The parties need to consider what risks need to be insured and whether such insurance is available in the host country. Set out below is a summary of types of insurance that may be appropriate in a project: -
Insurance during transportation
Every element of materials and equipment to be used for the project should be insured during shipment to the site, including equipment to be integrated into the works, temporary plant and the construction contractor's equipment. This coverage may include marine cargo insurance. Transportation insurance must be correlated with the all risk policy on the site. A "fifty fifty claims funding" clause can help clarify liability for damage that may occur at or shortly after delivery, by stipulating that each insurer will pay 50 per cent. of the claim if it cannot be established whether it occurred during transit or after delivery.
Insurance of project assets
Equipment and materials will first need to be insured up to delivery to the site. This project asset coverage may include the construction contractor's equipment brought onto the site where such equipment is essential to progress and/or very expensive, for example, tunnel boring machinery. The loss of such equipment can seriously hamper the construction contractor and therefore the progress of the works. Project assets should be insured ex works to delivery at the site either into the hands of the construction contractor or into the construction contractor's storage facilities.
Construction all risk policy
Construction all risk ("CAR") or construction and erection all risk ("CEAR") insurance will cover all operations and assets on the site during the construction of the works. This policy generally excludes war risk. Parties may include a war risk endorsement to cover risks generally considered political in nature. The construction contractor may prefer to leave the grantor to provide the political aspect of the project asset insurance, to reduce costs and in an effort to maximise value for money in its insurance arrangements.
Professional indemnity ("PI")
This form of insurance is available under certain CAR or CEAR policies, or it may be provided separately. PI insurance covers design faults or other such professional services provided by the construction contractor or its designers. Such insurance is generally carried by a designer as a part of its normal business.
Operational damage
The final major aspect of project insurance will cover all risk insurance during operation, including, in particular, insurance of property damage during operations.
Third party liability insurance
The project should be covered from commencement of construction to the end of the concession period by liability insurance for any claim by third parties for the acts or omissions of the project company, and any of the contractors, subcontractors or other persons for whom it may be responsible, during construction and operation of the project. The grantor and the lenders may also want to be covered by this policy. This policy should cover, as far as practicable, any environmental effects of construction and operation.
Consequential loss
Insurance cover will generally exclude consequential losses or damages incurred by the project company. Therefore, the project company or the lenders may require that the project company obtain insurance coverage for consequential losses. These include delayed start up, advance loss of profit and business interruption insurance. The amount of such insurance obtained will generally be calculated to compensate for the fixed costs of the project. A separate consequential loss policy must be taken out for each form of insurance obtained. For example, where the construction contractor obtains a CAR policy and a marine cargo policy, it will need a consequential damage policy for each of them.
Mechanical or electrical failure
The operational policy may not cover events of mechanical or electrical breakdown, therefore separate insurance must be obtained. The nature of, and need for, this insurance cover will depend on the works in question and the cost of replacement of key equipment.
Automobile liability insurance
This policy should cover all vehicles to be used on site, and will often be mandatory under local law. The vehicles in use during construction and operation may extend beyond motor vehicles, to aeroplanes, helicopters, boats and ships or possibly more expensive machinery requiring specialist local and/or international insurance.
Workers' compensation, employer's liability
The construction contractor and the operator will be obligated either to the host government or to its staff for some form of statutory compensation or other form of benefits or other liability, which should be covered by an insurance policy. The coverage of this policy will depend on the provisions of local law concerning such liability, and local and international practice.
Directors' and officers' liability insurance
The project company will want to be protected from the possibility that a director's or officer's act or omission may have an impact on the project. Generally, the director or officer in question will not have the financial wherewithal to compensate the project company for such damages.
Political risk
A range of political and war risks will not be covered by the above insurances. Therefore, the project company may need to obtain special insurance to cover these risks. This coverage usually involves a multilateral agency or an export credit agency.
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