CONSTRUCTION CLAIMS Investigation and management By Sabine Chaugny Business Solutions Claims

Your presenter today

SABINE CHAUGNY– Senior International Claims Manager Sabine has experience of field loss adjustment, claims functions, technical handling of large and complex losses and claims strategy in the UK/Europe, North Africa and Middle East. Technically biased towards Property, Engineering and Business Interruption for larger industrial and global commercial groups, Sabine developed from a multi lines technical claims handler, through to claims operational management, audit controller and claims coordinator for offices worldwide. Sabine has a master degree in Insurance Law, University Paris Panthéon Assas and brings 23 years of claims expertise to the team

Construction Claims Investigation and management

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Special features of the construction insurance context

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Construction insurances

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Construction claims investigation & management

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Our view

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Construction projects in simple terms In the main construction contracts concern two parties:  The Employer (the person or organisation commissioning the work) and  The Contractor. BUT  The contract work involves many parties. Some of these parties are appointed by the contractor and others by the employer. Thus the employer appoints an architect and/or consultant engineer who, amongst other tasks, nominates sub contractors.

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Construction projects in simple terms

 A main contractor is responsible for the means and methods to be used in the construction of the project in accordance with the contract documents.  The contract documents usually include the:  Contract agreement including budget.  General and special conditions.  Plans.  Specifications of the project that are prepared by the design professional.  The expertise possessed by contractors can lead to particular duties being placed on them, outside the express terms of the contract.

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Special features of construction insurance

Owner, Banks, contractors temporally associated under contractual frameworks

Project developing over a possibly long period

Construction project

More and less a prototype in its design but also in the construction methods

Anywhere in the world and possibly not in a limited location 6

Special features of construction insurance

Owner Consulting Engineer Contractor Civil works

Suppliers

Banks

Contractor Equipment

Design offices

Design offices

Sub contractors

Sub contractors

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Special features of construction insurance

Insured value

Hand over

Maintenance

Inception of the project

Testing commissioning Construction / Erection Procurement

Transfer of ownership from the Contractors to the Owner

Design

Time 8

Special features of construction insurance

 Different level of liability transferred to the contractors by contract from construction only to Engineering / Procurement/ Construction  Budget of construction with some risks sharing to pure lump sum contract  Some performances to match in terms of project time milestone to reach and in terms of performance of the work to deliver Format of the contract is driving the “behaviour” between the parties in terms of risk management and communication

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High-level claims process 7) Final settlement

6) Calculation of settlement 5) Calculation of reserve & loss model 4) Selection & use of preferred experts

8) Report writing e.g. retrocession, underwriters

9) Subrogation investigated

3) Claims investigation – sanction review 2) Validating policies cover & cause

1) Notification of claim

10) Proactive steps to manage & mitigate claim Communication of these steps – flash notices, internal reports, feedback

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Managing the claim – key details  Name and address of insured  Principal  Situation of contract  Description of works  Contract period and value  Location of loss  Date of loss  Cause  Nature and extent of damage  Reserve / estimate

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Managing the investigation – key areas 

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The contract  Principal parties to the contract and subcontractors.  Contract form / type. Description of project  Location, nature and value of the works and the situation of the damage.  Contract period. State of the works and extent of completion.  For plant losses - plant and value. Circumstances and cause  Circumstances up to and after the damage - time, day and date.  Discovery and by whom. Cause of damage. Nature and extent of damage  Nature and extent of damage under sub-headings, e.g. Contract works, plant etc.  Damage and outline of remedial works. Contractual liability  Liability under contract. Policy liability  Application of cover – exclusions  Terms of policy relevant to loss: parties, policy period, risk locations, business insured, basis of cover, exclusions, extensions. Subrogation aspect  None/ suspected - evidence, enquiries, financial recovery. Further action  Summary of proposed actions and pending instructions. Reserve  Basis on which reserve is calculated.

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Critical path

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Construction Claims Investigation and management

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Special features of the construction insurance context

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Construction insurances

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Construction claims investigation & management

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Our view

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Construction insurances – quelles sont les différentes offres d’assurance offertes aux Maîtres d’Ouvrages  Main kind of construction and engineering Insurance  COVER FOR THE CONSTRUCTION OR ERECTION OF A SPECIFIC PROJECT 

Une couverture d’assurance spécialement conçue pour un projet déterminé, et donc pendant toute la durée de la construction. La période d’assurance doit couvrir les différentes étapes exposées par Jonathan, de la date d’ouverture du chantier jusqu'à son achèvement et incluant les périodes de maintenance.

CAR Contractors All Risks is an insurance policy which covers contract works and engineering projects in the course of construction on an All Risks basis. It is often arranged in the joint names of the principal and the contractors. La Tous Risques Chantiers. La couverture d’assurance est le plus souvent accordée au Maitre d’Ouvrage et aux entreprises réalisant les travaux ainsi que leurs sous-traitants. C’est souvent pour des gros projets d’infrastructure, tunnel, autoroute, terminaux d’aéroport, ponts, projets de constructions de tours, centres commerciaux etc.

