Construction Insurances Explained – Project Cargo Insurance

D) Project Cargo Insurance

With the transportation of expensive equipment, there are risks such as a weight-shift aboard ship due to rough seas which causes irreparable damage to a water turbine and generator destined for a hydroelectric power plant.

Project cargo insurance covers amongst others oversized and expensive equipment that are essential parts of civil engineering and infrastructure projects. Due to the very nature of these project the equipment purchased for incorporation in to them are often custom designed and can have very long lead times to procure and manufacture, generally these items carry huge price tags and values in excess of RM 150 million for individual items are now common in large power or similar infrastructure projects.

Project cargo insurance covers physical loss or damage to the items while they are in transit from the manufacturing site to the construction site. The water turbine and generator that is damaged aboard ship may represent a RM 100 million physical loss. But RM 100 million may be just the beginning as far as the project owner or EPC Contractor is concerned.

Project cargo insurance also covers consequential loss or delay in start-up and advance loss of profits. This type of coverage addresses the financial losses that are incurred as a result of a covered physical loss, while a water turbine and generator is repaired or replaced, and re-delivered. So turning a RM 100 million loss into a RM 400 million loss due to delay costs, and losses incurred either as penalties or in loss of income due to late start-up of the power generation facility.

Generally the company that is building the power plant must obtain insurance first, before it seeks financing, begins site preparation or orders equipment to be manufactured. This sequence is dictated by the banks

and other financial institutions that are providing the capital for the project, with the intention of protecting their investment. This can translate into a three-year advance, from the time the company gets the order to the time the turbine is delivered to the construction site.

Economic growth and development basically drive the demand for project cargo insurance. Over the last couple of decades, much of the demand for project cargo insurance came from the United States and European, which were busy increasing their infrastructures, in particular new age power generation. However in recent years, demand has been generated largely from Asian Pacific countries, especially China, Malaysia and India, which are building their infrastructures at an ever-increasing rate as their requirements grow. Insurance companies and providers commonly examine projected GDP rates in countries around the world as a means of forecasting potential demand for project cargo insurance and Malaysia along with others in the region are seen a potential growth areas by the industry.

As a result of the demands of lenders in these huge mega infrastructure projects If project cargo and consequential loss insurance is unavailable, it is unlikely that the infrastructure projects will obtain funding and hence ever get built.

Project cargo insurance has been fundamentally designed to cater for the needs of infrastructure development and specifically for project owners, EPC Contractors and the projects financial backers. The companies may include multinational construction entities, a regional power generators, owners of a manufacturing complex and even a Government. The insurance is designed to transfer this relatively large risk from the owners, EPC Contractors and financial backers in order to ensure a project’s success.

Given the financial exposures and complexities associated with insuring project cargo there are relatively few insurers providing this class of insurance and premiums tend to be expensive in relation to other construction insurances.

Project cargo is truly an around-the-world risk with infrastructure projects in Malaysia being sourced globally from many countries on every continent. Project cargo insurance with consequential loss provisions and proper risk management can be a tool to ensure that these projects are accomplished with minimal risk to the financial backers, EPC Contractors and Project Owners when the risks are addressed under the policy. As with all insurance great care must be taken to ensure that the insurance providers are given all the pertinent information and that the cover they offer addresses all the risks inherent in such projects.