taken together for a specific project also
allow a seamless cover. It is essential that these policies reflect the
combined purpose of coverage of transportation for the specific project
which is covered under the specific EAR policy in order to be seamless.

c) Need for contract works (CW) Insurance

Some contracts involve both: the civil engineering works and machinery /
equipments to a substantial degree and require an insurance package
combining the covers offered by both the CAR and EAR insurance policies.
The Contract Works (CW) insurance takes care of this requirement. Indian
market doesn’t provide CW insurance as a practice.

The EAR/SCE and MCE insurances are discussed in more detail in this
chapter.

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b. Features of erection all risks (EAR) insurance

a) Erection all risks - Object

EAR policy provides virtually a comprehensive cover for the entire project of
installation / erection of machinery and equipments, from the time of
arrival of the first lot of materials at site and terminates on completion of
erection / testing /commissioning or the plant is taken over, whichever shall
occur earlier and during the maintenance period thereafter.

The cover provided is on an ‘All Risks’ basis i.e. every hazard is covered
which is not specifically excluded. This means that any sudden and
unforeseen loss or damage occurring during the period of insurance to the
property insured on the site of erection will be indemnified.

The interests of the principal may be included under the terms of the
contract but during the maintenance period the cover is restricted to loss or
damage for which the contractors are liable according to contract
conditions. The policy can also be taken by the principal in the joint names
of the principal, all other contractors / sub-contractors and the project
financiers.

b) Scope of cover

i. Section I - Material damage

As mentioned earlier the policy coverage is on an ‘All Risks’ basis. Normally,

the EAR insurance policy covers the following perils:

i. Fire and lightning

ii. Riot, strike, malicious and terrorism damage
iii. Theft and burglary
iv. Acts of God: i.e. Earthquake (fire and shock), Landslide / Rockslide /
Subsidence, Water damage, flood, inundation , storm, tempest,
hurricane, tornado, typhoon, cyclone
v. Impact from falling objects, collision
vi. Tearing apart on account of centrifugal forces
vii. Failure of safety devices
viii. Carelessness, negligence, faults in erection
ix. Short circuiting, arcing or similar electrical or mechanical breakdowns
during the time of testing including explosion of any kind

ii. Section II - Third party liability

The legal liability to third parties for property damage or personal injury can
be covered in conjunction with the material damage cover under EAR

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insurance policy. The third party liability is covered under a separate
section of the policy, so titled.

c) Exclusions

The cover provided by EAR insurance is only subject to a few exclusions

which International insurance markets usually applys. These are normally
termed as uninsurable risks. These exclusions are named in the policy and
essentially comprise of the following:

i. General exclusions (applicable to all sections)

 Loss or damage due to war or warlike operations, civil commotion,

etc.
 Loss or damage due nuclear reaction, radiation or radioactive
contamination
 Loss or damage due to wilful act or wilful negligence of the insured
or of his representative
 Cessation of work whether total or partial.

ii. Exclusions to Section I – Material damage

 An amount prescribed as Excess in the policy, which is to be borne by

the insured in respect of each and every claim
 Loss discovered only at the time of taking an inventory
 Loss or damage due to normal wear and tear, gradual deterioration
due to atmospheric conditions or lack of use, rust, scratching of
painted or polished surface or breakage of glass
 Loss or damage due faulty design, defective material or casting, bad
workmanship, other than faults in erection. However this exclusion is
limited to the items immediately affected and is not deemed to
exclude loss or damage to other items resulting from such excluded
perils
 The cost necessary for rectification or correction of any error during
erection unless resulting in physical loss or damage
 Loss of or damage to files, drawings, accounts, bills, currency,
stamps, deeds, notes, securities, cheques and the like
 Packing materials such as cases, boxes, crates.
 Consequential loss of any kind or description, penalties, lack of
performance
 Loss of or damage to vehicles licensed for general road use,
waterborne vessels, machinery / equipment mounted or operated or
fixed on floating vessel / barge / craft or aircraft

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iii. Exclusions to Section – II (Third party liability)

 The amount of excess mentioned in the Schedule of the policy to be

borne by the insured per property damage claims.
 Expenditure incurred in doing or redoing or making good or repairing
replacing anything covered or coverable in Section I of the policy.
 Liability consequent upon:

 Bodily injury or illness of employees or workmen of the insured or

members of their families
 Property belonging to or held in care by the insured or his
employees
 Any accident caused by vehicles licensed for general road use or
by waterborne vessel or aircraft
 Any agreement by the insured to pay any sum by way of an
indemnity or otherwise, unless such liability would have attached
in absence of such agreement

d) Period of insurance

i. Policy period

EAR policy provides cover from the time of arrival of the first consignment
of materials at the site or from the commencement of work, whichever shall
be the first, and shall remain in force until the date specified in the policy
or the completion of erection, testing and commissioning or the contract
works are taken over by the principal, which ever shall occur first.

However phased handing over is quite common in those contracts where

more than one separately identifiable plant sections are covered under the
same policy. The liability of the insurer ceases for that section of the work
taken over/put into use by the principal, whereas the cover continues for
balance of the work remaining to be completed.

In EAR insurance it is quite common for the contractors to take out cover
during the maintenance period (also known as Defects Liability Period) to
fulfil their obligations under the contract. Such maintenance period is
usually 12 months but may vary depending on the type of contract work.
However since the operational insurance covers also start with the
commencement of the maintenance period, the insurers do not prefer to
allow very long maintenance periods.

It will be necessary to show the storage and erection period, testing period
and the maintenance period separately in the policy. This will enable the
insured to more readily realise the need for requesting an extension of the
policy period either for the erection period or for the testing period, in the

81
event of non-completion of the relevant activities within the selected
period.

ii. Testing period

The testing period is normally the most hazardous period for plant and
machinery. Not only are the various items subjected to operating conditions
and load for the first time but for many types of plant the introduction of
feedstock or the operating media also increases both the fire and explosion
hazards (e.g. Petroleum Refineries, Petrochemical Plants etc.).

Testing operations can be divided into two categories: cold testing and hot
testing. In order to determine the testing, period for purpose of the EAR
policy, following definitions may be found useful:

Definition

Cold testing

The cold testing (functional testing) is the checking of parts and elements of
insured property by mechanical, electrical, hydrostatic, or other forms of
testing under ‘no load’ conditions. Cold testing excludes the operation of
furnaces or the application of any direct or indirect heat, the use of feedstock
or other materials for processing. In electrical power stations cold testing
excludes connections to a grid or other load circuits of electrical generating,
transforming, converting or rectifying equipment.

Definition

Hot testing (operational and commissioning tests)

The checking of parts, elements and /or production lines of insured property
under full or partial load and normal or simulated operating conditions including
the use of feedstock or other material for normal processing or other media for
load simulation. In electrical power stations, hot testing means checking after
connection to a grid or other load circuit of electrical generating, transforming,
converting or rectifying equipment.

Commissioning tests / acceptance tests shall mean operation of insured

property under production conditions for the purpose of attaining specification
requirements on both the quantity and quality.

Cold testing period is generally treated as a part of the normal or erection

period and does not worry the insurers. However, hot testing period is very
relevant for the insurers.

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The Works Contract may use the terms ‘hot test’, ‘operational test’,
‘commissioning test’ or ‘acceptance test’ to indicate the period during which
the plant is exposed to full load conditions for the first time. Since the insurer is
confronted with a period of considerably increased risk, a higher rate and
Excess is applied for the testing period and its extensions.

A diagrammatic expression for a project build-up, adapted from Swiss Re is

reproduced below

* Source: Adapted From Swiss Re Presentation

e) Sum insured and under-insurance

The provisions regarding sum insured and under-insurance are the same as
under CAR policy. See paragraph 11 of Chapter 5

f) Adjustment of sum insured

The sum insured under the policy is adjustable at the end of the policy
period / completion of testing / commissioning on the basis of actual values
to be declared by the insured in respect of freight and handling charges,
custom dues and construction costs and difference in premium to be suitably
adjusted. However any increase or decrease in the prime cost of materials is
not subject to premium adjustment.

g) Reinstatement of sum insured

In the event of a loss or damage, the sum insured stands reduced by the
amount of claim. In order to maintain the “estimated completely erected
value” in force during period of insurance, the sum insured needs to be
reinstated by payment of additional premium for the balance period, from
the date of loss to the policy expiry date, on pro-rata basis.
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h) Supplementary Covers

In addition to basic cover mentioned above the following supplementary

covers can be included, if required by insured:

i. Construction machinery, plant and equipment required for the project

(such as cranes, winches, welding machines, concrete mixing machines,
compressors etc.)
ii. Cost incurred in the clearance and removal of debris of the insured
property following a loss.
iii. Damage to existing property of the insured at the site
iv. Additional expenses incurred for overtime, work on public holidays as
well as express freight, air freight etc.
v. Legal liability for property damage or bodily injury suffered by third
parties caused by accidents at the project site and connected with
erection work being carried on
vi. A provision for escalation in value to take care of inflationary trends
vii. Temporary works or temporary structure at the project site
viii. Additional expenses incurred for air freight in connection with loss
indemnifiable under the policy.
ix. Additional custom duty incurred over and above the custom duty taken
into account in arriving at the sum insured of the affected item

All the above supplementary covers are included in the policy by way of
specific endorsements. An individual ‘limit of indemnity’ has to be
selected-either in amounts or in percentage – against each extension and the
insurers will charge suitable additional premium for the same.

It may be noted that all the above extensions get automatically terminated
upon taking over of the completed works by the principal and do not
continue during the maintenance period. Endorsements for each of these
supplementary covers are included in subsequent chapter for better
understanding of the coverage and terms and conditions.

i) Maintenance cover

Maintenance Visits Cover or Extended Maintenance Cover are the two

alternatives which can be obtained by the insured to cover loss or damage to
the permanent contract works occurring during the maintenance period. The
details of these two coverages are as under.

i. Maintenance visits cover

This is also known as ‘Limited Maintenance’ cover. It covers loss or damage

to the Contract Works solely caused by the insured contractor in the course

84
of operations carried out for the purpose of complying with his obligations
under the maintenance provisions of the contract.

ii. Extended maintenance cover

In addition to the maintenance visits endorsement (i.e. loss or damage to

contract works caused by the insured contractor(s) in the course of
operations carried out for the purpose of complying with obligations under
maintenance provisions of the contract) this endorsement covers loss or
damage occurring during the maintenance period provided such loss or
damage was caused on the site during the construction period.

j) Extension of period of insurance

The period of insurance under the EAR policy terminates at the latest on the
expiry date specified in the policy scheduled. At the request of the insured,
the insurer may extend the period of insurance on payment of appropriate
additional premium. Such extensions in the period may be required either in
the overall policy period or the testing period within or beyond the policy
period. However, before granting any extension a detailed investigation as
to the cause of the delay is made by the insurers.

Basis of indemnification

This clause is the same under CAR policy. See paragraph 17 of Chapter 5.

l) Excess (Deductible)

It is very common on a work site that numerous small incidents take place,
which cause loss or damage. Claiming indemnity for each such small loss
may unduly increase the administrative costs for the insurer and the
insured.

Also, since occurrence of such small accidents is incidental to handling the

contract, the contractors often leave some margin in the contract price for
the same. The insurer in turn desires that the contractor will be more loss
prevention minded if a reasonable proportion of their losses remains self-
insured. From their own experience of insuring comparable contracts, the
insurer would prescribe certain minimum level of excess amounts for
different types of perils or losses.

As per prevailing practice in the Indian insurance market, separate excesses

are prescribed for:

 Storage and erection claims,

 Testing and maintenance period claims,
 Fire claims,

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 Acts of God Perils,
 Fire claims,
 Collapse and Works in water,
 Maintenance period claims

The minimum excess amounts prescribed by the insurer are generally

termed as normal excess and discounts in premium will be available for the
insured selecting excess amounts higher than the normal.

m) EAR policy – Composition

The EAR policy is composed of the following:

 The Material Damage section, covering accidental physical damage to

the work and stored materials and to the contractor’s plant.
 The Third Liability Section, covering material damage and personal
injury inflicted on third parties.
 The Schedule: listing all policy data relevant to the two sections
 The General Conditions and Exclusions found in almost all property
insurance policies
 Endorsements for selected supplementary covers

n) Assessment of risks and technical control

In order to assess the risk that is proposed for “EAR” insurance the insurers
obtain information through the standard proposal form and special
questionnaires relating to specific information which will vary between and
be more appropriate to different types of plants and machinery. Systematic
underwriting is of utmost importance towards technical control of the EAR
risks. Systematic underwriting involves the following steps:

i. Checking the proposal form and questionnaire to ensure that the risk
information is complete. Most of the times documents like site plans,
extracts from the Works Contracts and other project documentation will
be required to understand:

 The obligations of each party under the contract,

 Risks to be borne by each party,
 Insurance requirements,
 Types of tests, testing methods and procedures,
 Defects Liability / maintenance warranties.

ii. Evaluating the information with systematic risk assessment methods.

This will involve understanding of:

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 Break down of values into major items including landed cost of
imported and indigenous machinery, custom duties, erection costs,
civil works and other supplementary covers
 Understanding the exposures from Acts of God perils,
 Duration of exposure for storage, construction / erection and testing
plus maintenance risks. Fires on project sites have produced large
losses for insurers the world over and fire prevention / protection on
the site during the period of erection should be carefully considered
 The technical risk of the erection job together with verification
whether the plant / machinery is of new design or already proven on
some other projects elsewhere
 Previous experience of the contractors / sub-contractors on similar
projects.

iii. Deciding on the acceptance and rates / terms of cover and

iv. Deciding on the insurance company’s own retention and reinsurance

o) Rating structure

In the international market professional reinsurers follow their own rating

pattern and rates may vary considerably depending on the nature of the
project, location, size, period of insurance, contractors’ experience, the
excess amounts etc. plus the condition prevailing in the reinsurance
market, whether the market is “soft” or “hard”.
In a “soft” market the rates and terms may be of a lower degree as the
reinsurers have not suffered any major losses in the immediate past; the
conditions in the “hard” market being opposite to this.

As mentioned earlier in the comments on “detariffing” EAR proposal and

policy form are standardised. Projects involving values of Rs. 2500 crores
and more are considered as Mega Risks and exempted from using these
standard wordings. Such proposals can be Reinsurance or Fac driven i.e. the
insurers may make a reference to their facultative reinsurers for wordings,
rates, terms and conditions.

p) Instalment premium

The provisions and the methodology adopted in the market is the same for
CAR policy. See paragraph 21 of Chapter 5.

q) Claims control

Claims control procedures under this policy are the same as for CAR
insurance. See paragraph 22 of Chapter 5.

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Test Yourself 1

In an Erection All Risk (EAR) Insurance Policy, the provisions related to material
damage are covered under ___________

I. Section I
II. Section II
III. Section III
IV. Section IV

88
B. Marine–cum erection (MCE) insurance

a. Need for marine-cum-erection (MCE) insurance

Traditionally, the transportation risk is covered under the marine cargo

insurance policy for both the imported and indigenously procured machinery
and equipments for the project.

However, the need of the project principals and the contractors is to avail of a
continuous uninterrupted insurance including both the Marine and EAR
coverages. The combined marine-cum-erection insurance policy in the Indian
market is well suited to take care of this need to offer comprehensive seamless
cover.

In the international scenario, practices of insurers and reinsurers vary. The

facility of such combined cover is normally arranged by the insurers only for
substantially large project values, wherein the insurer offers combined cover to
the insured and arranges proper reinsurance separately.

Nevertheless, demand for such combination covers is ever increasing and Munich
Reinsurance Company has introduced the Comprehensive Project (CP)
Insurance Policy as recommended wordings for use by their own clients – the
insurance companies.

Use of such international standard wordings facilitates avoiding ambiguities and

arranging reinsurance in a more effective manner. The CP insurance wordings of
Munich Re are discussed in detail in chapter 18. Following discussion is,
therefore, restricted to the India MCE insurance policy.

b. Scope of cover

Marine cum erection cover is the most comprehensive insurance cover for a
project during execution period. The scope of cover is on all risks basis at
various stages viz.

a) Marine voyage for imports

b) Offloading at ports / storage at ports or other intermediate places like a

bonded warehouse, fabricator’s workshop etc.

c) Inland transit – to the site of erection including any transhipments and

intermediate storages\

d) Unloading, storage, handling, shifting, installation / erection at the site

of erection

e) Testing and commissioning at the site of erection

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Marine insurance coverage of the policy for the project cargo is as per the
internationally accepted Institute Cargo Clauses drafted by ILU (Institute of
London Underwriters).The scope of cover under these Clauses is on “all risks of
physical loss or damage” followed by a few obvious exclusions. These exclusions
are:

i. Inherent vice, delay

This particular exclusion is mainly for perishable commodities and is not

relevant to the plant and machinery.

ii. War risk

This is duly covered during Marine Voyage; however as per international

practice damage by nuclear weapons is excluded.

iii. Insufficiency or inadequacy of packing

You should inform your supplier in advance that the packing should be
adequate to protect the goods against normal hazard of transit and
handling. The purpose of this exclusion is to encourage good packing and
reduce losses.

iv. Unseaworthiness of vessel, financial default by ship-owners

This exclusion can be avoided by selecting reputed shipping company and

also first class vessels classified as per the Lloyd’s Register or other
classified societies.

v. Ordinary leakage, loss in weight and contamination

This exclusion mainly applies to oil and petroleum products and would not
be applicable to plant and machinery.

It can therefore be observed that the exclusions under the Marine Insurance
Clauses are mainly to encourage loss minimisation and not to avoid any
unforeseen eventualities on which the Insured does not have any control.

Marine cum Erection Insurance Policy, can offer wider cover than what is
provided in the standard Institute Cargo Clauses, by allowing certain
modifications to the style of writing Marine cover mainly in respect of
following two aspects:

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a) 60 days storage limitation clause appearing in institute cargo clauses

The Institute Cargo Clause mentions that after offloading the imported
goods from the vessel / aircraft, Marine policy shall be in force for a
maximum period of 60/30 days respectively. Thus on account of say, strikes
in port or delay in inland transit, the Marine insurance policy would
terminate after 60/30 days limitation gets over. Similarly, the limitation of
7 days applies to inland transit of indigenously procured materials.

The above position can be modified in a Marine cum Erection insurance. The
60/30 days limitation clause and also 7 days limitation clause for indigenous
equipments can be completely deleted on payment of agreed extra premium
at commencement of insurance or the limitation period can be extended for
a particular consignment by payment of additional premium on individual
basis.

b) Storage at Intermediate Warehouse / Fabricator’s Workshop

As per the institute cargo clauses a marine policy would expire as soon as
the equipments are delivered to an intermediate warehouse or sent to a
workshop for additional work say, fabrication or lining of a vessel etc. Such
storage risk at the fabricator’s premises can be covered as incidental to the
marine cover.

The Marine cum Erection insurance policy, thus, provides a continuous cover
at all stages and also during storage period, during various transits if prior
information has been given in the proposal form, insurers having agreed and
the insured having paid premium accordingly.

c. MCE policy Vs. Separate marine and EAR policies

Marine Cargo insurances are sometimes arranged by the suppliers. However, in

so far as the principal / owner is concerned, there are certain disadvantages in
having more than one separate policies for transportation of different project
materials to the site. The suppliers’ policy may be an open cover with cover not
matching with the owner’s requirements and owner having no control.

Even if the principal / owner take separate policies for Marine and EAR, there
will be certain disadvantages as compared to a single combined MCE policy.
Major points of comparisons between separate policies for Marine and EAR
against a combined Marine cum Erection (MCE) insurance policy, are given
below for easy reference
i. Where two separate Marine and EAR policies are taken, inspection of
equipments at the port of entry is essential before Storage-cum-Erection
/ EAR policy is to be given by an Indian insurer. The inspection costs are
to be borne by the insured. The need for such inspections does not arise

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under a combined MCE policy as the same insurer offers continuous
cover.

ii. If any damages are observed during the inspection or the inspection
formalities are delayed for some reasons, the Indian insurer may not be
able to immediately confirm cover. Such a gap in cover will not occur in
a MCE policy.

iii. In respect of the imported project materials insured by a foreign supplier

upto port of entry in India, the Indian project owner will have to take
additional policies for covering Customs Duty and inland transit
insurance upto site of erection, which will involve additional premium.
The need for such additional policies is eliminated under a MCE policy.

iv. Damages which are detected at a much later stage during storage but
can be attributable to the Marine Cargo policy, cannot be recovered as
that policy has already expired. Such a gap in cover will not occur under
the MCE policy which offers continuous cover. Secondly, disputes may
arise in such cases as to which policy (i.e. whether marine or EAR) should
pay such claim. Such a situation will not occur under a MCE policy as it
offers a continuous cover.

v. Premium for the combined MCE policy will be cheaper than the total of
premiums for separate policies.

a) Sum insured and underinsurance

i. Marine

The practice of the Marine department is in no way altered under MCE

policy. The sum insured to be declared by the insured should correspond to
the CIF (cost, insurance, freight) value plus 10% plus Custom Duty amount.
Since this on declared value basis, there is no ‘underinsurance’.

ii. EAR

The Material Damage sum insured should be equal to the estimated

completely constructed value of the contract works inclusive of materials,
wages, construction costs, freight, customs duties and items supplied by the
Principal. The sum insured should represent the new replacement value. The
insured can increase or decrease the sum-insured in the event of any
material fluctuation in the level of wages or prices. However, the sum
insured need not include costs incurred for development of site, land
development, technical consultation fees, designer’s fees which are not
recurring in nature i.e. these costs will not be required to be incurred again
in the event of repairs / replacements after an accident on the site of
erection.

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In respect of construction plant, machinery and equipments the sum insured
should represent the new replacement value of each item to be covered.

In the event of loss or damage, it is found that the sum insured is less than
the amount required to be insured, then the amount recoverable by the
insured gets reduced in such proportion as the sum insured bears to the
amount required to be insured. This condition applies separately for each
and every item.

A separate limit of liability is to be selected by the insured for Third Party

Liability.

b) Excess under MCE policy

i. Marine Claims

In the normal course there is no Excess applied for marine claims for general
cargo. However, in respect of a project, position will vary depending on the
type of machinery / equipment, overall transportation plan, transhipments
and intermediate storages, loading / unloading facilities etc. It is not
uncommon to find an Excess amount specified for marine claims under cargo
policies for project materials.

ii. EAR claims

The Excess under EAR section are the same as for a separate EAR policy i.e.
separate excesses are prescribed for:

Storage and erection claims:

 Testing and Maintenance period claims,

 Fire claims,
 Acts of God Perils,
 Fire claims,
 Collapse and Works in water,
 Maintenance period claims

The minimum excess amounts prescribed by the insurer are generally

termed as normal excess and discounts in premium will be available for the
insured selecting excess amounts higher than the normal.

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d. Underwriting and rating considerations

For the purpose of MCE policy, the factors relating to marine need to be
considered in addition to those for the EAR portion. Such considerations would
be:

 Country of origin of the project machinery

 Mode of packing
 Particulars of voyage
 Mode of inland transit including transhipments, if any.
 Particulars of fragile items like refractory materials, glass material etc.
and their value
 Limits per sending
 Details of barge shipments, if applicable etc.

e. Rating

The rates and Excess for marine cargo insurance of project materials – both
imported and indigenous depend upon the type and value of cargo involved. The
EAR rating considerations remain the same as explained earlier under
description for EAR insurance.

Test Yourself 2

The ICC’ A’ mentions that after offloading imported goods from the vessel, the
Marine policy shall be in force for a maximum period of ___________.

I. 15 days
II. 30 days
III. 45 days
IV. 60 days

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Summary

a) The EAR policy provides a virtually comprehensive cover for the entire
project of installation / erection of machinery and equipment, from the
time of arrival of the first lot of materials at site and terminates on
completion of erection / testing /commissioning or the plant is taken over,
whichever shall occur earlier, and also during the maintenance period
thereafter.

b) In an EAR Policy, Section I covers the provisions related to material damage

and Section II covers provisions related to Third Party Liability.

c) The cover provided by EAR insurance is only subject to a few exclusions

(uninsurable risks) which the International insurance market usually applies.

d) General exclusions, Exclusions to Section I (Material Damage) and Exclusions

to Section II (Third Party Liability) are specified.

e) EAR policy provides cover from the time of arrival of the first consignment
of materials at the site or from the commencement of work, whichever shall
be the first, and shall remain in force until the date specified in the policy
or the completion of erection, testing and commissioning or the contract
works are taken over by the principal, whichever shall occur first.

f) The cold testing (functional testing) is the checking of parts and elements of
insured property by mechanical, electrical, hydrostatic, or other forms of
testing under ‘no load’ conditions.

g) The hot testing (operational and commissioning tests) is the checking of

parts, elements and /or production lines of insured property under full or
partial load and normal or simulated operating conditions including the use
of feedstock or other material for normal processing or other media for load
simulation.

h) In an EAR policy, in the event of a loss or damage, the sum insured stands
reduced by the amount of claim.

i) In an EAR policy, in addition to basic cover, supplementary covers can be

included if required by the insured.

j) Maintenance Visits Cover, also known as ‘limited maintenance’ cover, covers

loss or damage to the Contract Works solely caused by the insured
contractor in the course of operations carried out for the purpose of
complying with his obligations under the maintenance provisions of the
contract.

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k) Extended Maintenance Cover endorsement covers loss or damage occurring
during the maintenance period, provided such loss or damage was caused on
the site during the construction period.

l) In an EAR policy, the rates may vary depending on the nature of the project,
location, size, period of insurance, contractors’ experience, the excess
amounts etc.

m) The Marine-Cum Erection insurance policy provides continuous uninterrupted

insurance including both the Marine and EAR coverage.

n) Marine cum Erection Insurance Policy can offer wider cover than what is
provided in the standard ICC “A” Clause, by allowing certain modifications
to the style of writing marine cover mainly in respect of the following two
aspects:

 60 Days Storage Limitation Clause appearing in Institute Cargo Clauses

and
 Storage at Intermediate Warehouse / Fabricator’s Workshop.

o) In respect of imported project materials insured by a foreign supplier up to

port of entry in India, the Indian project owner will have to take additional
policies for covering Customs Duty and inland transit insurance upto site of
erection, which will involve additional premium. The need for such
additional policies is eliminated under an MCE policy.

p) For the purpose of underwriting and rating considerations of MCE policy, the
factors relating to marine insurance need to be considered in addition to
those for the EAR portion.

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Answers to Test Yourself

Answer 1

The correct option is I.

In an Erection All Risk (EAR) Insurance Policy, the provisions related to material
damage are covered under Section I.

Answer 2
The correct option is IV.

The ICC ‘A’ mentions that after offloading imported goods from the vessel, the
marine policy shall be in force for a maximum period of 60 days.

Self-Examination Questions

Question 1

In an Erection All Risk (EAR) Insurance Policy, the provisions related to third
party liability are covered under ___________.

I. Section I
II. Section II
III. Section III
IV. Section IV

Question 2

In EAR insurance, the contractors may take out cover during the maintenance
period to fulfil their obligations under the contract; such maintenance period is
usually ____________, but may vary depending on the type of contract work.

I. 6 months
II. 12 months
III. 18 months
IV. 24 months

Question 3

In EAR insurance, the contractors may take out cover during the maintenance
period, which is also known as _____________.

I. Defects Liability Period

II. Testing Period
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III. Transition Period
IV. Handover Period

Question 4

Cold testing is the checking of parts and elements of the insured property by
mechanical or other forms of testing under __________ conditions.

I. Full load
II. Partial load
III. No load
IV. Extreme Load

Question 5

The _____________ is more popularly known in India as Storage-cum-Erection

(SCE) Insurance Policy.

I. Marine-cum-Erection (MCE) Insurance Policy

II. Erection All Risk (EAR) Insurance Policy
III. Contractor’s All Risk (CAR) Insurance Policy
IV. Contract Works (CW) Insurance Policy

Answers to Self-Examination Questions

Answer 1

The correct option is II.

In an Erection All Risk (EAR) Insurance Policy, the provisions related to third
party liability are covered under Section II.

Answer 2

The correct option is II.

In EAR insurance, the contractors may take out cover during the maintenance
period to fulfil their obligations under the contract. Such maintenance period is
usually 12 months but may vary depending on the type of contract work.

Answer 3

The correct option is I.

In EAR insurance, the contractors may take out cover during the maintenance
period which is also known as Defects Liability Period.

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Answer 4

The correct option is III.

Cold testing is the checking of parts and elements of insured property by

mechanical or other forms of testing under no load conditions.

Answer 5

The correct option is II.

The Erection All Risk (EAR) Insurance policy is more popularly known in India as
Storage-cum-Erection (SCE) Insurance Policy.

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CHAPTER 7

CONTRACTS WORKS (CW) INSURANCE

Chapter Introduction

This chapter discusses large projects which cannot be insured with either EAR or
CAR polices, and is insured under contracts work insurance.

The chapter then provides a format of questionnaires and proposal forms that
are used for collecting information for underwriting purposes, in order to
provide a better understanding of the policy to the readers.

Learning Outcomes

A. Contract works (CW) insurance

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A. Contract works (CW) insurance

1. Contract works

The term “Contract Works” insurance is used in different insurance markets for
different types of policies. It is pertinent to note that CW insurance is not sold
in the Indian market, but it is essential to understand the basics of such a
policy.

The British market normally uses this term for open Annual Floater policies for
contractors who normally undertake construction works of similar nature in
sufficiently large numbers.

Example

a) Dwellings,

b) Apartments,

c) Residential units like row houses/ bungalows,

d) Commercial buildings and the like.

Effecting a separate CAR policy for each contract becomes administratively

cumbersome and inconvenient to handle.

On the other hand, some of the European insurers/reinsurers use this term for a
special cover which is combination of CAR and EAR insurances to suit the needs
of projects involving substantial amount of both civil construction and
machinery installation.

The Annual Floater policy is discussed in subsequent Chapter and the one
combining CAR/EAR is discussed hereunder.

2. CAR plus EAR

We have already seen that a CAR policy would be most suited for contracts
predominantly involving civil engineering works and an EAR or MCE policy would
cater to plant / machinery erection contracts.

Nevertheless, in practice we may come across some special types of contracts in

which both the civil engineering work and machinery installation work may be
of significant degree. It is a common practice in the Indian market to take an
EAR policy where both construction and erection are covered. It is also possible
to customise a CAR policy with an in-built testing commissioning section limited

101
to the machinery portion, at an extra premium. This is however specific to a
project only.

Example

Hydro-Electric project involves:

a) Heavy civil works like construction of dam, coffer dam, various tunnels,
power house building, pen stocks etc. and

b) Installation, testing and commissioning work in respect of machinery like

water turbines, electric generator, control room, transformers,
switchgear etc.

Also, both the types of work, at certain stages may require to be carried out
simultaneously and machinery parts like turbine casing are to be embedded in
civil works.

And thus, neither the EAR nor the CAR policy alone can meet insurance
requirements of the whole project. Equally separate CAR and EAR policies
would result in gaps and/or overlaps in coverage.

Under the circumstances, a composite policy named Contract Works Insurance

policy combining CAR and EAR coverage is devised. The normal terms and
conditions of the CAR and EAR policies apply to the respective works but the
combined policy helps in eliminating any gaps and overlaps in cover that would
have occurred if separate CAR and EAR policies were issued.

Some years back, Tariff Advisory Committee had adopted certain wordings for
this policy based on the standard wordings of Swiss Re. The policy includes
different sections for the sake of emphasis and clarity.

Salient features of this policy are as under:

a) Title Contract Works Insurance Policy – Building and Civil engineering

Works and Machinery Erection,

b) Preamble,

c) Policy Schedule ( Reproduced at the end of this description),\

d) General Conditions applicable to all Sections,

e) General Exclusions applicable to all Sections,

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f) Material Damage Section for Building and Civil Engineering Works
defining accident scenario, special exclusions to the Section, Period of
Insurance, Sum Insured and Loss Settlement basis,

g) Material Damage Section for Machinery Erection defining accident

scenario, special exclusions to the Section, Period of Insurance, Sum
Insured and Loss Settlement basis,

h) Reinstatement of sum insured after a claim,

i) Premium adjustment at expiry of period of insurance,

j) Third party Liability Section defining accident scenario, specific

exclusions to the Section, Period of Insurance, limit of Indemnity,

k) Special Conditions applicable to the Section,

l) Premium

The questionnaire and proposal form for collecting underwriting information is

exhaustive and is reproduced below in Table 1 for the sake of illustration and
clarity.

The Policy Schedule is reproduced below in Table 2.

Table 1:

Questionnaire and proposal form for contract works insurance

1. Building and Civil Engineering and Machinery Erection

Proposal No: ___________________

To be insured
1 Names and addresses of Parties To The Contract:
under this Policy?
1.0 Principal Yes / No
1.1 Main Contractor Yes / No
Sub- Contractor(s) …………………………….
1.2 ……………………………. Yes / No
…………………….………
Manufacturers (s) of main groups of industrial plant
1.3 Yes / No
and installations
1.4 Supervisory Firm (if engaged in project) Yes / No
1.5 Consulting Engineer Yes / No
Which of the above is the Proposer of this insurance?
1.0) 1.1) 1.2) 1.3) 1.4)
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2. LOCATION (exact identification of contract site) _____________
3. TITLE OF PROJECT ___________________________

Construction Erection

Please enclose Plant, machinery,

Civil engineering works,
General structures to be
3.0 buildings, construction
description erected, and
methods
operational processes
Main dimensions, Main operational data
Technical
3.1 capacities, design temperatures /
characteristics
specifications pressures
Main machinery, plant,
Individual values Main parts of project
3.2 structural items with
(cost breakdown) (bill of quantities)
manufacturer’s name
General layout
3.3 Main sections’ layout Main groups’ layout
drawings
Main parts showing
Main machinery, plant
Plans, cross construction type,
3.4 items
sections dimensions, construction
methods
Work progress
3.5 chart, Time
schedule
Copy of stipulations
Copy of stipulations
stating insurance
stating insurance
Tender conditions requirements,
requirements,
3.6 and/or Contract maintenance
maintenance
conditions obligations,
obligations, contractors’
contractors’
guarantees
guarantees

INSURANCE COVER DATES Duration Remarks

4. PERIOD
AND PERIODS in months
From To
Storage of machines,
4.0 material, equipment on
site before construction
starts
4.1 Construction
Storage of machines,
4.2 material, equipment on
site before erection starts
4.3 Erection
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4.4 Testing /Commissioning
Total Period from
commencement to PERIOD OF
4.41
estimated completion INSURANCE
date
Maintenance Construction
4.5
Erection
4.51 Final handing over date

Standard extensions of cover Please mark what is Aggregate

4.6
(Endorsements) desired limit Rs.
4.61 Existing Property Yes / No
Contractors’ Plant and
4.62 Yes / No
Equipment
4.63 Consequences of Faulty design
4.64 Expediting Costs
4.65 Airfreight
4.66 Riot and Strike
Maintenance (M): For Civil
Visits / Extended
4.67 Works
Visits / Extended
For Machinery
Other extensions of cover
4.7 (possibly by special
endorsement)
4.71
4.72
SUM INSURED

MATERIAL DAMAGE –
5. Detailed breakdown of values as per Rs.
separate enclosure
BUILDING AND CIVIL ENGINNERING
5.0
WORKS
Permanent works - Is it included
5.00 Yes / No
under 5.0?
Temporary works - Is it included
5.01 Yes / No
under 5.0 ?
Principal’s supplied materials- Is it
5.02 Yes / No
included under 5.0?
SUM INSURED– Building and Civil
Engineering (item 1 in the Schedule)
105
5.1 ERECTION WORKS
Principal’s supplied materials- Is it
5.10 Yes / No
included under 5.1?
SUM INSURED – Erection Works
(item 2 in the Schedule)
5.2 Clearance of Debris
5.3 Existing property as per 70
Contractors’ plant and machinery–
5.4
enclose list
Contractors’ equipment camp with
5.5
actual values
Architects’, Surveyors’ and
5.6
Consulting Engineers’ fees
TOTAL SUM INSURED 5.0 -5.6
6. EXCESS Amounts
BUILDING AND CIVIL ENGINNERING
6.0
WORKS
6.1 ERECTION WORKS
Testing/Commissioning (hot testing)
6.2
Period, Maintenance Period
6.3 Major or Special Perils
6.4 Existing Property
6.5 Contractors’ Plant and Machinery
Contractors’ Equipment, Camp with
6.6
installations
PROJECT INFORMATION –
7.
Complementary to 3 and 5
Is the project an extension of
7.01 existing plant, building, Yes / No
construction, facility?
If yes – will operation of existing
7.02 facilities continue during Yes / No
construction and erection?
Existing Property details to be  Description
7.03 Limit
attached  Layout
Previous Experience of
7.1
Manufacturer(s) or Contractor(s)
Subcontractor – Information
7.2 Subcontractors name
Previous experience

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Subcontracted work Contract value
7.3 Civil Engineering Work
Will civil engineering work be
7.31 Yes / No
completed before erection starts?
If no, for how many months will civil
7.32 engineering works be carried on in
parallel?
7.4 Exposure to Perils of Nature
Rainy season From ………To……..
7.41 month and
Max. rainfall
Distance to nearest River
7.42
(whether dry or running),Sea, Lake
Difference between Lowest plant
7.43 level: elevation and Highest Flood
Level
Maximum wind velocity Storm
7.44 frequency - high  medium 
low 
7.45 Earthquake Zone details
8. THIRD PARTY LIABILITY SECTION
8.0 Do parties to the contract have existing Third Party Liability policies
which also cover the activities for which the present insurance is
proposed?
If yes – mark: Principal  Main contractor  Subcontractors 
Supervising firm  Consulting Engineer 
Amounts:
801 Limits for bodily injury.
802 Limits for property damage
803 mits for combined (single) limit
8.1 Is Third Party Liability to be included in this policy?

Yes / No LIMITS EXCESS

Any one event deductible from property damage claims only

Limit of indemnity in respect of any one accident or series of accident arising

out of one event

811 for bodily injury – per person

I – any one event
812 for property damage any one event.
813 financial consequential losses
814 combined (single limit)

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815 aggregate limit of indemnity under the policy
8.2 Surroundings not belonging to the Insured Enclosures

Give description of exposure, size and value of  Description

neighbouring buildings, plants and installations and indicate importance of
streets (enclose maps and layout)
8.3 Cross Liability for Contract Works Period Yes  No 
Are the Insured (Contractor, Sub-Contractors, Principal) to be considered as
Third Parties amongst each other? Yes / No

We hereby declare that the statements made by us in this Questionnaire are

complete and true to the best of our knowledge and belief and we hereby agree
that this Questionnaire shall form the basis and be part of any Policy or Policies,
issued in connection with the above risk or risks. It is agreed that the Insurers
shall be liable in accordance with the terms of the Policy only and that the
Insured will not lodge any other claim of whatever nature.

Signed by the Insured on ________ this day of _____________

Signature

Table 2: CW Insurance Policy Schedule

ABC Insurance Company Limited

Contract Works Insurance Policy No. ……………

Insured: Name and Address
Site Address:
Title of Contract / Project:

Material Damage Section

Sum Excess
Item Item
Insured Rs. Rs.
Building and Civil Engineering Building and
Works including Permanent and Civil
Temporary Works Materials Engineering
supplied by Principal Works
1. Erection Works including
Permanent & Temporary Works Erection Works
Materials supplied by Principal
Estimated Total Contract Value Testing and
Commissioning
2. Clearance of Debris
Special or Major
Perils (AOG)
Limit per event
108
3. Existing Property Existing Property
4. Contractor’s Plant and Contractor’s
Machinery Plant and
Machinery
5. …………………..
6. …………………..
7. …………………..
8. Architects, surveyors and
consulting Engineer’s fees
Total of 1 - 9
Special Limits of Indemnity

9. ……………
10. ………………
11. ………………
Third Party Liability
Third party
Limit of indemnity in respect of property
any one or series of accidents Damage
arising out of one event: Any one event

1. Bodily Injury
2. Property Damage
3. Combined single limit
Period of Insurance

From………….. To………………..
……..Months
Maintenance period

From………….. To………………..
Premium
Rs.
Subject to Adjustment as per
Policy provisions
Endorsements Attached to this
Policy
…………………………………………………
…………………………………………………
………………………………………………….
Questionnaire No. …………………
signed by the Insured.
Information documents as per list
attached and forming part of the
Policy
Signed by Authorised representative of the Insurance Company
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Test Yourself 1

In which of the following countries does the term ‘Contract work’ refer to open
Annual Floater policies for contractors who normally undertake construction
work of similar nature in sufficiently large numbers?

I. The US
II. Britain
III. India
IV. Europe

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Summary

a) The term “Contract Works” insurance is used in different insurance markets

for different types of policies.

b) The British market normally uses this term for open Annual Floater policies
for contractors who normally undertake construction works of similar nature
in sufficiently large numbers.

c) European insurers/reinsurers use this term for a special cover which is a

combination of CAR and EAR insurances to suit the needs of projects
involving substantial amount of both civil construction and machinery
installation.

d) CAR policy is most suited for contracts predominantly involving civil

engineering works, and an EAR or MCE policy would cater to plant /
machinery erection contracts.

e) Composite policy named Contract Works Insurance policy combines

coverages of CAR and EAR policies; hence, a combined policy helps in
eliminating any gaps and overlaps in cover that would have occurred if
separate CAR and EAR policies were issued.

111
Answer to Test Yourself

Answer 1

The correct option is II.

The British market normally uses the term ‘contract work’ for open Annual
Floater policies for contractors who normally undertake construction work of
similar nature in sufficiently large numbers.

Self-Examination Questions

Question 1

In which of the following market does the term ‘contract work’ refer to special
cover which is a combination of CAR and EAR insurances to suit the needs of
projects involving substantial amount of both civil construction and machinery
installation?

I. The US
II. Britain
III. China, Europe

Question 2

ABC ltd is an infrastructure firm, which has been awarded a contract for
building a flyover. Which type of policies can be taken by infrastructure
companies that are involved in such civil engineering works?

I. CAR
II. EAR
III. IAR
IV. Contract works

Question 3

Which of the following policies would cater to plant / machinery erection

contracts?

I. CAR
II. EAR
III. IAR
IV. Contract works

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Question 4

ABC ltd has been awarded a contract for building a hydro electric project that
involves heavy civil work such as construction of a dam, and installation, testing
and commissioning work in respect of machinery, which at times can be
required to be carried out simultaneously.

Which of the following types of insurance policy will be most suited to ABC ltd?

I. CAR
II. EAR
III. IAR
IV. Contract works

Question 5

Which of the following statements is incorrect?

I. The term “Contract Works” insurance is used in different insurance markets

for different types of policies.
II. The European market normally uses the term ‘contract works’ for open
Annual Floater policies for contractors who normally undertake construction
works of similar nature in sufficiently large numbers.
III. A CAR policy would be most suited for contracts predominantly involving
civil engineering works.
IV. An EAR or MCE policy would cater to plant / machinery erection contracts.

Answers to Self-Examination Questions

Answer 1

The correct option is IV.

In the European market, the term ‘contract work’ refers to a special cover,
which is a combination of CAR and EAR insurances to suit the needs of projects
involving substantial amount of both civil construction and machinery
installation.

Answer 2

The correct option is I.

CAR policies are most suited to contracts predominantly involving civil

engineering works.

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Answer 3

The correct option is II.

EAR policies cater to plant / machinery erection contracts.

Answer 4

The correct option is IV.

Contract works insurance policy will be most suited to a hydroelectric project

that involves heavy civil work such as construction of dam, and installation,
testing and commissioning work in respect of machinery, which at times can be
required to be carried out simultaneously.

Answer 5

The correct option is II.

The British market (and not the European market) normally uses the term
‘contract works’ for open Annual Floater policies for contractors who normally
undertake construction works of similar nature in sufficiently large numbers.
Hence, option II is incorrect.

114
CHAPTER 8

CONTRACTOR’S PLANT AND MACHINERY INSURANCE

Chapter Introduction

In this chapter, we will discuss Contractor’s Plant and Machinery insurance,

popularly known as CPM insurance, which helps companies in protecting their
constructional tools and equipment against all external damage.

Learning Outcomes

A. Contractor’s plant and machinery insurance

115
Look at this Scenario

In March 2007, in the Czech Republic, a major accident occurred in which the
rail bed service machine got severely damaged. The accident occurred due to
the fault of the operator.

One of the rails was being lifted by the operator, but it accidentally fell down
when the arms were being moved into the rail bed. Due to this, 40 meters of
the frame structure of the machine broke down and bended towards the rail.

The estimated loss due the accident was approximately EUR 3,00,000.

Companies can protect themselves against such huge losses involved in

accidental damage of construction machinery by taking a Contractor’s Plant and
Machinery insurance policy (popularly known as CPM insurance).

Let us discuss the CPM insurance policy and its importance against CAR and EAR
polices in the chapter below.

A. Contractor’s plant and machinery insurance

1. Introduction

The large scale construction activity, as a result of economic development

leading to infrastructure and other large projects, has brought about a
tremendous development in the overall number, type and size of different plant
and machinery used by contractors on construction sites as well as in mines.

Today’s construction machinery, plant and equipment are technologically more

complex; involve huge capital investments and a different spectrum of
exposures to accidents and damages.

