| I think the one thing we can say is that there are now very few simple claims in construction In the half hour that I have today, I shall run through a number of claims and subsequent issues to give a flavour of some of the complexities rather than give some kind of structured discussion about claims management in the hope that this will be more enjoyable for you to listen to and less likely to get me into trouble! Obviously, like any public forum, the views I express here are my own and not those of Marsh |
I think it is perhaps appropriate that I first explain who I am and where I fit in within Marsh. I am currently the Leader of what we call Differentiated Services which is effectively the consultancy piece within Marsh Energy, dealing with claims, engineering, consequential loss practice and other client consulting initiatives. We have a large claims team in Marsh with a number of long time exponents of the art of claims handling. These days we open roughly one and a half thousand claims files a year encompassing all varieties of claims in the energy sector. We tend not to split ourselves up on different insurance products. We all tend to have exposure to Liability, DSU, Construction, Operational, etc. claims.
So, back to the construction claims. The first thing to say is that in days gone by we spent much time looking at, and trying to understand, wordings, as each were bespoke which led to many ambiguities and uncertainty. Today there is much more standardisation of the wordings. That said I think it is also true to say that in working on these wordings the markets have generally increased the complexity of the policies and made coverage more restrictive. We will see some of those elements surface in the following examples.
I suppose we can start right at the beginning. At the end of the day you have to have damage to have a claim and I think particularly for onshore construction claims the question of “what is damage?” has become a very familiar topic. Of course, sometimes, it is easy to spot damage but with the improvement of science, the reduction in tolerances and the ever pushing of technical boundaries to achieve more efficient and cost effective solutions, “What is damage?” is becoming increasingly difficult to tell. Surprisingly there is very little case law to assist us, but the science of investigation has clearly developed and we now talk about damage as physical change at a molecular level.
Underwriters too want to take advantage of improved detection systems, but we mustn’t forget that, construction and engineering in general is very much based on an empirical approach, in that we do things a certain way because we have seen it work that way before. Consider, for example a warranty for buckle detection to be in place during the laying of a pipeline. For buckle detection to work it would have to be sensitive, thus picking up very small deformations in the pipe. I would put it to this audience that it might be, that perhaps every pipeline ever laid in the world has got small deformations, but because of the quality control process, with the pressure retaining capability successfully tested, that they happily sit there and work for the design life. We keep building them that way, because we know it works. Do we really want to find all these bumps and defects and suddenly call them insurable damage? For engineers, damage is when something no longer conforms to requirements, as opposed to simple physical change.
That said, damage itself is not simply something that is not fit for purpose. A relatively recent claim involved suction anchors. There was one set of suction anchors for riser towers and another set for the floating production system. The riser tower suction anchors were painted, taken offshore and installed experiencing significantly more rapid penetration in the soil than was expected. It was claimed that the fact that the suction anchors were painted meant they weren’t obtaining quite such a good skin friction and their holding capacity was not sufficient with remedial actions required, at some cost. When the matter was investigated (and I should also add that there is absolutely no need to paint a suction anchor if it is going to sit in the mud) it was discovered that in the shipyard contracts the painting schemes were in the scopes of work and it was always intended that these anchors should be painted. It was thus concluded that the anchors were simply not fit for purpose. No damage had been done. However, for the FPSO anchors the situation was different. The project manager in charge of these anchors saw the riser tower anchors leaving on their barge to go to the field and thought, “Cor! Those look nice!” and so he decided to paint his as well. However they weren’t supposed to be painted according to the fabrication contract, so it was decided that for these anchors they were, in fact, damaged and accordingly this part of the claim was paid.
Of course, it is corrosion that gives us our biggest headaches. Firstly, is corrosion in itself a cause of damage or the resulting effect (i.e. the damage itself)? Some construction policies talk about excluding damage “as a result of” corrosion, meaning corrosion as a cause and others simply talk about excluding paying for corrosion, meaning, in my view, corrosion as the resultant damage.
