Vessel & Rig Construction Insurance Options – What You Must Know

Builder's All Risk (BAR):

What is it? BAR coverage is first-party coverage which is essentially an all risk property policy, plus liability and protection and indemnity (P & I) extensions to it.

Who is to be included within the Named Assureds? The parties to be included within the Named Assured Clause include Builder, Sub-Contractors, Owners, Lenders if applicable, and other parties with insurers interests if applicable

Who is to have subrogation rights against them waived? All parties with whatever the Named Assureds have agreed in their negotations, in either a written or verbal contract, to waive the rights of subrogation should benefit from waiver of subrogation. Usually, Manufacturers of major equipment are not among the parties who receive the benefit of this waiver of subrogation; instead, they are held accountable for their product and up their warranties provided to the shipyard and are prepared to allow recourse against them for failure or defects in their product / equipment.

What is the period? We recommend that BAR coverage is in place during the entire course of the vessel's / rig's construction; ie, that coverage pending contract signing, remain in place during design and engineering phase, through construction, and cease upon delivery to owner, be it ex-Yard or at final Site following a transit.

What is the Sum Insured? This sum is usually specified in the construction contract between Builder and Owner, and should include the estimated Final Contract Value (FCV) plus the Owner-Furnished Equipment (OFE) [plus it can include the value of the incoming hull in the event of a conversion].

The inclusion of an Escalation Clause allows for coverage up to a certain percentage above the estimated Total Sum Insured, the standard provision being 25% escalation.

In theory, the Builder's All Risk Underwriters reserve their capacity to ensure that they can pay four times (4x) the limit multiplied by the escalation provision. With an escalation provision of 25%, this means that Underwriters would require capacity to pay a claim of 500% of the estimated Sum Insured, or 125% four times, ie, once for physical damage, once for collision liability, once for protection & indemnity, and finally once for sue & labor expenses. We say "in theory" because in practical application, Underwriters would have kindly come to a point of ceasing to pay sue & labor charges and instead pay the full amount of the physical damage / replacement costs.

An example wherein each coverage section is used is this:

During construction, an oily rag falls into the engine room sparking a fire which burns out of control and burns the lines mooring the vessel to the dock. The vessel breaks free from her murals, and then collides with another vessel at an erratic shipyard which causes damages in the hulls of both vessels. Then, the insured vessel keeps on floating away out of control. The shipyard personnel soon hire a near tug in an attempt to slow the vessel and get in close enough sufficient to fight the fire. The fire is not brought under control and the vessel historically sinks in a shipping channel. What is recoverable under a broad Builder's Risk policy?

  • First party physical damage to be recoverable under the All Risk main section
  • Damage to the other vessel at the adj. Shipyard to be recoverable under the Collision Liability section
  • Wreck removal costs to be recoverable under the P & I section
  • Sue & Labor costs incurred by the hire of the tug boat and any fire fighting expenses to be recoverable under the Sue & Labor section

What are the situation / places of coverage? We recommend that the situation is territorial coverage which includes the movement of material and equipment between yards and various contractors' yards. Additionally, we recommend ensuring the appropriate distance that will be required during sea trials is specifically expressed within the coverage. (This is usually 250NM.)

If required, coverage can include items to become part of the vessel / rig under construction while in storage at Suppliers' warehouses – usually those in relatively close proxies to the shipyard or else those specifically declared to Underwriters.

Coverage for Owner-Furnished Equipment (OFE) usually commences under the BAR section from the point whereby a Named Assured Inspectors and accepts delivery of same at the port near the relevant shipyard (either on land or at sea).

What comprise the Interest that is covered? We recommend that all contract works that are to combine the new construction are included within the covered Interest. This includes all Contract Works of the Shipyard plus Sub-Contractors in respect of the construction in all its forms, including design, engineering, procurement, strike steel, keel-laying, fabrication, construction, dry-docking, undocking, installation of equipment, fitting out, supply of all materials pre-commissioning, testing, commissioning, sea trials and all works until delivery of the unit.

What are the parts of coverage usually afforded under BAR coverage?

a. Property All Risk – Subject to specific terms, conditions & exclusions, marine builder's risk insurance (BAR) covers the builder / owner (others with an insurable interest – as specified in the policy) of a vessel / rig under construction against physical loss of, or damage to, the vessel / rig caused and discovered during the period of insurance. We recommend that any restrictions be removed; common ones in standard policies include those for earthquake, volcanic eruption, faulty design, and faulty welds.

b. Collision Liability – Summs paid by the proportional Yard to any other person (s) arising out of the Yard's legal liability to pay sums for the following damages, as consequence of any vessel the Yard is working on coming into collision with any other vessel:

  • Loss or damage to any other vessel or property thereon
  • Delay to, or loss of, use of any other vessel or property thereon
  • General average, salvage of, salvage under contract of, any such other vessel or property thereon.

c. Protection & Indemnity (P & I) –

Sums paid by Yard to any other party arising out of Yard's legal liability to pay sums for the following damages, as a consequence of an accident or occurrence during the policy period:

  • Loss or damage to any fixed, movable, property or any other thing or interest whatsoever
  • Any attempted or actual raising, removal, destruction of any fixed movable object or property or other thing, including the wreck of a vessel, or any neglect to raise, remove or destroy same
  • Liability assumed by the Yard under contracts of customary towage for purpose of entering or leaving the port or maneuvering within a port
  • Loss of life, personal injury, illness, and payments made for life salvage.

d. Sue & Labor – Summs paid for the following expenses, as a consequence of an occurrence during the policy period, incurred in attempts to minimizeize recoverable loss:

  • In case of any loss or misfortune, it is the duty of the Assured and their servants and agents to take such measures as may be reasonable for the purpose of averting or minimizing a loss which would have been recoverable under this insurance.
  • Subject to the provisions of this clause, the Underwriters will contribute to charges properly and reasonably incurred by the Assured their agents or agents for such measures. General average, salvage charges, collision defense or attack costs and costs incurred by the Assured in avoiding, minimizing or contesting liability.
  • Measures taken by the Assured or the Underwriters with the object of saving, protecting or recovering the subject-matter insured shall not be considered as a waiver or acceptance of abandonment or otherwise prejudice the rights of either party.

What else should be considered / looked at with BAR policy?

  • Deductibles – Are they at levels that the Assureds can comfortably absorb? Do they apply per occurrence and / or in the aggregate?
  • Complete, detailed list of security and the ratings of the insurance companies and / or syndicates participating on the risk
  • Wording in detail – including endorsements, exclusions, qualifications, subjectivities, sub-limits, Warranties (Conditions Precedent), adjustment factors applicable to premium, cancellation provisions
  • Confirmation that accurate and proper underwriting information, including loss histories, was presented to Underwriters who are providing coverage for the risks