These machines and equipment are often used in very harsh working
environment and conditions and therefore, exposed to a larger frequency of
accidental losses involving unpredictable amounts.

The contractors are concerned about such accidents for two main reasons viz.

a) His limited fleet of machinery and equipment does not enable him to get
immediate replacements for the damaged machines and
b) He is not able to set aside sufficient financial reserves for covering such
accidental damages than the normal amount of depreciation.

As a consequence, the demand for insuring such plant and machinery has
increased. Insurers have responded to this need by offering cover under
‘Contractor’s Plant and Machinery ‘(CPM) insurance to protect the contractor

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against sudden and foreseen damage by external physical accidents to such
items.
CPM is a more popularly used terminology internationally. However some
insurers / reinsurers like Swiss Re call it as PLEQ (Plant and Equipment) or CPE
(Contractor’s Plant and Equipment) insurance. Indian insurers use the
terminology “CPM”

2. Object

All types of contractor’s plant and equipments are exposed to damage from
perils such as:

 Fire,
 Water ,
 Storm,
 Impact and perils of nature.

The object of this insurance is to protect the constructional tools and

equipment against all external damages.

The exposure of these perils commences from the time the first lot of plant and
equipment arrives at the construction site and has successfully commissioned
(in case it arrives in knock down conditions) and continues while the
construction work is in progress.

It is also permissible to insure such equipment at the project site as an item in

the schedule of EAR or CAR policy, provided the total value of construction
equipment is relatively small, in which case the period of insurance will be
concurrent to the project period. In this situation it is easier to allocate the
corresponding premium to the contract value.

However, in many cases the machinery and equipment are not required on the
same site for the entire duration of a project and contractors use them on
different sites for desired duration.

Under the circumstances it is more convenient to avail of the CPM cover on an

annual basis with declaration facility for movement on different site locations.

The annual coverage is also convenient where such plant and machinery forms
an integral part of production facility after commissioning and commencement
of commercial operations and thus remains on the same site.

3. Scope of Insurance

The standard Contractor’s Plant and Machinery Insurance introduced in the

Indian market covers damage from variety of causes including:

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a) Fire and lightning, external explosion,
b) Burglary, theft,
c) Riot, strike, malicious damage,
d) Earthquake, flood, inundation, subsidence, land slide and rockslide.
e) Storm, tempest, hurricane, typhoon and tornado.
f) Accidental damage while at work due to faulty handling dropping or
falling, collapse, collision, toppling over and impact etc.

4. Supplementary covers

The policy can also be extended to include the following additional risks:

a) Third party personal injury and property risks up to a limit of indemnity

as may be selected by the insured.
b) Expenses incurred for overtime, express freight, air freight, overtime,
holiday rates of wages, etc.
c) Cost incurred in the Clearance and removal of debris following an
accident.
d) Loss or damage to the existing surrounding property.
e) Additional customs duty.

5. Principal exclusions and other exceptions

The principal exclusions are:

a) Loss or damage occurred by war or war like operations

b) Nuclear reaction , nuclear radiation or radioactive contamination
c) Wilful act or wilful negligence on the part of the insured or his
authorised representative
d) Loss or damage due to electrical or mechanical breakdown for internal
explosions.
e) Loss or damage resulting from experiments or overload or similar tests.
f) Loss or damage to exchangeable parts and tools such as belts, ropes,
chains, blades, conveyer belts and similar other parts.
g) Loss or damage to vehicles licensed for general road use.
h) Loss or damage due to total or partial immersion in tidal water.
i) Loss or damage to the Hull and machinery of water-borne vessels or
crafts; however this exclusion does not apply to the contractor’s plant
and machinery mounted on such water –borne vessels or crafts for the
purpose of use for the contract works.
j) Loss or damage during transit from one project to another.
k) Loss or damage whilst working underground.
l) Loss or damage due to explosion of boiler and pressure vessel.
m) Loss or damage discovered at the time of taking an inventory.
n) Any kind of consequential loss.

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6. Sum insured and average

Sum insured of each individual item must represent its new replacement value
including:

 Transportation cost to site,

 Customs dues and
 All installation costs.

The current market value is not a suitable value, as it constantly changes, and
different valuation criteria and methods are possible.

In the event of loss or damage, it is found that the sum insured is less than the
amount required to be insured, then the amount recoverable by the insured
gets reduced in such proportion as the sum insured bears to the amount
required to be insured. This condition applies separately for each and every
item.

The sum insured should represent the replacement value throughout currency of
the policy and problems of inflation should be borne in mind. For this purpose
the sums insured should be reviewed at frequent intervals and, if possible,
value should be linked to an acceptable index showing fluctuation in prices.

An annual revaluation of the items of plant and machinery should also be

carried out in order to ensure that the sums insured are always kept up to date.

7. Basis of indemnification

In cases where the damage can be repaired, the basis of indemnification is the
cost of restoration to working order based on the customary daily rates together
with normal freight, erection cost and other duties and taxes.

If the value of one item or part thereof is increased by repairs, liability of

insurers is reduced by the amount of such increase. If the repairs are carried
out at a workshop owned by the insured, the insurer will pay cost of materials
and wages plus a reasonable percentage to cover overhead charges.

In such cases of all repairable damage no deduction is made for depreciation in

respect of parts replaced, except those with limited life, but value of salvage is
deducted.

Where the insured item is totally destroyed or is a constructive total loss the
basis of indemnification is market value of the item immediately before the
accident plus cost of removing the damaged machinery less value of salvage.

An insured item is regarded as totally destroyed if the repair cost as described

equals or exceeds its value immediately before the accident.

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Any extra charges incurred towards repairs, such as express freight, air-freight,
overtime and holiday rates of wages are payable only if special provision for
these items has been made in the policy in consideration of which an additional
premium is charged.

All costs of alterations, additions, improvements are to be borne by the insured

All the forgoing points are still subject to the comments contained under “Sum
Insured and Average”.

The insurers keep the option that they may repair, replace or reinstate any
property lost or damaged or pay in cash the amount payable.

8. Excess

The insurance is subject to an excess on each and every claim as prescribed

separately for:

a) Claims arising out of major perils and

b) Claims arising out of other than major perils.

This eliminates small claims which are costly and troublesome to handle, and as
such this is of benefit to both the parties. As far as the insurer is concerned this
is a useful aid to check the increasing claim cost.

9. Machinery classification

Classification of machinery and equipment will generally be on the following

lines:

a) Mobile machinery

 Earth moving machines,

 Tunnelling and mining machines,
 Road surface finishers/ rollers / compactors,
 Mobile cranes,
 Mobile material conveyors,
 Mobile power generators

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A mobile crane

Earth moving equipment

A road rolling machine (road surfacing)

b) Stationary plant

 Fixed conveyor systems,

 Concrete batching plants,
 Asphalt mixing plant,
 Tower cranes etc.

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Ready mix concrete batching plant

c) Tools and tackles

10. Underwriting considerations

The facts to be taken into account when assessing the risks are as follows:

Diagram 1: Underwriting considerations when assessing the risks

11. Technical and claims control

The contract site may be visited by engineers of the insurer in order to

ascertain prevailing conditions, hazards and to make recommendations on risk
minimisation measures and /or measures to improve the exposure hazards.

The skill of the operator is one prime consideration in assessment of hazards.

Other important factor is of course the terrain or other geological or
geophysical features of the erection sites.

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Claims under this policy may arise due to many causes, e.g. fire, riot, flood,
storm earthquake, theft, accidental damage to the contractor’s plant and
machinery. Proper claims forms should be used when processing the claims.

Insurers generally insist upon immediate notification of any claim for this class
of insurance in order that the cause and circumstances of the loss may be
ascertained and repair /replacement cost checked.

Prospects of recovery must not be overlooked and the insured will be required
to actively pursue the question of recovery from the manufacturers /suppliers
depending on the terms of the contract.

All theft claims require careful investigation in conjunction with the local police
authority.

Losses discovered only at the time of taking inventory are not covered under
the policy.

Salvage materials should be disposed of, preferably on “as is, where is” basis, at
best available prices and this will minimise the loss to a certain extent.
It is incumbent on the insured to forward to the insurer forthwith any notice of
claim received from a third party without admitting liability. On no account
should the insured offer, admit, compromise or promise any payment without
the consent of the insurer.

It is also recommended that the insured’s instructions for reinstating the sum
insured should be sought at the time the cheque in settlement of claim is
forwarded to him.

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12. Rating factors

The rates and terms will depend on the following factors:

Diagram 2: Rating factors

13. Recent trends and developments

In addition to the normal methods of insuring contractor’s plant, machinery and

equipment either as extension of CAR / EAR policies or under a separate annual
policy, a different requirement has come up from very large size contractors
handling the machinery and equipment in huge numbers as also involving
substantially high values for insurance.

In order to make the CPM insurance proposal more cost effective and
meaningful, these contractors require an annual policy on declaration basis for
total sum insured but with a specific per loss limit.

Such per loss limits can either be on the normal basis of loss settlement or on
First Loss basis. Given the volume and number of machinery / equipment, a few
policies can be found in the market which are totally reinsurance driven. In all
insurance markets of the world, such covers are written on case by case basis.

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Test Yourself 1

Contractor’ Plant and Machinery insurance is also known as ______________.

I. Plant and technology insurance

II. Contractor’s Plant and device insurance
III. Plant and Equipment insurance
IV. Contractor’s Factory and machinery insurance

Test Yourself 2

Which of the following is an example of ‘mobile machinery’?

I. Earth moving machines

II. Fixed conveyor systems
III. Concrete batching plants
IV. Asphalt mixing plants

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Summary

a) CPM insurance is also known as PLEQ (Plant and Equipment) or CPE

(Contractor’s Plant and Equipment) insurance by Swiss Re. Indian insurers
use the terminology “CPM”.

b) The object of CPM insurance is to protect the constructional tools and

equipment against all external damage.

c) In a CPM policy, the sum insured of each individual item must represent its
new replacement value, including transportation cost to site, customs dues
and all installation costs. The sum insured should represent the replacement
value throughout the currency of the policy and problems of inflation should
be borne in mind.

d) In cases where the damage can be repaired, the basis of indemnification is

the cost of restoration to working order based on the customary daily rates
together with normal freight, erection cost and other duties and taxes.

e) An insured item is regarded as totally destroyed if the repair cost as

described equals or exceeds its value immediately before the accident.
f) Claims under CPM policy may arise due to many causes, e.g. fire, riot, flood,
storm earthquake, theft, and accidental damage to the contractor’s plant
and machinery.

g) Losses discovered only at the time of taking inventory are not covered under
the CPM policy.

h) Salvage materials should be disposed of, preferably on “as is, where is”
basis, at best available prices and this will minimise the loss to a certain
extent.

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Answers to Test Yourself

Answer 1

The correct option is III.

Contractor’ Plant and Machinery insurance is also known as plant and Equipment
insurance.

Answer 2

The correct option is I.

An Earth moving machine is an example of ‘mobile machinery’.

Self-Examination Questions

Question 1

What is the main objective of CPM insurance?

I. To protect the constructional tools and equipment against all construction

damage.
II. To protect the plant and machinery against all wear and tear.
III. To protect the constructional tools and equipment against all external
damage.
IV. To protect the under construction structure against all natural perils.

Question 2

In CPM insurance, under which of the following conditions is an insured item

regarded as totally destroyed?

I. If the value of one item or part thereof is increased by repairs.

II. If the repair cost as described equals or exceeds its value immediately
before the accident.
III. If it is found that the sum insured is less than the amount required to be
insured.
IV. If the repair cost of one item of part thereof exceeds the present market
value.

Question 3

Which of the following is an example of a ‘stationary plant’?

I. Earth moving machines

II. Tunnelling and mining machines

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III. Road surface finishers/ rollers/ compactors
IV. Tower cranes

Question 4

In a CPM policy, ______________ should be disposed of, preferably on “as is,

where is” basis, at the best available prices in order to minimise the loss to a
certain extent at the time of claim.

I. Materials damaged in an accident

II. Stolen equipment
III. Losses discovered at the time of taking inventory
IV. Salvage materials

Question 5

Which of the following will not be covered in a CPM policy?

I. Theft items
II. Losses discovered at the time of taking inventory
III. Salvage materials
IV. Materials damaged in an accident

Answers to Self-Examination Questions

Answer 1

The correct option is III.

The main objective of CPM insurance is to protect the constructional tools and
equipment against all external damage.

Answer 2

The correct option is II.

An insured item is regarded as totally destroyed if the repair cost as described

equals or exceeds its value immediately before the accident.

Answer 3

The correct option is IV.

A tower crane is an example of a ‘stationary plant’.

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Answer 4

The correct option is IV.

In a CPM policy, salvage materials should be disposed of, preferably on “as is,
where is” basis, at the best available prices in order to minimise the loss to a
certain extent at the time of claim.

Answer 5

The correct option is II.

Losses discovered at the time of taking inventory will not be covered in a CPM
policy.

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CHAPTER 9

ADVANCE LOSS OF PROFIT / DELAY IN START-UP

INSURANCE

Chapter Introduction

In this chapter, we will discuss the Advance Loss of Profit (ALOP) insurance
policy, which is issued in advance of the actual commencement of business.

We will also discuss in detail the reasons this policy is always issued in
conjunction with and as an extension of EAR / CAR insurance policy.

Learning Outcomes

A. Advance loss of profits

B. Endorsements for advance loss of profits insurance

Look at this Scenario

Internationally, wind energy is being increasingly harnessed for generation of

electricity. Because of geographical conditions, Canada is able to effectively
harness this rich source of wind energy for generation of electricity, and
accordingly, several wind farm projects for generation of electricity are being
developed in the country.

However, in a major incident, an under construction power project, which was

installing wind turbines for generation of electricity, suffered major damage
due to a major tornado.
Major damage was caused to the turbines and other equipment.
Moreover, due to damage to turbines and other equipment, significant delay in
the project was anticipated while the damaged equipment was being repaired
or replaced.

In incidents such as these, ALOP polices can come to the rescue of the principal
of the project, which covers financial consequences of a delay in estimated
commercial operation date of a project, because of accidental damage to the
project materials admissible under Material Damage Section of an EAR or CAR
insurance policy.

We will discuss this policy in detail in the chapter below.

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A. Advance loss of profits

1. Introduction

Definition

“advanced loss of profits” refers to a particular class of Consequential Loss

insurance and covers financial consequences of a delay in estimated commercial
operation date (COD) of a project, because of accidental damage to the project
materials admissible under Material Damage Section of an EAR or CAR insurance
policy.

It follows in principle the characteristics of an annual Consequential Loss

insurance policy, but is issued in advance of the actual commencement of
business. It is always issued in conjunction with and as an extension of EAR /
CAR insurance policy under a separate section.

Though Marine Consequential Loss policies were fairly known for many years,
the ALOP insurance was known in the British market even before 1964.

Thereafter, a need arose in the chemical industry when modernisation and

revamping of existing plants / processes started on a massive scale. However,
initial experiences of the underwriters were far from satisfactory and the ALOP,
even today remains a very specialised class of business with high loss exposures.

A small number of policies on large plants have been issued in the global market
today with required indemnity limits under a single policy far exceeding the
ALOP premium earnings.

The ultimate outcome is that it continues to be a very costly insurance proposal

and hence have no ready buyers. The insurers are also very cautious in writing
this business.

With liberalised economies in different parts of the world a good number of

infrastructure plants /production facilities are privately funded by banks and
financial institutions. It is only with the compulsion of financiers of such
projects, that the need for this insurance is on the rise, especially in countries
like India.

Though this class of business has not developed to a substantial extent, it

nevertheless has allowed the insurance market to set up its own base rules
regarding conduct of the business and insurability of the project viz.

a) Practicability of connecting a loss of income to a material damage event

long after its occurrence,

b) Realistic financial projections to decide adequacy of insured values,

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c) Accurate definitions of coverage in the policy wordings.

2. Financial consequences of the project delay

The financial consequences of any delay in commissioning of a plant under

construction may relate to:

a) Liquidity i.e. short-term-flow.

b) Profitability i.e. long-term-cash-flow.

c) Growth.

d) Standing charges and a variety of continuing expenses during the period

of delay in commissioning of the plant / production facility.

3. Insurance of delay period

A wide variety of causes both internal and external to an organisation lead to

delays in commissioning of a new project. Such causes can be broadly classified
into two groups viz.

a) Speculative or trade risks which relate to political, social or economic

reasons or shortcomings in the management and errors in judgment.
Such risks are not insurable and do not worry the underwriters.

b) Occurrences related to natural perils, inherent defects and human

failures that lead to material damage of an accidental nature. These are
the ones that concern the underwriters and as a basic principle, ALOP
policy is issued only in conjunction with a Material Damage-CAR / EAR
policy.

In the case of a plant under construction/ erection, financial interests of

different parties to the project are at stake as under:

a) The Principal: Delay in commencement of project would affect his

anticipated earnings, interest on capital, wages depreciation etc.

b) The Contractor: Delay in handing over the plant would affect his
payments receivable, may invoke contractual penalties for such delays
and commitment on other contracts in hand,

c) The SubContractor: Same as for the contractor,

d) Suppliers : Same as for the contractor

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e) Customers: Delay in commencement of project would affect business
plans,

f) The financiers: Adverse effect on the project owner’s earnings reduces

the security of their loan, delays loan repayments and interest
payments.

For insurers, the financial consequences at stake are those which relate to the
period after the contractor would have handed over the plant to the owner /
principal and commercial operations commenced.

Thus, the principal alone and his financiers have an insurable interest in the
financial consequences of a delay in the project.

Accordingly ALOP policy is issued only to principal / owner of the project with
the interest of the financiers suitably recorded.

The Contractors / sub-contractors, suppliers cannot be a beneficiary under this

policy, even though they are joint insured’s under CAR / EAR policy.

An ALOP coverage is normally incorporated as an additional Section to the

Material Damage CAR / EAR policy, e.g. it is Section 3 of an EAR policy after the
first two Sections—the first relating to Material Damage and the second to Third
Party Liability.

4. Critical differences - Operational LOP Vs. ALOP

Before going into the details of ALOP insurance coverage, it would be desirable
to have a look at the following comparison between typical features of an
operating plant and a new venture, with specific reference to some important
factors that affect business:

Table 9.1

For an Existing Operating For a New Venture

Parameter
Plant
No experience but only
a) Market An established market
projections
Proven in quality and Product, demand and market
b) Product
accepted in the market acceptance uncertain
Technology / weaknesses No experience, newness of
c) Experience well known, staff well machinery and inexperienced
trained. staff.
d) Machinery / Largely unknown and proto-
Tested and time proven
Process type

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e) Revenue / Trading figures available for
Only projected figures
Cost Structure previous years
f) Infrastructure
/ Legal Frame Established Only assumptions
Work

Keeping the above points in mind, following paragraphs touch upon certain
important factors that relate to ALOP Insurance.

5. Object

The object of an ALOP Insurance is to indemnify the principal or the project

owner for actual loss sustained due to a delay in commencement of commercial
operations of a new project under installation / construction.

This delay must be caused by direct physical loss or damage to the project
property, admissible under the Material Damage section of CAR / EAR insurance
covering the contract works.

It is worth noting here that a number of reasons occurring during the CAR/EAR
policy period, contribute to delays of different degrees in commencement of
the project commercial operation.

Ultimately all these delays accumulate and result into a single delay period for
the project. It is always the case that some of these delay are on account of
uninsurable reasons, or may not result into admissible material damage and
hence not admissible for the purpose of ALOP. Whether the delay may be
insured or not will mainly depend upon the following factors:

a) Defining and estimating the sum insured.

b) Segregating the insured incident from others which may contribute to
project delays
c) Computing the financial impact of the delay.

6. Basic elements

a) The insured

The insured can only be the Principal / owner of the project i.e. the party
who stands to lose their estimated revenue earnings if the project gets
delayed.

Quite often the interest of the project financiers has to be noted on the
policy. Generally, they are included as “Additional insured”.

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The Contractor / Sub-contractor / Engineers etc. are joint insured’s with
the owner only under the CAR/EAR policy for the purpose of material
damage and TPL losses. Since they have no insurable interest, they cannot
be accepted as insured’s under the ALOP policy.

b) Sum insured

By and large the definitions on sum insured closely follow the ones found in
the standard loss of profits policies like MLOP or Fire LOP. However the
basic difference arises from the fact that, in case of ALOP insurance, there
are virtually no previous trading accounts available for arriving at a realistic
amount as sum insured.

The sum insured has to be based on assumptions and its definition is on

“would have been” basis.

Normally, the budgeting and costing calculations on which the financial

model of the project is based are used in computing the sum insured.

The sum insured can be on the following basis:

Table 9.2

The Annual Gross Profits would mean Net Profits plus

Annual Gross Profits Standing Charges (variable costs are not included) or
Turnover minus Variable Cost.
Debt Service Sometimes the project financiers require the owner to
Charges (Principal & take out insurance of amortisation plus interest. This
Interest ) will require only a portion of the gross profit.
They are generally accepted since the daily values on
Fixed Overhead
such charges can be easily known. However the loss
Charges
settlement will be on an Actual Loss Sustained basis.
The additional interest burden that may be faced by the
Interest Charges project owner during the period of project delay can be
insured.
This mainly applies to residential and office buildings
Loss of Rental for loss of rental due to the premises not being let due
to insured delays.

c) Period of insurance

The insurance period for ALOP coincides with the EAR/CAR policy period
including the testing period, if covered and terminates with the
commencement of commercial operation.
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The estimated “Commercial Operation Date (COD)” is an important
parameter because it is the starting point from which the delay period is
measured.

d) Indemnity period (IP)

The Period of Indemnity commences on the COD i.e. the day on which the
project would have been taken over by the owner had the accident not
occurred and ends on the day the commercial operation starts.

The Period of Indemnity is based on the longest replacement time required

for items critical to the plant. Such replacement time includes the elements
of:

i. Reordering
ii. Re-manufacturing
iii. Transportation to the site
iv. Re-erection / testing / commissioning

e) Time excess (TE)

The Time Excess or the waiting period is the period within the period of
delay for which loss is borne by the insured. It starts along with the
indemnity period and is normally stipulated to absorb the effects of delay
due to minor events which are inherent to the project.

The TE period depends on:

i. The type of plant / equipment,

ii. The replacement time for critical items,
iii. The location of site and
iv. Other underwriting factors.

The insurers would normally prescribe a minimum Time Exclusion period

depending on the type of plant

Example

30 days for a coal fired thermal power station having each unit of about 300 MW
capacity

7. Scope of cover / basis of indemnity

The basis of the scope of cover is normally detailed in the endorsement which
gets attached to the basic Material Damage CAR/EAR policy as separate
additional Section and relates to the actual financial loss sustained by the
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insured including Increased Cost of Working, less any sum saved during the
period of delay.

For the purpose of easy understanding the full endorsement wording

recommended by a professional reinsurer is reproduced below

Test Yourself 1

Which of the following risks are not insured in ALOP insurance policies?

I. Occurrence related to natural perils

II. Incidents occurring due to inherent defects
III. Accidents due to human failure
IV. Speculative or trade risks

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B. Endorsement for advance loss of profits insurance

1. Object of insurance

The Insurers hereby agree to indemnify the Insured (Principal or Owner) for
the actual loss sustained due to a delay in completion of the insured works
caused by direct physical loss or damage (hereinafter referred to as “accident”)
covered under the Policy to which this Endorsement is attached and occurring
within the stated Period of Insurance, as defined below.

The cover provided under this Endorsement shall be for the actual loss of gross
profit due to reduction in turnover and increased cost of working, and the
amount payable as indemnity hereunder shall be:

a) In respect of loss of gross profit: The sum obtained by applying the

rate of gross profit to the amount by which the actual turnover during
the Indemnity Period falls short of the turnover which would have
been achieved had the delay not occurred;

b) In respect of increased cost of working: The additional expenditure

necessarily and reasonably incurred for the sole purpose of avoiding or
diminishing the reduction in turnover which, without such expenditure,
would have taken place during the Indemnity Period, but not exceeding
the sum by which such loss amount otherwise payable under this
Endorsement is thereby reduced.

c) Less any sum saved during the Indemnity Period as may cease or be
reduced in consequence of the accident (including any liquidated
damages and penalties the Insured is entitled to receive).

If the annual sum insured hereunder is less than the sum obtained by applying
the rate of gross profit to the annual turnover, the amount payable shall be
reduced proportionately.

Definition

a) Turnover

The amount of money (less discounts allowed) paid or payable to the Insured
for goods, products or services sold, delivered or rendered in the course of
the insured business conducted at the premises.

b) Annual turnover

The turnover which would have been achieved, had the accident not
occurred, during the 12 months after the planned date of completion of the
insured works.
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c) Annual gross profit
The amount by which the annual turnover exceeds the amount of specified
working expenses. Specified working expenses are those costs which vary
directly with turnover, such as those for the acquisition of goods, raw
materials or auxiliaries, as well as for supplies (unless required for the
upkeep of operations) and any costs for packaging, carriage, freight,
intermediate storage, turnover tax, purchase tax, licence fees and royalties
for inventors, etc.
d) Rate of gross profit

The rate which would have been earned, had the accident not occurred, on
the turnover during the Indemnity Period.

2. Period of insurance

The Period of Insurance shall be stated in the Schedule to this Endorsement. It

shall end earlier if and when the entire works or parts thereof are taken over or
taken into use by the Insured.

For the purpose of this Endorsement, this shall be deemed to take place on
completion of full operational testing (if applicable) or at the planned date of
completion of the insured works stated in the Schedule, whichever shall occur
first.

3. Indemnity period

The Indemnity Period begins with the date upon which, had the accident not
occurred:

a) The insured works would have been completed or

b) The full operational testing of the insured works would have been
completed but not prior to the planned date of completion stated in the
Schedule.

The Indemnity Period ends with the actual date upon which:

a) The insured works are completed or

b) Full operational testing of the insured works is completed.

The maximum Indemnity Period is stated in the Schedule.

4. Deductible period (Time Excess)

The deductible period runs from the date upon which, had the accident not
occurred, the insured business would have been completed. When a delay

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exceeds the deductible period, the indemnity is reduced in the same proportion
as the deductible period bears to the Indemnity Period.

Special exclusions

Insurers shall not be liable under this Endorsement for delays due to:

a) Loss or damage covered as an endorsement under the Material Damage

Section unless it has been specifically agreed in writing;

b) Earthquake, volcanic eruption, tsunami, unless it has been specifically

agreed in writing,

c) Loss of or damage to surrounding property, construction machinery,

plant and equipment;

d) Loss of or damage to operating media or feedstock, shortage,

destruction, deterioration of or damage to any materials necessary for
the insured business;

e) Any restrictions imposed by a public authority, non-availability of funds;

f) Alterations, additions, improvements, rectification of defects or faults or

elimination of any deficiencies carried out after the occurrence; or for
any loss due to fines or damages for breach of contract for late or non-
completion of orders, or for any penalties of whatever nature.

5. Special conditions

a) Duties of the insured

The Insured shall take all reasonable steps to complete the works as
scheduled and shall fully observe all manufacturers’ instructions for
construction, erection, commissioning / testing of the works, as well as any
government, statutory, municipal and all other binding regulations in force
concerning the installation and commissioning / testing operation of the
works.

The Insurers’ representatives shall at all reasonable times have the right to
inspect and examine the works and the Insured shall provide the officials of
the Insurers with all details and information necessary for the assessment of
the risk.

The Insured shall periodically furnish the Insurers with updated works
progress programmes as stated in the Schedule.

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In the event of a difference between the anticipated and the actual progress
of the contract works necessitating a revision of the anticipated date of
completion, the Insurers and the Insured shall agree to a revised anticipated
date of completion, which will be amended to this Endorsement.

b) Change in degree of risk

The Insured shall immediately notify the insurers in writing of any material
change in the original risk, such as:
i. Changes of the envisaged works progress programme, testing procedure,
etc.;
ii. Alteration, modification or addition to any item of machinery or work,
etc.;
iii. Departure from prescribed construction or operation conditions ;
iv. Changes in the insured’s interest (such as discontinuation or liquidation
of the business or its being placed in receivership).
In such cases, continuance of cover under this Endorsement is subject to the
written consent of Insurers.
c) Conditions relating to claims

Should any occurrence giving rise or likely to give rise to a claim under this
Endorsement come to the knowledge of the Insured, the Insured shall:
i. Give immediate notice thereof to the Insurers by telephone, telex or
telefax and send written confirmation thereof, within forty-eight hours
of the event to the Insurers;
ii. Do and concur in doing and permit to be done all things which may be
reasonably practicable to minimise or to avoid or diminish the claim
amount or any delay in completion of the works;

iii. Discontinue the use of any damage machinery, unless the Insurers
authorise otherwise (the Insurers shall not be liable in respect of any
delay in completion of the works arising out of the continued use of any
damaged machinery or part of work without the prior authority of the
Insurers, until such parts has been repaired to the satisfaction of the
Insurers);

iv. So far as may be reasonably practicable without causing any increase in

period of interruption or interference, take precautions to preserve
anything that might prove necessary or useful by way of evidence in
connection with any claim;
v. Allow the Insurers and every person authorised by the Insurers, without
prejudice to any party insured by this Policy, to have access to the
construction site where such loss or damage has occurred for the
purpose of direct negotiation with the responsible contractor or
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subcontractor in order to establish the possible cause and extent of the
loss or damage, its effect on the items listed in the Schedule, to
examine the possibilities for minimising any delay to the schedule date
of completion of the insured works, and if necessary to make any
reasonable recommendations for the avoidance or minimisation of such
delay.

vi. If the Insured or anyone acting on his behalf hinders or obstructs the
Insurers during any of the above-mentioned acts or does not comply with
such recommendations of the Insurers, all benefits under this
Endorsement shall be forfeited.

In the event of a claim being made under this Endorsement the Insured shall:

i. Deliver to the Insurers in writing a statement noting particulars of the

claim, together with details of all other insurances covering the accident
or any part of it or consequential loss of any kind resulting there from;

ii. Also furnish to the Insurers such books of account and other papers
relating to the business such as invoices, balance sheets and other
documents, proofs, information, explanation and other evidence as may
reasonably be required by the Insurers for the purpose of requiring a
statutory declaration of the truth of the claim and of any matters
connected therewith.

In the event of an accident, the Insurer’s representatives shall have immediate

access to the plant and the right to take over and to control all necessary
repairs.

No claim under this Endorsement shall be payable unless the terms of this
condition have been complied with and, in the event of non-compliance, any
payment of account already made shall be repaid to the Insurers immediately”.

6. Risk categories for insurance

ALOP and similar forms of ‘Delayed Income Insurance’ have been requested for
all types of projects. In so far as the Indian market is concerned the demand for
this cover mainly comes from private owners of Infrastructure Projects, as most
of these projects are financed by banks / financial institutions.

Power and road projects, being more in demand, form the largest group of
clients who require ALOP insurance covers. Generally the demand from them
relates to ALOP / DSU cover in conjunction with both:

 The Marine Cargo Insurance for critical items of the project cargo and
 The CAR / EAR insurance for Construction Phase of the project.

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Internationally the insurers have come across requests for ALOP insurance for
the following classes:

a) Single Machine installations for coverage during erection phase only.

Such requests generally being for smaller periods of time and the
assessment for single machine installations being simpler, insurers have
found such risks acceptable.

b) Expansions of existing plants in the manufacturing sector. In this

category some underwriters preferred to restrict coverage only for “Key”
items.

c) New plants and production facilities

d) Buildings and civil engineering projects-either relating to works like road

construction or relating to heavy foundations for industrial plants.

e) For residential or office buildings a special policy form has been devised
to insure against loss of rent / interest.

7. Underwriting information

A simpler version of the information required is summarised in the following

proposal form recommended by a reinsurer:

“Questionnaire and Proposal”

Reproduced below is the proposal form recommended by a professional

reinsurer for collecting information for the purpose of underwriting an ALOP
risk.

Insured: _____________________________________________________________

Insured Project:_______________________________________________________

Nature of business: ____________________________________________________

Periods
Construction / erection: from ____________ to___________
Commissioning / testing: from ____________ to___________
Anticipated date of commencement of commercial operation:

Period of indemnity:

Time excess:__________________________________________________________

Please enclose detailed works progress programme indicating:

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Arrival of main items at site;
Construction / erection phase of main items and allowance for delays;
Commissioning / testing phase.

Please enclose description of how the installation works, together with:

Simplified process flow diagrammed indicating bottlenecks;

List of major items indicating probable replacement time in the event of a total
loss;
List of spares available on the site prior to commencement of commissioning /
testing.

Will the work involve any large scale manufacturing or fabrication on site?
If so, please state details.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

Will any second-hand machinery be installed? If so, please mark them on the
list of machinery and details regarding age, condition, spares available, etc.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

Please give details of envisaged site protection and when this will be operative
at the latest.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

Sum insured:__________________________________________________________

Please forward details of how the required sum insured was arrived at.
(Refer to definitions in the policy wording)

If phased handing-over is envisaged, please indicate break-down of sum insured

for each section to be handed over individually.

Please give details in respect of availability of import licences and foreign

currency for material, spare parts, labour and technical assistance to be
imported.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
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Please give details of possibilities of minimizing loss in case of damage to the
works: repair facilities on and near site, transport facilities, etc.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

Does the sales contract provide for penalties in case of delay in completion?
If so, please state details:
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

Please attach copy of envisaged underlying material damage policy with all
endorsements, should this be other than SR standard wording.
_____________________________________________________________________

The Proposer declares that the above particulars are correct and given in good
faith.
Place and date
Proposer’s name and signature

8. Rating of ALOP risks

Since no insurer has a sufficiently large portfolio, statistically supported rating

systems could not be developed to date. Obviously, in the Indian situation the
insurers have to depend upon the international reinsurance market for guidance
on a case to case basis.

Secondly, the criticality of proposal varying from project to project, no

guidelines can be formulated which can be used as standard document.

Test Yourself 2

____________ refers to the amount of money (less discounts allowed) paid or

payable to the Insured for goods, products or services sold, delivered or
rendered in the course of the insured business conducted at the premises.

I. Turnover
II. Annual turnover
III. Annual gross profit
IV. Rate of gross profit

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Summary

a) “Advanced Loss of Profits” refers to a particular class of Consequential Loss

insurance and covers financial consequences of a delay in estimated
commercial operation date (COD) of a project, because of accidental
damage to the project materials admissible under Material Damage Section
of an EAR or CAR insurance policy.

b) ALOP policy is issued only in conjunction with a Material Damage-CAR / EAR

policy.

c) ALOP policy is issued only to the principal / owner of the project with the
interest of the financiers suitably recorded. The Contractors / sub-
contractors and suppliers cannot be a beneficiary under this policy, even
though they are joint insureds under CAR / EAR policy.

d) The object of ALOP Insurance is to indemnify the principal or the project

owner for actual loss sustained due to a delay in commencement of
commercial operations of a new project under installation / construction.

e) The insurance period for ALOP coincides with the EAR/CAR policy period
including the testing period, if covered, and terminates with the
commencement of commercial operation.

f) The Period of Indemnity commences on the COD, i.e. the day on which the
project would have been taken over by the owner had the accident not
occurred, and ends on the day the commercial operation starts.

g) The Time Excess or the waiting period is the period within the period of
delay for which loss is borne by the insured.

h) As per the Indian market, the demand for ALOP insurance cover mainly
comes from private owners of Infrastructure Projects, as most of these
projects are financed by banks / financial institutions. Power and road
projects, being more in demand, form the largest group of clients who
require ALOP insurance covers.

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Answers to Test Yourself

Answer 1

The correct option is IV.

Speculative or trade risks are not insured in ALOP insurance policies.

Answer 2

The correct option is I.

Turnover refers to the amount of money (less discounts allowed) paid or

payable to the Insured for goods, products or services sold, delivered or
rendered in the course of the insured business conducted at the premises.

Self-Examination Questions

Question 1

In the case of a plant under construction/ erection, financial interests of

different parties to the project are at stake. Delay in commencement of project
would affect anticipated earnings, interest on capital, wages, depreciation etc.
would affect which of the following parties?

I. The principal of the project

II. Contractor
III. Customers
IV. Suppliers

Question 2

Who among the following can be beneficiaries under ALOP policies?

I. The principal of the project

II. Contractor
III. Sub-contractors
IV. Suppliers

Question 3

Who among the following can be accepted as ‘additional insured’ in ALOP

polices?

I. Contractors
II. Project financiers
III. Suppliers
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IV. Engineers

Question 4

What is the starting point from which the delay period is measured in an ALOP
policy?

I. Starting date of testing period

II. Estimated Commercial operation date
III. Starting date of production
IV. Construction commencement date

Question 5

____________ is the period within the period of delay for which loss is borne by
the insured.

I. Period of indemnity
II. Commercial operation period
III. Testing period
IV. Time Excess

Answers to Self-Examination Questions

Answer 1

The correct option is I.

Delay in commencement of project would affect the principal’s anticipated

earnings, interest on capital, wages, depreciation etc.

Answer 2

The correct option is I.

ALOP policy is issued only to the principal / owner of the project.

Answer 3

The correct option is II.

Project financiers can be accepted as ‘additional insured’ in ALOP polices.

Answer 4

The correct option is II.

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Estimated Commercial operation date is the starting point from which the delay
period is measured in an ALOP policy.

Answer 5

The correct option is IV.

Time Excess is the period within the period of delay for which loss is borne by
the insured.

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CHAPTER 10

A. ENDORSEMENTS – INCLUDING SUPPLEMENTARY

COVERS (CAR, EAR, CW)
B. INFORMATION REQUIRED FOR FRAMING
CONSTRUCTION PHASE INSURANCE PROGRAMME
FOR A PROJECT

Chapter Introduction

Reference to the Supplementary Covers has been made earlier while discussing
the “Construction Phase” insurance. This chapter includes standard
endorsement wordings for each such individual extension cover along with other
applicable endorsements. These endorsements are reproduced below to enable
the students to understand the finer details of these covers.

Learning Outcomes

A. Endorsements
B. Framing construction phase insurance programme for a project

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A. Endorsements

Civil engineering works (EAR and MCE)

“It is hereby declared and agreed, subject to the exceptions contained herein,
or endorsed hereon, that this policy is extended to cover the risks of loss or
damage to property brought on to the site of erection for performance of the
contract, details of which are stated as under:

All permanent civil engineering works such as buildings foundations earthwork

including materials for the constructions thereon, All temporary works such as
buildings, sheds.

Provided that the following exclusions shall apply:

i. Loss or damage directly caused by defective workmanship, material, or

design or wear and tear,
ii. Loss or damage directly caused by mechanical breakdown or
derangement,
iii. Loss or damage directly caused by deterioration due to lack of use or
obsolescence,
iv. Any loss of property either by disappearance or by shortage if such
disappearance or shortage alone is revealed during and after an
inventory is made,
v. Cessation of work whether total or partial

1. Endorsement regarding fire/explosion

"Notwithstanding the conditions provisions and other endorsement of this policy,

it is agreed and understood that the company shall indemnify the insured in
respect of any loss or damage caused by fire/explosion only if the following
requirements are fulfilled:

a) Adequate fire fighting equipments and extinguishing agents of sufficient

capacity shall always be availed at the site and be ready for immediate
use.

b) Watch and ward facility should be provided round the clock at the site.

c) Open storage of construction or erection materials at the site is divided

into sub-units which should be separated from each other by a distance
of atleast 15 meters.

d) In any case the liability of the company, per storage unit shall not
exceed 10% of the sum insured as per Memo 1 of the policy or Rs. 50
crores, whichever is less.

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e) Grass and / or any other vegetation in and around the site are regularly
removed.
f) Inflammable materials such as waste materials empty boxes crates,
waste wood and paper should be promptly removed from the site.

g) Other combustible materials required for the erection / construction

works such as shuttering materials not fitted for concreting,

h) Inflammable liquids, gases etc. Should be stored at a sufficiently large

distance from the erection / construction works.

It is further agreed and understood that the Company shall not be liable for
10% of the claim amount subject to a minimum of Rs. _________ (which
corresponds to the Deductible for claims during Testing period) for each and
every claim on account of fire / explosion.

2. Endorsement regarding cross liability cover

"It is agreed and understood that otherwise subject to the terms, exclusions,
provisions and conditions contained in the policy or endorsed thereon and
subject to the insured having paid the agreed extra premium, the Third Party
Liability Cover of the policy shall apply to the insured parties named in the
Schedule as if a separate policy had been issued to each party provided
the Company shall not indemnify the insured under the Endorsement in
respect of liability for

i. Loss of or damage to items insured or insurable under Section 1 of

the policy even if not recoverable due to an excess or any limit.

ii. Fatal or non-fatal injury or illness of employees or workmen's

compensation and/or employer's liability insurance.

The insurer's total liability in respect of the insured parties shall not however
exceed in the aggregate for any one accident or series of accidents arising out
of one event the limit of indemnity stated in the Schedule."

3. Endorsement regarding escalation

It is also hereby declared and agreed that in the event of a claim the insured
would be considered as fully insured upto the sum insured inclusive of ___%
increase as per selected escalation and under insurance would apply only in the
event of the cost of replacement of the affected equipment exceeding the
original value inclusive of selected ___% towards escalation.

It is however understood and agreed that the premium collected against price
escalation hereinabove shall not be subject to refund of premium as provided in
the premium adjustment clause in Memo 2 of the policy.

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It is further understood and agreed that in case of additional premium
chargeable during final adjustment, additional escalation premium will be
charged to the insured but in case of any premium refundable during final
adjustment no refund shall be allowed against the escalation premium
already charged to the Insured.

4. Endorsement regarding air freight

"It is hereby declared and agreed that the policy shall also indemnify towards
Air Freight incurred by the insured in connection with the idemnifiable loss
under the policy. In consideration thereof an additional premium of
Rs._______ is charged hereby. Limit of indemnity shall be Rs. ___________
during currency of the policy.

Each and every claim shall be subject to a minimum excess of 5% of the

admissible Air Freight incurred over and above the excess as applicable under
the policy.

Subject otherwise to terms, conditions and exceptions of the policy."

This provision to grant cover for air freight applies to both Marine and EAR
portions if combined Marine-cum-Erection policy is issued. In cases where
separate Marine and Erection All Risks policies are issued the Marine policy
should be specifically endorsed to the effect.

5. Endorsement regarding customs duty

"In consideration of the insured having paid an additional premium of Rs.

_________ it is hereby declared and agreed that the insured shall also be
indemnified during the currency of this policy, towards Additional Custom
Duty Rs. ________________ which may be incurred by the insured over and
above the Custom Duty amount taken into account in arriving at the Sum
Insured of the affected item.

Each and every claim payable under this extension shall be subject to an Excess
of 5% of the admissible Additional Custom Duty incurred and will be in addition
to the Excess amount applicable for the affected item under the policy.

The indemnity for such Additional Custom Duty will stand reduced after
occurrence of the claim unless reinstated by payment of an additional premium
prescribed by the company.

Subject otherwise to the terms conditions and exceptions of the policy."

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6. Endorsement for test run definition in respect of thermal power station

"Notwithstanding anything stated herein to the contrary it is hereby declared

and agreed that entire power station machinery insured hereunder are deemed
to have commenced their first test operation or test loading from the date of
synchronisation of the Turbo Generator set with the grid system/bus bar
provided the date of synchronisation is within 72 hours from the date of
introduction of steam into turbine and shall continue till the Turbo Generator
Set is operated at full load for a continuous period of 72 hours or until expiry of
testing period granted under the policy whichever is earlier. If, however, the
date of synchronisation exceeds 72 hours from the date of introduction of steam
of the first trial operation or test loading is deemed to have commenced from
the date of introduction of steam into the turbine of the Turbo Generator set.

If the trial operation/test loading is not completed within the time specified
hereunder the Company may extend the period of testing on receipt of
additional premium at agreed rates but in no case the total test period
available under the policy shall exceed 12 months."

7. Endorsement for test run definition for gas turbines in respect of

combined cycle power plant

Notwithstanding anything stated herein to the contrary, it is hereby declared

and agreed that the gas turbine insured hereunder is deemed to have
commenced its first operation of test loading when the fuel is introduced in the
combustion chamber of the gas turbine unit.

8. Hydrocarbon endorsement for testing and commissioning

a) Article 1

It is warranted that the insured shall give previous notice in writing to the
Company of the date of the initial start-up operation for testing of plant.
Commencing date of the initial start-up operation referred to in the
preceding paragraph shall mean the date of the first introduction of feed
stock or initially filled mixture of oil or hydrocarbon for cleaning or purging
or naphtha fuel for burning into the plant, whichever date is earlier.
However the operation carried out for cleaning and purging in each
individual unit will be considered a part of erection work provided such
cleaning and purging work does not exceed a period of two weeks in
each unit. It is however understood and agreed that during any operation
whatever cleaning, purging, testing or commissioning, where hydrocarbons
or Hydrogen are involved the deductible excess shall be 5% of claim amount
subject to minimum of Rs. 500000/-.

