American Marine Insurance Forum February 15, 2007 Brian F. Murphy, CPCU Starr Marine Agency, Inc. Roy Hornbeck General Reinsurance Corp. Marine Builder’s Risk Insurance: I. What’s Driving the Increased Demand? II. Some Underwriting Basics

Why the increased demand for builder’s risks coverage? 1)Attrition of dry cargo barges is creating a demand for replacements. It is estimated that 4,800 units will be retired over the next 5 years. This represents about 27% of the current dry cargo fleet.It is estimated that 4,800 units will be retired over the next 5 years. This represents about 27% of the current dry cargo fleet. Source: Informa Economics, Inc.

Dry Cargo Barges in Operation By Year of Construction Source: Informa Economics, Inc.

Why the increased demand for builder’s risks coverage? 1) Attrition of dry cargo barges is creating demand for replacements. 2) OPA 90 double-hull requirements are effective January 1 st, ) OSV / liftboat construction increasing due to oil boom. Recent reserve discoveries in the Gulf of Mexico will likely fuel this demand. 4) U.S. government building a large amount of smaller, more nimble vessels due to the changing nature of external threats. 5) Hurricanes Katrina and Rita have resulted in: Increased need for vessel repairs and replacements. Increased need for vessel repairs and replacements. Insurers scaling back their writings in specific geographic regions. Insurers scaling back their writings in specific geographic regions. 6) High steel prices have accelerated the scrapping of older vessels. 7) Shipping companies are expanding and upgrading their fleets to cash in on the lucrative shipping market.

Builder’s Risk can be a profitable class of business, but be wary of… Builder’s Risk can be a profitable class of business, but be wary of…

Recent entrants into the vessel repair/building market Many individuals with little experience have entered the market to take advantage of the favorable dynamics. Underwriters should look for accounts with: Many individuals with little experience have entered the market to take advantage of the favorable dynamics. Underwriters should look for accounts with: 1) Five years or more experience in the vessel repair/construction industry building the types of vessels we’re being asked to cover. 2) An organized approach to safety and proven track record of safe operating procedures.

Delivery Trips 1) Vessels may have to transit waters that are more hazardous than those they’re intended for. 2) The crew for the delivery trip may be unfamiliar with the vessel. present an increased risk of loss… Delivery trips present an increased risk of loss…

Delivery Trips A trip survey should address: A trip survey should address: 1)Seaworthiness of the vessel(s) for the intended voyage. 2)Towing arrangements, if vessel is to be towed. 3)Experience of captain and crew. 4)Weather routing / ports of refuge. 5)Wave height restrictions. Additionally, the underwriter should review the towage contract, if any, and adjust terms and premiums accordingly.

Delivery Trips Delivery trips are not covered by an unendorsed BR form. Addendum #1 must be added to include this coverage. Addendum #1 requires that: Delivery trips are not covered by an unendorsed BR form. Addendum #1 must be added to include this coverage. Addendum #1 requires that: 1) Prior Notice is given to the Underwriters. 2) Additional terms and premium are agreed to. 3) A trip survey is completed by an Underwriter appointed surveyor.

Aggregation of Risk Builder’s Risk is a unique hull coverage in that it presents carriers with a potentially large accumulation of static risk.

Dealing With Aggregation 1)For open policies, establish a location limit for any one occurrence. 2)Develop a mechanism for monitoring aggregation by location and geographic region.

Aggregate Tracking At a minimum, an aggregate tracking tool should monitor limit accumulation on… At a minimum, an aggregate tracking tool should monitor limit accumulation on… 1)… an individual risk basis, taking into account:  Builder’s Risk Limit, inclusive of any pre-keel coverage  Hull limit(s) for vessels covered under a hull form, i.e. drydocks.  Contractor’s Equipment exposure

Aggregate Tracking At a minimum, an aggregate tracking tool should monitor limit accumulation on… At a minimum, an aggregate tracking tool should monitor limit accumulation on… 1)…an individual risk basis 2)…a portfolio basis, totaling the limits on individual risks by region

Builder’s Risk Protection & Indemnity The P&I coverage within the BR form grants a limit equal to the Agreed Value. The P&I coverage within the BR form grants a limit equal to the Agreed Value. When possible, the P&I should be sub- limited to $1M and then scheduled as an underlyer on the Assured’s excess policies. When possible, the P&I should be sub- limited to $1M and then scheduled as an underlyer on the Assured’s excess policies.

Builder’s Risk Protection & Indemnity The standard BR form excludes bodily injury, illness, or loss of life to any employee of the Assured. The standard BR form excludes bodily injury, illness, or loss of life to any employee of the Assured. –The MARAD P&I clause of Addendum #1 provides this coverage when the vessel is waterborne. –Coverage under this clause does not cover liability under any compensation act (other than a seaman). –Coverage should be sub-limited to $1,000,000.

