1. International Marine Claims Conference - Dublin 26th October 2005
Builders’ Risks – Proposed changes
Chris Zavos

2. Introduction Institute Clauses for Builders’ Risks (01/06/88)
Cover purchased by yards or owners (usually in the case of upgrades and conversions)
First developed in 1963, amended in 1972 and again in 1988

3. What prompts change? (1) IUMI Singapore October 2004
Horrendous losses from October 2002 to January 2004

4. “Diamond Princess” – US$ 310 million
What prompts change? (2)
“Diamond Princess” – US$ 310 million

5. What prompts change? (3)
“Pride of America” – US$ 228 million

6. What prompts change? (4)
Premium October 2002 to January 2004 – US$ 125 million
Losses October 2002 to January 2004 – US$ 740 million
More recently
LNG cargo tanks – Chantiers De L’Atlantique
And …

7. Hurricanes Katrina and Rita US$ 250m ?
What prompts change? (5)
Hurricanes Katrina and Rita US$ 250m ?
                        

8. What prompts change? (6) Market response The 1988 clauses
Rating, deductibles
Coverage
Pre-risk surveys – JH143
The 1988 clauses
Under scrutiny
Clarity and contract certainty
Flexibility

9. A short history (1) Introduced in 1963, amended in 1972
Cover against all risks of “loss of or damage to the subject matter insured including the cost of repairing, replacing or renewing any defective part condemned solely in consequence of the discovery therein during the period of this insurance of a latent defect”
Amendments in 1972
Termination upon “delivery to Owners”
Incorporation of Institute Full Value Clauses

10. A short history (2) Amendments in 1988 New exclusion
“Notwithstanding anything to the contrary which may be contained in the Policy or the clauses attached thereto, this insurance includes loss of or damage to the subject matter insured arising from faulty design of any part or parts thereof but in no case shall this insurance extend to cover the cost or expense of repairing, modifying, replacing or renewing such part or parts, nor any cost or expense incurred by reason of betterment or alteration in design.”
Amendments in 1988
“all risks of loss of or damage to the subject matter insured caused and discovered during the period of the insurance”
“In no case shall this insurance cover the cost of renewing faulty welds”

11. A short history (3) The process of change
Earthquake and volcanic exclusion
narrower than “warranted free of claim arising from earthquake or volcanic eruption, or tidal wave arising therefrom”
The process of change
The committee includes Claims and Average Adjusters
Facelift or re-write …
Consultation
Release draft in late 2005
Consult until April/May 2006
Finalise for a 1/5 or 1/6 release

12. The issues on the 1988 clauses (1)
Page 1 – is it ever completed?

13. The issues on the 1988 clauses (2)
Who is the assured
Yard? Owner? Contractors?
“and/or … and/or”?
Is there cover for simple discovery of a latent defect?
Interaction between latent defect cover and the faulty design exclusion
Constructive total loss?
Unrepaired damage

14. The recent authorities
Not many, but two important ones
State of Netherlands v Youell 1998
Application of paint to submarines built for the Dutch navy
Excessive thickness in the primer coating
Both yard and navy insured under BAR insurance
Composite rather than joint cover – failings of yard could not be visited on the Dutch navy
Shell UK v CLM Engineering 2000
Breakdown of insulating gel
Cover for pure economic loss?
Both cases settled without the Court being asked to determine whether de-bonding of paint or breakdown of gel was “damage”

15. The new clauses (1) Format – 6 sections
General provisions – definitions, premium, due diligence, measure of indemnity, subrogation
Section A
Principal all risks cover and exclusions
Section B
Liability cover – P&I and RDC
Section C
War risks cover effective from launch
Section D
Strikes, terrorism, political motive and malicious acts cover effective on inception
Section E
Optional buybacks in respect of Section A exclusions

16. The new clauses (2) Assureds, other assureds and subrogation
Who is it/are they? “affiliates, contractors, sub-contractors and those from whom the assured may receive instructions to insure” or “as may be required”
BP Exploration v Kvaerner 2005
A wide “other assured” clause will not in itself be sufficient to give cover
the insured operator “must have assumed a contractual obligation to such contractor to procure the benefit of cover for him”.
Cover for contractors where
Written contracts with the assured
Contracts provide for contractors to have the benefit of cover

17. The new clauses (3) Due diligence But New Duty to exercise:
Cover no wider than provided for in the written contract
No greater rights under the insurance than the assured
No waiver of subrogation to the extent contractor required to take out liability cover
Due diligence
New
Duty to exercise:
By the assured in the choice of sub-contractors
By all assureds in the conduct of operations
Objective test and Underwriters not liable for loss attributable to a failure to exercise due diligence

18. The new clauses (4) Works value/CTL
Sum insured defined in the slip – escalation limited to 10% (unless otherwise agreed)
Based on a “Works Value” comprising:
Labour cost
Material cost
Contractor cost
Plus an agreed percentage by way of overhead

19. The new clauses (5) When does a CTL arise?
Attempt to mirror standard form build contracts
Builder relieved of obligation to build when vessel “determined” or “deemed to be” a total loss (which includes a CTL)
Cart driving the horse?
CTL will now arise where the costs of recovery/repair exceed the “Works Value” at the time of loss

20. The new clauses (6) The principal insuring clause
Remains an “all risks” form
But all risks of “physical loss” or “physical damage”
English insurance definition of damage? - at least “a physical change in state leading to a loss of value or usefulness”
Reinforces the position at law and makes clear that no cover for pure economic loss. Compare offshore construction wordings
Australian authority that “loss of usefulness” may be damage, but not physical damage
Define “damage”???

21. The new clauses (7) Latent defect
“this insurance is against all risks of loss or damage to the subject-matter insured caused and discovered during the period of this insurance including the cost of repairing, replacing or renewing any defective part condemned solely in consequence of the discovery therein during the period of this insurance of a latent defect”.
Is discovery enough in the absence of consequential damage?
Steel J in Shell v CLM Engineering thought not
Section A likely to exclude claims for repair or rectification of latent defects and defective design, whilst allowing claims for consequential damage

22. The new clauses (8)
Costs of rectifying latent defects and defective design will be optional buybacks in Section E, where there has been consequential damage – akin to the Additional Perils Clause
Renewing faulty welds and costs of betterment or alteration in design will remain excluded as presently

23. Summary 1988 clauses draw heavily on their 1963 predecessors
Probably no longer appropriate to multi-million dollar constructions
New form will
Enable a more flexible approach
Provide clarity in a number of areas which are inherently uncertain
Provide “contract certainty”
Comments and questions welcomed