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b) Article 2

As from the introduction of hydrocarbon / feedstock into the plant, the

company shall not be liable for the loss or damage to:

i. Catalysts unless specifically covered by separate endorsement;

ii. Reforming units due to overheating or cracking of any tubes

Note: Any consequential damage to the neighbouring items of plant or

machinery indirectly due to cracking or overheating of tubes in
reforming units is however indemnifiable under the policy.

iii. The insured plant due to overheating or cracking following an

exothermic reaction.
iv. The insured plant due to non-observation of prescribed techniques or
cutting out of safety devices and/or any liability resulting therefrom.

The insurers shall only indemnify the insured for loss or damage resulting
directly or indirectly from fire and / or explosion if adequate fire
fighting facilities for the insured plant are installed and rendered
serviceable immediately after completion of the rough structure of the
building and before any machinery is stored and / or installed therein.

All machinery and equipments shall be stored in such a manner that the
value of items stored per storing unit shall not exceed Rs ............ and that
such individual storing unit shall be at least _______ feet apart separated by
fire-proof walls.

Should the value per storage unit exceed Rs ............ then in the event of a
claim, the liability of the Company shall be in the same proportion as Rs
............ bears to the total value of items stored in the concerned
individual storage unit as defined above.

Following article is to be included after excluding 2(a) above, in case the

insured desires cover for catalyst during testing period:

c) Article 3

Catalyst valued at Rs ............... are specifically covered during hot testing

period for any loss or damage caused by an indemnifiable loss or damage to
the insured plant and / or equipment.

Each and every claim shall be subject to an excess / deductible franchise of

5% of the value of catalysts in the system subject to a minimum of Rs.
2,50,000/- which is the hot testing period Excess.

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9. Endorsement concerning storage

It is agreed and understood that otherwise subject to the terms,

exclusions, provisions and conditions contained in the policy or endorsed
thereon, the Insurers shall only indemnify the Insured for loss of or damage
to the Insured items during storage upto a value per storage unit not
exceeding the equivalent of Rs.____________.

The individual storage units shall be either atleast 50m apart or separated by
fireproof walls.

10. Endorsement regarding safety measures

It is agreed and understood that otherwise subject to the terms, exclusions,

provisions and conditions contained in the policy or endorsed thereon, the
insurers shall only indemnify the insured for loss, damage or liability directly
or indirectly caused by flood and inundation if adequate safety measures have
been taken during planning and execution of the project. Adequate safety
measures in this context shall mean that the average monthly rainfall, flood and
inundation hazard as known from statistics of the competent meteorological
offices for the respective month and location has been taken into account.

11. Endorsement regarding damage to crops, forests etc.

It is agreed and understood that otherwise subject to the terms, exclusions,

provisions and conditions contained in the policy or endorsed thereon, the
Insurers shall not indemnify the insured for loss, damage or liability directly
or indirectly caused to crops, forests and / or any cultures during the
execution of the contract works.

12. Special conditions for open trenches during laying of pipelines ducts and
cables

It is agreed and understood that otherwise subject to the terms, exclusions,

provisions and conditions contained in the policy or endorsed thereon, the
Insurers will indemnify the Insured for any loss or damage due to storm,
rainfall, flood, inundation such as sanding, silting up, mudding up,
erosion, collapse and floating up of pipes, ducts or cables, sustained by
completely or partly excavated open trenches and /or items laid therein,
upto a maximum length of ____km open trench only one loss event.

The insured shall make sure that plugging facilities are available near the
pipe ends for emergency purposes and that pipe ends exposed to flooding are
plugged before any interruption during idle work periods such as nights and
holidays.

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It is agreed and understood that otherwise subject to the terms, exclusions,
provisions and conditions contained in the policy or endorsed thereon, the
Insurers will indemnify the Insured for any loss or damage due to storm,
rainfall, flood, inundation such as sanding, silting up, mudding up,
erosion, collapse and floating up of pipes, ducts or cables, sustained by
completely or partly excavated open trenches and /or items laid therein,
upto a maximum length of ____km open trench only one loss event.

The insured shall make sure that plugging facilities are available near the pipe
ends for emergency purposes and that pipe ends exposed to flooding are
plugged before any interruption during idle work periods such as nights and
holidays.

13. Cover of leak search costs when laying pipelines

It is agreed and understood that otherwise subject to the terms, exclusions,

provisions and conditions contained in the policy or endorsed thereon, the
insurers shall indemnify the insured also for the following items under this
policy:

i. Leak search costs following hydrostatic test (including the cost of leasing
special apparatus, cost of operation and transport of such apparatus)
ii. Earthwork on a trench not damaged itself, search earthwork becoming
necessary in the search for and repair of leaks, e.g. excavation,
uncovering of the pipeline, backfilling.

Provided that:

The leak has been caused by an indemnifiable event or is attributable to faulty

execution on the site, and 100% of the welding seams have been X-rayed and
any deficiencies discovered thereby have been removed properly.

Indemnity shall be limited in the aggregate per testing section during one policy
period. Costs caused by faulty repair of welding seams shall be excluded from
the cover.

14. Design defect exclusion (DE) wordings

The standard EAR policy as prescribed by the Tariff, Excludes the affected part
which is defective in design, but covers the consequential damage to other
property, in the event of a loss or damage due to such defective part. However,
depending on the provisions of the Works Contract, the project company,
contractors or financiers may require variations in this regard. Five sets of
Endorsement wordings are available from the London Market for the Defect
Exclusion (D.E.) Wordings. All these five wordings are reproduced below for
better understanding of the differences between them.

157
It is also expected that students who are in the marketing teams of the
insurance companies will be better placed to discuss the relevant issues with
their clients.

The first wording DE-1, relates to outright exclusion of ‘design defect’ damages
and corresponds to the standard CAR policy, whereas DE-3 corresponds to
standard EAR policy.

a) Outright defect exclusion DE 1

This policy excludes loss of or damage to the property insured due to

defective design, plan, specification, material or workmanship.
b) Extended defective condition exclusion DE 2
This policy excludes loss or damage to and the cost necessary to replace,
repair or rectify
i. 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
ii. Property insured which relies for its support or stability on (i) above

Property insured lost or damaged to enable the replacement, repair or

rectification of property insured excluded by (i) & (ii) above

Exclusion (i) and (ii) 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 & 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 part thereof.
c) Limited defective condition exclusion DE 3

This policy excludes loss of or damage to and the cost necessary to replace,
repair or rectify
i. Property insured which is in a defective condition due to a defect in
design, plan, specification, material or workmanship of such property
insured or any part thereof but not to other property insured which is
free of the defective condition but is damaged in consequence thereof
ii. Property insured lost or damaged to enable the replacement, repair or
rectification of property insured excluded by (i) above

For the purpose of the policy & 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 part thereof.
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d) Defective part exclusion DE 4

This policy excludes loss of or damage to and the cost necessary to replace,
repair or rectify

i. Any component or part or individual item of the property insured which

is defective in design, plan, specification, materials or workmanship
ii. Property insured lost or damaged to enable the replacement, repair or
rectification of property insured excluded by (i) above

Exclusion (i) 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 & 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 part thereof.

e) Design improvement exclusion DE 5

This policy excludes

i. The cost necessary to replace, repair or rectify any property which is

defective in design, plan, specification, materials or workmanship
ii. Loss or damage to the property insured caused to enable replacement,
repair or rectification of such defective property

But should damage to the property insured (other than damage as defined in
(ii) above) result from such a defect this exclusion shall be limited to the
cost of additional work resulting from improvement to the original design,
plan, specification, materials or workmanship

For the purpose of the policy & 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 part thereof.

In order to understand the design defect illustration better, a following

example is given.
The example shown is a steel portal framed building assembled with
defective bolts with a roof and cladding. Adjacent to the building is free-
standing wall. The bolts fail and the building collapses onto the wall
bringing it down at the same time.

159
• DE 1 This is an outright exclusion clause and cover will not be
provided for any damage to the building or the wall or for
anything else damaged in consequence of the failure.
• DE 2 Under the policy this clause excludes the cost of repairing
everything including those parts which rely for their support on
the defective part. In this particular case the cost of repairing
anything on the buildings excluded but the free-standing wall is
covered as it is the “remainder of the property insured”
• DE 3 This is perhaps the most common wording. In this case cover will
be given for ‘the remainder of the property insured. If the
building collapses Insurers will pay for the walls, cladding and the
roof. The steel frame and bolts are specifically excluded as these
form an integral structural element in their own right.
• DE 4 In this particular case Insurers will pay for everything with
the exception of the bolts which were defective in the first
place.

In the Indian market, as a practice, usually in construction projects, design

defect cover upto DE3 is provided and in erection projects, design defect
cover upto DE4 is provided, subject to insurer’s discretion and assessment of
project quality.

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Test Yourself 1

Under which endorsement, each of the insured party is considered as if

separately insured

I. Civil Works
II. Airfreight
III. Cross liability
IV. Escalation

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B. Framing construction phase insurance programme for a project

1. Introduction

The proposal form individually prescribed for each class of construction phase
insurance relates to information required for specific policies. The list of items
discussed in the following paragraphs broadly covers all the measure headings
under which information would be required by an underwriter for making
decisions on:

a) Acceptance of risks,
b) Type of insurance including scope of cover
c) Rates, terms and conditions
d) Retention
e) Reinsurance

2. General information on the project

a) Title of the project

b) Location of the project
c) Principal’s name and address including joint venture partners and / or
lenders
d) Detailed description of project scope including any civil works
e) Executive summary of geological, hydrological, meteorological reports
f) Wind, flood and rainfall statistics at site
g) Seismic design features and earthquake history at site
h) Copies of the contracts, giving insurance requirements for parties to the
contract

3. Erection all risk (EAR) insurance

a) Contract

i. Split of total contract value into major units

ii. Details of Civil Engineering works with values
iii. Principal supplied materials
iv. Bar chart / time schedule of various activities
v. Period of erection / construction including testing and commissioning
vi. Details of phased handover, if any
vii. Maximum values in store and their locations
viii. List of suppliers and their locations
ix. Scaled site plan
x. Scaled plot plan
xi. Site plan showing layouts of fire protection system
xii. Process flow diagrams

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b) Third party

i. Description of surrounding property

ii. Limits of liability required

c) Construction plant and machinery

i. List of construction plant and machinery

ii. Values of individual items to be insured
iii. Criticality of items for project completion

4. EAR advance loss of profit / delay in start-up

a) Scheduled date of completion

b) Details of fabrication / manufacturing on site

c) Repairs facilities on site

d) Possibilities of alternative sourcing of equipment

e) Lists of critical items with lead time (i.e. with maximum replacements
times including manufacture, installation and commissioning) and
probable country of source

f) Details of:

 Upstream dependencies
 Downstream dependencies critical to schedule
 List of utility supplies to the project

g) Impact on throughput following damage to each of the:

 Critical items
 Upstream/downstream dependencies
 Utilities
 Extent to which project can partially operate

h) Type of consequential loss to be insured. E.g. profit, interest charges,

standing charges

i) Calculation of sum insured

j) Indemnity period

k) Confirmation that contractor responsible for delay

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l) Penalties

5. Marine cargo insurance

a) Full details of cargo to be shipped, including dimensions and weight.

b) Origin of:

 General cargo
 Critical items

c) Sum insured in respect of:

 Import cargo
 Critical items
 Local items

d) Full details of how the bulk of cargo will arrive at project site

e) Limits of liability:

 Any one conveyance

 Any one location

6. Marine consequential loss

a) Estimated shipping date each key item

b) Estimated shipping time each key item
c) Estimated installation time each key item
d) Estimated hot testing/commissioning time each key item
e) Period of indemnity required
f) Type of consequential loss to be insured e.g. profit, interest charges,
standing charges, etc.
g) In the event of partial consequential loss, please advise whether the
plant could still be operated
h) Commercial operations / start-up date of construction project

Test Yourself 2
The proposal form individually prescribed for each class of construction phase
insurance relates to information required for specific policies. In case of an EAR
policy, the details of surrounding property will be included under which section?
I. Contract section
II. Third Party section
III. Construction Plant and Machinery section
IV. Claim section

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Summary

a) Endorsement regarding Fire/Explosion: company shall indemnify the insured

in respect of any loss or damage caused by fire/explosion.

b) Endorsement regarding Cross Liability Cover: the Third Party Liability Cover
of the policy shall apply to the insured parties named in the Schedule as if a
separate policy had been issued to each party.

c) Endorsement Regarding Escalation: the insured would be considered fully

insured up to the sum insured, inclusive of ___% increase as per selected
escalation, and under insurance, would apply only in the event of the cost of
replacement of the affected equipment exceeding the original value -
inclusive of the selected ___% towards escalation.

d) Endorsement Regarding Air Freight: policy shall indemnify towards Air

Freight incurred by the insured in connection with the idemnifiable loss
under the policy.

e) Endorsement Regarding Customs Duty: the insured shall also be indemnified

during the currency of this policy, towards Additional Custom Duty Rs.
_______ which may be incurred by the insured over and above the Custom
Duty amount taken into account in arriving at the Sum Insured of the
affected item.

f) Endorsement for Test Run Definition for Gas Turbines in respect of

Combined Cycle Power Plant: the gas turbine insured is deemed to have
commenced its first operation of test loading when the fuel is introduced in
the combustion chamber of the gas turbine unit.

g) Other endorsements include:

i. Hydrocarbon Endorsement For Testing & Commissioning: Article 1,

Article 2 and Article 3
ii. Endorsement Concerning Storage
iii. Endorsement Regarding Safety Measures
iv. Endorsement Regarding Damage to Crops, Forests etc.
v. Cover of Leak Search Costs when Laying Pipelines

h) Special Conditions for Open Trenches During Laying of Pipelines Ducts and
Cables: Insurers will indemnify the insured for any loss or damage due to
storm, rainfall, flood, inundation such as sanding, silting up, mudding up,
erosion, collapse and floating up of pipes, ducts or cables, sustained by
completely or partly excavated open trenches and / or items laid therein,
upto a maximum length of ____ km open trench only one loss event.

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i) Design Defect Exclusion Wordings: Five sets of Endorsement wordings are
available from the London Market for the Defect Exclusion (D.E.) Wordings.

i. Outright Defect Exclusion DE 1

ii. Extended Defective Condition Exclusion DE 2
iii. Limited Defective Condition Exclusion DE 3
iv. Defective Part Exclusion DE 4
v. Design Improvement Exclusion DE 5

j) The proposal form individually prescribed for each class of construction

phase insurance relates to information required for specific policies.

k) The below list broadly covers all the major headings under which
information would be required by an underwriter for making decisions on:

i. Acceptance of risks
ii. Type of insurance including scope of cover
iii. Rates, terms and conditions
iv. Retention
v. Reinsurance

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Answers to Test Yourself

Answer 1

The correct option is III.

In an endorsement regarding Cross liability, each joint insured is considered as

if separately insured for the purpose of liability.

Answer 2

The correct option is II.

In an EAR policy, the details of the surrounding property will be included under
the Third Party section.

Self-Examination Questions

Question 1

In an endorsement regarding air freight, each and every claim shall be subject
to a minimum excess of _______ of the admissible Air Freight incurred over and
above the excess as applicable under the policy.

I. 1%
II. 5%
III. 10%
IV. 20%

Question 2

In an endorsement regarding customs duty, each and every claim shall be

subject to an excess of _______ of the admissible Additional Custom Duty
incurred, and will be in addition to the excess amount applicable for the
affected item under the policy.

I. 1%
II. 5%
III. 10%
IV. 20%

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Question 3

In an ‘endorsement for test run definition in respect of Thermal Power Station’,

in no case the total test period available under the policy shall exceed ______.

I. 12 months
II. 18 months
III. 24 months
IV. 30 months

Question 4

In a ‘Hydrocarbon Endorsement For Testing & Commissioning’ – Article 1, during

any operation where hydrocarbons or hydrogen is involved, the deductible
excess shall be 5% of claim amount subject to minimum of __________.

I. Rs. 100000/-
II. Rs. 250000/-
III. Rs. 500000/-
IV. Rs. 750000/-

Question 5

The first wording DE-1 relates to outright exclusion of ‘design defect’ damages
and corresponds to the standard _________, whereas DE-3 corresponds to
standard ________.

I. CW policy, Marine policy

II. MCE policy, CW policy
III. CPM policy, EAR policy
IV. CAR policy, EAR policy

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Answers to Self-Examination Questions

Answer 1

The correct option is II.

In an endorsement regarding air freight, each and every claim shall be subject
to a minimum excess of 5% of the admissible Air Freight incurred over and above
the excess as applicable under the policy.

Answer 2

The correct option is II.

In an endorsement regarding customs duty, each and every claim shall be

subject to an excess of 5% of the admissible Additional Custom Duty incurred,
and will be in addition to the excess amount applicable for the affected item
under the policy.

Answer 3

The correct option is I.

In an ‘endorsement for test run definition in respect of Thermal Power Station’,

in no case the total test period available under the policy shall exceed 12
months.

Answer 4

The correct option is III.

In a ‘Hydrocarbon Endorsement For Testing & Commissioning’ – Article 1, during

any operation where hydrocarbons or Hydrogen is involved, the deductible
excess shall be 5% of claim amount subject to minimum of Rs. 500000.

Answer 5

The correct option is IV.

The first wording DE-1 relates to outright exclusion of ‘design defect’ damages
and corresponds to the standard CAR policy, whereas DE-3 corresponds to
standard EAR policy.

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CHAPTER 11

MACHINERY INSURANCE

Chapter Introduction

All industrial enterprises, whether big or small, are vulnerable to breakdown or

damage of machinery which may have serious financial and economic
consequences.

Hence, in this chapter, we will discuss Machinery insurance policies which

provide protection to industries against any accidental physical damage to the
machinery.

Learning Outcomes

A. Machinery insurance
B. Important provisions under Machinery insurance

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Look at this scenario

A US based paper and pulp making factory suffered huge loss of USD 6.5 million
as one of its paper making machine became non-operational for 15 days. One of
a guide roll in the drying section of the paper machine broke which caused
serious damage to drying cylinders and frame of the paper machine.

It took 8 days to repair the machine during which machine was totally non-
operational and additional 7 days were lost in installation of new drying
cylinders and guide roll.

Such incidences in the factories emphasis the need for Machinery insurance
cover which provides protection to factories against cost of repairs or
replacement as a result of machinery breakdown.

A. Machinery insurance

1. Introduction

Machinery insurance (also called as Machinery Breakdown insurance) should be

of interest to everyone who operates machinery –not only the big industrial
enterprises, using large units or sophisticated production plants but also small
/medium- undertakings where machinery may have serious financial and
economic consequences.

All items of plant and machinery are susceptible to breakdown or damage

irrespective of their quality or the attention given to them by their owners.
With steady increase in the cost of parts, labour and freight charges, repairs
and replacements are becoming more and more expensive day by day.

A modern factory may contain valuable machinery concentrated in a relatively

small area. An accident such as a disrupting machine or impact from an
extraneous cause may very well result in an expensive loss involving several
machines.

Even breakdown of individual items of machinery may produce very substantial

losses .Where major equipment e.g. a turbo alternator is involved; such a loss
may run into lakhs of rupees. Accidents under machinery insurance policies
occur more frequently than under, say, Fire or Boiler explosion insurances.

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2. Scope of insurance

Standard Machinery Insurance Policy covers unforeseen and sudden physical

damage by any cause (subject to excepted risks) to the insured property:

a) While it is at work or at rest.

b) While being dismantled for clearing or overhauling.

c) During cleaning or overhauling operations.

d) When being shifted within the premises.

e) During subsequent erection.

The loss producing events could be:

a) Electrical

Example

Excessive electrical pressure whether due to:

i. Atmospheric electricity or otherwise,

ii. Failure of insulation,
iii. Short circuits,
iv. Open circuits,
v. Arcing,
vi. Failure of insulation,
vii. Malfunctioning of control and protection circuits (including damage by
internal fire so set up)

b) Mechanical

Example

i. Faulty material,
ii. Faulty design,
iii. Faulty casting,
iv. Construction or installation,
v. Vibration,
vi. Maladjustment,
vii. Malalignment,
viii. Defective lubrication,
ix. Loosening of parts,
x. Abnormal stress,

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xi. Molecular fatigue,
xii. Self heating,
xiii. Centrifugal force,
xiv. Explosion due to external pressure or internal vaccum,
xv. Failure of connected machinery or protective devices,
xvi. Defective lubrication etc.

c) External

Example

i. Lack of skill,
ii. Carelessness or malice of persons whether in the insured’s employ or
not,
iii. Obstruction or entry of foreign bodies,
iv. Falling impact,
v. Collision, etc.

In short, the insurance coverage is in respect of electrical breakdown,

mechanical breakdown and accidental damage by extraneous causes.

3. Insured plant and machinery

Range of insurable items

a) Boilers

With auxiliaries such as feed pumps, fans, blowers

b) Electrical equipments

Including power generation, transmission and distribution machinery such as

generators, alternator, transformers, switchgears, rectifiers, cables

c) Mechanical plant

Including engines, turbines, blowers, compressors, pumps, machine tools

and presses. Process machinery in such industries as cold storages,
engineering and metal industries, pulp and paper making, printing, rubber,
plastics and textiles etc.

d) Lifting equipment

Including cranes with fixed installations, conveyors and lifts. (Movable

cranes can only be covered under Contractors Plant and Machinery policy
explained earlier)

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4. Underwriting features

a) Driving machinery

Broadly speaking the most eligible risks for Machinery Insurance are units of
power generating machines and prime movers. These types of machines are
found in many industries. Their common characteristics, from an insurance
point of view are that they are substantially same in design and construction
irrespective of the industry in which they are used.

Machinery of the following type is normally acceptable as good risks for

insurance purpose:

i. Alternators and generators

ii. Boilers
iii. Compressors
iv. Electric motors
v. Engines (steam, diesel, oil etc.)
vi. Fans, blowers,
vii. Machine tools and presses
viii. Pumps
ix. Rectifiers
x. Switchgears
xi. Transformers
xii. Turbines

b) Process machinery

In contrast to power plant and prime movers, process plant varies

considerably from one industry to another. Process plant is designed for a
variety of purposes sometimes by the insured’s own engineering staff. This
may mean new, untried features are involved with the machinery being of
unproved operational reliability.

Following are some of the unsatisfactory features of process plant from

machinery insurance angle:

i. Process plant is generally of less stable design than power plant ;

modifications are more frequently made and it is probably built with
smaller margins of safety

ii. Working conditions are often tougher; overloading shocks occur due to
uneven loads or unskilled operators, the materials undergoing processing
and foreign bodies entering the plant with such materials are frequently
causes of the breakdown.

iii. Rapid depreciation and obsolescence are usually encountered

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iv. Less care and maintenance is normally applied on process machinery
although these are generally operated in damp and or corrosive
atmosphere.

v. Replacement of parts at frequent intervals is a common feature due, in

most cases to normal and rapid wear and tear. Not only may this result
in disagreement as to the cause of the trouble leading to the
replacement but the constant turning down of claims may also create
dissatisfaction.

vi. Caution is necessary in selecting process machinery for insurance and the
past experience of breakdown should be carefully investigated.

c) Hazardous risks

Machinery of all types (power plants, independent units and process) under
the following category is generally considered as hazardous:

i. In brick works , quarries and mines (above and below ground) or used by
builders and other contractors , e.g. tractors ,dumpers bulldozers,
excavators and other earthmoving equipments.

ii. In industries where working conditions impose extraordinary loads or are

otherwise conducive to plant breakdown.

iii. Used underground or installed in any vehicles, air craft or water borne
vessels.

iv. Operating in remote situation with no facilities nearby for repairs and
replacement

v. Acceptance of experimental and prototype machinery should be avoided.

5. Principal exceptions

a) Fire and special perils

The policy does not cover damage due to fire, lightning, explosion (other
than disruption of turbines, compressors, etc. or other items subject to
internal pressure)., theft, collapse of buildings, subsidence, landslide, water
which escapes from water containing apparatus, flood, inundation, storm,
tempest, earthquake, volcano or other Acts of God and impact with vehicles
or aircraft damage including articles dropped from aircrafts or other aerial
device.

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b) Damage to machinery caused by electrical fire

This is specially excluded. However, the intention (with regard to electrical

plant) of the Machinery Insurance Policy is to cover self heating or internal
fire due to electrical faults but exclude damage caused by external fire or
direct lightning which are covered by the Fire Policy. Damage to a machine
by fire spreading from an adjacent machine is also excluded. This also falls
under Fire insurance policy.

c) Explosion

The explosion exclusion in Machinery insurance policy is qualified so that it

does not exclude bursting, disintegration or disruption of turbines,
compressors, transformers, switchgears, etc. or physical explosion of vessels
containing gas, steam and / or a liquid substance due to internal pressure.

Whilst these are occurrences which fall within the term “explosion” they
nevertheless constitute “breakdown” accident as contemplated by the
Machinery Insurance Policy. Otherwise, explosion risk is excluded from the
Machinery Insurance Policy because it is covered under a Fire insurance
policy.

6. Other exceptions

The other major exceptions are:

a) Damage occasioned by war and civil war (uninsurable) or riot, strike and
kindred risks (matter for the fire policy), or nuclear risks (uninsurable).

b) Damage resulting from experiments or overload or similar tests.

This wording excludes those tests or experiments which involve an abnormal

and unpremeditated conditions such as hydraulic tests on boilers, overload
tests on lifting machinery and overload rotating machines, over speed tests
on electrical plant and engines.

This is however, not intended to apply to routine and maintenance tests,

such as insulation tests on electrical plant.

c) Wastage of material or the like or wearing away or wearing out of any

part of the machine caused by or naturally resulting from ordinary usage
or working, or other gradual deterioration.

The intention of this exception is simply to exclude the actual wastage, wear or
deterioration but not sudden and unforeseen damage to other parts resulting
there from. In other words the parts immediately affected by wear and tear are
excluded, but damage to other parts of the items insured is covered.

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d) Loss or damage caused by the willful act or gross negligence on the part
of the Insured or his responsible representatives.

e) Loss of use or any other kind of consequential loss.

f) Faults or defects which were in existence when the insurance was

arranged and known to the insured.

g) Damage due to faults or defects for which the manufacturer or the

supplier is responsible either by law or under contract.

h) Exchangeable parts and tools such as belts, ropes, chains, dies, moulds,
blades, cutters, knives, engraved cylinders, engraved rolls and similar
other parts including all objects not made of metal (except insulation of
electrical conductors).

7. Sum insured and average

Sum insured of each individual item must represent its new replacement value
including

 Transportation cost to site,

 Customs dues and
 All installation costs.

The current market value is not a suitable value, as it constantly changes, and
different valuation criteria and methods are possible.

In the event of loss or damage, it is found that the sum insured is less than the
amount required to be insured, then the amount recoverable by the insured
gets reduced in such proportion as the sum insured bears to the amount
required to be insured. This condition applies separately for each and every
item.

The sum insured should represent the replacement value throughout currency of
the policy and problems of inflation should be borne in mind. For this purpose
the sums insured should be reviewed at frequent intervals and, if possible,
value should be linked to an acceptable index showing fluctuation in prices.

An annual revaluation of the items of plant and machinery should also be

carried out in order to ensure that the sums insured are always kept up-to-date.

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8. Basis of indemnification

In cases where the damage can be repaired, the basis of indemnification is the
cost of restoration to working order based on the customary daily rates together
with normal freight, erection cost and other duties and taxes.

If the value of one item or part thereof is increased by repairs, liability of

insurers is reduced by the amount of such increase. If the repairs are carried
out at a workshop owned by the insured, the insurer will pay cost of materials
and wages plus a reasonable percentage to cover overhead charges. In such
cases of all repairable damage no deduction is made for depreciation in respect
of parts replaced, except those with limited life, but value of salvage is
deducted.

Where the insured item is totally destroyed or is a constructive total loss the
basis of indemnification is market value of the item immediately before the
accident plus cost of removing the damaged machinery less value of salvage.

An insured item is regarded as totally destroyed if the repair cost as described

equals or exceeds its value immediately before the accident.

Any extra charges incurred towards repairs, such as express freight, air-freight,
overtime and holiday rates of wages are payable only if special provision for
these items has been made in the policy in consideration of which an additional
premium is charged. All costs of alterations, additions, improvements are to be
borne by the insured

All the forgoing points are still subject to the comments contained under “Sum
Insured and Average”.

The insurers keep the option that they may repair, replace or reinstate any
property lost or damaged or pay in cash the amount payable.

9. Excess

The insurance is subject to an excess on each and every claim. This eliminates
small claims which are costly and troublesome to handle and as such this is of
benefit to both the parties. As far as the insurer is concerned this is a useful aid
to check the increasing claims costs.

The amount of the excess should be sufficient to eliminate the cost of repairing
routine minor accidents. The excesses like the sums insured, should preferably
be reviewed annually. With the escalation in the price of plant and machinery it
is essential that the amount of the excess is also kept updated.

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Higher excesses are recognised by reductions in the premium as many insured’s
may not require cover against small losses which the can account for in the
normal course of business.

Test Yourself 1

The amount of the excess should be sufficient to

I. Eliminate the cost of repairing routine minor accidents.

II. Pay routine losses
III. Avoid insurance claim payment
IV. Pay only losses smaller than premium

B. Important provisions under machinery insurance

1. Other important provisions

Other important provisions and conditions of the policy are as under:

a) Inspection of turbine and turbo-generator

All mechanical and electrical parts of any steam turbine, gas turbine, water
turbine generators shall be inspected and overhauled thoroughly under the
supervision of Maker’s representative, or any competent agency in the field
in a completely opened up state as per manufacturer’s recommendations
but in no case later than completion of 32000hours of operation or four
years whichever is earlier.

The report of the overhauling to be submitted to the insurer immediately

after the work has been carried out. Insurer may agree to extend the period
between two overhauls if the risk is not aggravated thereby.

b) Obligations of the insured

The insured shall take all reasonable steps to maintain the insured property
in efficient working order and to ensure that no item is habitually or
intentionally overloaded.

The insured shall fully observe the manufacturer’s instructions for

operating, inspections and overhaul, as well as Govt., Statutory, Municipal
and all other binding regulations in force concerning the operation and
maintenance of the insured plant and machinery.

The insurance company officials shall at all reasonable times have the right
to inspect and examine any property insured and the insured shall provide

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the insurer with all details and information necessary for the assessment of
the risk.

The report of the insurance company official shall be treated as strictly

confidential by both the insurer and the insured.

In the event of any:

i. Material change in the original risk.

ii. Alteration, modification or addition to an insured item.
iii. Departure from prescribed operating conditions, whereby the risk of loss
or damage increases.
iv. Change in the insured’s interest (such as discontinuation or liquidation of
the business or being placed in receivership), taking place
The policy shall be void unless its continuance by agreed by endorsement
signed by the company.

c) Duties following an accident

In the event of any occurrence which might give rise to a claim under this
policy the insured shall:

i. Immediately notify the company by telephone or telegram as well as in

writing, giving an indication as to the nature and extent of loss or
damage.
ii. Take all reasonable steps within his power to minimise the extent of the
loss or damages or liability.

iii. Preserve the damage or defective parts and make them available for
inspection by an official or surveyor of the company.
iv. Furnish all such information and documentary evidence as the company
may require.

The insurer shall not be liable for any loss or damage of which no notice and
completed claim form have been received by the insurer within fourteen
days of its occurrence.

The liability of the insurer in respect of any item of property sustaining

damage, for which indemnity is provided shall cease if the said item is kept
in operation without being repaired.

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d) Position after a claim

The insured shall not be entitled to abandon any property to the insurer
whether taken possession of by the insurer not.

As from the day of loss the Sum Insured for the remainder of the period of
insurance is reduced by the amount of compensation. To prevent under-
insurance during the remainder of the current period of insurance the
amount insured must be reinstated.

The reinstatement premium will be calculated pro-rata from the day the
repaired item is again put to work. For subsequent periods of insurance the
original indemnity and premium are again in force unless circumstances
justify an alteration.
e) Technical control
Acceptance of Machinery Insurance risks are usually subject to a satisfactory
Inspection Report. The inspections should be arranged not only at the
inception but also at all subsequent renewals.

The inspection is carried out in order to assess the environment in which the
machinery works, the standard of maintenance and supervision and the
general housekeeping at the premises. The most important factor is the
general condition of the item proposed for insurance including its past
claims history.

Wherever the Inspecting Engineer makes any recommendations for the

improvement in the risks these measures should be immediately conveyed to
the clients and implemented by them before cover can be considered.

f) Claims control
The policy condition clearly lays down the procedure to be followed by an
insured in the event of damage to insured machinery. It would be desirable
to obtain a claim form duly completed and signed and to check that both
the item and the risk involved are insured under the policy.

It is also essential at the outset to check whether any Loss of Profits

(Machinery) Insurance or deterioration of stock insurance is in force covering
the damaged machinery. If so, immediate action is necessary for taking
proper steps to minimise the consequential loss.

A qualified engineer surveyor is generally deputed to assess the loss who will
then:

 Scrutinise claims estimates,

 Determine the cause of the accident and
 Certify that the charges claimed for are reasonable and
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 Exclude cost of improvement, alteration or temporary repairs.

An up to date copy of the policy should be made available to the

independent surveyor, if engaged in the initial stage so that he is fully
acquainted with the terms, conditions and excess under the policy.

A further important point to be borne in mind is the deduction of excess

from the total repair costs. Where more than one item is damaged in the
same accident, the excess deduction would be the highest applicable to any
one of the affected items. Allowance for salvage / scrap should be made in
all settlements.
Consideration must be given to the application of ‘average’ in the event of
any under-insurance.

Possibilities of recourse from the Makers or Suppliers of the machine should

also be explored.

Reinstatement of the sum insured after a claim should be kept in mind and
the insured’s agreement may be sought to issue the necessary endorsement
while preparing to settle the claim proceeds.

Any recommendations made by the loss adjuster to improve the risk features
should be suitably conveyed to the insured for implementation. The insurer
has also to look into the aspect of revisions in terms of cover, if required, to
continue coverage.

g) Special underwriting considerations

While deciding rates, terms and conditions for Machinery Insurance risks, the
following points must be kept in mind:

Table 1.1

Repair Whether dependable repair facilities for major damage are

facilities readily available in the vicinity.
Working conditions of the machinery including the standard of
Nature of risk
housekeeping and maintenance.

Stand-by /
This ensures that the machine will be intermittently used and
spare working
an alternate machine is available in the event of an accident
machines
Generally items of machinery manufactured by reputed firms
Makers
present a better risk.

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It is also to be examined whether the item can be easily
Obsolete replaced in this country in the event of a total loss. It is not
model un-common to find that a relatively minor damage to such
equipment leads to a constructive total loss settlement.

Loss A poor loss experience over past few years would result in
experience higher premium and/or restricted conditions of cover.
Statutory and
other Such inspections serve the purpose of ensuring that all is well
inspection with the items proposed for insurance.
reports
Selection of higher excess amount qualifies for discounts in
Higher Excess
premium.

h) Rating factors

The rates and terms will depend on the following factors:

i. Type of machinery/equipment and its condition,

ii. Origin of the machinery/equipment – whether imported or local,
iii. Working environment on the site,
iv. Maintenance and upkeep system,
v. Quality of operators – whether trained or otherwise,
vi. Experience of the contractor and operators,
vii. Previous accident and claims history.
i) Recent trends and developments

The trend in recent years has shown that more and more insured’s are
looking for “All Risks” cover to avoid / minimise gaps in cover and
overlapping cover that may occur when separate policies are issued for Fire,
Machinery Breakdown, Fire and Machinery LOP.

The Industrial All Risks (IAR) insurance policy in the Indian market is a way
forward in this direction. IAR combines the perils of fire, machinery
breakdown, fire loss of profits and theft/burglary; machinery loss of profits
being an optional cover. The policy is well suited for industrial occupancies,
where fire and allied perils are the predominant risk exposures.

Nevertheless, with the demands in the international markets for an All Risks
cover for machinery breakdown as predominant peril, Munich Reinsurance
Company has developed the new Comprehensive Machinery Insurance (CMI)
policy. This policy is described in Chapter 18.

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Test Yourself 2

Which of the following statements is incorrect?

I. The insurer shall be liable for any loss or damage of which notice has been
received by the insurer after fourteen days of its occurrence.
II. The liability of the insurer in respect of any item of property sustaining
damage, for which indemnity is provided, shall cease if the said item is kept
in operation without being repaired.
III. The insured shall not be entitled to abandon any property to the insurer
whether taken possession of by the insurer not.
IV. The insurance company officials shall at all reasonable times have the right
to inspect and examine any property insured

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Summary

a) Machinery insurance policy covers unforeseen and sudden physical damage

by any cause (subject to excepted risks) to the insured property.

b) Most eligible risks for Machinery Insurance are units of power generating
machines and prime movers. Their common characteristics from an
insurance point of view are that they are substantially the same in design
and construction, irrespective of the industry in which they are used.

c) Process plant is designed for a variety of purposes, sometimes by the

insured’s own engineering staff, which means new, untried features are
involved, with the machinery being of unproved operational reliability.

d) Machine insurance policy does not cover damage due to fire, lightning,
explosion theft, collapse of buildings, subsidence, landslide, water which
escapes from water containing apparatus, flood, inundation, storm,
tempest, earthquake, volcano or other Acts of God.

e) In machinery insurance, the sum insured of each individual item must

represent its new replacement value including transportation cost to site,
customs dues and all installation costs.

f) In cases where the damage can be repaired, the basis of indemnification is

the cost of restoration to working order based on the customary daily rates
together with normal freight, erection cost and other duties and taxes.

g) In the event of any occurrence which might give rise to a claim under this
policy, the insured shall immediately notify the company by telephone or
telegram as well as in writing, giving an indication as to the nature and
extent of loss or damage.

h) The insurer shall not be liable for any loss or damage of which no notice and
completed claim form have been received by the insurer within fourteen
days of its occurrence.

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Answers to Test Yourself

Answer 1

The correct option is I

The amount of the excess should be sufficient to eliminate the cost of repairing
routine minor accidents

Answer 2

The correct option is I.

The insurer shall not be liable for any loss or damage of which no have been
received by the insurer within fourteen days of its occurrence. Hence, option I
is incorrect.

Self-Examination Questions

Question 1

Which of the following machinery involves new and untried features and is of
unproved operational reliability?

I. Driving machinery
II. Process machinery
III. Electrical machinery
IV. Lifting equipment

Question 2

Which of the following type of machinery is normally acceptable as good risks

for insurance purpose?

I. Driving machinery
II. Process machinery
III. Electrical machinery
IV. Lifting equipment

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Question 3

Which of the following statements is incorrect?

I. If the value of one item or part thereof is increased by repairs, the liability
of insurers is reduced by the amount of such increase.
II. If the repairs are carried out at a workshop owned by the insured, the
insured will pay cost of materials and wages plus a reasonable percentage to
cover overhead charges.
III. Where the insured item is totally destroyed or is a constructive total loss,
the basis of indemnification is the market value of the item immediately
before the accident plus cost of removing the damaged machinery less value
of salvage.
IV. An insured item is regarded as totally destroyed if the repair cost as
described equals or exceeds its value immediately before the accident.

Question 4

Machinery insurance is also known as ________________

I. All risk insurance

II. Machinery Breakdown insurance
III. Industrial all Risk insurance
IV. Equipment insurance

Question 5

Which of the following statements is incorrect with respect to insurance claim?

I. The insured shall not be entitled to abandon any property to the insurer
whether taken possession of by the insurer not.
II. To prevent under-insurance during the remainder of the current period of
insurance, the amount insured must be reinstated.
III. The reinstatement premium will be calculated pro-rata from the day the
repaired item is again put to work.
IV. For subsequent periods of insurance, the original indemnity and premium to
be revised even if circumstances do not justify an alteration.

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Answers to Self-Examination Questions

Answer 1

The correct option is II.

Process machinery involves new and untried features and is of unproved

operational reliability.

Answer 2

The correct option is I.

Driving machinery is normally acceptable as good risk for insurance purpose.

Answer 3

The correct option is II.

If the repairs are carried out at a workshop owned by the insured, the insurer
will pay cost of materials and wages plus a reasonable percentage to cover
overhead charges. Hence option II is incorrect.

Answer 4

The correct option is II.

Machinery insurance is also known as Machinery breakdown insurance.

Answer 5

The correct option is IV.

For subsequent periods of insurance, the original indemnity and premium are
again in force unless circumstances justify an alteration. Hence, option IV is
incorrect.

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CHAPTER 12

BOILER AND PRESSURE PLANT INSURANCE

Chapter Introduction

Boilers and pressure plants are used for various processes and for driving
machinery in different industries. Any damage to boiler or pressure plant can
lead to serious financial consequences.

In this chapter, we will discuss in detail the importance of Boiler and Pressure
Plant insurance policies which can be used to prevent financial disasters.

Learning Outcomes

A. Boiler and pressure plant insurance policy

B. Important provisions in boiler and pressure plant insurance

Look at this scenario

ABC Brewing Company is a US based brewery which produces approximately

1,00,000 barrels of beer each year. The brewery had installed two identical fire
tube steam boilers worth USD 1.5 million in which one of the boiler always
remained on a permanent standby. A common feed water pump was regulated
by the water level controller of the operating boiler.

In one of the incidents, while transferring operational mode from one boiler to
another, the operator forgot to change the feed pump of the control system
attached to the particular boiler. As a result pump failed to start as the water
level became low and; low level water safety device failed to shut down the
plant. As the boiler got overheated due to lack of feed water, fire tube of the
boiler got cracked.

The damage resulted into USD 3.5 million losses to ABC Brewing Company. To
avoid such huge financial losses, companies that uses boilers for different
process purpose, should purchase boilers and pressure plant insurance which
covers the loss that occurs due to damage to the boiler.

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A. Boilers and pressure plant insurance

1. Introduction

Boilers generate steam at pressure and pressure plants include other vessels
under steam gas, or fluid pressure. Both these together form an important
system which is used for process purposes in industries e.g. paper mills, cotton
mills, fertilisers, petrochemicals etc; or for driving machinery e.g. turbines for
generation of electricity in Thermal power plants.

The result of major boiler / pressure plant explosion can be quite disastrous;
not only does it result in wrecking the boiler plant and the property in the
vicinity, it can also give rise to personal injuries and damage to property of
Third Parties.

Historically, increasing use of steam for steam for industrial purposes and
resultant explosions in boilers led to the introduction of Boiler Explosion
insurance policy aimed at specifically insuring the boilers against risks of
explosion and/or collapse.

The policy is titled differently in different insurance markets, such as - Boiler

Explosion Insurance Policy, Boiler and Pressure Vessel Insurance Policy and, as
titled in India – Boiler and Pressure Plant Insurance Policy.

2. Scope of insurance

The Boiler and pressure Plant Insurance policy covers insured boilers and
pressure vessels (both fixed and unfixed) against the risk of ‘explosion’ and
‘collapse’ and indemnifies the insured against:

a) Damage to insured item itself (other than by fire).

b) Damage to other surrounding property of the Insured (other than by

fire).

c) Liability for Third Party Property Damage and / or fatal or non / fatal
personal injuries.

Surrounding property and TPL are optional covers.

It may be noted that Explosion or Collapse arising in the course of ordinary

working only is covered. The policy also automatically covers Explosion caused
by ignition of flue gases.

Liability towards employees for death or bodily injury arising out of and in the
course of employment is excluded.

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3. Definitions

The following definitions are given in the standard Boiler and Pressure Plant
Insurance Policy:

a) “Boiler” shall mean any fired closed vessel or a combined container

piping system in which steam is generated under pressure.

b) “pressure plant” shall mean any unfired closed container under steam,
gas, or fluid pressure.

c) “Explosion” shall mean the sudden and violent rendering or tearing

apart of the permanent structure of a boiler or pressure plant or any
part or parts thereof by force of internal steam, gas or fluid pressure
causing bodily displacement of the said structure and accompanied by
the forcible ejectment of its contents.
d) “Collapse” shall mean the sudden and dangerous distortion of any part
of a boiler or pressure plant by bending or crushing caused by steam,
gas or fluid pressure whether attended by rupture or not. It shall not
mean any slowly developing deformation due to any cause.

e) “flue gas explosion” shall mean an explosion of ignited gases in the

furnaces or flues of the boilers economisers and super heaters.
f) “chemical explosion” shall mean an explosion arising out of chemical
reaction in any plant.

4. Explosion

It is desirable to understand what is meant by the word ‘Explosions’.

Explosions can be broadly classified under two categories for the purpose of
Insurance Covers:

 Chemical Explosions
 Physical Explosions

a) Chemical explosions

It is a matter of common knowledge that gun powder, detonators or any

similar explosive compound could cause explosion under the influence of
mechanical or thermal shocks. It is equally known that combustible and
highly inflammable fluids and dusts can cause explosion if their
concentration in the atmosphere exceeds the explosive limits.

It is generally seen that origin of all such explosions is some form of

chemical reaction or a chain of chemical reaction and on account of these,

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such explosions are classified under the general category of ‘Chemical
Explosions’.

From the insurance concept, these explosions are considered as very rapid
form of combustion. The speed and acceleration of such combustion is so
high that the products of combustion liberated are incapable of withholding
the energy generated and the release of uncontrolled energy in this fashion
causes extensive damages.

Normally a majority of the types of explosions are in some form or other,

connected with or originate from ignition and therefore such explosions are
covered under Fire Insurance Policy. These types of explosions would occur
in any premises and are not restricted to any particular industry and plant or
premises.

