Mary Shaddock JonesAttorney At Law

msjones@msjllc.com

Welcar Construction All Risk

Insurance Policy:“Pros and Cons”

Agenda

1. When trying to answer the question “What are the Pro’s and Con’s of a Welcar 2001 Policy”, does it matter if you are the Owner or the Contractor who purchased the policy?

2. What positive aspects has Welcar 2001 provided to the energy market?

3. What are the negative aspects from the perspective of the Owner and the Contractor?

4. Lessons Learned.

Who purchased the policy?

Why does it matter if the Owner purchased the policy or the Contractor? A few things to consider:

• Who bears risk of loss for the Work under the construction contract?

• What QA/QC requirements are the basis of the policy?

• Who determined the sub-limits under the policy?• Who determined if the defective-part exclusion was

bought back?• Who established Schedule B and on what basis? • Who ultimately bears the risk of loss if the coverage

isn’t sufficient to cover the losses sustained by an occurrence?

Risk of Loss of “Work”

• Each oil or gas company will have its own preferred contract form, but a common approach to allocating risk can be summarized as follows:– The risk of loss or damage to the contract works

(defined as the “Permanent Works”), while they are in the care, custody and control of the Contractor prior to handover of the works, is borne by the Contractor.

• As a result, Contractors have much at stake when it comes to how CAR insurance is structured and applied.

• If the CAR policy is insufficient, then the Contractor is the one who suffers the economic loss, not the Owner.

Owner provides “CAR”??

Even though the Contractor has Risk of Loss for the Work, the Owner is the party that generally purchases the builders risk insurance applicable to a construction project. Why? From the Owners perspective:

• Contractors commonly include the cost of insurance in their contract price. With multiple contractors on one project, Owners can generally buy a policy to cover all of the projects for a lower cost

• The Owner can maintain control over the extent of coverage - ensuring all necessary perils are included and the policy remains valid at all times.

• The Owner retains control of the policy at the critical time of transition from the construction to the operational phase to ensure there is no gap in coverage.

What is the Answer?

• There are certainly good reasons why the Owner of a field under development wants to have a single CAR policy especially if there are multiple contractors involved.

• At this time, the Owners are not inclined to accept risk of loss of the work.

• Therefore, there are solutions to what contractors perceive as being inequities in the policy:

– Overall Limitation of Liability for damage to the Work with a release, defense and indemnity in excess of the agreed amount; or,

– Joint participation by Owner and Contractor when binding Welcar terms and limits.

Positive Aspects of Welcar

• General Stability in Wording

• Very Little Litigation

• A Lot of Settled Claims

Less Positive Aspects

• “Other Assureds” : QA/QC• Due Diligence/Marine Warranty

Surveyor• Defective Part• Schedule B and Escalation• Standby: Weather or Other?

Other Assureds

Principal Assuredsi. [Name] and/or joint venturers as they may now or subsequently exist.ii. Parent and/or subsidiary and/or affiliated and/or associated and/or interrelated companies of the above as they are now or may hereafter be constituted and their directors, officers and employees, while acting in their capacities as such.

Other Assuredsiii. Project Managersiv. Any other company, firm, person or party (including contractors and/or subcontractors and/or manufacturers and/or suppliers) with whom the Assured(s) named in i, ii, iii and iv have entered into written contract(s)directly in connection with the Project.

Special Conditions

… SPECIAL CONDITIONS FOR OTHER ASSUREDS

It is a condition precedent for any party identified in Other Assureds definition clause iii. and iv. above to benefit from the Other Assureds status under the Policy that they perform their operations according to Quality Assurance/Quality Control system(s) which comply with the Quality Assurance/Quality Control provisions passed on by the Principal Assureds through each and every written contract awarded within the scope of insured works as scheduled under the Policy.

QA/QC

QA/QC Clause• As a condition precedent to coverage as an

additional insured and to a waiver of subrogation, contractor must have carried out the works in compliance with a Quality Assurance/Quality Control (“QA/QC”) programme

• One reason why it “matters” who buys the CAR policy!– No impact upon the “Principal Assured’s”, but

impacts “Other Assureds” (i.e. Contractors who have risk of loss under the contract).

