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Managing risk in infrastructure projects

Managing risk in infrastructure projects

Frequently, major projects and investments are only possible if insurance cover is available, but infrastructure project suffer from risks that are not covered. Easwara Narayanan M explains the types of general insurance available to the industry.

Over the next two decades, the global economy is expected to double; fuelling additional infra¡structure needs which are estimated around $50 trillion. Against this massive need for investment, increas¡ing societal infrastructure demands and technological advancements, it is more critical than ever for project owners and construction firms to effectively manage the business-financial, operational and event risks associated with these projects. While entrepreneurial risk itself is not insurable, protection against the consequences of property damage has long been provided by the insurance industry. Major physical infrastructure can be covered under general insurance in:

  • Power plants including thermal, hydel, solar, wind mills, generation and distribution
  • Roads, bridges, flyovers, subways, viaducts, etc
  • Oil & Gas
  • Railways
  • Airports and sea ports
  • Dams
  • Water supply distribution

Project stakeholders & risks faced

Promoter: Timely completion, revenue generation, RoI and debt servicing (contractors fault, physical damage, liability)

Lender: Realisation of principal and Interest within time (failure to recover debt, inadequacy of earning over cost of debt, legal proceedings)

Contractors: Timely completion, cost control, profit earning, O&M obligations (other contractors fault, physical damage, liability, legal proceedings)

Construction Phase Insurance

Contract Works: This insurance is often provided as a combined material damage and legal liability policy.

  • The material damage insurance insures the works under construction, material for the project stored on the site and off-site, plant and equipment, material related to projects against all risk cover subject to specified exclusions.
  • The second part of the policy insures against damage to property or personal injury to third parties arising from construction activities on and off the site.

Standard exclusions applicable for such covers are:

  • Loss or damage due to war or similar events, civil commotion or confiscation by an authority
  • Loss or damage due to nuclear energy and radioactive contamination of any kind
  • Loss or damage resulting from any wilful act or gross negligence on the part of the insured or its representative
  • Loss or damage resulting from a cessation of work
  • Terrorism risks
  • Inventory losses
  • Faulty design
  • Penalty and fines
  • Defective material
  • Gradual deterioration wear

Land Risk: In the event of any loss or damage, there is no loss or damage to the land per se. The project can be started on the same land and the true indemnity would be only to reinstate the damaged property in state where it was before the loss. Hence, land is not covered under insurance.

Supplementary covers: The following additional supplementary covers under project policies:

  • Design defect cover
  • Express freight/holiday and overtime rates of wages-Covers additional costs incurred in the event of a material damage at the site of erection due to an indemnifiable loss
  • Air freight – Covers additional costs incurred by way of air freight while bringing replacement to a damaged part covered under erection
  • Additional customs duty – Covers additional duty incurred while importing replacement to a damaged part covered under erection
  • Maintenance visit – Covers contractors maintenance obligations after completion of project as per agreed terms

To have a comprehensive coverage of risks associated with the projects, the following policies can be taken:

  • Advance Loss of Profit (ALOP) – In the construction phase, insured can be protected against loss of anticipated revenues by advance loss of profit cover. ALOP is designed to secure the portion of revenue which the principal requires to service debt and realise anticipated profit. It provides protection against delays arising from physical damage caused by any type of peril included in the relevant material damage cover.
  • Workers Compensation – Workers’ compensation coverage provides wage loss and medical benefits to workers injured in the course and scope of employ¡ment.
  • Professional Indemnity – This insurance indemni¡fies an insured for amounts which the insured becomes legally liable to pay as a result of any actual or alleged negligent act, error or omission in the conduct of completion of infra projects.
  • Commercial general Liability and Excess General liability policy – Customised commercial umbrella solutions designed to minimise the potential for dangerous coverage gaps and inconsistencies bet¡ween layers of coverage for companies of varying sizes and business sectors
  • Terrorism Risk – The coverage is available up to certain limit in domestic market as per the Indian Terrorism Pool.

In order to have a seamless cover from materials procurement stage, the following policies can be opted:

  • Marine Cargo or Transit – This insurance covers the risks of loss or damage to cargo being transported from one country to another by sea, rail or air.
  • Marine Delay in Start Up – Often associated with large infrastructure projects, these covers arise from the need for an insured to be able to meet ongoing project or financial commitments as a result of damage to goods during the transit which causes delay in the start-up (earning capacity) of a project; The trigger for DSU activation will be loss or damage under the cargo/transit policy with the consequences causing impact (loss or delay) to the defined revenue or expenditure targets set-out for the project. The level of indemnity for DSU should reflect the reasonable anticipated profits expected from the completed complex.

In case of mega projects, considering the exposure and complexity, comprehensive reinsurance driven co¡vers are available to cover the risks associated with the projects. Once the project is completed and handed over or becomes operational, the insured can be go in for operational phase insurance covers.

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