In a case where a tank started to leak not long after being commissioned, the actual leak path (crack) was corrosion. There was no stress failure, no particular fracture, no particular event, it just corroded due to the stored fluids and accordingly the insurers excluded the claim. However, on further investigation, it was realised that it was always known that these particular fluids stored in this tank would be highly corrosive to the material of the tank therefore an internal painting scheme or liner was used to protect the metal of the tank. It transpired that this scheme was not that well applied and some gaps existed and thus this corrosion took place. So in fact, whilst corrosion was the damage, the cause was, in effect, poor workmanship. The exclusion only excluded damage caused by corrosion and in this case, clearly it wasn’t and therefore in the end the claim was paid.
Perhaps a rather more difficult coverage to work out is a situation that we have only very recently resolved. I can’t give you any answer, but this concerned a gravity based structure that was installed on an area of sea-bed signed off as having been flattened as part of the works which were also insured in the policy. When they landed the gravity base onto the sea-bed the rock dump vessel was to come along and dump rocks because they were worried about the potential for high scour – scour being the removal of sand by the action of water current around the base of the gravity base structure. Sadly the rock dump vessel broke down and no rocks could be dumped and what appeared to be large gaps, appeared at the corners and below the edges of the gravity based structure with some uncertainty as to exactly how far below the structure they had gone. Rocks were dumped by a replacement vessel, to at least arrest any further scouring however, winter closed in, everybody had to pack up and go home and come back some 7 to 8 months later. During those 7 to 8 months a lot of money was spent preparing for a grouting operation and all the equipment and facilities were mobilised for ten’s of millions of dollars of cost. However, when they got back to the site they discovered the gaps had disappeared, the GBS had settled itself. So, the question is, is it possible for something to be damaged one minute and not the next? The property of the insured contract works basically resolved itself without any external influence of man. It was certainly one of the most difficult claims to get your head around that I have ever come across.
Perhaps the other thing people often find it hard to get their head around is the fact that construction risks are unique in that it isn’t just physical loss or damage to the assets being created, rather damage or physical loss to the works. As a Broker this obviously allows us to come out with some fairly neat prose on occasions!
In offshore construction policies, a form of damage insurers no longer pay for is the replacement of faulty welds, whether containing resultant damage or not - the “faulty weld exclusion”. Now a lot of debate rages about what exactly is a faulty weld. We see many welds where the actual damage that results, namely a crack, doesn’t actually occur in the weld material itself, rather in the heat affected zone adjacent to the weld. I think over the coming months the question of whether the heat affected zone that surrounds the weld is part of the weld or not will be much discussed, but on that I can say no more!
Turning to onshore, I think a characteristic of onshore construction we are seeing at the moment is some incredibly large projects. Projects we call Mega Projects, requiring thousands upon thousands of workers. Running the camps for these workers can alone put a billion dollars on the contract value for the works. What it has meant is the bringing together of many, many, cultures and these cultures sadly often don’t really understand each other. It means we have recently seen a spate of claims relating to riots with fires and losses to a lot of these very expensive workers camps appearing on our radar. Similarly in the wind storms in the States a number of projects had fantastic crisis management plans (CMPs) for recovery of any damages caused by a hurricane. That is providing the CMP can be worked on! With most workers living within region of the construction, not surprisingly the workers families and their homes were as affected, and an immediate priority. The lack of established worker camps caused increased costs and greater delays to the projects than expected. There are also the cases of bird flu and SARs preventing transfer of certain foreign workers between major sites and their homeland. Significant problems resulted, all of which were uninsured.
Perhaps one of the most interesting areas of construction claims are those arising during the maintenance period, that time after the construction is finished and the facility has started it’s operating life. Of course, for the insured, he can claim under whichever policy he wishes, provided of course, he can prove the claim. Then it is left for the construction risk underwriters and the operating risk underwriters to sort it out amongst themselves. No such case in recent times is better known than the “P36” that sank off Brazil a total loss in the order of 600 million dollars. The insured Petrobras went to their operating underwriters and asked them to pay up and pay up they did within a short time frame. The “P36” is believed to have sunk because fumes that built up in the waste oil tank (part of the production plant) led to a small explosion that burst the primed sea water fire main line. With the loss of pressure kicking in the seawater pumps for fire fighting, sadly the pump energised then merrily filled up the unit until it sank. Now, anybody who knows much about offshore floating production vessels will know that it is not advisable to put any part of the production plant inside the water-tight integrity spaces, in this case the column of the unit. And so operating policy underwriters believed this to be an error in design as a main approximate cause of the loss and thus a claim that could fall under one of the main perils in the maintenance period of the construction policy.