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Construction insurances -

quelles sont les différentes offres d’assurance offertes aux Maîtres d’Ouvrages

 Main kind of construction an engineering Insurance  COVER FOR THE CONSTRUCTION OR ERECTION OF A SPECIFIC PROJECT La Tous Risques Montage Essai

EAR Erection All Risks offers cover very similar to a CAR policy. It is however aimed more at erection of plant and machinery rather than the construction of buildings.

Comprehensive Project Insurance – a combined EAR and CAR into one Policy.  COVER FOR OPERATION – typically an annual cover Operation of machines, plants, installation.

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Construction insurances Construction and/or Erection All Risks cover outline (CAR/EAR): Loss of or damage to the Contract Works described in the Schedule anywhere in the Territorial Limits occurring during the Period of Insurance a. Transit - while in transit other than by sea or air to and from the contract site….. b. Contract Site - at the contract site until…….. c. Maintenance - during the maintenance or defects liability period caused by the Contractor…… Possible extensions (additional sections to the policy) with:  Third parties Liability (TPL)  Delay in Start Up (DSU)  Contractor Plant and Equipment (CPE)  Operation (in case of phased handover)

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Construction insurances

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Construction insurances: CAR/EAR

Insured

Owner

Consulting Engineer Contractor Civil works

Suppliers

Banks

Contractor Equipment's

Design offices

Design offices

Sub contractors

Sub contractors

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Construction insurances: CAR/EAR

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Construction insurances: CAR/EAR

Insured value

Hand over

Maintenance

Inception of the project

Testing commissioning Construction / Erection Procurement

Insurance period Transfer of ownership from the Contractors to the Owner

Design

Time 21

Construction insurances: CAR/EAR

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Construction claims investigation and management

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Special features of the construction insurance context

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Construction insurances

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Construction claims investigation & management

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Our view

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Construction claims investigation and management

Project cost

CONSTRUCTION CONTRACT ASPECT

Inception of the project

Actual hand over

Target hand over Project cost increase and /or Delay in hand over ⇒ Not for the benefit of fair discussion for claims Time 24

Construction claims investigation and management

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Ex 1. Background  Offshore installation – design and build    

Claim against contractor’s engineering team for delay in start up Escalation in costs and missed tow out slot Alleged failure of design integration Alleged long lead items not sourced

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Ex 1. Investigation  Reviewed key issues    

60 day pre-contract review Novation of preliminary design Novation of project management software and sourcing Basis of claims

 Outcome  Claim resisted as could be shown that the client managed interfaces and procurement

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Ex 2. Background  Failure of mortar in new build housing estate  Investigation shows incorrect specification  Insufficient wall ties installed  Perimeter walls not designed to resist wind loading

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Ex 2. Investigation

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Unclear despite expert evidence what mix of mortar should have been specified.

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Class action for homes on estate resisted.

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Remedial action to mitigate by “reskinning” houses.

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Costs allocated between insured, PI and PL insurers.

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Ex 3. Background  Fire damage to a Heat Recovery Steam Generator (HRSG), works insured as part of the third stage of construction of an electrical power plant.  Fire spread from a Fuel Gas Heater that had been installed within the 2nd stage of the project and was operated by the Electricity Company of the state.  Investigation revealed that the HRSG damaged by fire was operating at the time of the loss and had been synchronised a couple of weeks before.

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Ex 3. Investigation 

Policy period. Testing period. Does the EAR apply? Period of Cover provision in the EAR policy: “ The Liability of the Company shall commence notwithstanding any date to the contrary specified in the Schedule, directly upon commencement of work or after the unloading of the items entered in the Schedule at the site and shall continue until immediately after taking over or after the first test or test loading is completed, what ever is the earlier, but not beyond 4 weeks from the date of commencement of the test.”

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Physical damage part of the project works and covered under the EAR. Subjectivity relating to the operational risk, the GT open cycle plant: “ Confirmation that the GTG continues to be covered under the operational program during the whole period of the projects. Cover is granted to existing property with a sub limit (see schedule) due to losses caused by construction activities.”

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Subrogation avenue against the operator, Electricity Company. Waiver of subrogation in the EAR policy: “It is hereby understood and agreed that notwithstanding anything herein to the contrary and in the event of any claim under this Policy involving any Corporation, or Individual or other party comprising the Insured named in the Schedule the Company agrees to waive its right of subrogation against such Corporation, Individual or Party.”

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Ex 4. Background  Failure of sound absorbing panels being built along an LGV railway, about 300km.  2 panels were damaged in the supplier’s workshop.

 1 panel was found damaged in a container when delivered on he project site.  2 other panels failed after being installed on the project site  Insured engaged investigations to test all panels and find out damage.