The following damages caused by explosion are covered under Fire Policy:

i. Fire resulting from explosion

ii. Damages caused by explosion of Boiler used for domestic purposes.
iii. Damage caused by explosion of gas used for domestic purposes only for
lighting or heating a building not forming a part of any gas work.

b) Physical explosions

In respect of Pressure Vessels handling inert fluids such as Steam, explosion

can occur due to variation in fluid pressure. The variation being only in
physical form and there are no chemical reactions or changes responsible for
such explosions , as such these are classified as physical explosions as
distinct from chemical explosions.

The cover under Fire policy however excludes damages to all steam
generators or boiler plants arising out of their own explosions. It would thus
be seen that separate Boiler Explosion insurance policy would be required in
respect of steam generating plants or boilers.

Therefore, boiler should be insured under Boiler Explosion policy to cover

risk of its own explosion and also under Fire policy to cover risk of explosion
taking place elsewhere in the vicinity and affecting the boiler, in addition to
other risks covered under a fire policy

5. Special exceptions in the policy

a) Fire and special perils

The Policy does not cover loss or damage caused by fire (arising from
whatever cause) lightning, theft, collapse of buildings, subsidence,
landslide, rockslide, water escaping from water containing apparatus,

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inundation, earthquake, storm, tempest or other Acts of God, impact with
vehicles of any kind, aircraft and / or aerial devices including articles
dropped there from.

The list of excluded perils does not require elaboration. The reason they are
not covered is that most of these should be conveniently insured under a
Fire Policy.

The basic cover under the Boiler Policy is explosion or collapse resulting
from its own internal working.

Note: The risk of external explosion (taking place elsewhere in the vicinity)
affecting the boiler is covered under a fire policy. This will be clear from
the operative clause of the fire policy which covers, among other risks,
explosion / implosion but excludes loss or damage to

i. Boilers (other than domestic boilers) economisers or other vessels,

machinery or apparatus in which steam is generated or their contents
resulting from their own explosion / implosion.

ii. Caused by centrifugal force

b) Loss or damage occasioned by the application of steam, hydraulic or any

other test of the plant as specified by the Inspecting Authority or
otherwise.

c) Failure of individual tubes unless resulting in explosion or collapse.

d) Loss or damage due to chemical explosion (other than flue gas explosion)
The other exclusions are the same as under Machinery insurance and
relate to gradually developing flaws, overload experiments, wear and
tear, existing defects, willful negligence, manufacturers or supplier’s
responsibility, loss of use, war and kindred risks.

6. Warranties

The policy is subject to the following warranties:

a) The Boiler and Pressure Plant described in the Schedule are annually
inspected by Inspectors appointed by the appropriate Government
Authorities except where there is not statutory requirement for
Government inspection is to be carried out by an independent
competent person.

b) The Boiler and pressure Plant described in the Schedule shall only be
operated by Attendants holding a valid certificate of competency issued
under the appropriate Boiler Act.

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c) The insured shall be in possession of the unqualified permission in
writing of the competent inspecting authority to operate the said Boiler
and Pressure Plant.

d) If the maximum pressure or load upon safety valve immediately prior to

any explosion or collapse was in excess of that stipulated by the said
Authority the Insured shall not be entitled to any compensation or
indemnity under this Policy in respect of such explosion or collapse.

7. Sum insured and average

As for machinery insurance, the sum insured should represent the new
replacement value of the plant which is inclusive of freight and customs duties,
if any, and erection cost. Each item of the plant insured is separately subject to
pro-rata average.

In the event of loss or damage, it is found that the sum insured is less than the
amount required to be insured, then the amount recoverable by the insured
gets reduced in such proportion as the sum insured bears to the amount
required to be insured. This condition applies separately for each and every
item

It should also be borne in mind that wherever super heaters or economisers do

not form an integral part of the Boiler installation they should be described
separately and specifically while completing the policy schedule. Similarly the
policy does not include steam and feed water piping. Such items are covered
only if specifically listed in the Schedule.

It should also further be remembered that each individual boiler and its
auxiliaries should be separately described in the schedule and the individual
new replacement value of each item separately mentioned.

The sums insured in respect of the insured’s own surrounding property damage
and Third Party Liability may be fixed separately on a “first loss” basis having
regard to the exposure involved. The condition of pro-rata average does not
apply.

The surrounding property section and the Third Party section being on “first
loss” basis, all claims arising under these headings will be assessed and settled
up to the amount of the loss not exceeding the Sum Insured without deduction
for Average.

8. Basis of indemnification

The provision regarding basis of indemnification is the same as under Machinery

Insurance policy. See para 15 of Chapter 11.

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9. Excess

Boiler Pressure Plant policy is not subject to any excess.

10. Policy conditions

The conditions which are special to this policy are:

a) The pressure or load on the safety valves of the plant insured shall not
exceed the maximum specified in the schedule or the permissible
pressure as set out in the report on the last inspection whichever is
lower.

b) Any alteration of fuel used for the plant must be notified to the company
and additional premium paid if required.

c) The Insured shall comply with manufacturer’s instructions and all

statutory and municipal regulations.

d) The Company has a right to inspect the insured plant.

Test Yourself 1

__________ refers to a fired closed vessel or a combined container piping

system in which steam is generated under pressure.

I. Boiler
II. Pressure plant
III. Container
IV. Tanker

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B. Important provisions in boiler and pressure plant insurance

Important provisions and conditions

1. Obligations of the insured

The insured shall take all reasonable steps to maintain the insured property in
efficient working order and to ensure that no item is habitually or intentionally
overloaded. The insured shall fully observe the manufacturer’s instructions for
operating, inspections and overhaul, as well as Govt., Statutory, Municipal and
all other binding regulations in force concerning the operation and maintenance
of the insured plant and machinery.

The insurance company officials shall at all reasonable times have the right to
inspect and examine any property insured and the insured shall provide the
insurer with all details and information necessary for the assessment of the risk.
The report of the insurance company official shall be treated as strictly
confidential by both the insurer and the insured.

In the event of any:

i. Material change in the original risk.

ii. Alteration, modification or addition to an insured item.

iii. Departure from prescribed operating conditions, whereby the risk of loss
or damage increases.

iv. Change in the insured’s interest (such as discontinuation or liquidation of

the business or being placed in receivership), taking place the policy
shall be void unless its continuance by agreed by endorsement signed by
the company.

2. Duties following an accident

In the event of any occurrence which might give rise to a claim under this policy
the insured shall:

i. Immediately notify the company by telephone or telegram as well as in

writing, giving an indication as to the nature and extent of loss or
damage.

ii. Take all reasonable steps within his power to minimise the extent of the
loss or damages or liability.

iii. Preserve the damage or defective parts and make them available for
inspection by an official or surveyor of the company.
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iv. Furnish all such information and documentary evidence as the company
may require.

The company shall not be liable for any loss or damage of which no notice and
completed claim form have been received by the company within fourteen days
of its occurrence.

The liability of the insurer in respect of any item of property sustaining damage,
for which indemnity is provided shall cease if the said item is kept in operation
without being repaired.

3. Position after a claim

The insured shall not be entitled to abandon any property to the insurer
whether taken possession of by the insurer not.

As from the day of loss the Sum Insured for the remainder of the period of
insurance is reduced by the amount of compensation. To prevent under-
insurance during the remainder of the current period of insurance the amount
insured must be reinstated.

The reinstatement premium will be calculated pro-rata from the day the
repaired item is again put to work. For subsequent periods of insurance the
original indemnity and premium are again in force unless circumstances justify
an alteration.

4. Underwriting and rating

The proposal form elicits full information of the plant to be insured, in addition
to the other usual details.

i. Description, makers name, makers no, capacity and year of make.

ii. How the boiler is fired e.g. oil, gas, coal.

iii. Working pressure and maximum load on safety valve.

iv. Details of past inspections.

v. Details of boiler attendants.

Risk inspection is conducted by the company’s engineers who have to submit, a

report on external and internal examination of pressure vessel.

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The underwriting considerations for Boiler and Pressure Plant Insurance Policy
are:

i. Type of boiler and its age

ii. Type of fuel
iii. Makers name
iv. Other auxiliaries such as economisers, super heaters and steam piping,
Other unfired pressure vessels if these are to be insured
v. Existing or proposed inspection arrangement
vi. Details of surrounding property and Third Party exposures, if required to
be insured
vii. Sums to be insured on boilers and pressure plants
viii. Limits of indemnity for surrounding property and Third Party Liability
sections
5. Rating

The basic rates of premium depend upon the type of boiler, type of fuel and
age. Additional premium is charged for boilers not certified by the Boiler
Inspectorate and for over-age. A percentage of the basic rate is charged for
surrounding property and third party liability.

6.Technical Control

Before any risk can be accepted it must be ensured that the plant is periodically
inspected by a competent authority and cover can be granted subject to
existence of a valid certificate issued by the Govt. Inspector of Boilers, as per
Indian Boiler Act 1923.

The policy issued on the strength of a valid current certificate incorporates a

warranty making the existence of a current license to operate the boiler at a
specified pressure, a condition precedent to liability.

Inspection of other pressure plants not falling within the purview of the Boiler
Act can be carried out by competent independent engineers.

7. Claims

The procedure is the same as under Machinery Insurance policy. The special
aspects that need attention are:

i. Whether the loss falls within the definition of ‘Explosion’ or ‘Collapse’.

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ii. Whether the warranties have been complied with.

8. Claims Control

Generally, claims are for substantial amounts and require great care during
investigation and negotiation. It is necessary to investigate the cause of the
damage and ascertain whether the claim falls under the policy definitions of
Explosion or Collapse.

The certificate issued by the Govt. Inspector of Boilers must be checked to

ensure that the accident occurred within its validity period and that all its
terms and conditions complied.

It is preferable to have assessments of boiler explosions claims carried out by

qualified engineer surveyor who can determine the exact cause of the loss and
arrive at a fair assessment as to the quantum of claim payable. A formed duly
completed and signed should be obtained in all cases.

If the claim is on account of Third Party personal injury or property damage, it

must be made quite clear that on no account should the insured offer, admit,
promise or compromise any payment without the consent of the insurance
company in writing.

Test Yourself 2

Which of the following statements is incorrect?

I. The basic rates of premium depend upon the use of boiler, its maker and
cost.
II. Additional premium is charged for boilers not certified by the Boiler
Inspector
III. In case of over-aged boilers, additional premium is charged
IV. A percentage of the basic rate is charged for surrounding property and third
party liability.

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Summary

a) The Boiler and Pressure Plant Insurance policy covers insured boilers and
pressure vessels (both fixed and unfixed) against the risk of ‘explosion’ and
‘collapse’.

b) Boiler shall mean any fired closed vessel or a combined container piping
system in which steam is generated under pressure.

c) Pressure Plant shall mean any unfired closed container under steam, gas, or
fluid pressure.

d) Explosion means the sudden and violent rendering or tearing apart of the
permanent structure of a boiler or pressure plant or any part or parts
thereof by force of internal steam, gas or fluid pressure causing bodily
displacement of the said structure and accompanied by the forcible
ejectment of its contents.

e) Collapse means the sudden and dangerous distortion of any part of a boiler
or pressure plant by bending or crushing caused by steam, gas or fluid
pressure whether attended by rupture or not.

f) Explosions that are in some form or other, connected with or originate from
ignition are covered under Fire Insurance Policy.

g) Boiler should be insured under Boiler Explosion policy to cover risk of its own
explosion and also under Fire policy to cover risk of explosion taking place
elsewhere in the vicinity and affecting the boiler.

h) The basic rates of premium depend upon the type of boiler, type of fuel and
age. Additional premium is charged for boilers not certified by the Boiler
Inspectorate and for over-age.

i) Before any risk can be accepted, it must be ensured that the plant is
periodically inspected by a competent authority and cover can be granted
subject to existence of a valid certificate issued by the Govt. Inspector of
Boilers, as per the Indian Boiler Act 1923.

j) It is preferable to have assessments of boiler explosion claims carried out by

a qualified engineer surveyor who can determine the exact cause of the loss
and arrive at a fair assessment as to the quantum of claim payable.

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Answers to Test Yourself

Answer 1

The correct option is I.

Boiler refers to a fired closed vessel or a combined container piping system in

which steam is generated under pressure.

Answer 2

The correct option is I.

The basic rates of premium depend upon the type of boiler, type of fuel and
age. Hence, option I is incorrect.

Self-Examination Questions

Question 1

_________ is an unfired closed container under steam, gas, or fluid pressure.

I. Boiler
II. Pressure plant
III. Container
IV. Tanker

Question 2

____________ is a sudden and violent rendering or tearing apart of the

permanent structure of a boiler or pressure plant or any part or parts thereof by
force of internal steam, gas or fluid pressure causing bodily displacement of the
said structure and accompanied by the forcible ejectment of its contents.

I. Explosion
II. Collapse
III. Eruption
IV. Inundation

Question 3

Which of the following damages are not covered under Fire insurance policy?

I. Fire resulting from explosion

II. Damages caused by explosion of Boiler used for domestic purposes
III. Damage caused by explosion of gas used for domestic purposes only for
lighting or heating a building not forming a part of any gas work
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IV. Explosion due to fluid pressure

Question 4

What is a ‘flue gas explosion’?

I. An explosion arising out of chemical reaction in any plant.

II. An explosion of ignited gases in the furnaces or flues of the boilers,
economisers and superheaters.
III. An explosion arising due to fluid pressure
IV. Explosion caused due to combustible and inflammable fluids

Question 5

___________ means the sudden and dangerous distortion of any part of a boiler
or pressure plant by bending or crushing caused by steam, gas or fluid pressure.

I. Explosion
II. Collapse
III. Eruption
IV. Inundation

Answers to Self-Examination Questions

Answer 1

The correct option is II.

Pressure plant is an unfired closed container under steam, gas, or fluid

pressure.

Answer 2

The correct option is I.

Explosion is a sudden and violent rendering or tearing apart of the permanent

structure of a boiler or pressure plant or any part or parts thereof by force of
internal steam, gas or fluid pressure causing bodily displacement of the said
structure and accompanied by the forcible ejectment of its contents.

Answer 3

The correct option is IV.

Damage caused by explosion due to fluid pressure is not covered under fire
insurance policy.

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Answer 4

The correct option is II.

“Flue Gas Explosion” means an explosion of ignited gases in the furnaces or

flues of the boilers, economisers and super heaters.

Answer 5

The correct option is II.

Collapse means the sudden and dangerous distortion of any part of a boiler or
pressure plant by bending or crushing caused by steam, gas or fluid pressure.

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CHAPTER 13

MACHINERY LOSS OF PROFITS INSURANCE

Chapter Introduction

Today’s industries rely increasingly on machines for manufacturing. Damage or

breakdown of machinery can lead long interruptions and the business earnings
will be adversely affected. These financial consequences of interruptions
following breakdown of machinery can be covered under Machinery Loss of
Profits insurance (MLOP) policy.

Hence, in this chapter, we will discuss in detail about the various features and
importance of MLOP.

Learning Outcomes

A. Introduction to machinery loss of profits insurance

B. Risk assessment and underwriting considerations

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A. Introduction to machinery loss of profits insurance

1. The Need

The process of industrialisation and technological advancements has resulted in

use of machines of high production capacities, compact designs accompanied
with more and more automation.

Though machines of such sophisticated designs have increased efficiency and

quality of production, the exposure to accidents has increased. Any breakdowns
may lead to longer periods of interruptions. In today’s environment of high
competition, no business can survive unless it can either successfully avoid such
interruptions or it is protected by insurance for financial impacts of such
interruptions.

The insurance available for protecting the financial impacts of any interruptions
in the business are termed as:

 Loss of profits insurance

 Consequential loss insurance
 Business interruption insurance
 Loss of earnings insurance etc.

Engineering insurance caters to the needs for such a policy in the following
circumstances:

a) Delay in commencement of earnings due to accidents during construction

/ erection of the project. (The available insurance is ALOP insurance,
which has been discussed earlier.)

b) Interruption in business activities due to explosions / collapse of boilers

and/or pressure vessels.

c) Interruption in business activities due to electrical and/or mechanical

breakdowns in production machinery.

With the impacts of the above, the manufacturer would not only be unable to
make the profit which he had hitherto been making, but there would also be
several continuing expenses to meet although the business was no longer
earning the money to pay them. Such continuing expenses are referred to as
“Standing Charges”.

In addition, an effort to reduce the impact of interruption of the business, the

owner may have to adopt alternative measures, but at increased cost

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In the event of breakdown of or accident to a vital part of manufacturing plant,
the actual damage to the machinery could be small but the loss sustained
through inability to manufacture might be heavy.
These losses are covered under Machinery Loss of Profits Policy (MLOP). In fire
insurance, this policy was earlier known as Consequential Loss policy, however
in recent times, the American term ‘Business Interruption Insurance’ is
popular.

MLOP provides indemnity against:

 Loss of net profit.

 Insured standing changes.
 Increased cost of working.

2. Items for MLOP insurance

It is not necessary that all the items of plants equipments at the Insured’s
factory should be covered under the MLOP Policy.

The insured is allowed to select those key items of the plant where stoppage
would seriously interrupt the business, e.g., Steam boiler, turbo alternators,
transformers, major process machinery and so forth.

The insured machinery is listed in the policy schedule. In this respect practice
followed for MLOP Insurance differs from that of Fire LOP Insurance.

3. Material damage provision

Like the Fire LOP, the MLOP policy is meant to cover business interruption loss
as a consequence of an insured material damage loss.

Like the Fire LOP Policy there is also a condition under the Machinery LOP Policy
that a claim must first be admitted under the concurrent material damage (i.e.
Machinery and / or Boiler) Insurance Policy before a claim becomes admissible
under the Machinery LOP Policy.

However, if no payment is made solely as a result of an Excess under the

material damage policy, i.e. liability admitted, the MLOP loss will be
admissible.

4. Scope of insurance

The scope of insurance is prescribed in the policy as under:

“If during the period of Insurance any machinery or other apparatus described
in the Schedule and used by the Insured at the premises stated in the Schedule
for the purpose of the Insured’s business, be affected by an “ACCIDENT” as

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defined hereinafter and the Insured’s business carried on by the Insured at the
premises be in inevitable consequence thereof interrupted or interfered with,
the Company will pay to the Insured the amount of loss resulting from such
interruption or interference as defined herein or endorsed hereon.”

The insured business is described in the Schedule of the policy and losses are
insured only in respect of the business described. Where business of a diverse
nature is to be insured, it is essential that they be properly described.

If some part only of some business is to be insured, then this must be made
clear at time of effecting the policy.

Similarly, the premises of the business is an important factor as MLOP

insurance covers only the business carried out in the premises specified in
the policy Schedule. When different manufacturing activities are carried out in
separate premises, interdependence between each such section can be provided
for but has to be declared and agreed at inception of the policy.

Definitions

The MLOP policy is precise on the intentions as various parameters related to it

are clearly defined in the policy. These definitions are as under:

a) Accident

Sudden and unforeseen physical damage as defined in the concurrent

Machinery / Boiler and Pressure Plant Insurance policy described in the
Schedule resulting in a claim admissible under that policy.

b) Gross profits

The sum produced by adding to the Net Profit the amount of the insured
standing charges as per list attached or if there be no Net Profit the amount
of the standing charges less such a proportion of any net trading loss as the
amount of the insured standing charges bears to all the standing charges of
the Business.

c) Net profit

The net trading profits (exclusive of all capital receipts and accretions and
all outlay properly chargeable to capital) resulting from the Business of the
insured at the Premises after due provisions have been made for all Standing
and other charges including depreciation, but before deduction of any tax
on profits.

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d) Turnover

The money (less discount allowed) paid or payable to the insured for goods
sold or services rendered in course of the Business at the Premises.

e) Output

It’s a measure in terms of unit of production e.g. No. of T.V. sets, tons of
paper, etc.

f) Indemnity period and time exclusion

The period beginning with the occurrence of the Accident and ending not
later than the number of months mentioned in the Schedule, during which
the results of the business shall be affected in consequence of the Accident
provided always that the insurer shall not be liable for the amount of the
loss arising during the number of working days (Time Exclusion) mentioned
in the Schedule immediately following the occurrence of the Accident.

In other words, the indemnity period commences on the date of accident and
terminates when production reaches normal level existing at the time of the
occurrence of the insured peril or the expiry of the number of months selected
by the insured, whichever occurs earlier.

Restoring the business to its normal working may involve:

i. Procuring new machinery / having damaged machinery repaired and

ii. Erection and commissioning of the new / repaired machinery.

5. Insured standing charges

Standing charges have not been defined in the policy but these can be said to
be such charges which do not reduce proportionately with a reduction in
production following an accident.

These can also include such charges which could have been reduced but are
specifically desired to continue to be incurred in the overall interest of the
business. Hence, it is very essential for the insured client or the advisor to
understand the business revenue streams and appropriately include such
expenses under the head “standing charges” in order to explicitly cover the
same.

The insured has to decide which charges to insure or exclude according to the
particular circumstances of his business.

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The expenses normally considered as Insurable Standing Charges are:

a) Interest payable on all types of loans, bank overdrafts, debentures,

deposits including brokerage on deposits, dividend on preference shares
etc.,

b) Bank charges and guarantee commission.

c) Rents, rates and taxes (tax on profit is included in net profit).

d) Duties, licence fee and patent fees.

e) Directors fees / remuneration

f) Legal, auditing and other professional fees of a regular nature.

g) Insurance premium.

h) Advertisement and publicity.

i) Conveyance, travelling and motor car expenses.

j) Stationery, postage, telephones, telegrams, telex, teleprinter and

computer expenses.

k) Research and development expenses of a regular nature.

l) Heating, cooling, lighting and power charges other than for production
purposes (such as for administrative offices, staff colony, street lighting
in colony and factory and the like) including minimum charges. These
can be depreciation on capital assets such as buildings, plant and
machinery, furniture / fixtures / fittings, office equipments, motor
vehicles etc.,

m) Repairs and maintenance expenses on capital assets.

n) Subscription to trade associations, magazines and regular donations to

charities (not one-time donations).

o) Expenses on clubs for staff and guest house.

p) Gardening expenses pertaining to the factory areas and staff colonies.

q) Salaries to permanent staff.

r) Provident fund, bonus, superannuation, pensions, gratuity, perquisites

like. Medical expenses and leave concessions and other benefits and
staff welfare expenses.

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s) Water charges other than for manufacturing purposes.

t) Miscellaneous expenses, not exceeding 5% of the total of all other

specified standing charges

u) By separate item: wages, including state insurance contributions either:

i. To all employees or
ii. To employees of specified categories or
iii. To the extent of a specified percentage of the total wages.

It must be noted that the list given above is not exhaustive but only indicative.
Nomenclature of heads of account will also differ from one company to the
other.

The Insured can choose to insure all his Standing Charges or only part of the
Standing Charges, in which case, the Standing Charges selected for insurance
must be specified by their title or name in accordance with the head of account
or nomenclature used in the insured’s accounts.

These will constitute the “Insured Standing Charges”. This would automatically
imply that there are some ‘uninsured standing charges’, which will not be taken
into account while working out the rate of Gross Profit at the time of loss.

The other effect of omission of certain Standing Charges (by selection or by

mistake) is as per provision of Memo 2 of the policy, which reads as follows:

“If any standing charges of the business be not insured then in computing the
amount recoverable as increase in cost of working that proportion only of the
additional expenditure shall be brought into account which the sum of the Net
Profit and the Insured Standing Charges bears to the sum of the Net Profit and
all the standing charges”

This is a kind of pro-rata average for the purpose of under insurance.

6. Exclusions

Loss, which is sustained as a result of any interruption or interference of

operations arising out of or aggravated by the following are excluded from the
MLOP policy:

a) The willful neglect or willful act of the insured or his responsible

representative.

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b) Exceptional events occurring during the period of interruption which
events are not amongst the perils insured by this policy or concurrent
machinery / boiler explosion insurance policy.

c) Loss of turnover due to import licenses being issued by the govt. To the
insured’s clients for the import of the products manufactured by the
insured or due to insured’s /clients obtaining supply of such products
from other sources.

d) Any restrictions (on reconstruction or operations) imposed by a

government authority, including any delays on account of obtaining
import licenses.

e) The insured not having at his disposal sufficient capital for repairing or
replacing damaged or destroyed plant or machinery.
f) Alterations, improvements or overhauls being made while repairs or
replacements of the damaged or destroyed property are being carried
out.

g) Any defects existing at the commencement of this policy.

h) Under- insurance under the material damage policy.

i) Depreciation of stocks or spoilage of materials.

j) Cost of preparation of litigation costs.

7. Sum insured and underinsurance

Sum insured is the Gross Profit i.e. Net profit plus Standing Charges.

After the Gross Profit is worked out from the previous year’s financial results,
appropriate additions should be made to project the figures for the next
financial year during which the Policy will be in force.

Since the profit of the business cannot be accurately forecast, it is advisable to

keep the gross profit figure sufficiently high to cover all anticipated increase in
gross profit during the covered financial year.

There is a provision in the Policy for downward adjustment of the sum insured
up to 50% at the end of the policy period, if the sum proposed for insurance
exceeds the actual Gross Profit of the business, as ascertained from the
Insured’s audited account.

This enables the insured to take cover for a fairly high estimated projected
figure, and if the expectations do not fully materialise and the actual Gross

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Profit turns out to be lower, the insured can get a refund up to 50% of the
premium originally paid.

If sum insured at time of a claim is found to be less than the amount required to
be insured, the condition of Average is applied to work out the extent of
underinsurance.
The Increased Cost of Working (ICOW), alternatively falls within the scope of
the policy. It relates to the additional expenditure on item of expenses such as:

a) Sub – contracting of the production to some other party

b) Difference between the expeditious costs for repairs and the normal
costs of repairs
c) Hiring of temporary replacement machinery, if available
d) Hiring of extra labour force
e) Overtime working etc.

8. Loss assessment

The method of computation of loss is provided in the policy itself and is similar
to the method in Fire Loss of Profits policy.

The following terms have to be understood to work out the method.

i. Rate of gross profit

The rate of gross profit earned on the turnover / output during the financial
year immediately before the date of the damage.

ii. Annual turnover / output

The turnover/output during the twelve months immediately before the date
of damage.

iii. Standard turnover/ output

The Turnover / Output during that period in the twelve months immediately
before the date of the damage which corresponds with the indemnity
period.

Such adjustment shall be made to rate of gross profit, Annual / Standard

Turnover / Output as may be necessary to provide for the trend of the business
and for variations in or special circumstances affecting the business either
before or after the damage or which would have affected the business had the
damage not occurred so that the figures thus adjusted shall represent as nearly
as may be reasonably practicable the results which but for the damage would
have been obtained during the relative period after the damage.

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The computation of loss is based on the following figures and percentages
ascertained in sequence:

a) The rate of Gross profit based on turnover and gross profit figures of the
last audited financial accounts.

b) Actual turnover during the Indemnity period is deducted from the

Standard Turnover to arrive at the

c) Reduction in turnover.

d) The rate of gross profit is applied on the reduction. This is the amount of
claim payable for reduction in turnover.

e) The additional expenditure incurred to avoid or diminish reduction in

Turnover.

f) The Turnover maintained because of the additional expenditure and the

gross profit earned thereon.

g) The additional expenditure is subject to two adjustments:

i. If any standing charges are not insured, then that proportion only of
the additional expenditure which the sum of the Net Profit and
insured standing charges bears to the sum of Net Profit and all
Standing Charges shall be payable.
ii. The additional expenditure cannot exceed the sum produced by
applying the rate of gross profit to the amount of reduction in
turnover avoided. In other words, additional expenditure cannot
exceed the gross profit earned by it. This is known as the economic
limit.

h) The amount of insured standing charges which are not incurred during
the indemnity period because of the damage. (Savings in insured
standing charges).

i) The amount of claim payable is iii plus v minus vi.

j) The rate of gross profit is applied to the annual turnover to determine

the insurable amount. If the sum insured under the policy is less than the
insurable amount the claim amount arrived at in vii above is
proportionately reduced. This is pro-rata average to take care of under-
insurance.

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9. Auditor’s fees

In the vent of a claim under the policy it may be necessary for the Insured’s
auditors to produce a certificate of the figures which could be required in the
final computation of the claim.

The Auditor’s charges for his additional work can be insured under a separate
item and the sum insured should represent the estimated fees likely to be
charged.

10. Excess

Time Exclusion period is the Excess applicable under MLOP insurance policy. All
MLOP policies are subject to a minimum Excess. Since the MLOP loss is ‘Time
related’ i. e. the loss grows with time element, it generally expressed in
number of days.

This period commences with the Indemnity Period and indicates period after an
accident for which no payment is made under the policy.

11. Premium adjustment clause

As per the practice followed in India full annual premium on the declared sum
insured is collected at inception of policy period and the premium is adjusted at
the expiry of the policy period. Such adjustment is made to the extent of 50%
downwards depending on the actual gross profit achieved during the financial
year.

Test Yourself 1

Which of the following policy provides cover against business interruption loss as
a consequence of an insured machinery breakdown loss?

I. Fire LOP
II. ALOP
III. MLOP
IV. EAR

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B. Risk assessment and underwriting considerations

1. Risk assessment

In addition to the proposal form submitted by the insured it is essential that an

Engineer carries out a pre-acceptance inspection of the machinery and
equipment proposed for MLOP insurance. A special form has been devised for
eliciting all the information connected with a MLOP proposal.

Since risks vary considerably between industry to industry it will also be useful
if a process description along with a process flow diagram can also be furnished
with the proposal. This will give the inspecting engineers an idea as to the
importance of each machine, by-passing and other arrangements available, etc.

The risk inspection report will among other things, provide the following
details.
a) Description of plant (including maker’s name)

 Date of make
 Work performed

b) Loss potential

i. Proportionate effect on production if damaged.

ii. Alternative means of working

 Description
 Proportion of production maintained
 Time to put into effect and extra cost
iii. Estimates of repair time following major damage

iv. Spare parts held

v. Any factors which could delay resumption of production e.g.

 Solidification of materials
 Phased restarting etc.

c) Observations on special features affecting the risk e.g.

i. Prototype experimental design or use

ii. Prolonged working hrs
iii. Unattended plant

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d) In case of ‘Stand by’ equipment/machinery, the report should indicate
if they are available for immediate use and to what extent can they do
the work of the items which they replace.

(Note: A flow diagram should accompany the report)

2. Risk assessment factors

Some risk assessment factors are:

a) Relative importance of each machine that is the percentage of the

Insured’s daily total production which would be lost by the stoppage of
the machine.

b) Whether or not any alternative means of working are available in case of

stoppage of any of the insured machines, for example, can the alternate
working machines carry the load originally borne by the machine which
has failed; can the work be done at any other premises at an increased
cost; can suitable replacement machines be hired temporarily?

c) The availability of standby machinery and whether such standby

facilities are available for immediate use and, if so, to what extent they
can do the work of the items which they replace.

d) The spare parts held by the insured for the plant and machinery, the
repair facilities available at the site and locally.

The age of the plant, make, country of origin, previous breakdown experience
and communication facilities to the work sit.

3. Underwriting and technical considerations

The prime consideration is the schedule of machinery to be covered against

MLOP risks. It must be ensured that all the items proposed for MLOP insurance
are also covered against Machinery Breakdown/ Boiler Explosion risks as
appropriate with the same Insurer under a material Damage Policy which must
run concurrently with the LOP policy.

The second factor to be determined is the relative importance of each machine

that is the percentage of the Insured’s daily total production which would be
lost by the stoppage of the machine.

The next information to obtain is whether or not any alternative means of

working are available in case of stoppage of any of the insured machines.

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Example

a) Can the alternate working machines carry the load originally borne by the
machine which has failed?
b) Can the work be done at any other premises at an increased cost?
c) Can suitable replacement machines be hired temporarily?

The next point to look for is the availability of stand-by machinery and whether
such stand-by facilities are available for immediate use and if so, to what
extent can do work of the items which they replace.

Other factors of importance are:

a) Spare parts available with the insured (underwriters are not interested in
spares on consumables but on critical equipment )
b) Repair facilities available locally or otherwise,
c) Age of the machines, country of origin, possibilities of indigenous
replacements,
d) Nature and history of previous breakdowns and
e) Transportation and Communication facilities to the site
f) Effect of import and Foreign Exchange Regulations

Since risks may vary considerably between industry to industry, it will also be
important to examine the process description along with process flow diagrams.

This will enable the underwriter to understand the importance and contribution
of each machine to the profits / output and alternate modes of product
variation etc.

To ascertain all the foregoing points it is essential that a qualified Engineer

carries out a pre-acceptance inspection of the machinery and equipment
proposed for MLOP proposal.

4. Claims control

Unlike other claims under Engineering Policies it is difficult to make even a

rough estimate of the interruption loss during early stages of breakdown or
explosion claim. It is, therefore, necessary to appoint a licensed and specially
qualified Engineering Surveyor/Chartered Accountant wherever there is any
prospect of the time exclusion being exceeded.

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Since the interruption loss increases with passage of time, immediate action is
most important in dealing with any claim under Engineering Loss of Profits
Policy.

Immediate steps are required to be taken to avoid or minimise interruption loss.

Hence the Company’s Engineer and /or the Independent Surveyor must arrive at
the spot immediately, on receipt of news of any breakdown.

The computation of actual loss sustained is more or less on the same lines as
that under a Fire Loss of Profits policy. Provision is made for saving during the
indemnity period in consequence of the accident. This is in conformity with the
principle of indemnity as otherwise the insured could gain from his misfortune.

5. Rating

Normally MLOP cover is granted only if the factory has completed at least one
year trouble free commercial production and claims experience under MI policy
is satisfactory.

Since the interruption loss is time related, utmost caution needs to be exercised
in adequate rates and time excess periods commensurate with the risk
exposure.

Certainly each MLOP proposal will require to be rated on its merit and the
business can not be a tool for competition on commercial considerations.

The current common practice is to obtain an MLOP cover within the Industrial
All Risks (IAR) policy without specifying the particular machinery. This provides
a wider cover. Normally the time deductible in MLOP varies from 14 days of
Standard Gross Profit to 45 days of Standard Gross Profit, depending on the type
of industry and class of machinery. For more customized covers, usually a higher
deductible is imposed by insurers.

Test Yourself 2

What is the minimum period for which a factory has to carry on trouble-free
commercial production before it can become eligible for MLOP cover?

I. Six months
II. One year
III. Three years
IV. Five years

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Summary

a) In the event of breakdown or accident to a vital part of a manufacturing

plant, the actual damage to the machinery could be small but the loss
sustained through inability to manufacture might be heavy. These losses are
covered under Machinery Loss of Profits Policy (MLOP).

b) In fire insurance, MLOP is generally known as Consequential Loss policy. The

American term ‘Business Interruption Insurance’ is also becoming popular.

c) The insured is allowed to select key items of the plant where stoppage
would seriously interrupt the business, e.g. Steam boiler, turbo alternators,
transformers, major process machinery and so forth.

d) The premises of the business is an important factor as MLOP insurance

covers only the business that is carried out in the premises specified in the
policy Schedule.

e) In MLOP, the Sum insured is the Gross Profit i.e. Net profit plus Standing
Charges.

f) There is a provision in the Policy for downward adjustment of the sum

insured up to 50% at the end of the policy period, if the sum proposed for
insurance exceeds the actual Gross Profit of the business, as ascertained
from the Insured’s audited account. If profit turns out to be lower, the
insured can get a refund up to 50% of the premium originally paid.

g) As per the practice followed in India, full annual premium on the declared
sum insured is collected at the inception of the policy period and the
premium is adjusted at the expiry of the policy period.

h) For underwriting, among other factors, it must be ensured that all the items
proposed for MLOP insurance are also covered against Machinery
Breakdown/ Boiler Explosion risks as appropriate with the same Insurer
under a material damage policy which must run concurrently with the LOP
policy.

i) Normally, MLOP cover is granted only if the factory has completed at least
one year of trouble free commercial production and claims experience
under MI policy is satisfactory.

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Answers to Test Yourself

Answer 1

The correct option is III

MLOP policy provides cover against business interruption loss as a consequence

of an insured machinery breakdown loss.

Answer 2

The correct option is II.

A factory has to successfully complete one year of trouble free commercial

production before it can become eligible for MLOP cover.

Self-Examination Questions

Question 1

In MLOP cover, the turnover during the twelve months immediately before the
date of damage is referred to as _____________.

I. Gross profit
II. Annual turnover
III. Standard turnover
IV. Net turnover

Question 2

Which of the following needs to be deducted from the Standard Turnover to

arrive at the reduction in turnover?

I. Gross profit
II. Annual turnover
III. Standard turnover
IV. Actual turnover

Question 3

As per the practice followed in India in MLOP, how is the premium on the
declared sum insured collected by the insurance company?

I. Annual premium of equal installments based on sum insured is collected on

monthly or quarterly basis.
II. Annual premium of unequal installments based on sum insured is collected
on monthly or quarterly basis.
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III. Full annual premium on the declared sum insured is collected at the
inception of the policy period.
IV. Half of the annual premium on the declared sum insured is collected at the
inception of the policy period.

Question 4

The Turnover / Output during the twelve months immediately before the date
of the damage which corresponds with the indemnity period is referred to as
_____________.

I. Gross profit
II. Annual turnover
III. Standard turnover
IV. Actual Turnover

Question 5

Which of the following is correct with respect to MLOP?

I. Sum insured is the Gross Profit i.e. Net profit plus Standing Charges.
II. Sum insured is the Net Profit i.e. Gross profit plus Standing Charges.
III. Sum insured is the Gross Profit i.e. Net profit less Standing Charges.
IV. Sum insured is the Net Profit i.e. Gross profit less net profit

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Answers to Self-Examination Questions

Answer 1

The correct option is II.

In MLOP cover, the Turnover during the twelve months immediately before the
date of damage is referred to as Annual turnover.

Answer 2

The correct option is IV.

Actual turnover needs to be deducted from Standard Turnover to arrive at the

reduction in turnover.

Answer 3

The correct option is III.

As per the practice followed in India, full annual premium on the declared sum
insured is collected at the inception of the policy period.

Answer 4

The correct option is III.

The turnover / output during the twelve months immediately before the date of
the damage which corresponds with the indemnity period is referred to as
standard turnover.

Answer 5

The correct option is I.

Sum insured is the Gross Profit i.e. Net profit plus Standing Charges.

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CHAPTER 14

ELECTRONIC EQUIPMENT INSURANCE

Chapter Introduction

Industries nowadays employ high value electronic equipment, any damage to

which may lead to huge losses to the company.

Electronic equipment insurance policy has been designed to protect the

companies against such losses that can be incurred due to damage to the
electronic equipment. Hence, in this chapter, we will discuss the Electronic
Equipment Insurance (EEI) policy and its various sections in detail.

Learning Outcomes

A. Introduction to electronic equipment insurance

B. Technical control and underwriting considerations

Look at this Scenario

A microchip plant suffered huge losses of around USD 12 million as the

equipment in the plant got damaged due to flood. Water entered the basement
of plant during heavy rainfall, which caused sudden power failure at the plant.
Due to sudden power failure many of the equipment got damaged as a result of
which production had to be stopped till the equipment was repaired.

Financial losses occurring due to above mentioned incidences can be prevented

by taking Electronic Equipment Insurance (EEI) which provides protection
against financial losses occurring due to any damage to installed and operating
equipment.

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A. Introduction to electronic equipment insurance

1. Introduction

Electronic equipment, in particular, computer installations with all the

peripherals often involve a large number of high valued equipment contained in
a relatively small area. An accident such as impact from falling object, leakage
of water or steam into the equipment or damage from other extraneous causes
may result in very expensive losses.

The term equipment includes the entire computer system consisting of CPU,
Keyboards, monitors, printers, UPS, System Software etc. Thus, peripheral
equipment as well as auxiliary equipment such as air-conditioning, heating and
power conversion, etc. are also covered.

Example

Some examples of electronic equipment are:

a) Electronic Data Processing (EDP) equipments.

b) Electronic equipment for medical use.
c) Communication facilities.
d) Lighting and navigation facilities.
e) Equipment for research and material testing,
f) Computer controlled production plant and machinery including
robotronics.
g) Peripheral equipment such as monitors, printers, modem, etc.
h) Peripheral such as air conditioning, heating and auxiliary power supply
units.

The Electronic Equipment Insurance (EEI) policy is available to the owner as the
operator, lessor or the maintainer and the hirer.

2. Scope of cover

The Policy applies to the insured items only after successful completion of their
performance / acceptance test, whether they are at work or at rest or being
dismantled for the purpose of cleaning or overhauling or in the course of
aforesaid operations themselves or when being shifted within the premises or
during subsequent re-erection.

The EEI Policy offers cover on an ‘All Risks’ basis in three Sections as under:

 Section 1 : Material Damage

 Section 2 : External Data Media and
 Section 3 : Increased Cost of Working (ICOW)
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a) Section 1 – Material damage

The cover applies to any unforeseen and sudden physical loss or damage
from any causes, (other than those specifically excluded), in a manner
necessitating repair or replacement.

The Material Damage Section offers cover virtually on an “All Risks” basis,
and indemnifies the insured against any physical loss or damage due to the
following perils:

i. Fire and Lighting

ii. Riot, strike, malicious and terrorism damage
iii. Theft and burglary
iv. Acts of God : i.e. Earthquake (fire and shock), Landslide / Rockslide /
Subsidence, Water damage, flood, inundation, storm, tempest,
hurricane, tornado ,typhoon ,cyclone
v. Impact from falling objects, collision
vi. Short circuiting, arcing or similar electrical or mechanical breakdowns.
vii. Failure of safety devices
viii. Carelessness, negligence, faulty operation
ix. Faulty design, faulty material, faults in manufacturing/ assembly/
erection
x. Damage due to water, moisture and humidity

b) Section 2 – External data media

This Section of the EEI policy indemnifies the expenses incurred for the
purpose of restoring insured external data media, entered in the policy
Schedule including the expenses for reproducing lost data or information,
necessitated due to operation of a peril covered under Section-1.

c) Section 3 – Increased cost of working (ICOW)

This Section of the EEI policy indemnifies the additional costs which the
insured shall incur to ensure continued data processing on substitute
equipment, if such costs arise as an unavoidable consequence of an
indemnifiable loss or damage under Section 1.

3. Exclusions

a) General exclusions (applicable to all Sections)

i. Loss or damage due to war or warlike operations, civil commotion, etc.

225
ii. Loss or damage due nuclear reaction, radiation or radioactive
contamination
iii. Loss or damage due to willful act or willful negligence of the insured or
of his representative
iv. Cessation of work whether total or partial
v. Cost incurred/time involved in the movement of machinery and/or any
other property and/or personnel outside the territorial limits of India
other than the cost of delivery of replacements, for machinery lost or
damaged.
vi. Derangement of the Insured property not accompanied by damage
otherwise covered by this policy.
vii. Loss of or damage to the property covered under this policy falling under
the terms of the Maintenance Agreement.
viii. Loss destruction or damage directly occasioned by pressure wave caused
by aircraft and other serial devices travelling at Sonic or Supersonic
Speeds.

b) Special exclusions to section I – Material damage

i. The excess stated in the schedule

ii. Loss or damage caused by any faults or defects existing at the time of
commencement of the insurance.
iii. Loss or damage caused by failure or interruption of any gas, water or
electric supply.
iv. Loss or damage due to wear and tear, erosion, corrosion or gradual
deterioration due to atmospheric conditions.
v. Loss or damage for which the manufacturers or suppliers are responsible
by law or under contract.
vi. Loss or damage to rented or hired equipment for which the owner is
responsible.
vii. Loss of or damage to bulbs, valves, tubes, ribbons, belts, wires, chains,
etc. or any operating media.
viii. Consequential loss or liability of any kind.

c) Special exclusions to section II – External data media

i. The excess stated in the schedule.

ii. Any cost arising from false programming, punching or inadvertent
cancelling of information etc.
iii. Consequential loss of any kind.

d) Special exclusion to section III – Increased cost of working

i. Restrictions imposed by Public Authority.

ii. Necessary funds not being available to the insured in time for repairing
or replacing the equipment.

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iii. Cost incurred for use of substitute equipment during the time excess
period.

4. Sum insured and average section 1

The sum insured for Section 1-Material Damage should be equal to the cost of
replacement of the insured property by the new property of the same kind and
capacity i.e. its replacement cost including freight, dues and custom duties, if
any, and erection costs.

The condition of “Average” applies in the event of under insurance.

5. Maintenance warranty

A service or maintenance contract with the computer makers is warranted in

the policy. This contract should normally provide for:

 Regular servicing and maintenance and

 The making good by the makers of all damage by breakdown sustained
by the equipment except damage which is caused by the negligence of
the owner / hirer / user of the equipment.

a) Section 2: External data media

The sum insured in this section should be the amount required for restoring
the insured external data media by replacing lost or damaged data media by
new material and reproducing lost information.

The indemnity under this section is on first loss basis and the condition of
“Average” does not apply.

b) Section 3: ICOW

The insured need to select the limits in respect of the following:

i. Indemnity per hour

ii. Indemnity per occurrence for ___weeks
iii. Aggregate indemnity limit during the period of insurance
iv. Expenses on transportation of materials

If the indemnity limits selected “per hour’ is not found sufficient in the
event of a claim, the condition of “Average’ would apply.