– Shouldn’t the Contractor have a say in QA/QC?

Warranty Clause

WARRANTY (EXEMPLAR-FINAL VERSION TO BE AGREED)

Warranted London Offshore Consultants and/or Global Maritime and/or Noble Denton Associates and/or London Salvage Association and/or MatthewsDaniel approve and issue as applicable Certificates on the project as follows:

Conceptual – Certificates to be issued prior to relevant load-outs/installations.

 i. Procedures for laying, burying, jetting and rock dumping, trenching (all if and as applicable) including the tie-ins of same and installation of spool pieces and risers.ii. Positioning and orientation procedures for jackets at offshore site(s).iii. Piling in procedures in respect of ii. above.

Due Diligence

DUE DILIGENCE 

It is a condition of the Policy that the Assureds shall exercise due care and diligence in the conduct of all operations covered under the Policy, utilizing all safety practices and equipment generally considered prudent for such operations. In the event any hazardous condition develops, including with respect to any well from which consequential damages covered by the Policy may arise, the Assureds shall at their expense make all reasonable efforts to prevent the occurrence of a loss insured against under the Policy

 

Warranty/Due Diligence

• Another reason “matters” who buys the CAR policy– What warranty survey requirements are

included in the policy?– Should the insurer be able to void the

policy for breach of warranty if a claim arises with respect to another part of the warranty that was fully complied with? Or does the breach of warranty have to be material to the loss?

Defective Part

7. Defective parts… covers physical loss and/or physical damage to the property insured… resulting from a Defective Part, faulty design, faulty materials, faulty or defective workmanship or a latent defect even though the fault in design may have occurred prior to the attachment of the Policy.… does not provide coverage for loss or damage to (including the cost of modifying, replacing or repairing) any Defective Part itself unless all of the following is satisfied:

a) such Defective Part has suffered physical loss or physical damage during the Policy Period;b) such physical loss or physical damage was caused by an insured peril external to that part; andc) the defect did not cause or contribute to the physical loss or physical damage.”

Defective Part

• Definition of “Part”• Buy back: did Owner buy it?

• Good to have• Too expensive• Limits too low

• Another reason why it “matters” who buys the CAR policy!– No impact upon the “Principal Assured’s”, but

impacts “Other Assureds” (i.e. Contractors who have risk of loss under the contract).

– Is there alternative wording that can be negotiated?

Amount of Liability

• Underwriters’ total liability under Section I for all claims arising out of any one Occurrence shall not exceed 125% of the latest agreed Schedule “B” values, including payments made under the sue and labour clause, the additional work clause and the removal of wreckage and/or debris clause (each of which is separately limited under the appropriate coverage clauses).

• In the event of escalation as provided under clause 5 of Section I, Underwriters’ total liability under Section I for all claims arising out of any one Occurrence shall not exceed 150% of the initial Schedule “B” values, including payments made under the sue and labour clause, the additional work clause and the removal of wreckage and/or debris clause, and the Escalation Clause (each of which is separately limited under the appropriate coverage clauses).

 • Notwithstanding anything contained herein, Underwriters’ maximum

limit of liability in respect of Section I shall not exceed the Schedule “A” value in the aggregate.

Schedule B and Escalation Clause

Where as the values stated in the Declaration at the time the risk was bound represent the Estimated Completed Value and are therefore provisional, it is agreed that the final completed value of the property herein shall be the Insured value.Should the insured values, determined as above:a. Exceed the provisional value stated in

Schedule B, the Assureds agree to declare to Underwriters hereon the amount of such excess and to pay premium as agreed, and Underwriters agree to accept their proportionate share of the increase; or…….

Schedule B

• The structure of schedule B can have a significant effect on available limit in event of a loss.

• Original primary purpose was so that full ECV is not available for repair cost.

• Schedule B represents budgeted cost at end of a milestone stage.

• Policy clause allows Schedule B to be uplifted- max of 150% of Schedule B.

