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Bring on tomorrow: Deconstructing construction risk

Source: Asia Insurance Review | Feb 2014

As an industry globalises, its insurance needs become ever more specialised. To illustrate this, Mr Brad Berg of AIG Asia Pacific explores the needs of the construction industry, in particular, an international LNG project called Wheatstone Project. For a multinational project like this, global expertise and coverage is crucial. 

In the hugely popular Jason Bourne movies, the titular hero, in search of information about Operation Treadstone, pursues a dangerous quest for answers across the world, passing through the Mediterranean Sea, Zurich, Paris, Moscow, Mykonos, Tangier, Berlin, Washington and New York. 
 
Back in the real world, the construction insurance industry has embarked on its own globalised adventure, perhaps best characterised by the similarly named Wheatstone Project.
 
A true megaproject
Operated by Chevron, Wheatstone is an international LNG project on a magnificent scale, located on the North West coast of Australia. At peak construction, it will employ up to 6,500 employees directly and indirectly. 
 
The project was an international initiative from inception, with the initial budget of around US$29 billion underwritten by supply contracts already in place with customers across the Pacific region. The partners in the project reflect its global nature, with American, Australian, Japanese, Anglo-Dutch and Kuwaiti investors. 
 
Steel for the project is being imported directly from rolling mills in Korea and China. Australian contractor Thiess is providing onshore plant, storm water system and access roads. Daewoo Shipbuilding & Marine Engineering Co. in South Korea is constructing the platform. US construction giant Bechtel Oil, Gas and Chemicals, Inc. secured the Front End Engineering and Design (FEED) contract. The American-Australian Kiewit Ertech Joint Venture was awarded the $296 million Construction General Services 3 contract. Australian company Worley Parsons provides construction management services, a $235 million contract.
 
From customers to owners, from suppliers to contractors, Wheatstone is a truly global megaproject. It is far from being alone: large-scale projects are increasingly embracing the globalised economy in search of resources, expertise and cost advantages. 
 
In Australia alone, Wheatstone accounts for less than 15% of $200 billion currently being invested into LNG. Further, this multinational approach is beginning to be replicated in smaller projects, as investors and contractors become more comfortable crossing boundaries, and suppliers are better able to deliver services and offer economies of scale across the world.
 
Globalise and specialise
Multinational construction companies are increasingly looking to insurers to match them at their game: to provide globe-spanning protection for their activities. Even as they ask for uniform cover across the world, they are expecting greater insight into their businesses and appreciation of their unique risk footprint. Deep risk expertise in particular country alone isn’t enough; a broad global network of legal and claims support alone is inadequate. Carriers seeking to compete in this arena need to be able to play broad and deep, standardised and specific.
 
At AIG, we believe that risk managers for complicated multinational construction projects need to ask searching questions of their advisors and risk carriers. 
 
A straightforward multinational programme may meet regulatory requirements, but it may not meet the specific needs of their project. A carrier may have deep and proven construction expertise in the risk manager’s home country, but it may not have the network to deploy that expertise half the world away. 
 
And with litigation itself becoming a globalised industry, the ability of a carrier to provide adequate liability cover is a critical part of building a robust multinational programme for a complex construction project.
 
International cover and scenario planning
The first question a risk manager needs to consider is whether the programme they are designing truly provides end-to-end cover for their risks across multiple geographies, construction phases and legal systems. 
 
Sometimes a company will choose to build a multinational programme having first tried to build cover from the ground-up, country by country. At AIG, we believe that for large-scale, global construction projects, the use of a multinational programme is typically the most elegant and natural solution. It should be the starting point of the risk manager’s thought process. 
 
With advice and guidance from brokers, and the support of carrier with expertise in multinational programme development and servicing, the risk manager can ensure that she has end-to-end cover with no material gaps in protection.
 
Many countries require local insurance policies to be issued. Working with an experienced insurance partner with the ability to issue local paper around the world can ensure that the buyer can be compliant and does not suffer regulatory or tax issues when a claim comes to be paid. A Controlled Master Programme with local underlying layers is the ideal way of ensuring end-to-end coverage. 
 
The second question for the risk manager to address is the ability of the risk carrier to deliver its construction engineering and claims expertise globally. Moreover, it is not enough that the risk carrier has general construction expertise; they need to understand the detail of the risk manager’s particular project. 
 
Expertise required to safeguard the Insured’s interests
Again, as the industry globalises, it demands ever greater specialisation.
 
Wheatstone provides a useful prism through which to examine the issue. To manage costs and timelines, much of the fabrication of construction elements has been carried out offshore, with partially-completed elements transported to site and erected on-site. 
 
If a defect is discovered after the fact, and the timing or cause of damage cannot be established, the benefits of having clear policy wordings, contract certainty and crisp claims protocols in place are immediately apparent.
 
The most pro-active risk managers take the design process a step further, working with their partners to put claims protocols in place before the construction project begins. They work through potential claims scenarios identifying grey areas in the wording or duplication between covers. 
 
Umbrella wordings and ‘Difference in Conditions’ clauses may be required to safeguard the Insured’s interests or where overlap/duplication could occur, clear wordings and claims protocols should be agreed to regulate contribution without the Insured suffering from a dispute between Insurers arguing as to who pays what part of the claim. 
 
Just as the civil and process engineers on the project use simulation to streamline and improve their design, so the risk manager, broker and underwriters should do the same. 
 
A particular example of this approach is the interaction between Marine Cargo and CAR/EAR policies. These can be dovetailed to ensure that there is no break in coverage between fabrication, shipping and erection. If not properly integrated, there could be a question as to which policy the claim falls under. Ideally both fabrication and assembly would fall under a single CAR policy, and a single insurer would lead both the marine and CAR policy, so that interests are aligned.
 
Liability protection
The third and final area that the risk manager should focus on is the need for liability policies providing global cover, from a carrier able to directly manage claims globally.
 
With project stakeholders – investors, contractors, suppliers, staff – drawn from across the globe, there is the potential that a third party claimant could seek to bring claims in the most favourable jurisdiction, and succeed in getting a case heard. 
 
If the liability policy does not have global jurisdiction, then any claims arising from a third party claim in an unexpected country may not be covered. Putting aside this particular risk, it is vital that that the insurer has presence around the world and the experience to manage claims in high liability countries (particularly Australia and the US). 
 
Risk managers should reassure themselves that they have adequate liability cover that reflects the nature of their project’s risks. Typically a CAR policy has a TPL cover embedded within the wording. However this will most often be a standardised liability cover with relatively low limits. Standalone TPL policies can readily be included within the Controlled Master Policy framework of a multinational programme to address a specific project’s risks and to deliver adequate protection to the project.
 
A transparent, partnership approach
At AIG, we listen to our clients then structure multinational programmes that optimally meet their needs—and pave the way for a productive, long term partnership. We work with our clients and their advisors to create multinational programmes tailored to their needs and preferences, whether it is local policies, a global policy, or a combination: a controlled master programme.
 
We deliver consistently high-quality underwriting, loss control/engineering, and claims services, wherever they operate. Our deep local knowledge and expertise infuses all facets of our programmes through our local employees worldwide. We offer insights and tools that facilitate well informed decisions in managing multinational risks.
 
With this expertise behind them, we are confident that our clients can safely say: “Bring on tomorrow”.
 
Mr Brad Berg is Head of Energy and Engineered Risks at AIG Asia Pacific. 
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