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6. Basis of indemnification

a) Section 1: Material damage

The provision regarding basis of indemnification is the same as under

Machinery Insurance policy. See Chapter 11.

b) Section – 2 External data media

This Section of the policy indemnifies the expenses that can be proved to
have been incurred by the insured within 12 months as from the date of the
occurrence strictly for the purpose of restoring insured external data media
to a condition equivalent to that existing prior to the occurrence and
necessary for permitting data processing operations to be continued in the
normal manner.
c) Section – 3: Increased cost of working
This section indemnifies those costs and expenses, which can be proved to
have been incurred during the indemnity period to maintain data processing
operations to their previous extent, that are additional to those which
would have been incurred during the same period if no insured event –
indemnifiable under Section 1 – had occurred.
The total indemnity for event shall not exceed an amount equal to the
agreed indemnity limit per hour or the “actual hourly rate payable for the
use of substitute equipment” whichever is less, multiplied by the number of
working hours stated as “indemnity period” in the schedule or by the actual
number of working hours for which the substitute equipment is put into use,
whichever shall be less.
If the limit selected “per hour” is found to be less than the amount actually
incurred per hour the condition of “Average” will apply.

Interruptions shorter than the “Time Excess” would not be payable.

Interruptions longer than the time excess the insured shall bear that
proportion of each claim which corresponds to the “Time Excess”.

7. Excess
All the three Sections of the policy are subject to separate Excess prescribed in
the Schedule.

Section 1-Material Damage and Section 2- External Data Media are subject to
monetary excess amounts, whereas Section 3 – ICOW is subject to a Time
Excess.

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Test Yourself 1

In EEI insurance, which of the following sections indemnify the insured against
any physical loss or damage to electronic equipment due to ‘Act of God’?
I. Section 1: Material damage
II. Section 2: External data media
III. Section 3: Increased cost of working (ICOW)
IV. All sections

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B. Technical control and underwriting considerations

1. Technical control and underwriting considerations

A service or maintenance contract with the computer makers is stipulated in

the policy itself. This contract should normally provide for

a) Regular servicing and maintenance and

b) The making good by the makers of all damage by breakdown sustained
by the equipment except damage which is caused by the negligence of
the owner /hirer /user of the equipment.

Separate consideration should be given to the computers used for process

control.

A Technical Survey should be conducted of all such electronic equipment and

computer installation. A special questionnaire is to be filled in by the Insured
giving relevant particulars of the items proposed for Insurance and there is also
a special survey report form to be filled in by the Inspecting Engineer

Particular attention should be paid to fire damage, water damage and malicious
damage potential. Also cover for only the equipment which has completed at
least three months trouble free operation should be granted. No cover is
therefore provided in respect of equipment which is not of order or not yet
commissioned.

In view of very high loss potential it is not the practice in India to grant cover
for Loss of Profits. Only in selected cases cover is granted against increased
costs of working subject to a fixed limit.

2. Rating

All the three sections of the EEI Policy are subject to separate rates and terms.
For Sections 1 and 2 a flat rate is prescribed, whereas for Section 3 i.e. ICOW,
the rate is linked with selected Time Exclusion period as well as the Indemnity
period selected. As per the erstwhile tariff provisions, a rate of 1% was
chargeable for equipment that’re under a manufacturers’ warranty and a rate
of 2% was chargeable for older equipment., however these rates have varied
very significantly in the recent times on account of detariffing.

The policy warranty regarding Maintenance can be waived at additional

premium. Information on good / adverse features in a risk accompanied with
the following information is important in deciding rates and terms of cover:

a) Claims History for previous five years i.e. information on total number
of claims, details of all claims over Rs. 10000/-, total premium received
and claims paid and outstanding
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b) Maintenance programme and Repairs facilities,
c) Good and adverse features and
d) Any other special information.

Selection of higher Excess amounts may be eligible for rate credits.

Test Yourself 2

For which of the following sections of EEI is the rate linked with selected Time
Exclusion period as well as the Indemnity period selected?

I. Section 1: Material damage

II. Section 2: External data media
III. Section 3: Increased cost of working (ICOW)
IV. Applicable to all sections

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Summary

a) The Electronic Equipment Insurance (EEI) policy is available to the owner as

the operator, lessor or the maintainer and the hirer. The term equipment
includes the entire computer system consisting of CPUs, keyboards,
monitors, printers, UPS, system software etc.

b) The EEI Policy applies to the insured items only after successful completion
of their performance / acceptance test, whether they are at work or at rest
or being dismantled for the purpose of cleaning or overhauling or in the
course of the aforesaid operations themselves or when being shifted within
the premises or during subsequent re-erection.

c) The Section 1 (Material Damage) offers to indemnify the insured against any
physical loss or damage due to different perils. Section 2 (External data
media) indemnifies the expenses incurred for the purpose of restoring
insured external data media entered in the policy Schedule. Section 3
(ICOW) indemnifies the insured against additional costs which the insured
shall incur to ensure continued data processing on substitute equipment.

d) The sum insured for Section 1 should be equal to the cost of replacement of
the insured property by the new property of the same kind and capacity,
whereas for Section 2, it should be the amount required for restoring the
insured external data media by replacing lost or damaged data media by
new material and reproducing lost information.

e) For Section 3, the insured needs to select the limits for the sum insured in
respect of the following: indemnity per hour, Indemnity per occurrence for
weeks, Aggregate indemnity limit during the period of insurance and
Expenses on transportation of materials.

f) Section 1-Material Damage and Section 2- External Data Media are subject to
monetary excess amounts, whereas Section 3 – ICOW is subject to a Time
Excess.

g) All the three sections of the EEI Policy are subject to separate rates and
terms. For Sections 1 and 2, a flat rate is prescribed, whereas for Section 3
i.e. ICOW, the rate is linked to selected Time Exclusion period as well as the
Indemnity period selected.

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Answers to Test Yourself

Answer 1

The correct option is I.

In EEI insurance, ‘Section 1: Materials damage’ indemnifies the insured against

any physical loss or damage to electronic equipment due to an ‘Act of God’.

Answer 2

The correct option is III.

In EEI insurance, Section 3: Increased Cost of Working (ICOW), the rate is linked
with selected Time Exclusion period as well as the Indemnity period selected.

Self-Examination Questions

Question 1

In EEI, which of the following sections indemnifies the insured against physical
loss or damage to electronic equipment due to faulty design of the equipment?

I. Section 1: Material damage

II. Section 2: External data media
III. Section 3: Increased cost of working (ICOW)
IV. All sections

Question 2

In EEI, which of the following sections indemnifies the insured against expenses
for reproducing lost data or information?

I. Section 1: Material damage

II. Section 2: External data media
III. Section 3: Increased cost of working (ICOW)
IV. Applicable to all sections

Question 3

Which section(s) of the EEI policy indemnifies the additional costs which the
insured shall incur to ensure continued data processing on substitute
equipment?

I. Section 1: Material damage

II. Section 2: External data media

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III. Section 3: Increased cost of working (ICOW)
IV. All sections

Question 4

For which of the following sections of the EEI policy should the ‘sum insured’ be
equal to the cost of replacement of the insured property by the new property of
the same kind and capacity?

I. Section 1: Material damage

II. Section 2: External data media
III. Section 3: Increased cost of working (ICOW)
IV. All sections

Question 5

Which of the following sections of EEI are subject to time excess?

I. Section 1: Material damage

II. Section 2: External data media
III. Section 3: Increased cost of working (ICOW)
IV. All sections

Answers to Self-Examination Questions

Answer 1

The correct option is I.

In EEI insurance, ‘Section 1: Materials damage’ indemnifies the insured against

physical loss or damage to electronic equipment due to faulty design of the
product.

Answer 2

The correct option is II.

In EEI, section 2: External data media indemnifies the insured against expenses
for reproducing lost data or information.

Answer 3

The correct option is III.

Section 3: Increased cost of working of the EEI policy indemnifies the additional
costs which the insured shall incur to ensure continued data processing on
substitute equipment.
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Answer 4

The correct option is I.

The sum insured for Section 1-Material Damage should be equal to the cost of
replacement of the insured property by new property of the same kind and
capacity.

Answer 5

The correct option is III.

Section 3 – ICOW is subject to a Time Excess.

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CHAPTER 15

OTHER ANNUAL POLICIES

Chapter Introduction

In this chapter, you will learn about the features of Deterioration of Stocks
(DOS) and Civil Engineering Completed Risks (CECR) Insurance policies.

Learning Outcomes

A. Deterioration of stocks (DOS) insurance

B. Civil engineering completed risks (CECR) insurance

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A. Deterioration of stocks (DOS) insurance

Concept of deterioration of stock (DOS) insurance

The policy, known as Deterioration of Stock (DOS) Insurance or Stock Spoilage

Insurance is a form of consequential loss cover granted in the Engineering
Department for stocks contained in cold storages. The cover is against the risk
of deterioration / putrefaction and contamination of stocks as a result of
change in temperature of the cold storage chambers due to breakdown of the
refrigeration plant and machinery; a claim for such breakdown being admissible
in terms of the concurrent Machinery Insurance Policy. The package of
Machinery and DOS insurance together is often termed as Refrigeration Plant
Insurance.

In the Indian Market it is customary to have two different forms of policies:

iii. Deterioration of Stocks Insurance (other than potatoes): This policy is

for stocks of fish, prawns, frog legs and other types of sea foods, fruits,
cheese, provisions and other dairy and agricultural products etc.
iv. Deterioration of Stocks Insurance (potatoes): This policy is exclusively
meant for the contents of potato cold storage.

Although basic cover is the same in both cases, two different forms of insurance
protection are provided. These two different forms of cover will be discussed
separately in this chapter.

1. Deterioration of stocks insurance (other than potatoes)

a) Scope of cover

The cover applies to loss or damage by deterioration or putrefaction of the

contents of the cold store caused by rise or fall in temperature resulting
from:
i. Breakdown of refrigeration plant and equipment at the premises
ii. Damage to the said plant and equipment by an incidental extraneous
cause subject to certain excluded perils mentioned later

iii. Action of refrigeration fumes escaping from the aforementioned plant

and equipment

iv. Reasonable expenses incurred to avoid or diminish such loss or damage

by deterioration or putrefaction, e.g., by transferring threatened goods
from one cold store to another.

v. The policy can also be extended on payment of additional premium to

cover damage to stocks resulting from accidental failure of electricity
supply at the terminal ends of the supply authority’s service feeder at

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the insured’s premises due to an accident by a peril insured under the
material damage i.e. Machinery Breakdown Policy.

b) Principal exclusions

i. Fire, lightning, extinguishing of fire or subsequent dismantling, chemical

explosion, theft, collapse of building, subsidence, landslide, water which
escapes from water containing apparatus, flood, inundation, storm,
tempest, earthquake and other Acts of God perils.

ii. War, civil war, riot, strike and nuclear risks

iii. Consequential loss, damage or liability due to or arising from the

deterioration, putrefaction or contamination of the goods (e.g. claim for
“Loss of market” etc.) or third party claims for poisoning as a result of
eating contaminated goods.

c) Sum insured and average

The sum insured should represent the maximum value of stocks in the cold
store at any one time during the currency of the policy. This is very
necessary as these policies are subject to the condition of average. The
extent of under-insurance can easily be detected from the updated stock
register.

d) Basis of indemnification

The liability of the insurer is normally limited to the market value of

commodities immediately before the accident. In one event the total
liability of the company will not exceed the sum insured under the policy.

Since claims under the Deterioration of Stock Policy follow a breakdown

covered under the Machinery Breakdown Insurance Policy, as soon as
indications of a breakdown in a cold store is received, it is necessary to
simultaneously check the conditions of the stock also. This will enable the
assessor to determine whether the loss under the Deterioration Policy has in
fact occurred as a result of the breakdown or due to some other extraneous
cause.

Normally, claims under this Policy particularly covering fish/meat cold

stores should be supported by Certificates issued by the Government
Authorities confirming that the stocks are unfit for human consumption.

e) Excess (self-insurance)

Like most other engineering policies, Deterioration of Stock Insurance

Policies are also made subject to a deductible excess in respect of each and

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every claim, and this is clearly indicated in the policy. The excess should
preferably be fixed at a reasonably high level.

f) Technical control

i. Technical inspection report

In view of the very serious loss potential it is absolutely essential that

acceptance of this risk is made subject to receiving a satisfactory Technical
Inspection Report of an engineer. This technical inspection should also be
carried out prior to each renewal mainly with a view to checking the
standard of refrigeration plant and additions and alterations in the storage
arrangement, if any.

ii. Concurrent machinery insurance policy

The Deterioration of Stocks Policy, as already mentioned earlier, follows a

Machinery Insurance Policy and it is a condition precedent under the
Deterioration Policy that a claim should be admitted under the Machinery
Insurance Policy. A concurrent Machinery Insurance Policy should, therefore,
remain in force preferably with the same insurer along with the
Deterioration Policy.

Generally speaking, in view of the high loss potential acceptance of this

class of business should be done with utmost care. The loss potential is
enormous since the goods do not possess inherent qualities of preservation
and there is absolutely no scope for any salvage either.

iii. Extension of policy

The policy can be extended on payment of additional premium, to include

the risks of deterioration due to accidental failure of electricity supply at
the terminal ends of the Supply Authorities’ Service Feeders at the insured’s
premises. The cover under this extension follows the basic cover under the
Machinery Insurance Policy and the exclusions are also more or less
common. In addition the risks of power rationing, load shedding, drought
and / or fuel shortage are other important exclusions under this extension.

Where several cold storages are connected to a single grid, the risk of
accumulation of losses due to failure of electricity supply cannot be ruled
out. Extreme care should, therefore, be taken before granting this
extension. It may be useful to check the records of the public supply
Authority, the transmissions lines serving the cold stores and to ascertain
whether the supply is through single or double feeder lines and how far they
travel from the sub-station to the cold stores.

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iv. Checking of log books

The inspecting engineer will be interested in checking all the log books
maintained by the cold store owner with a view to ascertaining the
temperature readings on different dates, as well as the operating of the
refrigeration plant and machinery.

g) Underwriting considerations

Premium of this class of business is fixed depending upon past experience,

age and condition of the plant, stand by repair and / or replacement
facilities, standard of maintenance and supervision, nature of the
refrigerant gas used, alternative storage facilities in the event of claim, the
amount of excess and similar other factors.

Cover is granted subject to satisfactory pre-acceptance report.

Special importance is attached to the following warranty appearing in the

policy:

i. Maintenance contract in respect of plant and equipment to be kept in

the force throughout the currency of the policy.

ii. Log books are maintained showing the temperature reading at regular
intervals.

iii. Stock books are maintained containing proper record of all stocks in the
cold store date wise.

In case of large cold stores it is permissible to issue Deterioration Policies on

a declaration basis.

h) Rating structure (other than potato)

Each cold store should be rated on its merits as outlined earlier. At present
each insurance company follows own rating structure for cold storage
insurance (other than potato). It is reported that experience for this class of
business on a world wide basis has been adverse. Such policies are generally
issued on an annual basis.

2. Deterioration of stock (Potatoes) in cold storage insurance policy

a) Scope of cover and principal exclusions

This form of policy has been exclusively designed for potato stocks in cold
stores.

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The cover afforded under this policy and the principal exclusions are almost
identical to the standard Deterioration of Stock insurance policy. In addition
there are certain extra conditions and warranties inserted in the policy
mainly in view of the nature of the stock being covered.

b) Sum insured and average

The sum insured under this policy should represent the value of the goods
obtained by multiplying the full storage capacity of the cold store as
declared by the insured by the average price of the goods at the time of
storage. This agreed price should also include the storage charges for the
entire season. The policies are subject to pro-rata condition of average.

c) Basis of indemnification

The value of the potatoes at the time of commencement of the insurance is

mutually agreed upon between the insured and the insurance company and
this value should clearly be mentioned in the policy. In the event of a claim
the insured value or the market price whichever is lower, forms the basis of
claim settlement, subject to deductions for rottage, shrinkage, under-
insurance, salvage, if any, and the excess applicable. In any event the total
liability of the company will not exceed the total sum insured under the
policy.

d) Excess

The deterioration of Stock Policy for potatoes is also subject to an excess

which the insured has to bear in respect of each and every claim.

e) Technical control

i. Moral Hazard

In view of very high loss potential for this class of business also rigid
acceptance procedure has been introduced. Moral hazard of the proposal
plays an important role in this class more than any other branch of
engineering insurance.

ii. Concurrent machinery breakdown insurance policy

The deterioration of stock policy for potatoes is also subject to the

condition precedent that a claim must be first admitted under the
Machinery Insurance Policy before a claim can be accepted under the Stocks
Deterioration Policy. It is, therefore, essential that a concurrent Machinery
Breakdown Insurance Policy must be effected and kept in force with the
same insurer that is underwriting the Stocks Deterioration Policy for
potatoes.

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iii. Pre-insurance inspection

According to the Rules and Regulations framed for acceptance and rating of
Potato Cold Stores Insurance, pre-insurance inspection is required before
every season / renewal. This pre-insurance inspection must be carried out
before coming on cover during the loading period which in any event should
be before 15th of April each year.

The inspecting Engineer must be clear and precise in giving his findings and
recommendations in respect of the plant/equipment, the condition of the
cold chambers and the temperatures maintained therein. The inspecting
Engineer is required to fill in the special reporting form on the spot.

iv. Frequent mid-term inspections

In almost all cases frequent mid-term inspections of the cold store are
carried out by the competent Engineers, and the follow up measures found
necessary at the time of such inspections are taken. This is mainly to
prevent substantial claims being reported at the time of unloading of stocks
at the end of the season. Mid-term inspection might reveal if any stock has
been affected by deterioration and/or contamination and, if so, immediate
arrangements are to be made to segregate such affected stocks.

v. Maintenance of log book

The cold store owner is also under an obligation to maintain a Log Book in
which recordings of temperature (both wet bulb and dry bulb readings),
humidity, section discharge and oil pressure of the various compressors
should be recorded at the four hourly intervals. This Log Book should be on
the form supplied by the insurance company.

vi. Maintenance of stock register

In addition the insured is expected to maintain a stock register in the

proforma to be supplied and regular declaration of the stock position should
be communicated from time to time.

If accidental failure of power supply extension cover is granted, full data

regarding the date and period of interruption should be properly recorded.
It is of course understood that potato stocks can withstand fluctuations in
temperature in the cold store for hours.

f) Underwriting considerations

The underwriting considerations for this class of business are identical to

those stated under the general deterioration of stock section.

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The facility allowed to insured for arranging a policy on declaration basis, is
however, different from that available under the normal deterioration of
stock insurance policy.

g) Claims control

On receipt of notification of a claim under a machinery breakdown policy

where deterioration of stock policy is also involved, a qualified engineer
surveyor must be deputed at the shortest possible time not exceeding 48
hours, in order to:

i. Inspect the damage, dismantling and / or removal of the affected

properties carried out by the insured and carefully investigate the cause
of loss in relation to the breakdown of plant and machinery.
ii. Note the nature and extent of the loss and scrutinise log sheets and
records which the cold store owners are obliged to maintain under the
statute.
iii. Examine, ascertain and sign the stock registers to quantify the stock at
the time of reported damage / loss;
iv. Prepare for use of the underwriting office, a provisional estimate of the
loss.
v. Recommend and supervise all loss minimisation measures i.e. arrange for
immediate repair / replacement of the affected equipment.
vi. Check salvage disposal measures after taking sample of stocks for further
scrutiny.

Whenever a Machinery Breakdown claim is reported, the stocks must also be

inspected by the Surveyor to establish beyond doubt that deterioration, if
any, has not been caused by the breakdown in question. (It is well known
that sprouting of potatoes cannot start if breakdown duration is within 72
hours).

A claim form duly competed by the claimant must be obtained.

Test Yourself 1

Deterioration of Stocks Insurance (other than potatoes) cover applies to loss or

damage by deterioration of the contents of the cold store caused by a
_________

I. Rise in temperature
II. Fall in temperature
III. Rise or fall in temperature
IV. Constant temperature

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B. Civil engineering completed risks (CECR) insurance

1. Need for CECR insurance

Owners and operators of civil engineering structures look for comprehensive

insurance protection against loss or damage after the construction work has
been completed and the facilities have been taken over. In such structures, the
fire risk is often negligible, so that the standard fire policy is unsuitable. Of far
greater importance are the natural hazards in connection with the operation
and use of the facilities.

2. Structures suitable for CECR insurance

Structures suitable for CECR insurance are mainly the following

 Roads
 Dry docks
 Runways
 Overhead lines
 Bridges
 Transmission masts
 Tunnels
 Pipelines only if conveying non-combustible substances
 Dams of all kinds
 Irrigation systems
 Canal systems
 Water reservoirs
 Harbours
 Sewer systems

Note: The CECR policy will not compete with policies already existing, such as
the fire policy, nor will it replace such policies.

3. Scope of cover

The CECR policy is a named – perils policy. It covers the insured against any
unforeseen and sudden physical loss or damage necessitating repair or
replacement. Such loss or damage must be caused by the following perils:

a) Impact of landborne or waterborne vehicles or aircraft or articles

dropped therefrom
b) Earthquake, volcanism, tsunami,
c) Storm (air movements stronger than Grade 8 on the Beaufort Scale)
d) Flood or inundation
e) Subsidence, landslide, rockslide or any other earth movement
f) Frost, avalanche, ice, snow
g) Vandalism of individual persons
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h) Fire, lightning, explosion

In special cases, further perils can be included by endorsements, depending on

the location and type of the risk involved e.g. bush fire in Australia.

The fact that fire, lightning and explosion are listed here as perils covered does
not contradict the introductory remarks, as conceivably an external fire may
cause damage to the property insured.

4. Exclusions

Although the CECR policy is a named-perils policy, special attention should be

paid to various exclusions, the most important of which are:

a) Wilful act or wilful negligence of the insured or his representatives

b) Loss, damage or expenses arising out of inherent vice, wear and tear,
gradual deterioration, expansion or contraction due to changes of
temperature
c) Loss or damage caused by or aggravated by inadequate maintenance
d) Consequential loss or damage of any kind
e) War and nuclear risks
f) Strike, riot, civil commotion; (these hazards can, however, be included
by endorsement)

The underlying idea of CECR insurance is to provide cover against external

hazards for which the original contractor or the operator or owner as the
insured is not responsible.

The exclusion of inadequate maintenance is to make clear that the CECR policy
does not exempt the insured from his responsibility for appropriate
maintenance and upkeep. The CECR policy cannot replace a suitable
maintenance schedule.

5. Sum insured

In accordance with the policy condition, the property must be insured at new
replacement value.

This means that the sum insured may not be less than the cost of replacement
of the insured items by new items of the same kind and capacity, inclusive of all
materials, wages, freight, etc. Otherwise, under-insurance will be applicable.

In order to receive full cover, the insured should include a realistic amount for
the removal of debris, such amount to be indicated separately in the policy.

245
6. Basis of indemnity

Cover is granted only for material damage to the property insured; only the
repair costs are indemnifiable. The increase in value connected with a repair
will not be debited to the insured i.e. in the case of partial losses, there is no
deduction new for old.

When determining the current value of a structure at the time of a loss, one
must apply the depreciation rates of comparable structures. In this context, the
service life of the property must be considered.

The determination of the service life depends above all on the type and scope
of normal maintenance work and on regular overhauls and repairs.

Under insurance is applied if the sum insured on the day of the loss does not
correspond to the new replacement value of the items insured.

The insurers remain fully liable even if the third party has caused the loss. In
such cases, the insured is reimbursed, but the insurers will try, wherever
possible, to recourse against the party that caused the loss, which often proves
to be difficult, tedious and costly.

7. Period

Insurance of civil engineering completed risks should always be effected on the

basis of renewable policies, the period not exceeding one year.

At each renewal, the sum insured must be reviewed and adjusted to the
increase in prices in the meantime. Furthermore, the age and condition of the
property insured should be taken into consideration.

8. Underwriting assessment

The following aspects are checked:

a) Geographical location of the risk

b) Topography
c) Special exposure to inundation, storm, landslide, earthquake, sea quake,
etc. due to the exposed location of the risk
d) Type and condition (depending on age and use) of the risk
e) Is the property to be insured maintained regularly and adequately?
f) Is it particularly old or worn above average?
g) Has the risk previously been damaged due to hazards to be covered?
h) If so, what measures have been taken to prevent repetition?
i) Has the damage been repaired properly?
j) Experience during the construction period
k) Were special construction methods applied?

246
l) Did any special aggregations or damage occur during the construction
period?

Inspection reports should indicate whether or not the design and calculation
make adequate allowance for the hazards to be expected, such as storm,
inundation and earthquake. Due to advanced developments, the original design
may now prove faulty and inadequate, although it fully complied with the latest
technical standards at the time of construction.
Such a report should also include an estimate of the repair cost to be expected
for the maximum probable loss.

Special attention should be paid to the operating risk. In this context, the
following details are of importance:

a) Purpose and use of the object to be insured.

b) Exact information on all previous damages caused by the hazards to be
insured.
c) Detailed information on all damage due to other causes.
d) Special exposure to fire, explosion, blasting work or other hazards.
e) Presence of operating personnel.

The following additional information is also to be collected:

a) Data of the original construction period and cost.

b) Pictures of the structure and its surroundings.

All information available is to be evaluated carefully in order to ensure that the

construction components are sound as far as their design, construction and
condition are concerned.

Test Yourself 2

In a CECR policy, in special cases, perils can be included by __________.

I. Modifications
II. Endorsements
III. New policy
IV. Addendums

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Summary
a) Deterioration of Stock (DOS) Insurance or Stock Spoilage Insurance is issued
in two forms: potatoes and other than potatoes.

b) The cover applies to loss or damage by deterioration or putrefaction of the

contents of the cold store caused by a rise or fall in temperature.

c) Principal exclusions are Acts of God, war, civil war, riot, strike and nuclear
risks, consequential loss, damage or liability.

d) Sum insured should represent the maximum value of stocks in the cold store
at any one time during the currency of the policy.
e) The liability of the insurer is normally limited to the market value of the
commodities immediately before the accident.
f) The policy is subject to a deductible excess in respect of each and every
claim.
g) Acceptance of this risk is made subject to receiving a satisfactory Technical
Inspection Report of an engineer.

h) It is a condition precedent under the Deterioration Policy that a claim

should be admitted under the Machinery Insurance Policy.
i) Premium is fixed depending upon past experience, age and condition of the
plant, stand by repair and / or replacement facilities, standard of
maintenance and supervision, nature of the refrigerant gas used, alternative
storage facilities in the event of claim, the amount of excess and similar
other factors.
j) The CECR policy is a named-perils policy. It covers the insured against any
unforeseen and sudden physical loss or damage necessitating repair or
replacement.
k) Although the CECR policy is a named-perils policy, special attention should
be paid to various exclusions.
l) The underlying idea of CECR insurance is to provide cover against external
hazards for which the original contractor or the operator or owner as the
insured is not responsible.
m) Sum insured may not be less than the cost of replacement of the insured
items by new items of the same kind and capacity, inclusive of all materials,
wages, freight, etc.
n) Cover is granted only for material damage to the property insured; only the
repair costs are indemnifiable.
o) Insurance of civil engineering completed risks should always be effected on
the basis of renewable policies, the period not exceeding one year.
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Answers to Test Yourself

Answer 1

The correct option is III.

Deterioration of Stocks Insurance (other than potatoes) cover applies to loss or

damage by deterioration of the contents of the cold store caused by a rise or
fall in temperature.

Answer 2

The correct option is II.

In a CECR policy, in special cases, perils can be included by endorsements.

Self-Examination Questions

Question 1

In case of Deterioration of Stock Policy, in one event, the liability of the

insurance company will not exceed ___________.

I. 25% of the sum insured under the policy

II. 50% of the sum insured under the policy
III. 75% of the sum insured under the policy
IV. 100% of the sum insured under the policy

Question 2

It is a condition precedent under the Deterioration Policy that a claim should be

admitted under the Machinery Insurance Policy.

I. Civil Engineering Completed Risks Insurance Policy

II. Fire Insurance Policy
III. Machinery Insurance Policy
IV. Marine Insurance Policy

Question 3

In case of Deterioration of Stock policy, the pre-insurance inspection must be

carried out during the loading period before __________.

I. 15th of April each year

II. 15th of July each year
III. 15th of October each year
IV. 15th of January each year
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Question 4

On receipt of notification of a claim under a machinery breakdown policy where

deterioration of stock policy is also involved, a qualified engineer surveyor must
be deputed at the shortest possible time not exceeding _______.

I. 24 hours
II. 48 hours
III. 3 days
IV. 7 days

Question 5

In case of CECR Insurance, insurance of civil engineering completed risks should

always be effected on the basis of renewable policies, the period not exceeding
__________.

I. One year
II. Two years
III. Three years
IV. Four years

Answers to Self-Examination Questions

Answer 1

The correct option is IV.

In case of Deterioration of Stock Policy, in one event, the liability of the

insurance company will not exceed 100% of the sum insured under the policy.

Answer 2

The correct option is III.

It is a condition precedent under the Deterioration of Stocks Policy that a claim

should be admitted under the Machinery Insurance Policy.

Answer 3

The correct option is I.

In case of Deterioration of Stock policy, the pre-insurance inspection must be

carried out during the loading period before 15th of April each year.

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Answer 4

The correct option is II.

On receipt of notification of a claim under a Machinery Breakdown policy where

deterioration of stock policy is also involved, a qualified engineer surveyor must
be deputed at the shortest possible time not exceeding 48 hours.

Answer 5

The correct option is I.

In case of CECR Insurance, insurance of civil engineering completed risks should

always be effected on the basis of renewable policies, the period not exceeding
one year.

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CHAPTER 16

REINSURANCE

Chapter Introduction

In this chapter, we will discuss different methods of arranging reinsurance in

the Engineering insurance department. At the end of the chapter, we will also
discuss the reinsurance programme, retention and reinsurance of Engineering
Insurance business in India.

Learning Outcomes

A. Methods of arranging reinsurance in the engineering insurance department

B. Reinsurance of engineering insurance business in India

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A. Methods of arranging reinsurance in the engineering insurance
department

1. Introduction

Reinsurance is a method employed by the direct insurer to dispose off the

surplus in excess of its capacity to retain. The idea of insurance is based on the
same principle which brought insurance into being, viz. the desire that the loss
of one shall be shared amongst many.

With the aim of achieving a steady growth of business and its profitability over
the years the insurer must ensure that his business result do not show wide
fluctuations from year to year. An effective reinsurance programme can greatly
assist to ensure this.

Majority of the claims are small but the catastrophe risk is always present in
Engineering Insurance. In fact large losses do occur following accidents involving
pressure plant and machinery causing devastating damage to property and at
times result into prolonged interruption in the production facility.

2. Methods of arranging reinsurance

There are different methods of arranging reinsurance. The common types of

Reinsurance in the Engineering Department are stated below:

a) Facultative reinsurance

This is the oldest method of reinsurance. Under this method, the ceding
company offers each and every risk in excess of its own retention capacity
for reinsurance and the reinsurer examines each risk according to its merit.

This method is akin to the original insurance contract between the insured
and the insurer and as the insurer decides whether to accept a business or
not, the reinsurer has also the liberty to accept or decline any business.

This method is time consuming and administrative expense involved is very

high since full underwriting information including Layout Plan, Process
Diagram, Bar chart etc. are to be submitted to the reinsurer. The reinsurer
may raise several queries which are also to be answered satisfactorily. So
this is used now-a-days only when automatic reinsurance capacity is
exhausted.

b) Treaty reinsurance

Treaty is a prior agreement between the ceding company and the reinsurer
whereby the ceding company agrees to cede and the reinsurer agrees to

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accept all business (subject to certain exclusions) up to a certain limit laid
down in the treaty contract upon agreed terms and conditions.

Thus it is an automatic protection which helps the ceding company to a

great extent for its day today normal operations.

An insurance company places its treaty with a large number of reinsurers to

achieve as much spread of risk as possible. Treaties are annual contracts and
are placed every year with the same or different reinsurers.

Treaties may be of various types amongst which the following types of

treaties are absolutely necessary for running the insurance business.

i. Quota share treaty

Here the ceding company is bound to cede and the reinsurer is bound to
accept a fixed percentage of each and every risk irrespective of the sum
insured but subject to a certain limit. In India, 15% obligatory cessions are
made to GIC, subject to certain limits, on each and every direct insurance
policy written by the insurance companies. This is a Quota Share Cession.

ii. Surplus treaty

Surplus treaty is an arrangement whereby the ceding company cedes the

surplus in excess of its net retention and priority cessions like Quota Share
Cession subject to an agreed maximum limit. Usually, a surplus treaty
provides reinsurance capacity up to a certain number of lines (i.e. an agreed
multiple of the reinsured’s own net retention).

If a company has five line treaty with a net retention of say, Rs.1 crore, the
maximum limit under the surplus treaty will be Rs.5 crore. An example is
given below for the reinsurance arrangement of a hypothetical risk with a
sum insured of Rs.10 crore, net retention of Rs.1 crore and a five line
surplus treaty.

Example

Net Retention : 1 Line - Rs. 1 crore i.e.10%

Cession to Surplus Treaty : 5 Lines - Rs. 5 crore i.e. 50%
Facultative : 4 Lines - Rs. 4 crore i.e. 40%

c) Excess of loss reinsurance

Whereas Facultative, Quota Share Treaty and Surplus Treaty are

proportional reinsurance arrangements (premium and loss shared by the
reinsurer in the same proportion), Excess of Loss treaty is a non-proportional

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arrangement (premium and loss are not shared by the reinsurer in the same
proportion).

Definition

Excess of Loss treaty is an arrangement where liability of the reinsurer is limited

up to a certain pre-determined amount of loss, in excess of the amount of loss
borne by the ceding company which is known as the Underlying Limit.

Definition

The Underlying Limit is a specific limit up to which the ceding company will
bear all the losses on its net account.

This arrangement is very much necessary to protect the net account of the
insurance company in the event of catastrophic losses. An example is given
below:

Example

a) An insurance company has issued 50 policies with varying sums insured

covering risks located in a particular area.
b) On each of these policies, the net retention is Rs.1 crore.
c) In a severe catastrophic event (Earthquake, Flood etc.) all the 50 policies
become total losses.
d) The total accumulated loss of the insurance company arising out of this
event will be Rs.50 crore (50 * Rs.1 crore).
e) The insurance company may have an Excess of Loss treaty for Rs.40 crore
excess of Rs.10 crore, whereby net retained loss will be Rs.10 crore and the
balance Rs.40 crore will be recovered from the reinsurers.
f) Thus the net retained loss of the insurance company will never exceed Rs.
10 crore per event.

The Excess of Loss treaty may be arranged in several layers depending upon the
requirement of the insurance company and may be on the basis of per risk or
per event.

Test Yourself 1
In ________________ method, the ceding company offers each and every risk in
excess of its own retention capacity for reinsurance and the reinsurer examines
each risk according to its merit.

I. Facultative reinsurance
II. Quota share treaty
III. Surplus treaty
IV. Excess of loss reinsurance
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B. Reinsurance of engineering insurance business in India

1. Engineering Insurance business

Engineering Insurance business embraces:

a) Property Insurance,
b) Liability Insurance and
c) Consequential Loss

And as such it is essential that there is an Excess of Loss cover to protect the
high exposure in the net account.

If the financial strength of the company is sound, for large risks, Facultative
Excess of Loss cover may sometimes be taken instead of taking Facultative
Reinsurance Cover in order to reduce the premium outgo to the reinsurers.

2. Reinsurance programme, retention and automatic reinsurance capacity

The aim of an insurer should be to devise an optimal reinsurance programme so

as to achieve a balance between the risk of incurring a retained loss, or an
accumulation of losses and the cost of the required reinsurance.

A key element in formulating an optimal reinsurance programme is for the

insurer to decide how much it wishes to retain for its own account of risk it has
written.

The first step for an insurer is to review its objectives, and from there develop
an appropriate retention strategy. A highly risk averse company will fix a lower
retention limit than an insurer that aims to achieve an acceptable balance
between expected profits and potential fluctuations in annual profits.

Despite the number of actuarial procedures and models that have been
developed over recent years for determining retention limits, generally
retentions still tend to be fixed according to simple rules of thumb that, mostly,
have stood the test of time.

The following factors generally determine retentions:

a) Size of the Portfolio.

b) Probability of Loss.
c) Size of Loss.
d) Capital, Reserves and Rate of Return.
e) Premium Rates.
f) Cost of Reinsurance.
g) Investment Policy.

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A table of retention for various classes of risk is prepared which is referred to
while writing any business. Too low a retention leads to avoidable reinsurance
while too high a retention may expose the net account unduly.

As far as Engineering Insurance is concerned, the insurance company may

decide to keep a reasonably high retention in respect of construction of a block
of single storied residential quarters in a less hazardous zone whereas in respect
of construction of a coffer dam or a bridge a comparatively low retention may
be opted for.

The general practice amongst Engineering Insurers is to construct a table of

retention graded down according to nature and characteristics of risks. After
fixing the net retention, an insurer arranges for automatic reinsurance capacity
based on the nature and the size of the portfolio in order to deal with the large
majority of the risks, it is called upon to insure.

If the table of retention is drawn up only on the basis of sum insured, then the
insurance company would end up keeping an insignificant retention on a large
and well spread out risk where exposure is much less. Here is where the use of
underwriter’s discretion is called for in deciding on an appropriate retention
instead of relying on the thumb’s rules. The insurers can reasonably commit
themselves to a more realistic retention level on such large Engineering risks by
fixing the retention on the basis of MPL (Maximum Probable Loss).
Determination of MPL or EML (Estimated Maximum Loss) is a more complex
exercise.

3. Reinsurance of engineering insurance business in India

At present, 10% of all direct Indian Engineering business, subject to a certain

limit, is obligatorily ceded by all the Indian insurance companies to the GIC.

a) After obligatory cession, a proportion of the risk is retained on the net

account as per the table of retention.

b) Thereafter, cession is made to the First Surplus Engineering Treaty.

c) Thereafter, cession is made to the Second Surplus Engineering Treaty.

d) The first and second Surplus Engineering Treaties are arranged by each
company themselves and are placed in the overseas market.

e) Any surplus left after this, is first ceded to the Market Surplus
Engineering Treaty administered by GIC

f) For the surplus left, the insurer are expected to show the risk to other
Indian insurers for facultative acceptance,

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g) For very large risks, where automatic facilities are not sufficient enough,
it is necessary to place facultative reinsurance with reputed overseas
reinsurers.

Now-a-days, all major power, petro-chemicals or other heavy engineering

projects require very large facultative reinsurance to the tune of 80%. As a
result, facultative reinsurers play a major role in fixing the terms and conditions
of the insurance policy in such cases. They provide vital technical assistance in
underwriting such large risks including assessment of PML,

As a matter of fact, for such large projects, a quotation for rates and terms is
first obtained from the professional reinsurers / brokers, who specialise in
Engineering Insurance, for submission to the client. The policy wordings are also
prepared in consultation with them.

Example

Following hypothetical illustration may be useful to understand how cessions are

made to various treaties after obligatory cession and net retention in respect of
an Engineering Risk whose sum insured is Rs. 100 crore.

Sum Insured Rs. 100 Crore

Obligatory Cession to National Reinsurer 15% RS. 15 Crore
NET retention 10% Rs. 10 Crore
1st Surp.Engg. Tty. 30% Rs. 30 Crore
2nd Surp.Engg. Tty. 25% Rs. 25 Crore
Market Surp.Engg. Tty 20% Rs. 20 Crore
Facultative Nil Nil
100% Rs. 100 Crore

The risk is fully absorbed within the total automatic capacity of the market and
hence no facultative reinsurance is necessary.

Test Yourself 2

Which of the following statements is incorrect with respect to engineering

reinsurance?

I. A highly risk averse company will fix a higher retention limit

II. A high retention level exposes the company towards high risk
III. A high retention limit is kept in case of construction of a block of single
storied residential quarters in a less hazardous zone
IV. A low retention limit will be kept in case of construction of a coffer dam

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Summary

a) Reinsurance is a method employed by the direct insurer to dispose off the

surplus in excess of its capacity to retain.

b) Under facultative reinsurance method, the ceding company offers each and
every risk in excess of its own retention capacity for reinsurance and the
reinsurer examines each risk according to its merit.

c) Treaty is a prior agreement between the ceding company and the reinsurer
whereby the ceding company agrees to cede and the reinsurer agrees to
accept all business (subject to certain exclusions) up to a certain limit laid
down in the treaty contract upon agreed terms and conditions.

d) In quota share treaty method, the ceding company is bound to cede and the
reinsurer is bound to accept a fixed percentage of each and every risk
irrespective of the sum insured but subject to a certain limit.

e) Surplus treaty is an arrangement whereby the ceding company cedes the

surplus in excess of its net retention and priority cessions like Quota Share
Cession subject to an agreed maximum limit.

f) Excess of Loss treaty is an arrangement where the liability of the reinsurer is

limited up to a certain pre-determined amount of loss, in excess of the
amount of loss borne by the ceding company which is known as the
Underlying Limit.

g) Facultative, Quota Share Treaty and Surplus Treaty are proportional

reinsurance arrangements; Excess of Loss treaty is a non-proportional
arrangement.

h) A key element in formulating an optimal reinsurance programme is for the

insurer to decide how much it wishes to retain for its own account of risk it
has written.

i) For reinsurance, a table of retention for various classes of risk is prepared

which is referred to while writing any business. Too low a retention leads to
avoidable reinsurance while too high a retention may expose the net
account unduly.

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Answers to Test Yourself

Answer 1

The correct option is I.

In Facultative reinsurance method, the ceding company offers each and every
risk in excess of its own retention capacity for reinsurance and the reinsurer
examines each risk according to its merit.

Answer 2

The correct option is I.

A highly risk averse company will fix the lowest possible retention limit, hence
statement I is incorrect.

Self-Examination Questions

Question 1

In which of the following reinsurance methods will the administrative expenses

be the highest?

I. Facultative reinsurance
II. Quota share treaty
III. Surplus treaty
IV. Excess of loss treaty

Question 2

_________ is a prior agreement between the ceding company and the reinsurer
whereby the ceding company agrees to cede and the reinsurer agrees to accept
all business up to a certain limit laid down in the contract upon agreed terms
and conditions.

I. Facultative reinsurance
II. Treaty
III. Stop Loss reinsurance
IV. Excess of loss treaty

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Question 3

Which of the following reinsurance methods provides reinsurance capacity up to

a certain number of lines i.e. an agreed multiple of the reinsured’s own net
retention?

I. Facultative reinsurance
II. Quota share treaty
III. Surplus treaty
IV. Excess of Loss treaty

Question 4

Which of the following is an example of non-proportional reinsurance

arrangement?

I. Facultative reinsurance
II. Quota share treaty
III. Surplus treaty
IV. Excess of loss treaty

Question 5

_________ is an arrangement where the liability of the reinsurer is limited up to

a certain pre-determined amount of loss, in excess of the amount of loss borne
by the ceding company which is known as the Underlying Limit.

I. Facultative reinsurance
II. Quota share treaty
III. Surplus treaty
IV. Excess of loss treaty

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Answers to Self-Examination Questions

Answer 1

The correct option is I.

In facultative reinsurance method, the administrative expenses will be the

highest since full underwriting information including Layout Plan, Process
Diagram, Bar chart etc. are to be submitted to the reinsurer.

Answer 2

The correct option is II.

Treaty is a prior agreement between the ceding company and the reinsurer
whereby the ceding company agrees to cede and the reinsurer agrees to accept
all business up to a certain limit laid down in the contract upon agreed terms
and conditions.

Answer 3

The correct option is III.

Surplus treaty provides reinsurance capacity up to a certain number of lines i.e.

an agreed multiple of the reinsured’s own net retention.

Answer 4

The correct option is IV.

Excess of loss reinsurance is an example of non-proportional reinsurance

arrangement.

Answer 5

The correct option is IV.

Excess of loss treaty is an arrangement where the liability of the reinsurer is

limited up to a certain pre-determined amount of loss, in excess of the amount
of loss borne by the ceding company, which is known as the Underlying Limit.

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CHAPTER 17

RISK MANAGEMENT, RISK INSPECTIONS AND LOSS

PREVENTION

Chapter Introduction

In this chapter, you will learn what is risk management and the various stages
involved. We will also discuss risk inspections, loss prevention and loss
minimisation measures in Engineering insurance.

Learning Outcomes

A. Risk management and risk inspections

B. Loss minimisation in engineering insurance

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A. Risk management and risk inspections

1. Risk management

a) Objectives of risk management

The fundamental objective of ‘Risk Management’ is

 Preservation of assets and

 Preservation of earning power from loss or destruction

The concept of risk management is gaining popularity throughout the world.

This is an area where the general insurance industry has to play an active
role in the best interest of national economy.

On a worldwide basis the cost of insurance protection (premium) is going up

which is mainly due to mounting claims cost. This is why the insurers in India
are paying special attention to their clients’ efforts in eliminating or
reducing risk exposure.

b) Risks covered by engineering insurance

The risks covered by engineering insurance are varied. Their range become
obvious if one considers only a few examples like
 Dams,
 Bridges,
 High-risks buildings,
 Electric power stations of all kinds,
 Nuclear energy installations,
 Mines,
 Chemical and petro-chemical plants,
 Offshore platforms,
 Satellites etc.