Typically of course, any loss is not the result of one problem, and this loss was the result of a number of problems not least the fact that the fire pumps on the port side of the unit which were the ones that should have kicked in when the starboard side fire main lines lost pressure, were both absent for maintenance. The matter has, I believe, been settled between the two sets of underwriters, I don’t know exactly what the result would be, but as you can imagine for 600 million dollars it was a long drawn out and thoroughly investigated process by some of the industries top experts.
Perhaps having mentioned the experts I should go no further without referring to the main experts that we see in the construction claim process - The Loss Adjuster. For me there is quite a marked difference between your Offshore Loss Adjuster and your Onshore Loss Adjuster which in fact exemplifies the whole culture of the upstream / downstream claims environment, in what is, as you know, two very distinctive sets of markets.
The Offshore Adjuster is somewhat more of a holistic animal, focussed more on whether the insured has taken the right decisions at the very beginning of their remedial actions and less concerned of the minutiae of the costs that come together to form the claim. This is because working offshore if you make a bad decision the costs to actually rectify anything can be a magnitude greater than making the right decision. When it actually comes to the expenses to be incurred there may only be one or two choices for suppliers, equipment, or contractors, and so the scrutiny and need for things like competitive tendering are simply not appropriate. Furthermore, it is a truism offshore that time is money, so rarely is there a dispute over a decision to get things done quickly, as invariably this leads to a cheaper overall cost.
On the other hand onshore adjusters take a far more rigid approach. For them onshore policies are black and white with not much room for negotiation. And not caring whether something is done by one man in a hundred days or by 100 men in one day and/or all the permutations in between, the onshore loss adjuster’s real value is having the skill to be able to pick over the claim with a fine toothcomb. Of course, each adjuster to their own, and in the main they do a very high quality job. It is of sadness to our clients that loss adjusters are given less ownership and responsibility in the claims process than they used to be by their insurer clients.
Speaking of quality, in the past years we have seen a move to introduce conditions in policies requiring contractors and sub-contractors to rigidly adhere to the quality plan of the principal insured without which they will lose their additional assured status to the policy and the waiver of subrogation by underwriters will no longer apply.
Given today that so much about quality control and assurance is about pre-qualification of the work and self certification by the principal insured, it might be a truism to say that, in actual fact, you can’t tell if somebody failed in their obligations to quality control and assurance until the project is actually finished. I am not going to go into any specific detail on that, which is a paper in itself. However, safe to say that it’s an area of real “greyism” and I think the uncertainty that it brings to the parties involved in a claim both in the way in which the claim can be approached and obviously the fear of having no coverage for the contractors, is of great detriment to the valuable product that our clients want to buy.
There are other areas of policy wordings that have tightened, particularly in offshore construction which relies on the Welcar Form. A recent case highlighted a number of these issues. It was a case where a standard jacket & deck platform was installed. The jacket was launched and upended and set on the sea floor, the deck was then brought in by barge and lifted on top of the jacket, I believe the deck was in the order of 10,000 tonnes. Post installation of the deck, under water video cameras discovered the braces on the jacket structure to have collapsed raising significant doubts as to the integrity of the platform and a number of issues arose.
First, it was determined that a structural scantling in the braces was under sized due to a glitch in a computer programme. Did this therefore make the collapsed braces faulty or defective parts? Underwriters argued there was no consequential damage. Second the deck was necessarily picked up in a great hurry and taken back to shore. This was viewed as sue and labor activity to mitigate a potential loss of the deck. However, the amount of sub-limit for a sue & labor claim did not cover the costs of the actual operation. You could argue that as you were going to remove the deck as part of the repair plan for the platform, in any event, that only the enhanced costs of doing it in a hurry should have formed the sue & labor claim. Furthermore, as there was now no repair claim associated with the deck, (being viewed as not in itself being damaged), the sub-limit for repair constituted only the value for the jacket, greatly reducing the available sum of money to the insured. This was made worse when insurers argued that the escalation clause in the policy was not automatic, for the actual costs of building the jacket had greatly exceeded those originally estimated and included in the schedule of values. The escalation clause provides for 25% increased costs (and thus cover) for the scheduled values. The issue is whether the increased value has to be declared to underwriters prior to the loss occurring or can it automatically attach after the loss.