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Ex 4. Investigation 

Cause: Failure of the adherence between the concrete and the sound absorbing layer as a result of a faulty workmanship.

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The supplier is named insured.

 Broad definition of the site in the policy. “Les terrains constituant la zone de chantier pour la réalisation des Travaux Assurés et les terrains à proximité immédiate de la zone de chantier ainsi que tout autre lieu pour y réaliser des travaux, ou des stockages ou des transports en relation avec les travaux.” 

The CAR policy covers, during the construction, erection and tests, all risks of physical loss or damage to Insured Properties that occur on site.

 How many events do we have? Clear definition of the loss in the policy: “L’ensemble des pertes physiques ou dommages matériels consécutifs à un même évènement ou attribuable à une même cause.” 

Are the investigations undertaken to determine whether other panels could fail covered under the policy?

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Are the costs incurred to replace the costs associated with the replacement of the suspected defective panels covered under the CAR policy?

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Construction claims investigation & management LINEAR WORKS: Railways, motorways, pipelines…

Possibility of the Loss Adjuster to access the damaged areas

Appropriate organization of the Insured to be able to report details of damages all along the construction sites 34

Construction claims investigation & management LINEAR WORKS: Example of bored tunnel Collapse at 3rd September 2009

Metro project in Tunnel at 30m deep Under ground water

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Construction claims investigation & management LINEAR WORKS: Example of bored tunnel

 Root cause: to identify the soonest the possible cause of the damages with appropriate expert on board of Loss Adjusting Team  Suitable accounting organization on site to work jointly with the Loss Adjusting Team: Dedicated account, dedicated people in charge in an early stage  To identify what is subject to indemnification or not  Discussion between the parties

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Extensions to the CAR/EAR policy: Delay in Start up (DSU)

Insured value

Planned Hand over

Revenue

Inception of the project

Testing commissioning Construction / Erection

Delay in the revenue stream further to damages prior to hand over

Procurement

Design

Actual Hand over

Loss DELAY Time

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DSU

yes Anticipated Turnover of Insured Business Gross Profit of Insured Business Anticipated Net Profit of Insured Business

Additional Costs Costs Savings from Variable Costs

Specific Standing Charges Debt Service

Capital Repayments

Interest Payments

Capital Repayments

Interest Payment / Loan Fees Loan Fees

Fixed OPEX

Fixed Staff / Labour Costs Fixed Maintenance Costs Depreciation (unrelated to actual use) Take-or-Pay Costs for fuel or raw materials

Increased cost of working ICW

Variable Staff / Labour Costs Variable Maintenance Costs Depreciation (proportional to time of use) Fuel (non Take-or-Pay) Raw Materials Consumables

Re-Financing Re-Advertising Cancellation Costs Trade Deficit

Additional ICW Extra Expenses

Insured Interest based on figures for "Undisturbed Operation" plus "Additional Costs"

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DSU in practice

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DSU investigation Investigate:  There needs to be identifiable physical loss or damage  This loss or damage needs to be reviewed to see how it has caused delay  Examine the project schedule to see which activities are truly affected and therefore delayed  Review not just the schedule but also rate of spend  Understand the scheduling software  Consider use of contract scheduling experts  Understand critical path Objective:  Reconstructing an accurate picture of events  Expert analysis of complex programme data  Objective separation of delays between events and causes  Analysing concurrency and critical path

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Construction Claims Investigation and management

1

Special features of the construction insurance context

2

Construction insurances

3

Construction claims investigation & management

4

Our view

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High-level claims process 7) Final settlement

6) Calculation of settlement 5) Calculation of reserve & loss model 4) Selection & use of preferred experts

8) Report writing e.g. retrocession, underwriters

9) Subrogation investigated

3) Claims investigation – sanction review 2) Validating policies cover & cause

1) Notification of claim

10) Proactive steps to manage & mitigate claim Communication of these steps – flash notices, internal reports, feedback

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Our view

 Suitable named Loss Adjuster on the insurance policy wording  Claims Procedure organized in an early stage  Communication with a dedicated specialized Claims Manager

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Claims Procedure

It defines mainly:  The dedicated persons to contact in case of loss with contact details  Broker  Loss Adjuster  Leading Insurer  Summary of Policy requirement and conditions  Collection of evidences requirements  Procedure for immediate repair works

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Loss notification

 Loss Notification  In the event of a loss, the focal point insurance co-ordinator on site, for each package, will notify details to the Adjusters through www.scorcar.com  On scorcar.com, once the relevant package is selected by the user, in a dropdown menu, the loss will automatically be sent to the relevant Adjuster (see Adjuster Allocation Section below). Phase

Package

Within Deductible

Above Deductible

One

Ground works

Adjustco

Adjustco

Two

Tunnelling and infrastructure

Adjustco

THS

Three

Above ground anf finishing

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E and B

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Questions / Answers

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