Clearly all manufacturing, business organisations, new entrepreneur or

project authorities are exposed to pure risks of various types and
magnitude. It may be due to natural peril or human peril.

c) Stages of risk management

In the field of inquiry of pure risks (as distinct from speculative risks) one
has to move in a logical way by stages.

i. Risk identification
The first stage of risk management process is ‘risk identification’ i.e. the
main risks to which the organisation is exposed. Checklists and

264
questionnaires are available with the risk managers to ensure systematic
inspection.

ii. Risk evaluation

The second stage is ‘risk evaluation’ i.e. the extent to which the resources
can be affected in terms of physical damage, injury, interruption, liability
etc. In a way this is an estimation of Maximum Probable Loss (MPL) to which
the organisation may be exposed.

iii. Risk control

The third stage is ‘risk control’. Risks can be reduced or losses prevented by
adopting specific loss prevention measures e.g. installation of fire fighting
equipment or making available appropriate spare parts or standby
equipment reduce business interruption risks.

iv. Risk financing

In the last stage comes ‘risk financing’. This includes partial risk retention
with acceptance limit and risk transfer by way of insurance or otherwise.
Financing of hard core risk by means of insurance is perhaps the most
accepted method that meets the Company’s long term interest.

d) Risk management as a science

Risk Management as a science, however has developed during the 20th

century. It is being practised in various countries in varying departments.
Thus in USA and UK, it is practised for last four decades and is now gradually
making its appearance in Indian sub-continent.

2. Risk inspections

a) Concept of risk inspections

The whole process of risk management plays an important role in achieving

smooth, timely implementation of a construction / erection contract as well
as uninterrupted and continued business operations. Various techniques are
applied in achieving the desired goals. Risk inspections can be considered as
important tool in identification and measurement of risks. From an insurer’s
perspective risk inspections are extremely important in facilitating a number
of insurance / reinsurance related decisions as well as addressing the issues
related to loss prevention / risk improvement.

b) Purpose of inspections

Risk inspections are made to provide adequate information to an

underwriter for acceptance, rating and deciding on his retention and
265
reinsurance. Such inspections are not only useful for collecting underwriting
information, but also from the point of view of making specific
recommendations aimed at risk improvement, loss prevention and loss
minimisation measures.

Test Yourself 1

Checklists and questionnaires are made available with the risk managers to
ensure systematic inspection. This is done during which stage of risk
management?

I. Risk identification
II. Risk evaluation
III. Risk control
IV. Risk financing

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B. Loss minimisation in engineering insurance

1. Direct and indirect losses

Since independence, the Indian Government is engaged in the task of national

reconstruction and in improving the standard of living of the citizens through
application of technology for transforming raw materials into various end-
products. This exercise involves application of considerable financial, material
and human resources as well as technology.

a) Direct losses
It is prime importance to ensure that industrial plants are not merely
constructed and operated but also protected against threats of destruction
from accidents like fire, explosion, disruption, breakdown and other causes.

Accidents of these types do not just happen but are mainly caused due to
failure of equipment or lack of skill on the part of contractors or operator
and therefore most of them can be prevented. Failure to prevent such
accidents can lead to serious financial repercussions.

b) Indirect losses
In addition we have to consider the impact of indirect losses like:
 Interruption in production due to lack of spares,
 Need to rebuild the facilities,
 Stoppage of work,
 Need to train new skilled operators and so on

All these could seriously affect the sales and delivery schedules. Such indirect
costs of accident may not be easily quantifiable but their impact on national
economy is very real and considerably higher than direct losses. Many
catastrophic loss events the world over, have gained major significance. Apart
from such spectacular disasters, small or medium size losses do occur every day
which are no less important, no less catastrophic for the economy of the
country or people at large.
2. Role of engineers

a) Inspections

All Indian general insurance companies are equipped with a team of

engineers qualified in different disciplines and experienced in various fields
of engineering activities.

They make inspections for different purposes including

267
 Pre-acceptance inspections,
 Risk management inspections aimed at pml (probable maximum loss)
assessment,
 Risk improvements and
 Loss prevention programmes

b) Techno-marketing purposes

Their services are also utilised for techno-marketing purposes. Engineers

hold discussions with clients to understand the technical insurance
requirements and deciding the most adequate type of coverage together
with advices on applicable rates and terms commensurate with risk
exposures.

c) Project cells

The project cells created by insurance companies mainly concentrate on

new projects insurance marketing. The engineers in these cells study the
documentation of various projects and prepare the insurance programme to
suit the project requirements. Many a times such insurance programmes
require much wider coverage than the standard policies. Hence close
consultation with reinsurer becomes necessary in arriving at adequate rates
and terms for the project insurance programme. In some companies, the
engineering department itself directly deals with the reinsurers whereas in
some companies this activity is jointly conducted by the engineering and
reinsurance departments.

Though engineers are utilised in scrutinizing loss survey reports, the loss
assessment surveys are conducted by independent loss adjusters.

Thus, the engineers in the insurance industry play an important role in the
areas of marketing, underwriting, risk management, loss prevention and loss
assessments. In a way they assist the management in formulating future
underwriting policies of the company in the light of the technical inputs
from engineers along with their past experience and also current market
developments.

3. Role of general insurance companies in loss minimisation

Whereas major accidents might appear to be isolated occurrences to an

individual or an organisation, because of infrequent incidents, agencies like
insurance companies, who have accumulated experience of accidents of
different magnitude in many establishments, have sufficient evidence to prove
that human and equipment failures are statistically predictable. What is more,
the available knowledge and technology with the insurers can be applied even
to control or reduce the number as well as the impact of accidents on the
national economy.

268
The general insurance industry in India believes that it has a great role to play
in preventing accidents and the losses arising from them, not merely because of
the immediate benefit that would accrue to it in terms of reduction in claim
experience but also because of conserving lives and property through loss
prevention activities in general. Moreover, the benefit of reduced loss ratio can
be passed on to the policyholders. Similarly heavy and uncontainable losses will
ultimately lead to increase in the cost of insurance to everyone.

Specific examples of loss prevention ideas that have emerged in respect of good
housekeeping, fire protection on construction sites, fire prevention checklist for
erection sites, site monitoring and maintenance of operational machinery, are
quoted below as useful illustrations.

4. Good house-keeping

Good housekeeping plays an important part in the prevention of accidents. Risks

are attached to every commercial and industrial venture. Risk management
seeks to curb financial losses in the most vulnerable areas like fire and natural
perils, human perils, crime, carelessness, accidents at work and so on. Some
risks can be removed, some substantially reduced whilst others are difficult to
eliminate. A few golden rules to be observed in industrial housekeeping, be it a
running factory or a new project, are outlined below:

a) The first step is to get a place for everything and then keep everything in
its own place. Plant and machinery, heavy structural, stocks, parts,
tools-each should have a place. Learn to put it back in its proper place.

b) If your operation produces dust or metal or wood shavings, stop often to

clean up. Use a brush and not human hand, but stop the machinery first.

c) If your operation produces a lot of scrap and the scrap does not get
hauled away before the scrap container is filled, stop work and get the
container replaced.

d) If you have to use inflammable materials, be sure your supply is properly

properly protected and stored in a safe place. Oily rags are the kind of
material that will burn by itself if piled up, so keep the oily rags in a
closed metal container.

e) Apart from the risk of fire, some of the industries are exposed to hazards
from explosion – explosion of all kinds which could be disastrous in
consequence, resulting in loss of life and property. Please ensure that
safe operational procedures are not deliberately or inadvertenly
neglected.

269
f) Theft of property and money continues to increase. Two fastest growing
crimes are violence including terrorism and fraud. Check the security
arrangements to achieve sensible protection against theft and robbery.

g) If the project site is adjacent to a river or any other body of water or is

prone to flooding, necessary precaution should be taken at the site
levelling stage itself to avoid inundation risks. If the site is in an
acknowledged seismic zone, adequate safeguard must be built into the
design itself for earthquake – resistance. Discharge of effluents into the
nearby water source should be properly treated to ensure reduced
pollution.

Even persons trained in Science and Engineering are not aware of all the
precautions to be taken in handling electrical gadgets. Hundreds of laymen use
electrical appliances every day. Added to this is the risk due to faulty wiring
and installation. There are safety rules for use of every kind of electrical
gadgets and those should be carefully observed.

Once you get the habit of keeping your own work place or project site in order,
you will find that the house-keeping you have done for safety’s sake will pay
you dividends. Good house–keeping is the protection for yourself and neighbours
from costly and crippling accidents.

Fire protection on construction sites:

Fire protection should be in accordance with the type and size of the contract
works involved. The following recommendations should be considered as
complementary to any local regulations or specific requirements.

5. Fire prevention features

a) The site engineer should be continually reminded of his responsibility for

fire protection on the site. Even if the daily supervision responsibility is
delegated, ultimate responsibility should still remain with the site
engineer.

b) The site should be secured by a properly constructed fence.

c) Temporary buildings (offices, rest rooms, material stores etc.) should be

made of non-combustible materials.

d) Living quarters should be well separated from the construction site and
provided with adequate first-aid fire protection (extinguishers, hoses,
etc.). Cooking facilities should be properly equipped with well-
maintained extinguishers.

e) Combustible material should be marked clearly and stored separately.

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f) Packing materials, combustible liquids and explosive substances should
be stored at a safe distance from buildings, plants and stores.

g) The use of combustible formwork material, scaffolding, etc. should, if

possible, be avoided. If such materials must be used, they should be
stored at a safe distance from the construction work.

h) Fire walls between different buildings should be erected along with the
individual storeys (no wall openings are permitted).Partitions should be
erected as early as possible (subdivision into fire sections).

i) Staircases should be erected together with the floor slabs to guarantee

escape routes and access for fire fighting.

j) Staircases and fire brigade access must be swept free and must not be
used as storage or parking areas.

k) Fire doors with automatic door closer should be installed as early as

possible.

l) Lightning conductors should be installed as early as possible.

m) Utmost attention should be paid to good housekeeping such as, orderly

storage; Periodical removal of combustible packing material either by
burning on site at a safe location or removal from the site; Clean-up of
site at least once a week.

n) Open flame work (welding, cutting, etc.) requires utmost caution.

o) No smoking rules must be enforced in areas exposed to fire (stores, etc.)

and in the vicinity of hazardous operations.

6. Fire control features

a) A watchman rules must be enforced in the areas exposed to fire (stores,

etc.) and in the vicinity of hazardous operations

b) Any fire must be reported immediately to the site engineer, the person
responsible for supervising fire protection and, if necessary, the guard at
the gate via the existing communication system (walkie-talkie,
telephone). An adequate alarm system (hooters or sirens) should be
provided and regularly tested.

c) Important telephone numbers (site engineer, person, responsible for

supervising fire protection, guard at the gate, fire brigade, doctor) must
prominently displayed near each telephone.

d) Portable fire extinguishers must be suitably located at the construction

site. Each location should be conspicuously marked by clearly visible
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signs. Checking and maintenance at regular intervals must be guaranteed
and recorded.

e) Water supply for fire – fighting purposes (pipe system, hydrants, pumps,
tanks, reservoirs, etc.) should be provided (at the beginning of the
construction period) either by a temporary system or by the early
completion of the permanent system – if practicable.

f) Water supply should be sufficient for several hours fire fighting.

g) Hydrants should be supplied with long hoses and proper fittings. Each
hydrant point should be conspicuously marked by clearly visible signs if
functional.

h) The pipe system should guaranteed a minimum pressure of 3 bars at the

most remote point.

i) Checking of the complete system by functional testing at periodic

intervals should be carried out by the person responsible for supervising
fire protection.

j) If an early connection to the public water supply is possible the

permanent hydrant points should be installed as soon as the construction
works permit;

k) In multi-storey buildings the hydrant rises should be installed and

pressurised storey by storey stored by as the construction progress
permits.
l) In all cases sufficient hoses and fittings should be provided to ensure
that all parts of the contract works can be reached with water.

m) An emergency plan must show each person’s responsibility in the event

of a fire. If necessary, it should be posted in several languages.

n) Fire-fighting teams should be formed and trained for each site. They
should co-ordinate with the competent public fire brigade. Any
equipment needed must be made available. The fire prevention
measures required and the access routes should be co-ordinated in detail
in advance with the public fire bridge.

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Checklist For Fire Prevention On Sites

Name of project_______________________________________________________
Insured_______________________________________________________________

Branch/object Land code ___________ Policy No. ___________

Inspection Date Name of Inspector

Progress of Percentage completed %

Construction/ erection

Estimate date/ Estimate date

Of completion of start of
Of work _________ trial run

Has safety / fire : yes / no If so, please indicate name and address
engineering been
appointed?

Site security

Has the site been fenced to Prevent unauthorised entry Yes / No

Is the site constantly guarded? Yes / No
Is entry to the site possible only with an accompanying person? Yes / No

Site fire brigade Is there a site fire brigade? Yes / No

If so, how many persons per shift?
When were the firemen last trained?
Other fire brigades Can in the event of fire the public or another Fire brigade
be called in? yes ( ) no( )
If so, km Travel minutes distance time
Is this fire brigade familiar with risk yes / no
Are site roads kept free for fire brigade access?

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Exinguishing water Is there a water reservoir on the site? Yes / no
If so, mention water reserve capacity on day of
inspection m3

Is there a hydrant system (ring main, riser) Yes / No

Did the system contain water on the day of inspection? Yes / No
Is the line pressurised? Yes / No

Is there a hydrant system (ring main, riser) Yes / No

Did the system contain water on the day of inspection? Yes / No
Is the line pressurised? Yes / No

Number of hydrants in the opening buildings.

Are hoses couplings and nozzles available in the Vicinity of the Yes / No
hydrants?
Distance of nearest hydrant to storage area

Number of hydrants in the opening buildings.

How many portable and ready for use fire extinguishers were on the site at the
time of the inspection?
Does the site staff have regular practice regarding the use of portable fire
extinguishers? Yes / no

Special fire
Are there any open fire places on the site? Yes / No
Is the site free of waste package material, form work material, Yes / No
etc?

Distance between construction and storage areas.

Storage ( ) in the open ( ) under a roof

Has prestorage been subdivided between several independed Yes / no

storage units?
If so, maximum concentration of values per storage per unit

Distance between storage unit

Is the no-smoking rule observed in the storage are?
Are heaters and / or cookers used in the storage area Yes / No
Are inflammable materials stored separately? Yes / No
If so, distance to other stores

Remarks
Has the checklist completed during an inspection? Yes / No
Issued at ____________ this ____________ day of __________ 20_____

Signature

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7. Site monitoring

Since insurers have a very real interest in the manner in which a building or civil
engineering projects is carried out it is important that they should monitor
conditions on the site as the work progress.

By becoming acquainted with the site personnel and by being aware of

developments through regular visits as well as by correspondence, insurers can
respond quickly and in a more informed way to loss related events and
experience tends to show that the overall effect of site monitoring is to improve
his risk awareness and reduce loss frequencies with a corresponding reduction
insurance claims.

Simultaneously, the most important angle from administering ALOP insurance is

to monitor site activities, including accidents, which helps in keeping track of
delays – both insured as well as uninsured.

a) Parties involved in a construction project

A construction project represents an ever changing risk scene and it is

important to bear in mind how the main parties interrelate in terms of
responsibility for the various risks involved.

i. The Employer (or principal)

The employer usually carries financial responsibility for risks which could not
reasonably have been foreseen and allowed for in the contract price.

ii. The Engineer or architect

These parties normally design the completed works and are responsible to
the employer for the same. It is not unusual, though, to find that the
contractor takes on the design of the temporary works and, on occasions,
some aspects of permanent design too.

iii. The Contractor

The contractor is responsible to the employer for the care of the works
together with all material and workmanship. The contractor is not
responsible for unforeseeable site conditions, nor is he responsible for
design prepared solely by the engineer. Notwithstanding these exclusions
most contractors have to spread their risk e.g. to sub-contractors and
suppliers. In practice, most conditions of contract require him to take out
insurance to cover the employer and the contractor against all but the
“excepted” risks, as specified in the contract.

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iv. Sub-contractors

The sub-contractors are directly responsible to the contractor for the

quality of their materials and workmanship.

v. Suppliers

The suppliers are responsible to their respective contractor for the quality
of materials only.

vi. Insurers

Insurers are responsible to the contractor or the employer where he controls

the insurance, for losses due to accidents and exceptional weather and all
losses resulting from defective design, materials or workmanship.

One important part of site monitoring is to ensure that losses which should
property fall to others are not passed on to insurers. In practice this may not
be easy, particularly where wide policy wordings mean that insurers are
giving cover which overlaps with contractual responsibilities of other
parties.

b) Risk factors

The risk exposure is determined, in broad terms, by the location and nature
of the project. Whilst these features are fixed there are many other factors
which affect the loss frequency and over which the contractor can exercise
a measure of control; particular attention should be paid to these during
site monitoring of the risk. General housekeeping and conditions on site are
obvious examples but other conditions where site monitoring can help to
identity potential losses include:

i. Overall site security and the risk of theft and vandalism,

ii. Storage of materials and equipment and their exposure to fire, water
damage or impact by vehicles and contractors’ plant,
iii. Exposure of partially completed structures to windstorm damage,
iv. Potential for flooding of all works at or below ground level, such as
basements, foundations and trenches,
v. Exposure to rainfall of all embankments, road works and other earth
structure,
vi. Changes in working methods

The contractor makes certain decisions regarding working methods and

choice of suppliers and sub-contractors; these decisions are incorporated in
his pricing. Once work commences he must keep within the tender
constraints, completing the contract to time and within budget, or risk
losing money.

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Naturally he will not pass up any opportunity to claim for losses which are
outside his control. These claims may be contractual or they may be against
insurers.

Quite often contractors change their working methods, when on site, in

order to achieve a saving in time and / or cost. If these changes are
prompted by loss events or delays then it is not unusual to find that safety
has been compromised. A typical example of this is where extensive
propping of trench walls has been specified but with time pressure due to
delays the contractor decides to reduce propping to a nominal amount
relving on the prospect of dry weather. Losses occur when with the onset of
the wet season the trenching suffers considerable damage.

As an overall guide, if a contract is in trouble financially and behind

programme then claims are likely to be pursued vigorously. Whilst these
claims are normally of a contractual nature the contractor will naturally
look for the opportunity to make insurance claims too.

c) Use of monitoring

Past experience encourages us to believe that regular monitoring is cost-

effective in reducing, in particular, the incidence of repetitive losses
resulting from poor basic risk management.

Because it is essential that the person carrying out the monitoring knows
what to look for, visits should be carried out by a suitably experienced
member of the insurer’s staff or if this is not possible, then someone
delegated by the insurer to act on his behalf, such as a locally based civil
engineer. Valuable records, in the form of photographs and drawings, can be
created by the local representative of the insurer immediately following a
loss in those instances where a loss adjuster cannot reach the site
expeditiously.

One of the difficulties experienced in site monitoring is persuading

contractors to talk freely and objectively about their current and future
working methods. Under these circumstances an engineer stands a better
chance of establishing a dialogue on technical matters.

During visits it is often possible to identify situations where the contractor’s

working methods or lack of precautions is putting the site at risk. The
contractor can be reminded of his responsibilities and if claim occurs,
insurers will, through familiarity with site conditions, be in a stronger
position to adjust, or refute, the claim by identifying the contractor’s
contribution to the loss due to his failure to protect the works adequately. It
should be said that potential claims situations often develop over a period of
weeks or months so that regular monitoring can assist by giving warning in
good time.

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Regularly site monitoring will allow insurers to keep abreast of contractual
developments involving delays, extensions and increases in values, with
their implications for additional cover and additional premiums.

Where a good understanding of the site conditions and progress of the works
has been obtained it is quite feasible, for the simple cases, to deal with
claims adjustments without involving a loss assessor. Apart from the obvious
cost saving on fees there are instances where knowledge of the
circumstances leading up to a loss has assisted in obtaining a lower
settlement.

d) Conclusion

In contrast to a survey report, generally produced by an independent party,

showing the conditions as they exist on a specific day and often terminating
with specific recommendations for action, the site monitoring activity is
intended to be carried out regularly by insurers. Its aim is to provide a
picture of the risk as it changes over the period, so as to alert insurers to
the development of potentially hazardous situations and thereby to attempt
to avert losses.

8. Maintenance and prevention

Maintenance, servicing and monitoring the condition of equipment to maintain

its performance is essential to ensure the reliability and availability of industrial
equipment. A distinction is thus made between preventive maintenance, the
purpose of which is to look for faults or weaknesses before they have
detrimental consequences, and corrective maintenance whose purpose is to
correct these faults or weaknesses. The purpose of predictive maintenance
which appeared about thirty years ago is to reduce the need for preventive
maintenance by making it less likely to dismantle equipment unnecessarily and
thereby altering a piece of equipment in perfect condition.

a) Preventive maintenance

The purpose of preventive maintenance is therefore to ensure that a piece

of equipment works well under the predefined operating conditions. This
means maintaining the original performances and limiting the effects of
wear and tear by eliminating them in time, that is, when the studied
parameters reach their safety thresholds.

Preventive maintenance operations are generally defined by the

manufacturer and carried out either by the operator, or by the service
companies, or by the manufacturer for the most important ones.

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For each piece of equipment, they detail the various interventions required,
the way to conduct them, their intentions, their frequencies and define the
tests to be performed.

They are essentially programmed as a function of the operating time and

particularly with respect to the equipment’s number of operating hours.

Thus the operation schedules (daily, weekly, quarterly, etc.) are defined.
These operations are organised in form of checks, measurements, analyses
carried out during total or partial inspections of the equipment. They define
the values beyond which products and parts must be replaced and further
adjustments made.

The careful updating of a historical record of this maintenance is a major

element of its quality. This alone allows experience to be taken into account
to improve this maintenance and follow-up the inevitable aging phenomenon
of the equipment.

b) Corrective maintenance

Corrective maintenance covers all of the repairs or replacements of

equipment or products of the equipment which is defective or damaged. It is
therefore carried out occasionally. This is often after the preventive
operations, highlighting the defects, have been completed. It frequently
comes up against the difficult problem of stocks of spare parts that modern
management methods tend to reduce to a maximum and which can
considerably lengthen the intervention leads times.

In certain cases, particularly for old equipment that the manufacturer has
stopped manufacturing or even disappeared, repairs can be problematic.

For this maintenance like major servicing, managers sometimes call in

outside organisations. It is important for the chosen companies to be
specialised in the interventions to be carried out, in particular for
interventions on boilers, welding work and the safety shut-off device
inspections.

c) Predictive maintenance

Certain systematic replacements and preventive operations can be avoided

or delayed if there is a means of diagnosis for assessing the condition of a
part and its degree of wear and tear. Then systematic intervention is
replaced by a systematic diagnosis. Certain techniques often allow such a
diagnosis but, since they are usually sophisticated, they imply using
specialists. They consist either in carrying out a direct examination of an
important part, or in looking for and analysing the effects of the operation
equipment.

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The purpose of the vibratory analysis is to check the mechanical condition of
the machine by analysing the effect of inertia of movables on the assembly.
Thus problems such as unbalance, alignment defect, mechanical or magnetic
imbalance, bearing and gearing deformations and wear and tear are
detected. It is specially adapted for rotating machines.

The infrared thermal analysis gives precise indications on the local

temperature rises. Thus either abnormal heating or thermal leaks can be
spotted. This technique which gives excellent results is greatly used in
electricity for machines such as motors, alternators, transformers. It also
means the conditions of the thermal protections (insulation, brickwork of
boilers) can be checked.

The latest of these methods consists in making a spectrometric analysis of

the lubricants. By checking for the presence of metals (copper, lead, nickel,
chrome) which are found (in traces) in oil and by determining their
respective proportions, it is possible to accurately determine the location
and extent of wear and tear. For diesel, it is possible to know what is
happening regarding the bearings, linings and rings. Likewise the
spectrometric analysis of the dissolved gases of the dielectic of a
transformer allows us to establish whether intervention on the windings is
required or not.

The human factor is the key to the success or failure of maintenance.

Personnel must be competent, trained and motivated. They must also have
the means, time and equipment, to carry out their work. Badly managed
maintenance can lead to disastrous consequences.

Test Yourself 2

Certain systematic replacements can be avoided if there is a means of diagnosis

for assessing the condition of a part and its degree of wear and tear. This can
be done through _________.

I. Preventive maintenance
II. Corrective maintenance
III. Predictive maintenance
IV. Logistical maintenance

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Summary

a) The fundamental objective of ‘Risk Management’ is preservation of assets

and earning power from loss or destruction.

b) The stages of risk management include:

 Risk identification
 Risk evaluation
 Risk control and
 Risk financing

c) Risk inspections can be considered an important tool in identification and

measurement of risks.

d) Risk inspections are made to provide adequate information to an

underwriter for acceptance, rating and deciding on his retention and
reinsurance.

e) Engineers make inspections for different purposes including pre-acceptance

inspections, risk management inspections aimed at PML (Probable Maximum
Loss) assessment, risk improvements and loss prevention programmes

f) Good housekeeping plays an important part in the prevention of accidents.

g) Fire protection should be in accordance with the type and size of the
contract works involved.

h) Site monitoring improves risk awareness and reduces loss frequencies with a
corresponding reduction in insurance claims.

i) Maintenance, servicing and monitoring the condition of equipment to

maintain its performance is essential to ensure the reliability and
availability of industrial equipment.

j) Maintenance is of three types: preventive maintenance, corrective

maintenance and predictive maintenance.

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Answers to Test Yourself

Answer 1

The correct option is I.

Checklists and questionnaires are made available with the risk managers to
ensure systematic inspection. This is done during the first stage of risk
management, which is risk identification.

Answer 2

The correct option is III.

Through predictive maintenance, certain systematic replacements can be

avoided by assessing the condition of a part and its degree of wear and tear.

Self-Examination Questions

Question 1

The estimation of Maximum Probable Loss (MPL) to which the organisation may
be exposed is done during which stage of risk management?

I. Risk identification
II. Risk evaluation
III. Risk control
IV. Risk financing

Question 2

Risk inspections can be considered an important tool in __________.

I. Identification and measurement of risks

II. Identification and elimination of risks
III. Transfer and elimination of risks
IV. Measurement and transfer of risks

Question 3

Stoppage of work due to fire in a factory will be classified as:

I. Direct loss
II. Indirect loss
III. Direct as well as indirect loss
IV. Neither direct nor indirect loss

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Question 4

The purpose of which of the following is to look for faults or weaknesses before
they have detrimental consequences?

I. Preventive maintenance
II. Corrective maintenance
III. Predictive maintenance
IV. None of the above

Question 5

The purpose of which of the following is to cover the repairs or replacements of

equipment which is defective or damaged?

I. Preventive maintenance
II. Corrective maintenance
III. Predictive maintenance
IV. None of the above

Answers to Self-Examination Questions

Answer 1

The correct option is II.

The estimation of Maximum Probable Loss (MPL) to which the organisation may
be exposed is done during the second stage of risk management, which is risk
evaluation.

Answer 2

The correct option is I.

Risk inspections can be considered an important tool in identification and

measurement of risks.

Answer 3

The correct option is II.

Stoppage of work due to fire in a factory will be classified as an indirect loss.

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Answer 4

The correct option is I.

The purpose of preventive maintenance is to look for faults or weaknesses

before they have detrimental consequences.

Answer 5

The correct option is II.

The purpose of corrective maintenance is to cover the repairs or replacements

of equipment which is defective or damaged.

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CHAPTER 18

SPECIAL TYPES OF ENGINEERING INSURANCE

COVERS IN INTERNATIONAL MARKETS

Chapter Introduction

In this chapter, you will learn about Comprehensive Project Insurance (CP)
which combines the classic construction and erection covers in one insurance
contract and thus provides comprehensive protection.

Next, you will learn about the Comprehensive Machinery Insurance (CMI) which
offers “all risks” cover of a predominantly engineering nature, particularly
against machinery breakdown, fire, lightning and chemical explosion, as well as
natural perils for the entire insured plant, with only a few property exclusions
and excluded perils.

You will also learn about Construction Annual Policies (Floaters), Machinery
Leasing Insurance and Aero Engine Breakdown Insurance.

Learning Outcomes

A. Comprehensive project insurance (CPI)

B. Comprehensive machinery insurance (CMI)
C. Other insurance policies

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A. Comprehensive project insurance (CPI)

(The following description is reproduced from Munich Re’s literature on the

topic.)

1. Introduction

Major projects and investments present great opportunities, but also harbour
risks. Entrepreneurial risk itself is not insurable, but protection against the
consequences of property damage has long been provided by the insurance
industry. It is frequently the case that major projects and investments are only
possible if insurance cover is available.

Munich Re has played a particularly important part in introducing contractors’

all risks (CAR) and erection all risks (EAR) insurances. Nowadays, major projects
generally include complex construction and erection work.

In order to cover both erection and construction risks and to provide

comprehensive protection, Munich Re developed comprehensive project
insurance (CPI). It combines the classic construction and erection covers in one
insurance contract and is therefore suitable for the insurance of both:

i. Construction risks such as bridges, tunnels and dams, and

ii. Erection risks such as complex industrial facilities and power stations,
which have to be commissioned and undergo a performance test before
take-over by the client

The modular structure of comprehensive project insurance allows a tailor-made

insurance solution for any construction or erection project. Depending on
requirements and the desired scope of cover, the insured can compile an
insurance contract tailored to the needs of the project using individual sections
and the additional policy extensions available.

Comprehensive project insurance combines the classic erection, construction

and marine covers in one insurance contract.

2. General section

The general section of the comprehensive project insurance contract comprises

the basic definitions, conditions and exclusions applicable to the project.

In the general section, the terms pertinent to all other sections are defined and
the applicable conditions stated.

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d) Exclusions

The standard international exclusions applicable to all sections are then

listed. Essentially, they include:

i. Loss or damage due to war or similar events, civil commotion or

confiscation by an authority

ii. Loss or damage due to strike or riot (these risks are excluded from cover
as a general principle, but cover may be included in certain
circumstances after a detailed examination on a case-by-case basis)

iii. Terrorism risk

iv. Loss or damage due to nuclear energy and radioactive contamination of

any kind

v. Loss or damage resulting from any wilful act or gross negligence on the
part of the insured or its representatives

vi. Loss or damage resulting from a cessation of work for a period exceeding
four weeks of which the insurer has not been notified

Complex buildings and industrial facilities involve sophisticated construction

and erection work. For reasons of economic efficiency, projects are
becoming larger and technically more challenging, whilst at the same time
having to be completed to increasingly tight deadlines. This results in high
demands on participants in projects in respect of organisation, knowledge of
the techniques being utilised and commissioning of the facility.

e) Who should be insured?

All parties involved in any way in the construction or the erection of a

building or structure and incurring a risk as a result may be insured. They
are:

i. Contractors, and also manufacturers or suppliers if construction or

erection is being carried out under their management or supervision
ii. Firms commissioned to carry out the work, including subcontractors
iii. Purchaser or owner
iv. Parties financing the project

In order to avoid gaps in cover, as far as possible a single insurance contract

should be issued for the whole project incorporating all participants as
insured parties.

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f) What can be insured?

Comprehensive project insurance provides wide-ranging protection for a

project for the period of the contract.

i. Section 1A (project works)

This Section covers all of a project’s construction and erection works from
commencement and includes, where provided for, testing and the
subsequent defects liability period.

Construction and erection projects

The following construction and erection projects can be covered:

 Complete industrial facilities such as power stations, steel works,

chemical plants, paper factories, textile factories, service facilities
and other production installations

 All types of machinery, apparatus and structures, e.g. turbines,

generators, boilers, compressors, combustion engines, electric
motors, transformers, rectifiers, substations, machine tools, pumps,
lifts, cranes, conveyor belts, cable cars, printing machines, paper
machines, textile machines, overhead transmission lines, piping,
machine halls, tanks, vessels and steel bridges

 Any type of construction project above or below ground, e.g.

residential and office buildings, hospitals, schools, theatres, roads,
railways, bridges, tunnels, airports, dams, weirs, irrigation and
drainage facilities, canals and ports

 Preparatory work at the construction site such as site facilities,

excavation and levelling work and temporary structures (e.g. access
roads, diversion canals and protective embankments)

 Any materials to be used in the construction work stored at the site

Additional covers

The following additional covers are either standard in comprehensive

project insurance or can be agreed as riders:

 Loss or damage resulting from faulty manufacture. Only costs which

the insured would have incurred in any case to rectify the original
defect are excluded from cover, which may be extended or reduced
as required by means of appropriate clauses. As a rule, cover of
manufacturer risks over and above standard levels is highly risky.

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It should be examined on an individual basis and, if appropriate, granted
only for proven technologies and experienced manufacturers.

 Property belonging to or in the care, custody or control of one of the

insured parties, but not a part of the project itself

 Engineers’ and experts’ professional fees where their services are

required to rectify damage to insured Property

 Costs of reproducing plans, drawings and contract documents lost in

a claims event, in so far as they are included in the sum insured

 Cleanup costs resulting from an indemnifiable loss, which can be

considerable in the case of building and steel structures and include
the costs of removing and disposing of debris, demolition and shoring
up and reinforcing the insured property

 Additional costs incurred for overtime, Sunday and public holiday

work, express deliveries and, in exceptional cases, airfreight,
provided the expenditure is directly connected to the rectification of
the indemnifiable damage

 Off-site storage up to the agreed limit of indemnity

 Inland transit for sundry local supplies up to an agreed limit of

indemnity; the cover is not intended to apply to international
transport of major items and losses incurred during marine or air
transport are not therefore indemnified.

ii. Section 1B (Marine Cargo Insurance)

This cover can be taken out for the transport of major items, particularly
from abroad.

Plant, machinery and equipment can be incorporated in the insurance under

Section 1B, provided that the machines and items of equipment are listed
individually and their replacement values included in the sum insured under
this section. Whether the machinery is owned by the insured or rented is not
relevant.

Coverage: The insurance includes cover for

 Machinery, appliances and equipment for erection such as cranes, masts,

winches, welding equipment and compressors;

 Site facilities of all kinds such as accommodation, storage sheds,

treatment and mixing plants, scaffolding and utilities (power, water);

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 Machinery and appliances which are on the erection site and in the care,
custody or control of the insured;

 Construction machinery such as earthmoving plant and similar equipment

together with construction site

 Vehicles not licensed for general road use

Additional cover may also be incorporated, e.g. overtime and Sunday and
public holiday work costs, express deliveries, off-site storage and inland
transit.

g) What risks are insured?

Comprehensive project insurance provides all risks cover. All types of loss of
or damage to the insured property occurring by accident (i.e. sudden and
unforeseen) during the period of insurance are indemnified with the
exception of the exclusions listed in the insurance contract.

i. Possible causes of loss include:

 Fire, explosion, lightning, aircraft impact, or damage resulting from

fire-fighting water or other fire extinguishing measures
 Flooding, inundation, rain, snow, avalanches or seaquakes
 All types of storm
 Earthquakes, ground subsidence, landslides or rockfall
 Forced entry or theft and pilferage
 Faulty erection
 Human error
 Short circuits, over-voltage or electric arcs

 Excessive or insufficient pressure, or breakage due to centrifugal

force

 Loss or damage due to defects in design, plan or specification,

material or workmanship
 Other accidental occurrences, e.g. damage caused by collapsing or
falling items, penetration of foreign bodies

 Loss of, damage to or destruction of building or erection materials,

site facilities or construction machinery, including during transport to

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the site or temporary storage on site, and during erection or
dismantling of site facilities and construction machinery

ii. Non-indemnifiable losses include:

 Losses arising out of wear and tear, corrosion, oxidation or

deterioration of property insured, i.e. as a result of external or
internal factors and not a direct and unavoidable consequence of a
covered claims event

 Claims for compensation arising out of contract penalties,

unsatisfactory performance or pecuniary loss; loss of profits due to
delayed commissioning following insured material damage can be
covered by Section 3 of the insurance contract (“Delay in start-up”)

 Mechanical and electrical breakdown of construction and erection

machinery and apparatus, i.e. breakdown not due to external
effects; accidents resulting from such breakdowns are, however,
insured

 Rectification of faults, e.g. defects in design, materials or

workmanship; damage to non-defective items resulting from such
defects are, however, covered

h) How long does the insurance cover last?

The period of insurance covers the construction and erection period

including the testing and defects liability phase.

i. Construction and erection period begins when work actually

commences, when items are stored on site or on the agreed effective
date, whichever is the latest.

ii. Testing period begins when testing starts or when fuel, raw materials or
lubricants are first introduced, and ends on acceptance of the tests by
the principal or at the agreed date, whichever is the earlier.

iii. Defects liability period (“maintenance period”) begins on that date

either on which the insured property is put into commercial use or
operation by the owner or principal, or on which the taking-over
certificate is issued, whichever is the earlier. Generally, it lasts for 12
months and should not exceed 24 months.

If a project is not completed within the contract period, the period of

insurance can be extended on payment of an additional premium. The
extension premium should, however, only be determined shortly before

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expiry of the original period of insurance so that all special factors pertinent
at the time can be taken into account.

i) How are sum insured and premiums calculated?

i. Sum insured

The sum insured corresponds to the new reinstatement value of the property
or plant under construction at the end of the project according to the supply
contract, including costs of freight, customs duties, fees, erection and
increases in prices in the course of the project.

Developments in wages and prices, e.g. steel price rises, can inflate project
and repair costs substantially, particularly when projects last several years.
Since the insurance contract contains an underinsurance clause, the insured
has an interest in protecting himself against underinsurance. Any changes to
the sum insured should therefore be advised to the insurers immediately.

To cover the risk of failure to adjust the sum insured in time, the contractor
takes out insurance for an amount higher (e.g. 10%) than the full contract
price. At the end of the period of insurance, the final sum insured is
established and the premium adjusted accordingly. This also ensures that
numerous adjustments to sums insured do not put capacity at insurers under
strain. This option has proved effective to cover the risk of failure to adjust
the sum insured in time.

NB: Rise in the cost of materials and wages do not necessarily result in an
increase in the sum insured in the case of fixed-price contracts, but do
increase repair costs in the event of damage. This problem can only be
solved by means of special premium and deductible calculations.

Separate sums insured or limits are normally fixed for

 Professional fees and costs of reproducing plans and documents;

 Property owned by or in the custody of the insured;

 Debris removal;

 Costs of overtime, night work and express deliveries;

 Air freight;

 Additional covers where applicable

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Special care and prudence is warranted for natural hazard covers
(earthquakes, high water, flooding, all types of storm etc.). In certain cases,
it can make sense to define a limit of indemnity for each individual risk.
ii. Premiums

Due to the complexity of projects, an individual analysis of each risk is

necessary, to take account of varying technical and local conditions.
Premium rates can only be calculated when sufficient information to assess
a risk is available, for example:

 The technical description of the project together with the key size
and performance figures

 The contract price for the entire project including a detailed

breakdown of values into main areas and major items

 A site plan (to be able to assess the loss potential and take any
liability hazards into account)

 Geological, hydrological and meteorological data on the project

location

 Supply, construction and erection schedules

 Country of origin and manufacturer of main components

 Degree of prefabrication

 Availability of off-site storage

 Security

 Fire-extinguishing equipment

 Information on relevant experience of the companies involved in the

project

j) How does indemnification work?

i. Expenditure necessary to rectify damage to insured property

The insured is indemnified for expenditure which is necessary to rectify

damage to insured property. In the majority of cases, costs are incurred in
respect of replacements, partial loss and repairs. The value of components
still usable and the residual value of salvaged materials are set off against
the claim.

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Other costs

Additionally, costs of dismantling, freight and reassembly are covered. It is

also possible for indemnification of costs of overtime supplements, express
deliveries, air freight and debris removal and other additional costs included
in the insurance to be agreed. The cost of rectifying faults which would have
occurred anyway without a claims event is excluded.

iii. Deductible

As a general principle, the insured must bear a certain portion of any loss. In
the event of a claim, indemnification is paid net of a deductible. It is
intended to increase an insured’s interest in preventing loss or damage and
to spare the insurers small claims where administrative costs would be out
of all proportion to the amount of the indemnification.

As a rule, varying deductibles are agreed for construction and erection,

testing, the defects liability period, marine cargo and third-party liability.
The limit of indemnity is in all cases the sum insured, unless a limit per
claims event and / or an overall limit for all claims during the period of
insurance has been agreed.

k) Defects liability period (maintenance period)

Comprehensive project insurance includes as a standard feature an

extended defects liability cover during this period, incorporating liability for
the following losses:

i. Damage caused by the contractor whilst carrying out maintenance or

defect rectification work at the insured property in accordance with its
contractual obligations

ii. Damage arising during the defects liability period, but which is due to
factors originating in the construction, erection or testing periods on the
site.

This cover can be adapted to the requirements of the insured, or totally

excluded. In individual cases, it can be extended to guarantee liabilities
incurred by a manufacturer in respect of certain areas of its work.

However, this type of cover is a very high risk and should only be granted in
cases where facilities, procedures and construction and erection methods
are adequately tried and tested.

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3. Third party liability (Section 2)

In spite of the greatest care taken with construction and erection, losses can
never be avoided totally. Third-party claims are covered by Section 2 of the
comprehensive project insurance.

a) Scope of coverage

In addition to loss or damage directly associated with the project, property

belonging to third parties can suffer damage or persons not involved in the
project sustain injury, for which the insured is liable according to statutory
regulations. Claims of this type resulting from accidental property damage
or personal injury can be covered under Section 2 of the insurance contract
(third-party liability).

b) Limit

The third-party liability risk is assumed up to the agreed limit of indemnity

per claim.

The cross-liability principle is applied to liability claims between insured

parties so that all insured parties named under Section 1A of the insurance
contract are treated as if a separate contract had been concluded with each
one individually.

c) Period

The period of insurance for the third-party liability section is the same as
that for the project works section or, alternatively, can be separately
agreed; extensions must be approved in writing by the insurer.

d) Exclusions

Exclusions include:

i. Any liability resulting from the use of any waterborne vessel, aircraft or
vehicle licensed for general road use (this risk should be covered by the
usual classic third party liability insurance)

ii. Any liability resulting from personal injury to employees or workmen

working on the erection project (this is covered by workers’
compensation insurance)

iii. Any liability for consequential property damage or financial loss

following loss of or damage to property held in the care, custody or
control of an insured party or on which an insured party is working
(property damage can be covered under Section 1)

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iv. Any liability resulting from pollution or contamination other than that
caused by a sudden and accidental occurrence

v. Any liability for any occurrence which is inevitable having regard to the
circumstances and nature of the work undertaken and which should
therefore be allowed for by the insured; third parties liable to be
affected by the contract work are normally informed in advance, at
which time the basis on which the insured will assume the costs of the
expected damage is clarified.

4. Delay in start-up (Section 3)

The commissioning or use of an insured project can be delayed by loss or

damage incurred. Section 3 covers the resultant financial risks.

a) Who should be insured?

Only those parties which would incur a loss-of-profits risk in the event of a
delay in start-up can be insured. They are

 the owner,
 the principal,
 the future operator or parties financing the project, but not contractors,
manufacturers or suppliers of the facilities

b) What can be insured?

Under Section 3, the insured can cover the risk of loss of the insured
financial interest resulting from a delay in start-up following a loss
indemnifiable under Section 1A. Where the associated property claim is not
indemnified by virtue only of its being for an amount less than the agreed
deductible, a delay loss is nonetheless indemnifiable.

Definition

“Insured interest” means either gross profit lost (the loss actually sustained
resulting from a reduction in turnover taking into account any increased cost of
working or specific standing charges (e.g. interest, fixed costs, etc. limited to
the actual shortfall in earnings resulting from the reduction in turnover during
the indemnity period taking into account any additional costs) incurred during
the indemnity period which cannot be earned due to the delayed start-up of the
facility.

Loss-minimising expenditure is also indemnified, provided it reduces the loss

to be indemnified by the insurers, i.e. prevents, reduces or puts a
premature end to a delay loss following property damage.
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The following types of expenditure are among those covered:

i. Express deliveries, air freight

ii. Overtime, special shifts, Sunday work and other measures which speed
up repair and minimise the delay

iii. Machinery rental

iv. Purchase of non-identical, but adaptable machinery

v. Acquisition/sale of part-finished products

vi. Recommissioning of old facilities

vii. Switching of work to other companies

c) What is the extent of the cover?

The insurance covers delays arising out of property damage, the cause of
which is covered as standard under Section 1A (project works). By
agreement, cover under Section 1A can be extended to include, for
example, off-site storage, inland transit and even loss or damage due to
earthquakes, volcanic eruptions and tsunamis.

However, start-up delay losses are excluded if caused or aggravated by

i. Redesigning, altering, adding to or improving the property insured or

rectifying defects or faults;

ii. Loss or damage occurring after the project has been taken into use or
occupation;

iii. Loss of or damage to prototype facilities;

iv. Inadequate funding to complete the project;

v. Claims resulting from fines, damages for breach of contract and other
penalties

The loss corresponding to the time excess is also excluded. It is calculated

by multiplying the daily average loss incurred during the indemnity period by
the agreed time excess in days.

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d) How long does the insurance cover last?