• Another reason why it “matters” who buys the CAR policy!– No impact upon the “Principal Assured’s”, but

impacts “Other Assureds” (i.e. Contractors who have risk of loss under the contract).

Standby

STAND-BY CHARGES 

Subject to a sub-limit of US$ (AMOUNT) any one Occurrence aggregated at US$ (AMOUNT) over the Policy Period, Underwriters shall indemnify the Assureds for the cost of stand-by time on vessels and/or craft and/or equipment actively engaged in the course of repair following an Occurrence covered under Section I, where the Assureds are prevented from working in, around or about the damaged property by bad weather, including named hurricanes.

Standby: Weather or Other?

• What does/does not qualify as weather standby?

• What is “actively engaged in the course of repair”?

• What about Other types of standby during repair not necessitated by weather?

• Another reason why it “matters” who buys the CAR policy!– No impact upon the “Principal

Assured’s”, but impacts “Other Assureds” (i.e. Contractors who have risk of loss under the contract).

– Standby costs are a critical piece of the puzzle when undertaking repairs.

Lesson #1

• If the Owner is providing the CAR policy- make sure to either: – obtain a draft policy before you bid on a job

(and if awarded the job obtain a true and correct copy of the policy) and read it

– or try to include within your contractual qualifications that certain items must be included in the CAR policy or risk of loss shifts back to the owner with a defense and indemnity clause.

Lesson #2

• It is critical that a Contractor understand:

– (i) if the Welcar policy purchased by the owner requires a Schedule B and

– (ii) if yes, how the owner is structuring the breakdown of the project costs and milestones in the original Schedule B and any updated Schedule B’s submitted to the underwriter.

– (iii) What are the sub-limits under the policy.

Lesson #3

• Every Welcar Construction All Risk Policy contains the Due Diligence clause and some type of Marine Warranty Survey clause. It is critical that you are provided with a copy of the clauses from the Owners prior to commencing work so that you can provide the requirements to the Project Management Team.

Failure to have the proper certifications from a marine warranty surveyor or to comply with the Due Diligence clause as required by the policy can void coverage in the event of a loss.

Lesson #4

• It is important to determine who is supplying and who is assuming responsibility for the materials being installed. If the Owner is supplying the material, then the contract should exclude any risk of loss on the contractor for defective material.

• If the contractor is purchasing the material and/or has assumed liability for it in the contract, then it is critical to determine the likelihood that the material could be defective so that you can cover either all or part of it through a Defective Part Exclusion Buy-Back and/or contractually with the manufacturer of the material.

• If the owner buys the CAR policy, then it will be critical to request information prior to the bid as to the value of the material and the availability of coverage under the owner provided CAR policy for Defective Parts.

Lesson #5

• Regardless of who buys the CAR policy, if the contractor has risk of loss, they should be:– Specific in what you expect to be

included in the CAR policy. – Involved in any claim from the day it

occurs. Be a part of the team. – Keep good records on how and why

actions were taken in the repair. – Be reasonable.

Communication is Crucial

• “Communication and consultation between the underwriter and the insured buyer is crucial in seeking to develop a policy that is sustainable to both the insured and the insurer in order to provide “pre-event” certainty of coverage”.

• In situations where the owner/operator purchases the CAR policy, the contractor generally has no opportunity for communication and/or consultation with the underwriter; therefore, its voice is silent. Yet, it is the contractor who generally assumes risk of loss or damage for the Work being performed.

• As a result, it is critical that Contractors know and understand the Welcar 2001 policy and the particular terms and conditions contained in the owner purchased policy.

Welcar Revision in Progress

• A subcommittee was formed a few years ago under the Joint Rig Committee in London to study possible revisions to the Welcar 2001 policy.

• Input has been provided from several sources.

• Expect a draft in 2011

• Hopefully the draft will address some of the issues discussed today.

Questions?

Mary Shaddock JonesAttorney at Law1202 Kirkman St. Suite CLake Charles, LA 70601

337-513-0335 Office337-515-8527 Cell

msjones@msjllc.com