Coverage For Faulty Workmanship, Design, Etc. Lines of the AIBR Clauses exclude the “…cost or expense of repairing, replacing or renewing” part or parts which, because of their faulty design, have resulted in physical loss of or damage to the vessel. Lines of the AIBR Clauses exclude the “…cost or expense of repairing, replacing or renewing” part or parts which, because of their faulty design, have resulted in physical loss of or damage to the vessel. Ensuing damage is covered under the AIBR Clauses. Ensuing damage is covered under the AIBR Clauses.

Coverage For Faulty Workmanship, Design, Etc. Addendum #2 tightens the exclusion in lines by broadening the definition of faulty workmanship and design. Addendum #2 tightens the exclusion in lines by broadening the definition of faulty workmanship and design. Proceed with extreme caution when you are requested to delete this exclusion as this is a potentially large exposure. Proceed with extreme caution when you are requested to delete this exclusion as this is a potentially large exposure.

Conclusion Conclusion

Gathering of Underwriting Information Application Estimated building schedule for the year (open cover) Terms and conditions and loss history Yard survey, inspection or In house loss control report Insured website Diagram of yard or pictures

Yard Diagram

Jeffboat Assembly Line Launching Area Cranes

Exposures Fire & explosion Flood Earthquake Damage from crane accidents Launching Trials and Delivery Wind/Hurricane

Fire What is management’s attitude toward loss control? (drills, safety meetings, housekeeping, manuals, rewards.) Age, type & construction of building facility. Distance from fire hydrants and firehouse. Adequacy of sprinkler system Location & storage of flammable materials Location of neighboring structures

Fire Public (paid vs. volunteer) and private fire protection Type of vessels being built, steel, aluminum, fiberglass, wood Do they have adequate ventilation for fiberglass, spray paint, flammable coatings and saw dust? Welding is the number one cause of fires Should be welding in the designated areas only. Fire watch for ½ hour after welding

Flood Survey report should provide information regarding high water mark & height above sea level. Does the yard have seasonal flooding issues? Google Earth will also give you elevation above sea level. FEMA flood maps would provide flood Zone. Do they have an emergency plan to minimize the effects of flooding? Where do they store their expensive parts and equipment?

Earthquake Is the yard located in an earthquake zone? Are the structures built to withstand an earthquake? Do they employ techniques for securing and bracing vessels? Are you charging for this exposure if it’s covered?

Damage from Crane Accidents Most of the sophisticated builders use a module or block process. Full blocks of the vessel are built separately and then moved into place for final construction. All of these large pieces will have to be moved and lifted into place. Each time a piece is handled, the chance for a loss increases. Cranes can topple or collapse causing damage to the vessel.

Crane Accidents can be Expensive!

Modular or block construction

Failure to Launch Covers damage to the vessel as well as necessary costs to complete the launch. Crane Stern Launch Side Launch Marine Railway Floating Dry-dock Slipway

GravingDock Graving Dock

Floating Dry-dock

Trials and Delivery What type of vessel? Barge/Tug/Jack-up/Dredge/Crane barge? Delivery trips are usually endorsed on open builders risk policies for up to 250 miles. Frequently, vessels are towed to the buyer. Make sure you get a trip in tow survey! Make sure all recommendations are complied with. Groundings on delivery trips are responsible for a sizeable amount of builders risk claims.

Hurricane You can’t prevent a hurricane from striking the yard, but management can minimize loss by developing a hurricane plan. Does the yard have a written hurricane plan? All yards on the East coast and Gulf of Mexico are exposed to hurricanes. Some yards are more exposed than others. Storm surge will cause most of the damage.

Hurricane In general, storm surge is worse in the Gulf of Mexico than the East Coast due to shallow depth of water. Mississippi & Louisiana, is considered “hurricane alley”

Need a good strategy!

Major Hurricane Frequency – Cat 3 or Greater 40

Gulf of Mexico Storm Surge – Cat 5 Source: P.C. Weather Products Hurritrack software

New Orleans – Cat 5 Source: P.C. Weather Products Hurritrack software

Cat 5 Storm Surge – Pascagoula, MS Source: P.C. Weather Products Hurritrack software

Overlay of Storm Surge

Open Builders Risk Issues Rates based on values at risk vs. completed contract price. - The shipyard has an incentive to under report the monthly exposure. Excess layers being placed on open builders risks due to lack of primary capacity. Can be an issue if the primary rates do not contemplate this increased exposure. Monthly rates are the same for hurricane and non hurricane months. Rates should be differentiated.

Rates Rates vary drastically by account Low of.04% per month on values declared High of.10% per month on completed contract price Rates immediately increased after Katrina & Rita, but leveled off quickly.

Review Gather as much information as you can. Review the policy form and endorsements. Pay particular attention to fire and hurricane risk. Determine if these risks are acceptable. Determine necessary rates to ensure long-term profitability. Manage your aggregation.

Good Public (Free) Information MARAD.gov – Shipbuilding report and survey Colton Company – History, Statistics, New Contracts Google Earth – birds eye view NOAA – Hurricane info FEMA Company websites

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