Insurance cover begins on commencement of work on site or on the

effective date agreed for this section. It ceases on the planned or actual
date of commencement of operations. An extension of the project works
does not automatically mean that the period of insurance for this section
will also be extended. Any extension has to be approved by the insurer, and
terms and conditions such as premium, new time excess and, if necessary,
new limit agreed.

The indemnity period is defined as the period during which the use of the
insured property is impaired by a delay in start-up due to loss or damage,
beginning on the date on which business would have commenced, had loss or
damage not occurred, and limited by the agreed maximum indemnity
period. The basis for determining the indemnity period is the time needed
to rectify the delay loss. This is derived from the duration of repairs to or
replacement of the damaged facility including erection and testing.

e) How are sums insured and premiums calculated?

i. Sums insured

The sum insured equates either to a declared gross profit (turnover less
variable operating costs), or to specified standing charges for the maximum
indemnity period, subject to a minimum of 12 months’ operation.

Fixed costs resulting from a delay which have to continue to be paid

throughout the indemnity period include:

 Wages and salaries including employers’ contributions;

 Interest and other fixed, continuing finance costs;
 Expenditure on the normal upkeep of buildings, e.g. rent, provided
they are independent of turnover;
 Insurance premiums;
 Other fixed costs

ii. Premiums

Both market-based conditions and premium rates commensurate with the

risk are necessary for delayed start-up insurance to function successfully.
The determining factors are:

 The sum insured

 The maximum indemnity period (liability time limit)
 The length of the time excess
 The type of construction or erection project

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 The length of the construction, erection and, if applicable, testing
periods
 General risks and risks associated with the project
 The probability of property damage causing a delay in construction
 Spare parts planning and/or spare capacity
 Reserves built into the time schedule
 Safeguards such as fire-extinguishing systems
 Damage limitation possibilities

5. Marine cargo (Section 4)

Materials, building components and machinery needed for a project normally

have to be transported to the construction site over long distances.

The risk of transporting the property insured under Sections 1A and Section 1B
can be covered under Section 4 subject to the internationally recognised
Standard Institute Cargo Clauses. The inclusion of this cover in the insurance
contract has the following advantages over a separate marine insurance for the
insured:

 No gaps in or duplication of cover

 Where delay in start-up cover is included under Section 3, no
necessity for a separate time excess or indemnity period to be
agreed
 No need to determine which insurer is to indemnify property damage
or a delay loss where the cause or time of loss is unclear

a) Loss prevention

The lower the losses incurred in the course of a project, the more successful
the financial result is for all involved in the construction or erection. Loss
prevention precautions are therefore extremely important.

For comprehensive project insurance, as for all engineering insurances, the

significance of loss prevention is constantly increasing. Experience has
shown that precautionary inspections and recommendations for safety
measures reduce the number of claims and they are an effective way of
improving claims experience.

Preventing claims is therefore the imperative order of the day. Underwriting

aspects aside, the insured also benefits from assistance in loss prevention.
Continuous reviews of the risks and inspection of regular progress reports
are thus strongly recommended.

Major construction sites are exposed to a wide variety of hazards. Loss

prevention measures and keen risk awareness are therefore important for a
project’s success.

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6. Comprehensive project (CP) insurance – Endorsements

a) Special insurance covers

 Strike, riot and civil commotion

 Extra costs for airfreight
 Property insured taken into use or operation
 Liability consequent upon vibration, removal or weakening of support
 Extended defects liability period cover
 Nuclear fuel elements
 Costs of decontamination
 Reactor pressure vessels with internals
 Costs for leak search
 Oil, gas and/or geothermal drilling rigs and equipment
 Delay in start-up following marine cargo

b) Special exclusions

 Earthquake
 Flood or inundation
 Windstorm
 Crops, forests and cultures
 Construction of dams and water reservoirs
 Removal of debris
 Directional drilling
 Drilling rigs and equipment
 Piling, foundation and retaining wall construction work
 Full faults and defects
 Full faulty design
 Faulty part only
 Construction of tunnels, galleries and underground structures
 Normal action of the sea
 Marine and off-shore work
 Hydrocarbon processing industries 1
 Hydrocarbon processing industries 2
 Limited defects liability period cover
 Section lengths

c) Special conditions

 Contract time schedule

 Structures in earthquake zones
 Underground services
 Fire protection
 Open trenches, pipes, cables and ducts
 Loss prevention in respect of flood and inundation
 Directional drilling

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 Serial losses
 Erection of storage tanks
 Marine 50/50 loss sharing
 Flue gas purification plants

Test Yourself 1

In a comprehensive project insurance policy, ‘the marine cargo insurance’

under’ details are mentioned in which section?

I. General Section
II. Section 1A
III. Section 1B
IV. Section 2

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B. Comprehensive machinery insurance (CMI)

(The following description is reproduced from Munich Re’s literature on the

topic.)

1. Need for comprehensive machinery insurance (CMI)

The trend in recent years has shown that more and more insureds are looking
for “all risks” cover. Demand for classic “all risks” insurance with different
independent policies is falling in the market as it offers insufficient clarity as
far as gaps in cover and overlapping cover are concerned.

One alternative to covering damage to machinery by means of machinery

insurance, fire insurance, machinery loss of profits insurance and fire loss of
profits insurance is to offer an “all risks” policy offering all this coverage in one.

Fire insurance was extended in response to frequent demands from the market.
However, these policies did not take account of the conditions required for
machinery breakdown insurance and were often rated inadequately. The special
features of machinery insurance have therefore been properly taken into
account in the new comprehensive machinery insurance (CMI).

Munich Re developed this cover in English specifically for major international

industrial risks. In the individual markets, however, it operates only in
accordance with the usual rules and conditions applying there, and under
certain circumstances its use may not be possible or may be subject to certain
restrictions.

2. Main features of comprehensive machinery insurance (CMI)

The new policy offers “all risks” cover of a predominantly engineering nature,
particularly against machinery breakdown, fire, lightning and chemical
explosion, as well as natural perils for the entire insured plant, with only a few
property exclusions and excluded perils.

In addition, optional business interruption cover can also be granted in respect

of loss of profits, including increased cost of working, or in respect of specified
standing charges (Section 2 of the policy). The cover is clearly described and
easy to understand thanks to its structured content and layout. Important
definitions are given at the beginning.

The scope of cover is up to date and comprehensive, and can be adapted to the
specific features of a risk by means of a series of clauses.

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3. Suitable objects

Suitable “objects” for this cover are the following:

 Power plants, transformer stations, power distribution systems

 Equipment at open-cast mines and ore-dressing plants
 Plants in the metalworking industry
 Plants in the steel production industry
 Cement factories, machines for the construction industry and stone
working
 Breweries, bottling plants
 Transport and traffic systems
 Wastewater treatment plants
 Water supply systems

Unsuitable or less suitable objects are plants and equipment for which the fire
risk dominates:

 Refineries
 Fertilizer factories
 Plants / facilities in the textile industry
 Warehouses
 Printing works, bookbinding works
 Microprocessor production plants
 Shopping centres
 Equipment in the automotive industry

The cover of the Munich Re policy applies to mechanical and electrical

equipment, as well as to buildings, including their contents, goods being
processed, and stock.

Cover is granted at the business locations specified in the policy, and also
during transportation for the purposes of cleaning, renovation, repair or
maintenance.

Cover applies to the policyholders named in the policy: objects destroyed are
indemnified at new replacement value. In the case of machines, these are
indemnified at replacement value until they are five years old. Thereafter,
indemnity for machines is limited to their current market value. The cover for
business interruption provided under Section 2 of the policy essentially
corresponds to the content of the machinery business interruption and fire
business interruption policies.

4. Scope of comprehensive cover

Over and above the cover provided by machinery insurance, comprehensive

machinery insurance also covers the following perils and costs:

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 Fire, lightning and chemical explosion
 Fire brigade charges
 Impact of aircraft
 Theft
 Burglary
 Collapse and subsidence of buildings
 Flood, inundation
 Earthquake (only as an optional extra)
 Landslide
 Hurricane
 Volcanic eruption
 Inland transits

5. Premium calculation

Premiums are calculated on the basis of the rating for machinery breakdown
and machinery business interruption insurance. For coverage in respect of fire
and natural perils, the corresponding extra premiums for property and business
interruption insurance are added.

The premium determined by Munich Re experts is adapted very precisely to the

risks in the various countries by taking account of all the factors of influence,
thus providing a sound basis for satisfactory operation and further expansion of
this particularly risky class of business.

6. Comprehensive machinery insurance (CMI) – Endorsements

a) Special insurance covers

 Strike, riot and civil commotion

 Extra costs for airfreight
 Underground machinery and equipment
 Machinery breakdown during the guarantee period
 Earthquake
 Prolongation of the interruption period due to deterioration
 Maximum demand charges
 Additional expenditure other than increased cost of working
 Failure of public power, water, gas or steam supply
 Delay in repair
 Suppliers’ extension
 Customers’ extension

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b) Special conditions

 Serial losses
 Refractory materials and/or masonry in industrial furnaces and
boilers
 Refrigerant and lubricating oil
 Conveyor belts and chains
 Wires and non-electric cables
 Rewinding of electric machines (e.g. motors, generators,
transformers)
 Repairs to combustion engines (e.g. diesel, gas engines)
 Components along the hot-gas path of gas turbines
 Waiver of underinsurance
 Submerged and deep-well pumps
 Overhauling of platen presses
 Overhauling of electric motors and generators above 1,000 kW (other
than turbo-generators)
 Overhauling of steam, water and gas turbines and turbo-generator
sets
 Inspection and overhauling of boilers
 Sum insured on unit-price basis
 Flue gas purification plants

Test Yourself 2

In a Comprehensive Machinery Insurance policy, which of the following

statements is correct with regards to business interruption cover?

I. Business interruption cover is covered under the basic policy itself

II. Business interruption cover is a standard exclusion
III. Business interruption cover can be granted optionally
IV. Business interruption cover can be granted for additional fixed premium of
25%

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C. Other insurance policies

1. Construction annual policies (Floaters)

a) Need for construction annual policies (Floaters)

These types of policies are intended for contractors who normally undertake
construction works of similar nature in sufficiently large numbers e.g.
dwellings, apartments, residential units like row houses / bungalows,
commercial buildings and the like. Effecting a separate CAR policy for each
contract becomes administratively cumbersome and inconvenient to handle.

Open covers are the most appropriate tools for both the insurers and the
insureds to achieve the following under the circumstances:

 Greater cost effectiveness,

 Reduced and simple administration of the insurance programme,
 Regular flow of business with well spread risks.

b) Basis for annual policies

Such Open Covers or Floaters will usually be issued under Annual Policies on
any of the two different basis as under viz.

i. Individual declaration basis (Contract commenced basis)

The cover will be provided only for works actually commenced during the
policy period, to be individually declared.

ii. Turnover basis

The cover will be provided on the basis of the annual turnover of the
contractor from activity of construction works of similar nature.

The cover under any of the above basis is automatic for any contract work
commencing after inception of the policy. This results in the insurers loosing
opportunity of individually assessing each contract on its merit. Such
policies, therefore, are issued to clients of long and established
relationships, proven track record and generating adequate volume of
business.

Following points need special attention under both the forms of cover and
hence an underwriter would require substantially detailed information for
consideration before acceptance & commencement of cover:

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i. Individual declaration basis

 Monthly, quarterly or annual declarations may be appropriate where

a large number of small size contracts are carried out by the
contractor. The methodology needs to be pre-agreed.

 Individual declarations must be made before the contract work

commences where the contractor deals with good number of medium
size contracts.

ii. Turnover basis

 This method is most suited for where the contracts undertaken by

insured are of similar nature,

 There are no large fluctuations in the insured periods of individual

contracts and

 A large number of contracts are executed during the annual policy

period.

c) Premium payment procedures

Individual Declaration
Premium paid against each declaration
Basis
Deposit premium collected at commencement of
policy, which will be adjusted on an agreed date
Turnover Basis
between the insurer and the insured but normally
within 30 days of expiry of the policy.

2. Machinery leasing insurance

(The following description is reproduced from Munich Re’s literature on the

topic.)

a) Objectives of the policy

The main object of machinery leasing insurance is to protect the leasing

company’s interests as the owner of installations and machinery leased for a
certain number of years under various leasing contracts. It also covers the
interests of the lessee, however. It is an all risks cover with the same scope
as that of electronic equipment insurance. The type of machines and
equipment automatically insurable by declaration under the contract, which
is in the form of a master policy, is stated in the special conditions.

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b) Exclusions

Generally the following are excluded

 Vehicles (except for mobile machines),

 Underground installations,
 Ships, boats, etc.,
 All types of aircraft and
 Buildings (factory buildings can be included if the respective
installations are insured as well)

Installations are insured with an automatic extension of the annual cover up

to a maximum of five years, the usual length of a leasing contract. The
individual value of the leasing contracts, which are automatically covered
on declaration, is subject to a limit per insured location.

c) Indemnity

Indemnification is made on the same basis as in Machinery Insurance.

The rates are set in the machinery leasing master policy and correspond in
essence with the combined cover for machinery, fire, and natural hazards.
In addition to master policies written for leasing companies with a higher
level of deductible, policies for individual risks can also be taken out by
leasing companies and by lessees.

Due to the long-term nature of leasing master policies covering many single
contracts and the very poor experience with some policies, we must warn
against any extensions in the scope of cover and against any rating
agreements that are not commensurate with the full scope of cover.

3. Aero engine breakdown insurance

(The following description is reproduced from Munich Re’s literature on the

topic.)

a) Need for aero engine breakdown insurance

The aero engine breakdown policy is designed to provide mechanical

breakdown coverage for gas turbine aero engines on fixed-wing aircraft and
helicopters between scheduled overhauls.

b) Target markets

A target markets are corporate owners, charter, commuter and small to

medium airlines, as well as aero clubs. This type of breakdown coverage

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should be seen as a supplement to aircraft hull insurance which usually
indemnifies damage by ingestion, impact, etc.

An aero engine as defined in the policy wording shall mean a certificated

engine supplied by the engine manufacturer or through its approved vendors
as referenced in the respective engine illustrated parts catalogue.

c) Scope of coverage

The aero engine breakdown insurance covers unforeseen and sudden

breakdown to the insured engines, necessitating their repair or
replacement. Loss or damage covered is mainly due to one of the following
causes:

 Faulty design (calculations, plans, drawings and specifications),

faulty assembly, bad workmanship, defects in casting and material
 Faulty operation (pilot’s error)
 Tearing apart on account of centrifugal force
 Short circuit and other electrical causes
 Internal fire

d) Exclusions

The individual exclusions from the cover mainly comprise loss or damage
caused by:

 Wear and tear and gradual deterioration resulting from constant

operational influences such as erosion, burning, incipient cracks,
distortion
 Loss or damage from external sources such as fire, natural disasters,
collision and ingestion damage
 Damage discovered during the course of routine inspections or
maintenance work
 Loss or damage due to abuse of the engine
 Loss or damage due to wilful acts or gross negligence by the insured
 Consequential loss

e) Indemnity

Nearly all claims are partial losses. Indemnity is paid for all costs incurred to
restore the engine to its condition immediately before the occurrence of the
loss. The policy contains a depreciation clause for parts in the hot gas path,
for parts subject to low cycle fatigue, and for life-limited components.

It is recommended that a qualified loss adjuster be appointed for claims

settlement. The loss adjuster should already be present when the damaged

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engine is disassembled in order to ascertain the scope of damage in
accordance with the policy conditions.

f) Premium

The premium and the deductible are based on the type of engine, its value
when new, operating profile, and the respective loss statistics. For
quotation purposes the following information is necessary:

 Type of engine
 Value of new replacement engine
 Operating time since new
 Operating time since last overhaul
 Cycles (starts) since new
 Cycles (starts) since last overhaul
 Approved operating time between overhauls

Conventional piston engines can be insured under the standard machinery

insurance policy.

Test Yourself 3

Which of the below statement is correct with regards to construction annual

policies (floaters)?

I. They are issued on individual declaration basis or turnover basis

II. They are issued on group declaration basis or turnover basis
III. They are issued on individual declaration basis or percentage of work
complete basis
IV. They are issued on group declaration basis or percentage of work complete
basis

310
Summary

a) Comprehensive Project Insurance combines the classic construction and

erection covers in one insurance contract and is therefore suitable for the
insurance of both: construction risks and erection risks.

b) The general section of the comprehensive project insurance contract

comprises the basic definitions, conditions and exclusions applicable to the
project.

c) All parties involved in any way in the construction or erection of a building

or structure and incurring a risk as a result may be insured.

d) Section 1A (Project Works): covers all of a project’s construction and

erection works from commencement and includes, where provided for,
testing and the subsequent defects liability period.

e) Additional Covers: are either standard in comprehensive project insurance

or can be agreed as riders.

f) Section 1B (Marine Cargo Insurance Under): cover can be taken out for the
transport of major items, particularly from abroad.

g) Comprehensive project insurance provides all risks cover. All types of loss or
damage to the insured property occurring by accident (i.e. sudden and
unforeseen) during the period of insurance are indemnified with the
exception of the exclusions listed in the insurance contract.

h) The period of insurance covers the construction and erection period

including the testing and defects liability phase.

i) The sum insured corresponds to the new reinstatement value of the property
or plant under construction at the end of the project according to the supply
contract, including costs of freight, customs duties, fees, erection and
increases in prices in the course of the project.

j) Due to the complexity of projects, an individual analysis of each risk is

necessary, to take account of varying technical and local conditions.
Premium rates can only be calculated when sufficient information to assess
a risk is available.

k) CP insurance includes as a standard feature an extended defects liability

cover during this period, incorporating liability for the specified losses.

l) Third-party claims are covered by Section 2 of the CP insurance. The third-

party liability risk is assumed up to the agreed limit of indemnity per claim.

311
m) The commissioning or use of an insured project can be delayed by loss or
damage incurred. Section 3 covers the resultant financial risks.

n) Marine Cargo (Section 4): The risk of transporting the property insured
under Sections 1A and Section 1B can be covered under Section 4 subject to
the internationally recognised Standard Institute Cargo Clauses.

o) Comprehensive Machinery Insurance (CMI) Policy: offers “all risks” cover

of a predominantly engineering nature, particularly against machinery
breakdown, fire, lightning and chemical explosion, as well as natural perils
for the entire insured plant, with only a few property exclusions and
excluded perils.

p) Suitable “objects” for this cover and the unsuitable or less suitable objects
are specified in the policy.

q) Over and above the cover provided by machinery insurance, comprehensive

machinery insurance also covers the additional specified perils and costs.

r) Premiums are calculated on the basis of the rating for machinery breakdown
and machinery business interruption insurance. For coverage in respect of
fire and natural perils, the corresponding extra premiums for property and
business interruption insurance are added.

s) Construction Annual Policies (Floaters): are intended for contractors who

normally undertake construction works of similar nature in sufficiently large
numbers.

t) Construction Annual Policies are issued on individual declaration basis or

turnover basis.

u) The main object of machinery leasing insurance is to protect the leasing

company’s interests as the owner of installations and machinery leased for a
certain number of years under various leasing contracts.

v) In machinery leasing insurance, indemnification is made on the same basis

as in Machinery Insurance.

w) The aero engine breakdown policy is designed to provide mechanical

breakdown coverage for gas turbine aero engines on fixed-wing aircraft and
helicopters between scheduled overhauls.

x) In an aero engine breakdown policy, indemnity is paid for all costs incurred
to restore the engine to its condition immediately before the occurrence of
the loss.

y) In an aero engine breakdown policy, premium and the deductible are based
on the type of engine, its value when new, operating profile, and the
respective loss statistics.

312
Answers to Test Yourself

Answer 1

The correct option is III.

In a Comprehensive Project Insurance policy, ‘the Marine Cargo insurance

under’ details are mentioned in Section 1B.

Answer 2

The correct option is III.

In a Comprehensive Machinery Insurance policy, business interruption cover in

respect of loss of profits can be granted optionally.

Answer 3

The correct option is I.

The construction annual policies (floaters) are issued on individual declaration

basis or turnover basis.

Self-Examination Questions

Question 1

Which policy covers both: erection and construction risks?

I. Comprehensive Project Insurance

II. Comprehensive Machinery Insurance
III. Construction Annual Policies (Floaters)
IV. Machinery Leasing Insurance

Question 2

Which of the following statements is correct with regards to ‘terrorism risk’ in a

comprehensive project insurance policy?

I. Terrorism risk is covered by default

II. Terrorism risk is excluded as a standard international exclusion
III. Terrorism risk can be covered by paying 25% extra premium
IV. Terrorism risk can be covered subject to certain conditions

313
Question 3

Which of the following statements is correct with regards to ‘who should be

insured’ under a Comprehensive Project Insurance policy?

I. Only the contractor can be insured as the construction or erection is being

carried out under their management or supervision
II. Sub-contractors cannot be insured as they are not a direct party to the
construction or erection that is being carried out
III. Initially only parties financing the project can be insured as their money is
at stake
IV. All the above parties may be insured as long as they are involved in any way
in the construction or the erection of a building or structure and incurring a
risk as a result

Question 4

In a Comprehensive Project Insurance, which loss is not indemnifiable?

I. Loss arising out of human errors

II. Loss arising out of faulty erection
III. Loss arising out of wear and tear of property insured
IV. Loss or damage due to defects in design, plan or specification, material or
workmanship

Question 5

In a Comprehensive Project Insurance policy, which of the following statements

is correct with regards to sum insured or limits for debris removal?

I. Debris removal is covered in the basic sum insured

II. Sum insured or limits for debris removal are fixed separately
III. Debris removal is a standard exclusion and hence there is no sum insured or
limit for it
IV. It is at the discretion of the insured whether he wants to include it in the
basic sum insured or fix a separate limit for it

314
Answers to Self-Examination Questions

Answer 1

The correct option is I.

The Comprehensive Project Insurance Policy covers both: erection and

construction risks.

Answer 2

The correct option is II.

In a Comprehensive Project Insurance policy, terrorism risk is excluded as a

standard international exclusion.

Answer 3

The correct option is IV.

In a Comprehensive Project Insurance, all the parties may be insured as long as

they are involved in any way in the construction or erection of a building or
structure.

Answer 4

The correct option is III.

In a comprehensive project insurance policy, losses arising out of wear and tear
of property insured are not indemnifiable.

Answer 5

The correct option is II.

In a Comprehensive Project Insurance policy, sum insured or limits for debris

removal are fixed separately.

315
Chapter 1
Development of Engineering Insurance and
Relevant Legislation

Intro: This chapter discusses the historical background and development of engineering
insurance in Indian and international markets
Engineering insurance - History and development

Engineering Insurance initiated as a solution for Boiler

Explosions

Boiler Assurance Inspection services

included originally

Third party liability

Material damage Personal injury (i,e.) explosion of
boilers and other
pressure vessels

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Chapter 1
Development of Engineering Insurance and
Relevant Legislation

Development of engineering insurance business in India

In 1953 started transacting Engineering Insurance on a modest scale

The New India
Assurance Co. ltd
Munich Reinsurance Co. provides technical assistance

The Oriental Fire and General Insurance Co. Ltd

Started in Bombay, owned Engineering Insurance Department under guidance of Mr. Michael Taylor

London and Lancashire’, the ‘Concord’, ‘Atlas, ‘Yorkshire’, and ‘British India
General’ was formed in the year 1954

Syndicate Sharing agreement for transaction of Engineering and Allied risks in India

Risks were underwritten through a Technical Cell under the supervision of

experienced Engineers

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Chapter 1
Development of Engineering Insurance and
Relevant Legislation

Engineering insurance - Statues and regulations

Statutes and regulations of insurance business in India
Indian Factories Act 1948

Government has provided powers to Inspectors:

Make examination of Request for any Statement of any

Enter any factory plant and machinery prescribed information
/ document relating to person which he may
& premises the factory consider necessary

Indian Boiler Act 1923

Boiler should be registered before use

Chief Inspector of Boilers should issue authorised certificate

Period to use should not exceeding twenty-four months

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Chapter 1
Development of Engineering Insurance and
Relevant Legislation

Safety rules of plant and machinery

Lifting The Mines Act 1952

machines,
Hoists or Lifts chains / ropes &
lifting tackles Ensure safety and security in mines,
through active supervision of
Inspectors and other officials
Revolving
Pressure Plant Machinery

Tariff Advisory Committee, a statutory body formed by Government

of India under The Insurance Act , controlled and regulated rates
De-tariffing of and terms of coverage
engineering
insurance business IRDA initiated de-tariffication in 2007, and in phases, led to
completely detariffed market

Engineering Insurance now having fully market led pricing

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Chapter 2
Engineering Insurance: Classes of Business,
Principles and Practice

Intro: This chapter discusses the different classes of engineering insurance as well as principles
and modern practices in engineering insurance
Classes of engineering insurance
Engineering Insurance Part of miscellaneous branch of insurance in the Indian insurance market

Classes of engineering insurance

Contractor’s all risks (CAR) insurance

Erection all risks (EAR)

Normally “Period” or Marine cum erection (MCE) insurance

Construction
“one time” policies
phase
issued for the period
insurance Contract works (CW) insurance
of the project

Contractor’s plant and machinery (CPM) insurance

Advance loss of profits (ALOP) / Delay in start-up

(DSU) insurance

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Chapter 2
Engineering Insurance: Classes of Business,
Principles and Practice

Operational phase insurances

“Annual” policies renewable at each anniversary

Policies combining both Construction and Operation Phase interests are not allowed

Machinery Insurance (MI) also known as Machinery Breakdown (MB) Insurance

Boiler and pressure plant insurance (BPP)
Electronic equipment insurance (EEI)
Deterioration of stocks insurance (DOS)
Civil engineering completed risks (CECR) insurance
Machinery loss of profits insurance (MLOP)

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Chapter 2
Engineering Insurance: Classes of Business,
Principles and Practice

Principles and practices of engineering insurance

Principles applicable to engineering insurance

Subrogation and
Utmost good faith Insurable interest Indemnity Proximate cause
contribution

Proposal Form and Questionnaire always considered to form a part of the insurance policy

Proposal forms customer information Questionnaire deals with specific information

Type of
Name Address project

Locational Sum- Plant and

Machinery
details insured equipment

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Chapter 2
Engineering Insurance: Classes of Business,
Principles and Practice

Satisfactory examination by the company engineers

Cover notes Found technically acceptable

Corresponding premium paid

Issued only by authorised representative of company

Policies

Stamped document carefully drafted and issued in appropriate form

Provides evidence of insurance contract

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Chapter 2
Engineering Insurance: Classes of Business,
Principles and Practice

Endorsements

These are primarily addendum or revisions on the policy and form a part of policy

Attached to the policy document and together constitute evidence of insurance contract

Claims under engineering insurance policies procedures

Notification of claim, Duties following an

Position after a claim Arbitration procedure
Obligations of the insured accident

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Chapter 2
Engineering Insurance: Classes of Business,
Principles and Practice

Deductible or excess

Mentioned on the
policy schedule

Different excess
for normal perils,
Time Excess
AOG
applicable for
Perils/Collapse
Loss of Profit
for projects
policies (MLOP)
insurance
(CAR/EAR)

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Chapter 3
Type of Plant / Machinery & Equipment & Associated Hazards

Intro: This chapter discusses the various types of plant, machinery & equipment used in industries, hazards
associated with them, information on various kinds of power plants & risk that these plants are exposed to
during their construction & operation.

Types of plant, machinery & equipment

Boilers & associated equipment, Pressure plants

Steam turbines, Engines such as steam, gas, diesel or petrol engines

Plant, machinery &

Material handling machinery & equipment (cranes – both mobile & fixed, lifts, conveyors, fork
lifts & the like)
equipment

Pumps, Compressors

Refrigerating & Air Conditioning Plants

Power presses used for mass production of a wide variety of small stamped components or
profiled metal parts like a car door

Electrical plant & machinery

An underwriter may require support from technically qualified people for exposure assessment
tasks in respect of machinery & equipment used in industries

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Chapter 3
Type of Plant / Machinery & Equipment & Associated Hazards

Principles & practices of engineering insurance

Plant / Machinery / Equipment Intended use Associated hazards

 Explosion & collapse

 For generation of steam at
 Overheating due to shortage
pressure or
Boilers & associated equipment of water or presence of
 For driving electricity
grease or scale forming
generating machines
impurities in feed water

 Stripping of several rows of

blades
 For storage of steam, liquids
Pressure plant  Disruption of the entire
& gases under pressure
turbine due to centrifugal
forces

 Overheating caused due to

leakage of cooling water or
Engines such as steam, gas, failure of water circulation
 For driving machines
diesel or petrol engines system
 Cracking of cylinder heads &
seizure of pistons

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Chapter 3
Type of Plant / Machinery & Equipment & Associated Hazards

Plant / Machinery / Equipment Intended use Associated hazards

 Mechanical & electrical

Material handling machinery &
 For movement of breakdown
equipment such as cranes – both
materials, men &  Topple over due to overloading,
mobile & fixed, lifts, conveyors,
machines etc. storm, unstable ground
fork lifts & the like
conditions & errors in operation

 Failure of mechanical
 For conveying liquids & components like bearings,
gases from one machine impeller blades, vibration,
Pumps
to another or from one careless operation, misalignment,
place to another faulty design, faulty casting, lack
of maintenance etc.

 Failure of mechanical
components like bearings,
 For reducing volume &
impeller blades, vibration,
Compressors increasing pressure of
careless operation, misalignment,
liquids & gases
faulty design, faulty casting, lack
of maintenance

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Chapter 3
Type of Plant / Machinery & Equipment & Associated Hazards

Plant / Machinery / Equipment Intended use Associated hazards

 For cooling of storage

Refrigerating & Air Conditioning chambers, reducing  Mainly relate to the
Plants temperatures in buildings or compressor & motor
materials in process

 For mass production of a

 Failure of hydraulic pipes,
wide variety of small stamped
Power presses defective casting, defective
components or profiled metal
design, lack maintenance
parts like a car door

 Insulation break-down (due

to over voltage, high
 For generation, transmission,
temperature, lack of
distribution & supply of
ventilation, etc.)
Electrical plant & machinery electricity
 Failure of mechanical
 For driving other machinery ,
components (due to lack of
etc.
lubrication, poor termination,
failure of safety device, etc.)

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Chapter 3
Type of Plant / Machinery & Equipment & Associated Hazards

Steam for driving turbine

Conventional power
Coal as fuel in the boiler furnace
plants

Fuel oil & gas for burning in boiler furnace

Power plants & Potential energy from water courses to drive

associated turbine coupled to an alternator
Hydroelectric power
hazards plants
Generally classified based on basis of
available water head

Consists of nuclear/radioactive reactions &

conventional steam power plant sections
Nuclear power
plants
Generated heat is used for converting water
into steam

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Chapter 3
Type of Plant / Machinery & Equipment & Associated Hazards

Transportation, offsite storage & handling of heavy & odd-sized project

machinery

Accumulation of substantial values on construction sites

Inadequate safety & protection

Associated
Hazards for
conventional Exposure to fires, flash floods & inundation due to improper storage
power plants arrangements
during
construction /
erection Inadequate precautions against corrosion

Exposure to natural perils

Third Party Liability due to transportation & site accidents ALOP & DSU
exposures as a result of delay in commencement of commercial operations due
to accidents

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Chapter 3
Type of Plant / Machinery & Equipment & Associated Hazards

Associated Hazards for conventional power plants during operation

Fires in cable
Third Party Long
galleries, Disintegration
Mechanical/ Explosion Rupture of Exposure Liability interruption
switching of turbines due
electrical or collapse steam & to natural due to periods
rooms, to centrifugal
breakdown of boilers fuel pipes perils leakage & after an
transformers forces
pollution accident
etc.

Transportation, offsite storage & handling of heavy &/or odd sized project machinery

Accidents to heavy duty construction plant, machinery & equipment

Inadequate fire safety & protection. Remote location of site & difficult access create
Associated
problems in mobilizing help in case of emergencies
Hazards for
hydroelectric
power plants Exposure to fires, flash floods & inundation due to improper storage arrangements
during
construction / Inadequate precautions against corrosion
erection
Exposure to natural perils of earthquake, flood, landslide/rockslide

Third Party Liability due to transportation & site accidents

Long delay after an accident

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Chapter 3
Type of Plant / Machinery & Equipment & Associated Hazards

Associated Hazards for hydroelectric power plants during operation

Mechanical/electrical breakdowns

Bursting of dams, collapse of tunnels, floods, landslides/rockslides leading

to catastrophic losses

Defective design, material, specification and/or workmanship

Fires in cable galleries, switching rooms, transformers etc.

Disintegration of turbines due to centrifugal forces

Exposure to natural perils of earthquake, flood, landslide/rockslide

Third Party Liability due to leakage and pollution

Long interruption periods after an accident

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Chapter 4
Project Stages, Work Contract & Other Contracts

Intro: This chapter discusses various project stages, different activities involved in these stages & the
importance of work contract and other contracts.

Project stages

 Construction Phase Insurance is also known as “Project Insurance”

 The following information focuses on large projects; the procedure for smaller projects may follow the
same pattern

Project stages

Detailed
Need for the Feasibility Award of
Project Call for Tender
Project Study Contract
Planning

Defects- Land
Transportation
liabilities or the Acquisition &
Site Activities of Project
maintenance Site
Property
period Preparation

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Chapter 4
Project Stages, Work Contract & Other Contracts

Work contract and other contracts

Legal instrument that divides the
financial risk and responsibilities The principal and the contractor to
between the principal and the arrange different types of insurances
contractor for the project property
The Work
Contract
Among many other stipulations, Work
The people involved in execution of
Contracts will have clauses which
the project
describe the responsibilities of:

The third party liability that may

arise due to activities carried out in
connection with the project

In addition to the Work Contract, the principal enters into other contracts with different parties such as:

 Suppliers of machinery / equipment  Supplier of fuel (e.g. fuel supply agreement for a
 Suppliers of various services power project)
 Shippers and transporters  Finance agreement with financiers of the project
 Purchasers of production of the project (e.g. etc.
power purchase agreement)
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Chapter 5
Contractors All Risk Insurance

Intro: This chapter discusses CAR insurance (Contractor’s All Risks Insurance) & its
characteristics in terms of risk covered, sum insured, pattern of premium payment etc.
CAR Insurance

Contractor’s All Risks Insurance

Popularly known as CAR insurance

Protect the interests of the principals and contractors engaged in civil engineering projects
Cover from the time of arrival of the first consignment of materials at the site or from the
commencement of work, whichever is first

Sudden and unforeseen loss or damage occurring during the

Section I - Material
period of insurance to the property insured on the
Damage
construction site will be indemnified
CAR Scope of
Cover
Section II - Third Covers in conjunction with the Material Damage cover under
Party Liability CAR insurance policy

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Chapter 5
Contractors All Risk Insurance

Defects Liability period

Contractors may take out cover during the maintenance period or defects liability period to
fulfill the obligations under the contract

Material Damage sum insured must be equal to estimated completely erected value of contract works
Sum insured should represent the new replacement value of each item to be covered
If sum insured is less, then the amount recoverable under the insurance gets reduced in that proportion

Supplementary Covers
Construction machinery, plant and Provision for escalation in value to take
equipment required for the project care of inflationary trends
Clearance and removal of debris of the Temporary works or temporary structures
insured property following a loss at the project site
Damage to existing property of the Additional expenses for air freight
insured at the site
Additional expenses e.g. overtime, work Additional custom duty incurred for
on public holidays, air freight etc. replacements over and above
Legal liability for property damage / injury Maintenance Cover
because of accidents
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Chapter 5
Contractors All Risk Insurance

Assessment of risk and technical control

Tall Buildings

Airport Works

Underground Risks

Pipeline Construction

Tunneling
Assessment Trenching
of Risks and
Technical Hydro-electric
Control
Road Construction

Reservoirs

Bridge Construction

Off shore Structures and Equipment

Wet risks
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Chapter 5
Contractors All Risk Insurance

Claims Control

All incidents are notified to insurers immediately for realistic loss assessment

Insured will be required to actively pursue recovery from the manufacturers/suppliers depending on
the terms of contract

Theft claims require careful investigation in conjunction with the local police authority

Losses discovered only at the time of taking inventory are not covered under the policy

Salvage materials should be disposed off at best available prices which will minimize loss

Insurer is not liable for additional cost incurred for alterations in the contract works

Insured must forward to insurer any notice of claim received from a third party without admitting a
liability

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Chapter 6
Erection All Risks (EAR) insurance and Marine
Cum Erection (MCE) Insurance

Intro: This chapter discusses Erection All Risks (EAR) Insurance and Marine-cum Erection (MCE)
Insurance policies
Erection All Risks Insurance
Need for Erection All Risks (EAR) Insurance
Covers contracts primarily involving erection of plant, machinery, equipment, machine foundations &
also all associated civil engineering work of factories

Need for Marine-Cum-Erection (MCE) Insurance

• Project principals and the contractors to avail of a continuous uninterrupted insurance
cover including both the marine and EAR coverage

Erection All Risks - Object

The cover is from the time of arrival of the first lot of

Provides a comprehensive cover for the entire materials at site and terminates on completion of
project of installation / erection of machinery & erection / testing /commissioning or the plant is
equipment taken over, whichever shall occur earlier; and
during the maintenance period thereafter

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Chapter 6
Erection All Risks (EAR) insurance and Marine
Cum Erection (MCE) Insurance

Section I - Material Policy coverage is on an ‘All Risks’ basis, covers Fire &
Damage lightning, Riot, strike, flood, etc.
Scope of
Cover
Section II - Third Legal liability to third parties for property damage or
Party Liability personal injury

Policy Period

From arrival of the first consignment or from the commencement of work, whichever shall be the first
Applicable till the date specified in the policy / completion of erection, testing & commissioning or
The contract works are taken over by the principal, whichever shall occur first

checking of parts and elements of insured property by mechanical,

electrical, hydrostatic, or other forms of testing under ‘no load’ conditions
Cold Testing
Cold Testing is generally treated as a part of the normal or erection period
Testing
Period
Checking of parts, elements and /or production lines of insured property
under full or partial load and normal or simulated operating conditions
Hot Testing
Hot testing is a very significant risk for the insurers

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Chapter 6
Erection All Risks (EAR) insurance and Marine
Cum Erection (MCE) Insurance

Obtained by insured to cover loss/damage to permanent

Maintenance cover contract works occurring during maintenance period

Covers loss or damage to the project works during the

Maintenance maintenance period .caused by the insured contractor(s) in
Visits Cover the course of operations carried out for the purpose of
complying with the obligations under the maintenance
provisions of the contract
Types of Maintenance
coverage

Extended As above + losses occurring during the maintenance

Maintenance period provided such loss/damage caused on the site
during the erection period

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Chapter 6
Erection All Risks (EAR) insurance and Marine
Cum Erection (MCE) Insurance

In projects insurance, the excess / deductibles are separately

Excess / Deductible mentioned for different category of perils

Excess (Deductible)

Storage and Testing and Collapse and

Acts of God Maintenance
erection maintenance Fire claims Fire claims Works in
Perils period claims
claims period claims water

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Chapter 6
Erection All Risks (EAR) insurance and Marine
Cum Erection (MCE) Insurance

The minimum excess amounts prescribed by insurer are generally termed as normal excess

Discounts in premium available for insured selecting excess amounts higher than normal

EAR proposal and policy form are standardised, the rates have
been de-tariffed and follow market led pricing

Projects insurance
Projects involving values of Rs. 2500 crores and more are
rating and norms considered Mega Risks and may follow market led pricing
or can also obtain reinsurer driven rating and terms

Large mega projects usually follow Fac Reinsurance driven

rating and customized terms i.e. the insurers may make a
reference to their facultative reinsurers for wordings, rates,
terms & conditions

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Chapter 6
Erection All Risks (EAR) insurance and Marine
Cum Erection (MCE) Insurance

Marine–cum Erection (MCE) Insurance

Marine Voyage for Imports

Offloading at Ports / Storage at Ports or other intermediate places

Scope Inland Transit – to site of erection including any transhipments & intermediate storage
of
Unloading, Storage, Handling, Shifting, installation / Erection at the site
Cover
Testing and Commissioning at the site of erection

Sum Insured (Marine )

It is in no way different under MCE policy
Insured Value should correspond to CIF (cost, insurance, freight) value +10% plus Custom Duty
There is no ‘underinsurance’ as it is declared on value basis

Adjustment of sum insured (marine)

The policy is adjustable at the end of the policy On the basis of actual values to be declared by the
period / completion of testing / commissioning insured in respect of freight and handling charges,
(applicable only for marine portion) custom dues and construction costs and difference
in premium to be suitably adjusted

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Chapter 6
Erection All Risks (EAR) insurance and Marine
Cum Erection (MCE) Insurance

Marine Claims

Normal course: there is no Excess applied for marine claims for general cargo

In respect of a project, position will vary depending on the type of machinery / equipment, overall
transportation plan, transhipments & intermediate storages, loading / unloading facilities etc.

Underwriting & Rating Considerations (for marine)

Mode of Details of
Country of Particulars of
inland transit barge
origin of the Mode of Particulars of fragile items Limits per
including shipment, if
project packing voyage like refractory sending
transhipment, applicable
machinery materials etc.
if any etc.

Rating
Rates and Excess for marine cargo insurance of The EAR rating considerations remain the same as
project materials – both imported and indigenous explained earlier under description for EAR
depend upon the type and value of cargo involved insurance

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Chapter 7
Contracts Works (CW) Insurance

Intro: This chapter discusses contract works (CW) insurance

Contract Works (CW) Insurance

Contract Works (CW) Insurance

This term is used in different insurance markets for European insurers/reinsurers use this term for a
different types of policies special cover which is a combination of CAR and
EAR to suit the needs of projects

CAR policy would be most suited to contracts predominantly involving civil

engineering works

CAR plus EAR An EAR or MCE policy would cater to plant / machinery erection contracts

The normal terms & conditions for combined policy help eliminate any gaps
& overlaps in cover that would have occurred if separate CAR & EAR
policies were issued

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Chapter 8
Contractor’s Plant & Machinery Insurance

Intro: This chapter discusses contractor’s plant & machinery insurance

Contractor’s Plant & Machinery (CPM) Insurance

CPM insurance is for Capital equipment and machinery owned by Contractors and
used for the purpose of executing projects.
Note that this is an annual cover. Types of Equipment covered is as follows :

Construction Material Handling

• Bulldozers • Fork lift trucks

• Roadrollers • Cranes
• Pavers • Conveyors
• Transformers • Chain pulley blocks
• Site power generating
plants
• Motors, Compressors,
Pumps, Mixing Plants

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Chapter 8
Contractor’s Plant & Machinery Insurance

Limited fleet of machinery and

From perils such as: Fire,
equipment does not help to get
water, storm, Impact & perils
The object of CPM immediate replacements for the
of nature
insurance damaged machines

Accidental damage Fire and lightning,

while at work due to external explosion
faulty handling,
dropping, falling, Burglary, theft
collapse, collision,
toppling over, impact
etc. Scope of CPM
Insurance

Storm, tempest,
Riot, strike, malicious
hurricane, typhoon and
damage
tornado
Earthquake, flood,
inundation, subsidence,
land slide and rockslide

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Chapter 8
Contractor’s Plant & Machinery Insurance

The current market value is not

Sum insured of each individual a suitable value, as it constantly
item must represent its new changes, and different valuation
replacement value criteria and methods are
Sum Insured possible
& Average

In case of loss or damage, if sum

insured is less than the amount
required to be insured, then the
amount recoverable by the insured
gets reduced in such proportion as
the sum insured bears to the
amount required to be insured.
This condition applies separately to
each and every item.

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Chapter 8
Contractor’s Plant & Machinery Insurance

The basis of indemnification is the cost of restoration to

working order based on the customary daily rates together
with normal freight, erection cost and other duties and taxes

In cases where the If the value of one item or part thereof is increased by
damage can be repairs, liability of insurers is reduced by the amount of such
repaired: increase.

If the repairs are carried out at a workshop owned by the

insured, the insurer will pay cost of materials and wages plus
a reasonable percentage to cover overhead charges
Basis of
Indemnification
The basis of indemnification is market value of the item
immediately before the accident plus cost of removing the
damaged machinery less value of salvage

Where the insured item

An insured item is regarded as totally destroyed if the repair
is totally destroyed or is
cost as described equals or exceeds its value immediately
a constructive total
before the accident
loss:

All costs of alterations, additions, improvements are to be

borne by the insured

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Chapter 8
Contractor’s Plant & Machinery Insurance

Machinery Insurance

Mobile machinery Tools & Stationary Plant

• Earth moving machines Tackles • Fixed conveyor systems
• Tunnelling &mining machines • Concrete batching plants
• Road surface finishers/ rollers/ • Asphalt mixing plant
compactors • Tower cranes etc.
• Mobile cranes
• Mobile material conveyors Classification
• Mobile power generators of Machinery
& Equipment

Underwriting considerations

Conditions of
General Periodical General
the Experience of Any
condition of inspections standard and
construction the operators extensions of
job site & adopted by the quality of
plant & &/or drivers cover required
accessibility contractors maintenance
equipment

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Chapter 8
Contractor’s Plant & Machinery Insurance

Technical & Claims Control Rating factors

Origin of the
Other important factor is Type of machinery machinery /
The skill of the operator is equipment –
terrain or other geological or / equipment & its
one prime consideration in condition whether imported
geophysical features of the
assessment of hazards or local
erection sites.