I believe Insurers said no in this case, it must be declared prior to the loss. However, given that the premium for the construction policy is not actually paid on the estimated costs made at the beginning of the project (the original scheduled values), rather settled at the end of the policy when the actual cost values expended are known; and given that the ‘sum insured’ in the policies refers to this actual cost value (ACV) you could say that not allowing the escalation clause to be automatic is rather somewhat having your cake and eating it and an affront to utmost good faith!
Nonetheless, I suppose we must have sympathy with offshore construction Insurers with regard to the recent spate of some very high value offshore pipeline losses. One of the big problems is that the losses we are seeing are on contracts written back in 2004 and proportionately construction (repair) costs today are practically three times higher. Not surprisingly repair costs are coming in at much higher values than was initially envisaged within the rating structure when the policy was placed. Looking forward, with estimated contract values today being three times greater than they were in 2004 and with current doubled ratings, the pipeline construction risk must be at least 6 times a better commercial decision today as it was three / four years ago. But what do I know? I’m just a claims man!
Another significant problem of the tightness in the supply markets is the material delivery lead times. So, as well as companies trying to minimise the wall thickness of pipe, for example, to save money, it is now the case that the oil company is buying the pipes well in advance of hiring and appointing the contractor. This can lead to pipes being in storage for a long time, leads to more interfaces between the contractor with the client and also having to design the pipeline installation to fit the pipes that have been purchased rather than the other way around. In some cases we have seen this impacting losses in the offshore construction area.
We are also now seeing a number of windfarm claims, but with policies based on the Welcar Form, used for offshore construction, there are not that many surprises in this new area of our business. It is however, perhaps true to say, that the specialised equipment required to work in these highly congested and often shallow water areas is very much still under development and it will be some years yet, before we see readily available repair vessels to respond and repair a windfarm site soon after the damage has occurred.
Finally of course insurers are always wary of our client’s desire for betterment in the rebuilt model and remain ever wary of where the regulating authorities may impose themselves. Even more so when the client has purchased Delay in Start Up (DSU) insurance.
DSU cover is mostly seen for onshore construction projects where the works are completed in a more piecemeal process but subject to many varied potential loss scenarios. Like all projects the highest risks and exposures occur in the latter stages when systems become live and testing is underway. Most occurrences onshore can be minimised due to spacing of property and access for control measures.
DSU claims are the most difficult to get agreed by Insurers and the most difficult for managing expectations within the insured’s organisation. The DSU cover will be triggered by a claim (whether above deductible or not) under the property construction policy. It is important that all such claims are notified and additional notification made if a possibility for delay to the project exists. The DSU claim can only be assessed upon completion of the project when the extent of delay due to any one occurrence can be estimated. For this reason DSU claims are the most difficult claims to make and inevitably the number of days delay cannot be based on exact science. Settlements often are made 1 year following completion of the project for an event that took place 18 months prior to completion with the resulting claim looking little like the recast schedule and reduction in float.
An assured should recognise that the additional days, added into a re-cast schedule following an insured event, is not necessarily the number of days that the event will actually eventually delay the start date of the project. The days could be significantly more or less. Later happenings on the project may supersede any delay caused by an insurable occurrence thus at the end of the project taking the insurable occurrence off the critical path. Much expertise can be required to assist the process.
So are there things that we can be doing better for construction claims? If I look at our transaction activity as brokers it is very clear to me that we now have to do a lot more work to get to the finishing line, and this could be for a number of reasons. Not least, because in chasing high oil and energy prices our clients have not applied their resources to dealing with a claim as perhaps they should have. But I think as prevalent is the change in placing underwriters no longer being able to manage and handle claims in accordance with FSA regulations. This has led to the growth of underwriters writing only for their own lines, leading to sometimes 12 or 13 claims agreement parties on a policy and the consequent far more cautious approach to agreeing a claim with many more lawyers’ fingerprints in evidence.
At the end of the day, I see it as our role as Brokers to work in partnership with underwriters resolving a claim for OUR mutual client. This includes:-
That must be enough about claims after lunch! I trust the presentation has given a view on the current world of construction claims and I thank you for listening.