Project handover insurance cover

Striking the right balance

Project handover insurance cover:
striking the right balance

Introduction – no single solution for handover risk
One of the key considerations for mining risk managers is how to administer insurance during commissioning and phased handover.Commissioning a new mining operation is an exciting time for miners and their project stakeholders. It is also a time of intense administrative activity, whereby tight deadlines must be met. The commissioning of a new mining project can be a moveable feast – it is rare that things go completely to plan and it is common that finalisation is the outcome of a long period of fine-tuning and expectation management.There is no single insurance product to cover the lifetime of a mining operation and from a Property Damage perspective there are typically three insurance products which will need to be placed with different carriers as per the table below.For a project manager it can be a daunting task to ensure a smooth and uninterrupted handover of insurance products in line with a project’s development. The area associated with most difficulties is the transfer from Construction insurance carriers to Operational insurance carriers (Stages 2 to 3). In this short article we will consider some key points associated with this process and outline some of the items for consideration.

Handover often on phased basisIt’s not unusual with large projects for equipment to be handed over from contractors on a phased basis. For example, let’s assume that a dressing plant has three identical dressing stages. For practical reasons, commissioning will often start with the first stage and proceed later with the following two.

Figure 1 below indicates how a Construction insurance contract and Operational insurance contract may be split for a single facility of this type:

Fig 1 – Example of a division of cover between operational and construction policies for a dressing plant

Construction insurance approachRegardless of contract handover criteria, Construction insurers can cover some period of the initial operations (i.e. post-commissioning and maintenance period and including commercial production for a limited period). If in our example above, Stages 2 and 3 were to be commissioned one year later than Stage 1, it may not be possible to
extend the Construction policy and Stages 2 and 3 may need to be handed over to Operational Property insurers on a phased basis.Operational Property insurance approachOperational Property insurers can theoretically accept equipment as and when it is commissioned, but it’s important to make sure the insurance contract caters for this. Typically insurers will require that the property satisfies 100% of contract design criteria for a continuous period of 72 hours without interruption, and that punch list items and defects should be dealt with. However a mining company should take care to examine the details of these parameters, for example:

In a standard Property and Plant Testing and Commissioning clause, it may be stipulated that the entire plant must be commissioned - contradictory to a phased handover.

It may be that the mining company’s Construction contract defines ‘design’ criteria differently. For example, design criteria could be interpreted as nameplate capacity (maximum throughput), or it could be interpreted as a measure of output quality versus quantity.

Additional considerationsAdditional considerations need to be made when the production stages have shared utilities or buildings and where construction works continue in the vicinity of commissioned property:

What exactly should be declared to the Operational Property policy and what should remain declared to the Construction policy?

What would happen in practice if a loss during the construction phase on property declared to the Construction policy had an effect on property insured by the Operational Property policy?

It is worth noting that some insurers will consider the bespoking of the Testing and Commissioning clause in a limited way, but it is important if possible that there is a clear understanding of the handover requirements prior to negotiation.Other considerations – lossesLet’s consider the scenario shown in Figure 2 below. In this example a contractor working on SAG mill 2 is conducting hot works which results in a fire. In addition to the damage to SAG mill 2, the fire damages SAG mill1 and the shared building structure which are declared to the Operational Property policy.

Fig 2 – effect of fire on construction and operational policies

What can happen when it comes to claims settlement?

The Construction policy may have cover for surrounding property, which could cover the damage to SAG mill 1 and the building. However, coverages for surrounding property are often sub-limited and may not fully cover the costs to reinstate SAG mill 1 and the building.

The respective policies may respond for their respectively declared property. It should be noted that in some cases this may mean two deductibles are triggered, meaning the mining company’s self-retention is higher than intended.

There may be questions on how to allocate the loss for shared facilities such as the plant building.

The Operational Property insurers may seek to recover costs from the contractor that caused the fire.

It should be noted that the answer will also depend on what is written in the respective insurance contracts.This is all manageable, as long as:

Subrogation rights for Operational insurers are clearly defined in the insurance contract; they should work reciprocally with the project construction contract. For example, if the liability of the contractor is ultimately covered by the mining company, then there should be a subrogation waiver on the insurance contract.

It is important that Operational insurers have been made aware of the presence of contractors in the vicinity of SAG mill 1.

It is important that properties under the respective insurance contracts are clearly defined and segmented, especially with shared facilities such as the plant building. This may involve declaring it wholly to one insurance policy or declaring an agreed proportion of the building values to each policy separately.

Dangers of poor administrative disciplineIn our experience dealing with claims of this nature, difficult situations tend to occur where there is a lack of administrative discipline amongst the parties involved. Here are two typical examples:

A mining company has taken control of an asset and begun commercial production without formally signing acceptance certificates. This can raise questions about validity of cover for both Construction and Operational Property insurance.

Acceptance certificates are signed but the criteria for acceptance differ from the terms of the operational insurance contract. The Operational Property contract wording is not amended to cater for any variation in acceptance criteria.

Conclusion
If the mining company is commissioning equipment on a phased basis, then both Construction and Operational insurers can respond to this. Phased handover to the Operational policy is possible, but it is very important that the insurance broker and the mining company remain in constant discussions as to the progress of works.The seamless solution – if it is possible – would be to keep all assets covered under the Construction policy until the entire plant reaches commercial operation and all acceptance certificates are signed.

If the acceptance criteria differ from the operational insurance criteria, then the insurers could amend the Operational insurance contract accordingly, within reason. Alternatively a mining company could keep initial operations under the Construction policy until the criteria are reached. It is best for initial operations cover to be negotiated at the beginning of the Construction insurance contract; otherwise this may require amendment or extension of the Construction policy at a later stage.What is for certain is that the standard coverage on both Construction and Operational policies don’t address the issue of phased handover very well. As a result, we thoroughly recommend considering these issues well in advance of the inception of cover so an appropriate risk transfer solution can be developed.

Matt Tyler is a Divisional Director at Willis Towers Watson in London. He has been working as a broker and client manager for industrial clients in Russia, the CIS region and Europe for over nine year

Phased handover to the Operational policy is possible, but it is very important that the insurance broker and the mining company remain in constant discussions as to the progress of works.