Working
Maintenance &
environment on
Claims under this policy may upkeep system
the site
arise due to many causes, Insurers generally insist
e.g. fire, riot, flood, storm upon immediate notification
earthquake, theft, accidental of any claim for this class of
damage to the contractor’s insurance
plant and machinery Quality of operators Experience of the
whether trained or contractor &
otherwise operators

All theft claims require Losses discovered only at

careful investigation in the time of taking inventory
conjunction with the local are not covered under the Previous accident
police authority policy & claims history

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Chapter 9
Advance Loss of Profit / Delay in Start-up Insurance

Intro: This chapter discusses Advance Loss of profit (ALOP) insurance policy

Advance loss of profits

Refers to a particular class of Consequential Loss insurance

Advanced Loss Covers financial consequences of a delay in estimated

of Profits commercial operation date (COD) of a project

Accidental damage to the project materials admissible under

Material Damage Section of an EAR or CAR insurance policy

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Chapter 9
Advance Loss of Profit / Delay in Start-up Insurance

Risks related to political, social or economic reasons or

Speculative or trade risks shortcomings in the management and errors in judgment
not insurable
Insurance of
Delay Period
Lead to material damage of an accidental nature that
Occurrences related to
concern the underwriters; as a basic principle, ALOP policy
natural perils, inherent
is issued only in conjunction with a Material Damage-CAR /
defects and human failures
EAR policy

ALOP policy is issued only to principal / owner of the project with the interest
of the financiers suitably recorded

Contractors / sub-contractors, suppliers cannot be a beneficiary under this

policy, even though they are jointly insured under CAR / EAR policy

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Chapter 9
Advance Loss of Profit / Delay in Start-up Insurance

Objects of an ALOP Insurance

Indemnify the principal or the project owner for actual loss sustained due to a delay in
commencement of commercial operations of a new project under installation / construction
Delay must be caused by direct physical loss or damage to the project property, admissible
under the Material Damage section of CAR / EAR insurance covering the contract works

Indemnity Period
Insured Period of insurance Time Excess (TE)
(IP)

• Only the Principal / • ALOP coincides with • The day on which • Period of delay for
owner of the project the EAR/CAR policy the project would which loss is borne
• The Contractor / period including the have been taken by the insured which
Sub-contractor / testing period, if over by the owner starts along with the
Engineers etc. are covered and had the accident not indemnity period
jointly insured with terminates with the occurred and ends • Depends on type of
the owner only under commencement of on the day the plant / equipment,
the CAR/EAR policy commercial commercial replacement time for
for material damage operation operation starts critical items,
and TPL losses location of site and
other underwriting
factors.

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Chapter 9
Advance Loss of Profit / Delay in Start-up Insurance

Advance loss of profits to be attached to CAR / EAR Policy: Section 3

Objective of Insurance

Insurers indemnify the Insured for the actual loss sustained due to a delay in completion of the
insured works caused by direct physical loss or damage covered under the Policy to which this
Endorsement is attached and occurring within the stated Period of Insurance

Period of Insurance

It shall end earlier if and when the entire works or parts thereof are taken over or taken into use
by the Insured, period of Insurance shall be stated in the Schedule

Deductible Period (Time Excess)

It runs from the date upon which, had the accident not occurred, the insured business would
have been completed
When a delay exceeds the deductible period, the indemnity is reduced in the same proportion as
the deductible period bears to the Indemnity Period

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Chapter 9
Advance Loss of Profit / Delay in Start-up Insurance

Risk Categories for Insurance

ALOP and similar forms of ‘Delayed Income Insurance’ have been requested for all types of
projects

Demand for this cover mainly from infrastructure Projects, Power and road projects etc, as most
of these projects are financed by banks / financial institutions

Rating of ALOP risks

Insurers have to depend upon the international reinsurance market for guidance on a case to
case basis due to lack of sufficiently large portfolio, statistically supported rating systems

For standard documentation, there are no guidelines

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Chapter 10
A. Endorsements – Including Supplementary Covers (Car, Ear, CW)
B. Information Required for Framing Construction Phase Insurance Programme
for a Project

Intro: This chapter discusses standard endorsement wordings for each such individual extension cover
along with other applicable endorsements
Endorsements
Endorsement Regarding Fire/Explosion

Notwithstanding the conditions, provisions and It is further agreed and understood that the
other endorsements of this policy, it is agreed Company shall not be liable for 10% of the
and understood that company shall indemnify the claim amount subject to a minimum of Rs.
insured in respect of any loss or damage caused _________ for each and every claim on
by fire/explosion account of fire / explosion

Endorsement regarding Cross Liability Cover

Third Party Liability Cover of the policy shall apply to the insured parties as if a separate policy had
been issued to each party provided the Company shall not indemnify the insured under the
Endorsement in respect of liability for:
Loss of or damage to items insured or insurable Fatal or non-fatal injury or illness of employees or
under Section 1 of the policy even if not workmen's compensation and/or employer's liability
recoverable due to an excess or any limit insurance

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Chapter 10
A. Endorsements – Including Supplementary Covers (Car, Ear, CW)
B. Information Required for Framing Construction Phase Insurance Programme
for a Project

Endorsement Regarding Escalation

• It is also hereby declared and agreed that in event of a claim, insured would be considered
fully insured up to the sum insured inclusive of ___% increase as per selected escalation
and under insurance would apply only in the event of the cost of replacement of the affected
equipment exceeding the original value inclusive of selected ___% towards escalation

Endorsement Regarding Air Freight

• It is hereby declared and agreed that the policy shall also indemnify towards Air Freight
incurred by the insured in connection with the idemnifiable loss under the policy. In
consideration thereof an additional premium of Rs._______ is charged hereby. Limit of
indemnity shall be Rs. ___________ during currency of the policy

Endorsement Regarding Customs Duty

• In consideration of the insured having paid an additional premium of Rs. _________ it is

hereby declared and agreed that the insured shall also be indemnified during the
currency of this policy, towards Additional Custom Duty Rs. ________________ which
may be incurred by the insured over and above the Custom Duty amount taken into
account in arriving at the Sum Insured of the affected item

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Chapter 10
A. Endorsements – Including Supplementary Covers (Car, Ear, CW)
B. Information Required for Framing Construction Phase Insurance Programme
for a Project

Endorsement for Test Run Definition for Gas Turbines in respect of Combined Cycle Power Plant

Notwithstanding anything stated herein to the contrary, it is hereby declared and agreed that the gas turbine
insured hereunder is deemed to have commenced its first operation of test loading when the fuel is
introduced in the combustion chamber of the gas turbine unit

Endorsement Concerning Storage

It is agreed and understood that otherwise subject to the terms, exclusions, provisions and conditions
contained in the policy or endorsed thereon, the Insurers shall only indemnify the Insured for loss of or
damage to the Insured items during storage upto a value per storage unit not exceeding the equivalent of
Rs.____________.

Endorsement Regarding Damage to Crops, Forests etc.

It is agreed and understood that otherwise subject to terms, exclusions, provisions and conditions contained
in policy or endorsed thereon, Insurers shall not indemnify insured for loss, damage or liability directly or
indirectly caused to crops, forests and / or any cultures during execution of contract works

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Chapter 10
A. Endorsements – Including Supplementary Covers (Car, Ear, CW)
B. Information Required for Framing Construction Phase Insurance Programme
for a Project

Five sets of Endorsement

wordings are available from
Outright Defect Exclusion DE 1
London Market for Defect
Exclusion (D.E.) Wordings

Extended Defective Condition Exclusion DE 2

Design Defect Exclusion

Limited Defective Condition Exclusion DE 3
(DE) Wordings

Defective Part Exclusion DE 4

Design Improvement Exclusion DE 5

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Chapter 10
A. Endorsements – Including Supplementary Covers (Car, Ear, CW)
B. Information Required for Framing Construction Phase Insurance Programme
for a Project

Framing Construction Phase Insurance Programme for a Project

Underwriter requires information which covers all the measure headings for making decision on:

Type of insurance
Acceptance of Rates, terms and
including scope of Retention Reinsurance
risks conditions
cover
Contract
• Split of total contract value into major units
• Details of Civil Engineering works with values
• Principal supplied materials
• Bar chart / time schedule of various activities
• Period of erection / construction including testing and commissioning
Erection • Details of phased handover, if any
All Risk
(EAR) Third Party
Insurance • Description of surrounding property
• Limits of liability required

Construction Plant and Machinery

• List of construction plant and machinery
• Values of individual items to be insured
• Criticality of items for project completion

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Chapter 10
A. Endorsements – Including Supplementary Covers (Car, Ear, CW)
B. Information Required for Framing Construction Phase Insurance Programme
for a Project

Marine Cargo Insurance

Full details of cargo to be shipped, including dimensions and weight

Origin of

• General cargo
• Critical items

Sum insured in respect of

• Import cargo
• Critical items
• Local items

Full details of how the bulk of cargo will arrive at project site

Limits of Liability

• Any one conveyance

• Any one location

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Chapter 11
Machinery Insurance

Intro: This chapter discusses marine insurance policies which provide protection to industries against any
physical damage to the machinery

Machinery insurance

Machinery insurance

Also called Machinery Breakdown insurance

It should be of interest to everyone who operates machinery – not only the big industrial enterprises but also
small /medium undertakings where machinery may have serious financial and economic consequences

Scope of Insurance

Standard Machinery Insurance Policy covers unforeseen and sudden physical damage by any cause to the
insured property:
While being
During cleaning or
While it is at work dismantled for When being shifted During subsequent
overhauling
or at rest clearing or within the premises erection
operations
overhauling

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Chapter 11
Machinery Insurance

Underwriting Features:

Hazardous Risks - Machinery

of all types under following
Driving Machinery Process Machinery
categories is generally
considered hazardous

• Units of power generating • Process plant is designed for • In brick works, quarries and
machines and prime movers a variety of purposes, mines or used by builders
are most eligible risks for sometimes by insured’s own and other contractors
Machinery Insurance engineering staff • In industries where working
• They are substantially same • Some of the unsatisfactory conditions impose
in design and construction features of process plant are extraordinary loads
irrespective of the industry in generally of less stable • Used underground or
which they are used design than power plants installed in any vehicles,
• Alternators and generators, • Overloading shocks occur aircraft or water borne
boilers, Compressors, electric due to uneven loads or vessels
motors, engines, fans, unskilled operators • Operating in remote
blowers etc. are types of • Caution is necessary in situations with no facilities
machinery which are normally selecting process machinery nearby for repairs and
acceptable as good risks for insurance; the past replacement
experience of breakdown
should be carefully
investigated

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Chapter 11
Machinery Insurance

Principal Exceptions:

Fire and Special Perils

• Policy does not cover damage due to fire, lightning, explosion (other than disruption of
turbines, compressors, etc. or other items subject to internal pressure), theft, collapse of
buildings, subsidence, landslide, water which escapes from water containing apparatus,
flood, inundation, storm, tempest, earthquake, volcano or other Acts of God and impact with
vehicles or aircraft damage including articles dropped from aircrafts or other aerial device

Damage to machinery caused by fire

• This is specially excluded. Purpose of the Machinery Insurance Policy is to cover self
heating or internal fire due to electrical faults, but exclude damage caused by external fire or
direct lightning which are covered by the Fire Policy

Explosion

• Explosion exclusion in Machinery insurance policy is qualified so that it does not exclude
bursting, disintegration or disruption of turbines, compressors, transformers, switchgears,
etc. or physical explosion of vessels containing gas, steam and / or a liquid substance due to
internal pressure

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Chapter 11
Machinery Insurance

Sum Insured and Average

In event of loss or
damage, if sum insured is
Sum insured of each Sums insured should be
less than amount required
individual item must Current market value is reviewed at frequent
to be insured, then the
represent its new not a suitable value, as it intervals and, if possible,
amount recoverable by
replacement value, always changes, and value should be linked to
the insured gets reduced
including transportation different valuation criteria an acceptable index
in such proportion as the
cost to site, customs dues and methods are possible showing fluctuation in
sum insured bears to the
and all installation costs prices
amount required to be
insured

In cases where the damage can be repaired, the basis of indemnification is the
cost of restoration to working order based on the customary daily rates together
with normal freight, erection cost and other duties and taxes

Basis of Where the insured item is totally destroyed or is a constructive total loss the
Indemnification basis of indemnification is market value of the item immediately before the
accident plus cost of removing the damaged machinery less value of salvage

An insured item is regarded as totally destroyed if the repair cost as described

equals or exceeds its value immediately before the accident

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Chapter 11
Machinery Insurance

Important provisions under machinery insurance

Duties Following an Accident - In the event of any occurrence which

might give rise to a claim under this policy, the insured shall:

• Immediately notify the company by telephone or telegram, in writing, depending on extent

of loss or damage
• Take all reasonable steps within his power to minimise the level of the loss or damages or
liability
• Preserve the damage or defective parts and make them available for review by an official or
surveyor of the company
• Furnish all such information and documentary evidence as the company may require

Position after a claim

• The insured shall not be entitled to abandon any property to the insurer whether taken
possession of by the insurer not
• As from the day of loss, the Sum Insured for the remainder of the period of insurance is
reduced by the amount of compensation

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Chapter 11
Machinery Insurance

A claim form should be properly completed, signed and checked whether both the item and the
risk involved are insured under the policy

It is necessary to check whether any loss of profits insurance or deterioration of stock insurance
Claims Control

is in force covering the damaged machinery

A qualified engineer surveyor is generally deputed to assess the loss who will then scrutinise
claims estimates, determine the cause of the accident, certify that the charges claimed for are
reasonable and exclude cost of improvement, alteration or temporary repairs

An up to date copy of the policy should be made available to the independent surveyor

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Chapter 12
Boiler & Pressure Plant Insurance

Intro: This chapter discusses the importance of boiler and pressure plant insurance polices which
can be used to prevent financial disasters.

Boiler & pressure plant insurance policy

Different titles of the policy in

different insurance markets

Boiler Explosion Boiler and Pressure Vessel Boiler and Pressure Plant
Insurance Policy Insurance Policy Insurance Policy (in India)

insured boilers and

against the risk
Policy and pressure indemnifies
of ‘explosion’
covers vessels (both fixed the insured
and ‘collapse’
and unfixed) against

Note : Boiler Explosion Policy

doesn’t cover the perils that are Damage to other
Damage to Liability for Third Party
surrounding
covered under Standard Fire insured item Property Damage and /
property of the
Policy or Machinery Breakdown itself (other or fatal or non / fatal
Insured (other
policy than by fire) personal injuries
than by fire)

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Chapter 12
Boiler & Pressure Plant Insurance

• any fired closed vessel or a combined container piping system in which steam is
“Boiler”
generated under pressure

“Pressure
• any unfired closed container under steam, gas, or fluid pressure
Plant”

• sudden and violent rendering or tearing apart of the permanent structure of a boiler
/ pressure plant / any part or parts by force of internal steam, gas or fluid pressure
“Explosion”
causing bodily displacement of the said structure and accompanied by the forcible
ejectment of its contents

• sudden and dangerous distortion of any part of a boiler / pressure plant by bending
“Collapse” or crushing caused by steam, gas or fluid pressure whether attended by rupture or
not; shall not mean any slowly developing deformation due to any cause

“Flue Gas • explosion of ignited gases in the furnaces or flues of the boilers, economisers and
Explosion” super heaters.

“Chemical
• explosion arising out of chemical reaction in any plant.
Explosion”

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Chapter 12
Boiler & Pressure Plant Insurance

Classification of explosion for insurance cover

Chemical Explosions Physical Explosions

 Gun powder, detonators or any similar explosive  Explosion can occur due to variation in
compound could cause explosion under the influence of fluid pressure
mechanical or thermal shocks  Variation only in physical form, and no
 Combustible and highly inflammable fluids and dusts can chemical reactions responsible for such
cause explosion explosions
 Explosion is some form of chemical reaction  Cover under fire policy however excludes
 Chemical explosions are considered a very rapid form of damages to all steam generators or boiler
combustion plants arising out of their own explosions
 Due to high speed and acceleration of such combustion,  Separate boiler explosion insurance policy
the products of combustion liberated are incapable of would be required in respect of steam
withholding the energy generated generating plants or boilers
 The release of uncontrolled energy in this fashion causes  Boiler should be insured under boiler
extensive damages explosion policy to cover risk of its own
 Explosions are connected with or originate from ignition & explosion and under fire policy to cover
hence covered under fire insurance policy risk of explosion
Damages caused by chemical explosion covered under Fire Policy
Damages caused by Damage caused by explosion of gas used for
Fire resulting from
explosion of Boiler used for domestic purposes only for lighting or heating
explosion
domestic purposes a building not forming a part of any gas work
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Chapter 12
Boiler & Pressure Plant Insurance

Sum Insured and Average

Boiler Explosion Policy: sum insured should represent the new replacement value of the plant inclusive of
freight, customs duties and erection cost

Each item of the plant insured is separately subject to pro-rata average

In the event of loss or damage, if sum insured is less than the amount required to be insured, the amount
recoverable by the insured gets reduced in such proportion as the sum insured bears to the amount
required to be insured

This condition applies separately for each and every item

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Chapter 12
Boiler & Pressure Plant Insurance

Important provisions in boiler and pressure plant insurance

Position after a claim Rating Technical control

Insured shall not be entitled Basic rates of premium Before any risk can be
to abandon any property to depend upon the type of accepted it must be ensured
the insurer whether taken boiler, type of fuel and age that the plant is periodically
possession or not inspected and cover can be
granted

From the day of loss, the Additional premium charged

sum insured for the for over age boilers and Subject to existence of a
remainder of the period of boilers not certified valid certificate issued by the
insurance is reduced by the Govt. Inspector of Boilers, as
amount of compensation per Indian Boiler Act 1923

Percentage of basic rate

charged for surrounding
To prevent under-insurance, property & third party liability
the amount insured must be
reinstated

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Chapter 12
Boiler & Pressure Plant Insurance

Claim procedure

Same as under Machinery

Special aspects
Insurance policy

Whether the loss falls within the definition Whether the warranties have
of ‘Explosion’ or ‘Collapse’ been complied with

Claims control

• Claims are for substantial amounts and require great care during investigation and negotiation
• Necessary to investigate the cause of the damage and ascertain whether the claim falls under the policy
definitions of explosion or collapse
• Certificate issued by the Govt. Inspector of boilers must be checked to ensure that the accident occurred
within its validity period and that all its terms and conditions were complied with
• Preferable to have assessments of boiler explosion claims carried out by a qualified engineer surveyor who
can determine the exact cause of the loss and arrive at a fair assessment of claim payable
• Formed duly completed and signed; should be obtained in all cases
• If the claim is on account of third party personal injury or property damage, it must be made quite clear that
on no account should the insured offer, admit, promise or compromise any payment without the consent of
the insurance company in writing

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Chapter 13
Machinery Loss of Profits Insurance

Intro: Losses due to damage or breakdown of machinery can be covered by buying Machinery
Loss of Profits insurance (MLOP) policy - this chapter discusses various features and importance of
MLOP.

Introduction to machinery loss of profits insurance

Need of MLOP

Though the process of industrialisation and MLOP insurance is one of the

technological advancements have increased insurances available for protecting the
machines’ efficiency and quality of production, the financial impacts of any interruptions
exposure to accidents has increased too in the business

Standing charges: in case of any business interruption, the manufacturer would not only be unable to make
the profit, but there would also be several continuing expenses to meet although the business was no
longer earning the money to pay them

adoption of alternative loss sustained through inability to

Losses covered measures at increased cost to manufacture due to breakdown /
under MLOP reduce the impact of interruption accident of vital part of manufacturing
of the business plant

In fire insurance, this policy is generally known as Consequential Loss policy. The American term
‘Business Interruption Insurance’ is currently in practice

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Chapter 13
Machinery Loss of Profits Insurance

MLOP provides indemnity against:

Loss of net profit Insured standing changes Increased cost of working

The insured machinery is Items for MLOP

listed in the policy schedule. insurance

not necessary that all the In practice currently, there is no

In this respect practice items of plant & selection and all items of
followed for MLOP Insurance equipment should be machinery are deemed to be
differs from that of Fire LOP covered. The machinery held covered if machinery
Insurance items can be selected insurance has no selection

Material damage provision

Policy meant to cover business interruption loss as a consequence of an insured material damage
loss
Claim must first be admitted under the concurrent material damage before a claim becomes
admissible under the Machinery LOP Policy
If no payment is made solely as a result of an Excess under the material damage policy, i.e. liability
admitted, the MLOP loss will be admissible

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Chapter 13
Machinery Loss of Profits Insurance

Scope of insurance

Losses are insured only in respect of the insured business described in the Schedule of the policy

Where business of a diverse nature is to be insured, it is essential that they be properly described

If only some part of some business is to be insured, then this must be made clear at time of effecting
the policy

Premises of the business is an important factor as MLOP insurance covers only the business carried
out in the premises specified in the policy Schedule

When different manufacturing activities are carried out in separate premises, interdependence between
each such section can be provided for but has to be declared and agreed at inception of the policy

Insured Standing charges

Not defined in the policy but can be said to be such Can also include charges which could have been
charges which do not reduce proportionately with a reduced but are specifically desired to continue to
reduction in production following an accident. be incurred in the overall interest of the business

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Chapter 13
Machinery Loss of Profits Insurance

The Insured can choose to insure all Standing Charges or only part, in which
case, the Standing Charges selected must be specified by their title or name
in accordance with the head of account or nomenclature used in the insured’s
accounts

Effect of omission of certain Standing Charges (by selection or by mistake) is

as per provision of Memo 2 of the policy:

“If any standing charges of the business be not insured then in computing the
amount recoverable as increase in cost of working that proportion only of the
additional expenditure shall be brought into account which the sum of the Net
Profit and the Insured Standing Charges bears to the sum of the Net Profit
and all the standing charges”

This is a kind of pro-rata average for the purpose of under insurance

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Chapter 13
Machinery Loss of Profits Insurance

Sum insured: Gross Profit i.e. Net profit plus Standing Charges

After the Gross Profit workings, appropriate additions to project the figures for the
next financial year during which the Policy will be in force

Provision in the Policy for downward adjustment of the sum insured up to 50% at
Sum insured and the end of the policy period, if the sum proposed for insurance exceeds the
underinsurance actual Gross Profit of the business, as ascertained from the Insured’s audited
account

If profit turns out to be lower, the insured can get a refund up to 50% of the
premium originally paid

If sum insured at time of claim is found to be less than the amount required to be
insured, the condition of Average is applied to work out the extent of under
insurance

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Chapter 13
Machinery Loss of Profits Insurance

Excess: Premium adjustment clause:

In India, full annual premium on the declared

Time Exclusion period is the Excess applicable sum insured is collected at inception of policy
under MLOP insurance policy. period and the premium is adjusted at the
expiry of the policy period.

All MLOP policies are subject to a minimum Such adjustment is made to the extent of 50%
Excess. Since the MLOP loss is ‘Time downwards depending on the actual gross
related’, it’s generally expressed in number profit achieved during the financial year.
of days.

This period commences with the Indemnity

Period and indicates period after an accident
for which no payment is made under the
policy.

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Chapter 13
Machinery Loss of Profits Insurance

Risk assessment and underwriting considerations

Risk assessment: Special form devised for eliciting all the information connected with an MLOP proposal

hence useful if a
Risks vary of the importance of
process description to give the
considerably each machine, by-
along with a process inspecting
between passing and other
flow diagram can also engineers an
industry to arrangements
be furnished with the idea
industry available, etc.
proposal

Underwriting and technical considerations

All the items proposed

Determination of the
for MLOP insurance Obtain information
relative importance of To look for
are also covered whether or not any
Schedule of each machine that is the
against Machinery alternative means
machinery to the percentage of the availability of
Breakdown/ Boiler of working are
be covered Insured’s daily total stand-by
Explosion risk under a available in case of
against production which machinery &
material Damage stoppage of any of
MLOP risks would be lost by the its immediate
Policy which must run the insured
stoppage of the use
concurrently with the machines
machine
LOP policy

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Chapter 13
Machinery Loss of Profits Insurance

Claims control

Necessary to appoint a Company’s

licensed and specially Since the Engineer and /or
Difficult to estimate Immediate steps
qualified Engineering interruption loss Independent
interruption loss are required to be
Surveyor/Chartered increases with Surveyor must
during early stages taken to avoid /
Accountant wherever passage of time, arrive at the spot
of breakdown or minimise
there is any prospect of immediate action is immediately, on
explosion claim interruption loss
the time exclusion being most important receipt of news of
exceeded. breakdown

Normally MLOP cover is granted only if the factory has

Rating completed at least one year trouble free commercial production
and claims experience under MI policy is satisfactory

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Chapter 14
Electronic Equipment Insurance

Intro: This chapter discusses electronic equipment insurance (EEI) policy and its various sections.

Introduction to EEI
 EEI: designed to protect companies against such losses that can be incurred due to damage to electronic
equipment
 EEI policy: available to the owner as the operator, lessor or the maintainer and the hirer
The entire computer system CPU, Keyboards, monitors, printers, UPS,
consisting of System Software etc.
Equipment
includes
Peripheral equipment as well as air-conditioning, heating and power conversion,
auxiliary equipment such as etc.

Electronic Data Processing (EDP)

Electronic equipment for medical use
equipment

Communication facilities Examples Lighting and navigation facilities

of
electronic
Equipment for research and material Computer controlled production plant and
equipment
testing machinery including robotronics
Peripheral equipment such as monitors, Peripheral such as air conditioning,
printers, modem, etc. heating and auxiliary power supply units

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Electronic Equipment Insurance

Scope of cover

Insured items only after successful completion of their performance / acceptance test

Whether they are at work or at rest or being dismantled for the purpose of:
cleaning / overhauling / shifting within the premises or during subsequent re-erection

EEI Policy offers cover on an ‘All Risks’ basis in three Sections as under:
Section 3: Increased Cost of
Section 1 : Material Damage Section 2 : External Data Media
Working (ICOW)

indemnifies the expenses indemnifies the additional

incurred for the purpose of costs which the insured
restoring insured external shall incur to ensure
data media, entered in the continued data processing
policy Schedule on substitute equipment

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Electronic Equipment Insurance

Fire and Lighting; Riot, strike, malicious and terrorism

damage; Theft and burglary

Applies to any
unforeseen and Acts of God i.e. Earthquake (fire and shock), Landslide
sudden physical loss /Rockslide/Subsidence, Water damage, flood, inundation ,
or damage storm, tempest, hurricane, tornado ,typhoon ,cyclone

Section 1:
Material Impact from falling objects, collision
damage Offers cover virtually
on an “All Risks”
basis and
indemnifies against Short circuiting, arcing or similar electrical or mechanical
any physical loss or breakdown
damage due to
following perils
Failure of safety devices; Carelessness, negligence,
faulty operation

Faulty design, faulty material, faults in manufacturing

/assembly / erection

Damage due to water, moisture and humidity

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Electronic Equipment Insurance

Replacement cost including

freight, dues, custom duties Sum insured for Section 1- Material Damage
& erection costs

equal to the cost of replacement of the insured

condition of “Average” applies in the event of under
property by the new property of the same kind and
insurance
capacity

Maintenance warranty (service or maintenance contract with the computer makers is warranted in the
policy) normally provides for:

Making good all damage by breakdown sustained by the equipment

Regular servicing and
except damage which is caused by the negligence of the owner /
maintenance
hirer / user of the equipment

Sum insured for Section 2 – External

data media

the amount required for restoring the insured

indemnity under this section is on first loss
external data media by replacing lost or
basis and the condition of “Average” does not
damaged data media by new material and
apply
reproducing lost information

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Electronic Equipment Insurance

Indemnity per hour

Indemnity per occurrence for

___weeks
Need to select the limits in respect of
Aggregate indemnity limit during
the period of insurance
Sum insured
for Section 3 –
ICOW Expenses on transportation of
materials

If the indemnity limits selected “per hour’ is not Condition of “Average’ would
found sufficient in the event of a claim apply

Excess: all the three Sections are subject to separate Excess prescribed in the Schedule.
 Section 1-Material Damage and Section 2- External Data Media are subject to monetary excess
amounts, whereas Section 3 – ICOW is subject to a Time Excess

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Electronic Equipment Insurance

Basis of indemnification

Section 1: Section 2: External data

Section 3: Increased cost of working
Material damage media

Total indemnity for

Indemnifies those costs event shall not exceed
Indemnifies the expenses and expenses, which an amount equal to the
that can be proved to can be proved to have agreed indemnity limit
have been incurred by been incurred during per hour or the “actual
the insured within 12 the indemnity period to hourly rate payable for
Provision
months from the date of maintain data the use of substitute
regarding basis
the occurrence strictly for processing operations equipment” whichever
of
restoring insured external to their previous is less, multiplied by
indemnification
data media to a condition extent, that are the number of working
is the same as
equivalent to that existing additional to those hours stated as
under
prior to the occurrence which would have been “indemnity period” in
Machinery
and necessary for incurred during the the schedule or by the
Insurance policy
permitting data same period if no actual number of
processing operations to insured event – working hours for
be continued in the indemnifiable under which the substitute
normal manner Section 1 – had equipment is put into
occurred. use, whichever shall be
less

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Electronic Equipment Insurance

Technical control and underwriting considerations

A service or maintenance contract with the computer makers is stipulated in the

policy itself, & should normally provide for

The making good of all damage by breakdown

sustained by the equipment except damage which is
Regular servicing and maintenance
caused by the negligence of the owner /hirer /user of
the equipment

Technical Survey of all such electronic equipment and computer installation

Special questionnaire to be filled in by the Insured giving relevant particulars of the items
proposed for Insurance

Special survey report form to be filled in by the Inspecting Engineer

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Electronic Equipment Insurance

Rating

All the three sections of the EEI Policy are subject to separate rates and terms

For Sections 1 and 2 a flat rate is prescribed

For Section 3 i.e. ICOW, the rate is linked to selected time exclusion period & indemnity period

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Chapter 15
Other Annual Policies

Intro: This chapter discusses features of Deterioration of Stocks (DOS) Insurance policy and Civil
Engineering Completed Risks (CECR) Insurance
Deterioration of Stocks (DOS) Insurance

Cover is against the risk of

deterioration / putrefaction
and contamination of stocks

Policy is for stocks of fish, prawns, frog legs

Deterioration of Stocks
and other types of sea foods, fruits, cheese,
Deterioration of Insurance (other than
provisions and other dairy and agricultural
Stock (DOS) potatoes)
products

Deterioration of Stocks Policy is exclusively meant for the contents of

Insurance (potatoes) potato cold storage

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Other Annual Policies

Scope of cover
• Cover applies to loss or damage by deterioration or putrefaction of the contents of the cold
store caused by rise or fall in temperature

Principal Exclusions
• Acts of God, perils like war, civil war, riot, strike and nuclear risks, consequential loss,
damage or liability

Sum Insured and Average

• Sum insured should represent the maximum value of stocks in the cold store at any one
time during the currency of the policy

Basis of Indemnification
• The liability of the insurer is normally limited to the market value of the commodities
immediately before the accident

Excess (Self-insurance)
• It is subject to a deductible excess in respect of each and every claim, and this is clearly
indicated in the policy

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Other Annual Policies

Essential that acceptance of this risk is made subject to receiving a satisfactory Technical
Inspection Report of an engineer

Condition precedent under the Deterioration Policy that a claim should be admitted under the
Machinery Insurance Policy

Premium is fixed depending upon

Standby, Standard of Alternative The amount

Age and Nature of the
Past repair and / or maintenance storage of excess and
condition of refrigerant
experience replacement and facilities in the similar other
the plant gas used
facilities supervision event of claim factors

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Other Annual Policies

Deterioration of Stock (Potatoes) in Cold Storage Insurance Policy

For claiming the insured
Sum represents value of value
goods obtained by or the market price
multiplying full storage whichever is lower; forms The deterioration of Stock
Policy for potatoes is also
Exclusively designed for capacity of the cold store the basis of claim subject to an excess
potato stocks in cold as declared by the settlement, subject to which the insured has to
stores. insured by the average deductions for rottage, bear in respect of each
shrinkage, under-
price of the goods at the insurance, and every claim
time of storage salvage, if any,
and the excess applicable

Technical Control

Moral hazard of the proposal plays an important role

Claim must be first admitted under the Machinery Insurance Policy before a claim can be accepted
under the Stocks Deterioration Policy
Pre-insurance inspection is required before every season / renewal
Mid-term inspections carried out mainly to prevent substantial claims being reported at the time of
unloading of stocks at the end of the season
Cold store owner is also under an obligation to maintain a Log Book

Insured is expected to maintain a stock register in the proforma supplied

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Other Annual Policies

Civil Engineering Completed Risks (CECR) Insurance

Civil Engineering Completed Risks (CECR) Insurance

Sum insured may Insurance of civil

Named – perils Provide cover not be less than the engineering
policy which covers against external cost of replacement Cover is granted completed risks
the insured against hazards for which of the insured items only for material should always be
any unforeseen and the original by new items of the damage to the
sudden physical contractor or the property insured; effected on the
same kind and basis of renewable
loss or damage operator or owner
necessitating repair as the insured is not capacity, inclusive only the repair costs
are indemnifiable policies, the period
or replacement responsible of all materials, not exceeding one
wages, freight
year

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Chapter 16
Reinsurance

Intro: This chapter discusses different methods of arranging reinsurance in the engineering
department
Methods of arranging reinsurance

Reinsurance
Method employed by the direct insurer to dispose off the surplus in excess of its
capacity to retain

Facultative Reinsurance

Involves full underwriting

The ceding company information including
Reinsurer examines Time consuming; and
offers each and every Layout Plan; - Process
each risk according to its administrative expense
risk in excess of its own Diagram, Bar chart etc.
merit involved is very high
retention capacity are to be submitted to
the reinsurer

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Reinsurance

It is a prior agreement between the ceding company and the reinsurer

Treaty Reinsurance
An insurance company places its treaty with a large number of
reinsurers to achieve as much spread of risk as possible

Excess of Loss
Quota Share Treaty Surplus treaty
reinsurance
• As per agreement, ceding • Ceding company cedes the • Facultative, Quota Share
company &reinsurer is surplus in excess of its net Treaty and Surplus Treaty
bound to accept a fixed retention and priority are proportional
percentage of each and cessions reinsurance arrangements
every risk irrespective of • Surplus treaty provides • Excess of Loss treaty is a
the sum insured but subject reinsurance capacity up to non-proportional
to a certain limit a certain number of lines arrangement

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Reinsurance

Arrangement where liability of the reinsurer is limited up to a certain pre-

determined amount of loss

Excess of Loss In excess of the amount of loss borne by the ceding company which is known as
treaty the Underlying Limit.

Arranged in several layers depending upon the requirement of the insurance

company and may be on the basis of per risk or per event

Underlying Limit

Specific limit up to which the ceding company will bear all the losses on its net
account

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Reinsurance

Reinsurance of engineering business in India

Reinsurance program is for the insurer to decide how much it wishes to retain on its own account
of the risk it has written

Insurer is to review its objectives, and develop an appropriate retention strategy

A highly risk averse company will fix a lower retention limit than an insurer

Aims to achieve an acceptable balance between expected profits and potential fluctuations in
annual profits

Too low a retention leads to avoidable reinsurance

Too high a retention may expose the net account unduly

Engineering Insurers construct a table of retention graded down according to nature and
characteristics of risks

After fixing the net retention, an insurer arranges for automatic reinsurance capacity

Based on nature & size of portfolio in order to deal with large majority of risks called upon to insure

Insurers can commit to more realistic retention level on large Engineering risks by fixing retention
based on MPL

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Chapter 17
Risk Management, Risk Inspections and
Loss Prevention

Intro: This chapter discusses risk management, risk inspections, loss prevention and loss
minimisation measures in engineering insurance
Risk Management and Risk Inspections

Preservation of assets
Objectives of Risk Management
Preservation of earning power from loss or destruction

Stages of Risk Management Risk Inspections

Risk Risk Considered an important tool in

Identification Evaluation identification and measurement of risks

Play important role in facilitating insurance

/ reinsurance related decisions
Risk
Risk Control
Financing
Address issues related to loss prevention /
risk improvement

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Risk Management, Risk Inspections and
Loss Prevention

Loss Minimisation in Engineering Insurance

Constructed and operated loss

Direct
losses Protected against threats of destruction from accidents like fire, explosion,
disruption, breakdown and other causes

Role of Engineers
Indirect losses

Interruption in Inspections
Need to
production
rebuild the
due to lack of
facilities
spares

Need to train Techno- Project

Stoppage of new skilled marketing cells
work operators and
so on

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Risk Management, Risk Inspections and
Loss Prevention

Good House- The first step is to get a place for everything and then keep everything in its own
Keeping helps to place
prevent accidents

For use of inflammable materials, supplies should be properly protected and stored
in a safe place

Need to ensure that safe operational procedures are not deliberately or inadvertently
neglected

For protection against theft and robbery adequate security arrangements should be
available

To avoid inundation risks, necessary precautions should be taken at the site levelling
stage

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Risk Management, Risk Inspections and
Loss Prevention

Fire Prevention Features

Site engineer should be continually reminded of his responsibility for fire protection on
the site

The site should be secured by a properly constructed fence

Temporary buildings should be made of non-combustible materials

Living quarters should be separated from the construction site and provided with
adequate first-aid fire protection

Combustible material should be marked clearly and stored separately

Use of combustible formwork material, scaffolding, etc. should be avoided if possible

Staircases and fire brigade access must be swept free and must not be used as
storage or parking areas

Lightning conductors should be installed as early as possible

No smoking rules must be enforced in areas exposed to fire risk

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Loss Prevention

Fire Control Features

Fire must be reported immediately to the site engineer

Important telephone numbers must be prominently displayed near each telephone

Portable fire extinguishers must be suitably located at the construction site

Sufficient water supply for fire-fighting purposes should be provided

Water supply should be sufficient for several hours of fire-fighting

The pipe system should guarantee a minimum pressure of 3 bars at the remotest point

In multi-storey buildings, the hydrant rises should be installed, pressurised storey by storey &
stored by as the construction progress permits

An emergency plan must show each person’s responsibility in the event of a fire

Fire-fighting teams should be formed and trained for each site

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Risk Management, Risk Inspections and
Loss Prevention

Building or civil engineering projects should monitor conditions on the site as

the work progress
Site Monitoring
Need to monitor site activities, including accidents, which helps in keeping
track of delays – both insured as well as uninsured

Parties involved in a construction project

The
The
Employer The Sub-
Engineer or Suppliers Insurers
(or Contractor Contractors
Architect
Principal)

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Risk Management, Risk Inspections and
Loss Prevention

Use of Monitoring

Regular monitoring is cost-effective in reducing the incidence of repetitive losses

resulting from poor basic risk management

Maintenance and Prevention

Maintenance, servicing and monitoring the condition of equipment to maintain its performance is
essential to ensure the reliability and availability of industrial equipment.

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Risk Management, Risk Inspections and
Loss Prevention

Preventive Maintenance

• The purpose is to ensure that a piece of equipment works well under the predefined
operating conditions

Corrective Maintenance

• Covers all repairs or replacements of equipment or products of equipment which are

defective or damaged

Predictive Maintenance

• Certain systematic replacements and preventive operations can be avoided or

delayed if there is a means of diagnosis for assessing the condition of a part and its
degree of wear and tear

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Chapter 18
Special Types of Engineering Insurance Covers in International
Markets

Intro: This chapter discusses Comprehensive Project Insurance (CP) & Comprehensive
Machinery Insurance (CMI) as well as other insurance policies
Comprehensive Project Insurance (CP)

Comprehensive project insurance (CPI)

Developed by Munich Re for erection and construction risks and to provide

comprehensive protection

Combines the classic construction and erection covers in one insurance contract;
therefore suitable for the insurance of both construction risks & erection risks

General Section

• Comprehensive project insurance contract comprises the basic definitions, conditions and exclusions
applicable to the project

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Construction / erection of a building / structure

& incurring a risk as a result may be insured

Section 1A (Project Works)

Firms
commissioned Covers all of a project’s construction and
Contractors erection works from commencement and
to carry out
the work includes, where provided for, testing and
the subsequent defects liability period

Additional covers are either standard in

Parties comprehensive project insurance or can
Purchaser or
financing the be agreed as riders
owner
project

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Section 1B (Marine Cargo Insurance)

Cover can be taken out Plant, machinery and

The machines and items Their replacement values
for the transport of major equipment can be
of equipment should be are included in the sum
items, particularly from incorporated in the
listed individually insured under this section
abroad insurance

Comprehensive project insurance (CPI)

Covers all types of loss or damage to the insured property occurring by accident

During the period of insurance, indemnified with the exception of the exclusions listed
in the insurance contract

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Period of insurance covers Sum insured Premiums

• Construction and erection • New reinstatement value of • Due to the complexity of
period including the testing the property or plant under projects, an individual
and defects liability phase construction at the end of the analysis of each risk is
project necessary to consider
• The supply contract, varying technical and local
including costs of freight, conditions
customs duties, fees, • Rates can only be calculated
erection and increases in when sufficient information to
prices in the course of the assess a risk is available
project

Third Party Liability (Section 2)

Loss / damage belonging to third parties or persons not involved in the project sustain injury, for
which the insured is liable according to statutory regulations

Covers claims resulting from accidental property damage or personal injury

Liability risk is assumed up to the agreed limit of indemnity per claim

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Delay in Start-up (Section 3)

Cover the risk of loss of the insured financial interest resulting from a delay in start-up following a
loss indemnifiable under Section 1A

Delays arising out of property damage

By agreement, cover under Section 1A can be extended to include example, off-site storage,
inland transit and even loss or damage due to earthquakes, volcanic eruptions and tsunamis
Insurance cover begins on commencement of work on site or on the effective date agreed for
this section

It ceases on the planned or actual date of commencement of operations

The sum insured equates either to a declared gross profit or to specified standing charges for the
maximum indemnity period, subject to a minimum of 12 months’ operation

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Premiums determining factors:

The sum insured

The maximum indemnity period (liability time limit)

The length of the time excess

The type of construction or erection project

The length of the construction, erection and, if applicable, testing periods

General risks and risks associated with the project

The probability of property damage causing a delay in construction

Spare parts planning and/or spare capacity

Reserves built into the time schedule

Safeguards such as fire-extinguishing systems

Damage limitation possibilities

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Marine Cargo (Section 4)

• The risk of transporting the property insured under Section 1A and Section 1B can be covered under
Section 4 subject to the internationally recognised Standard Institute Cargo Clauses

Premium determining factors:

Strike, riot and civil commotion
Extra costs for airfreight
Property insured taken into use or operation
Liability consequent upon vibration, removal or weakening of support
Extended defects liability period cover
Nuclear fuel elements
Costs of decontamination & leak search
Reactor pressure vessels with internals
Reserves built into the time schedule
Oil, gas and/or geothermal drilling rigs and equipment
Delay in start-up following marine cargo

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Comprehensive Machinery Insurance (CMI)

Main features of Policy offers “all risks” cover of a predominantly engineering nature
Comprehensive
Machinery E.g. machinery breakdown, fire, lightning and chemical explosion, & natural perils for
Insurance (CMI) the entire insured plant, with only a few property exclusions and excluded perils

Power plants, transformer stations, power distribution systems

Equipment at open-cast mines and ore-dressing plants

Plants in the metalworking industry

Plants in the steel production industry

Suitable
Objects Cement factories, machines for the construction industry and stone-working

Breweries, bottling plants

Transport and traffic systems

Wastewater treatment plants

Water supply systems

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Premium calculation
Premiums are calculated on the basis of the rating for machinery breakdown and
machinery business interruption insurance

Special insurance covers

Strike, riot and civil commotion
Extra costs for airfreight
Underground machinery and equipment
Machinery breakdown during the guarantee period
Earthquake
Prolonged interruption period due to deterioration
Maximum demand charges
Additional expenditure other than increased cost of working
Failure of public power, water, gas or steam supply
Delay in repair
Suppliers’ & customers’ extension

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Policies are intended for contractors who

normally undertake construction works of
Construction similar nature in sufficiently large numbers Premium paid against each declaration under
Annual individual declaration
Policies
(Floaters) Open Covers or Floaters will usually be
issued under Annual Policies on any of
the two different basis On turnover basis, deposit premium collected
at commencement of policy & adjusted on
agreed date between insurer & insured within
30 days of expiry of policy

Main object is to protect the leasing company’s interests as

the owner of installations & machinery leased for a certain
number of years under various leasing contracts
Machinery Leasing
Insurance

Indemnification is made on the same basis as in Machinery

Insurance

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Aero Engine Breakdown Insurance

Need of insurance policy

• Policy is designed to provide mechanical breakdown coverage for gas turbines,
aero engines on fixed-wing aircraft and helicopters between scheduled overhauls

Scope of coverage
• Covers unforeseen and sudden breakdown of insured engines, necessitating repair
or replacement

Indemnity
• Paid for all costs incurred to restore the engine to its condition immediately before
the occurrence of the loss.

Premium
• Premium and the deductible are based on type of engine, its value when new,
operating profile and respective loss statistics

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