Commentary

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Section 6-1: General rules relating to the scope of construction risks insurance

  • Clause 18-81. Scope of application

    Section 6 is drawn up first and foremost with the interests of the owner in mind when he e.g. converts a tanker into an FPSO and enters into various contracts with a yard and/or other contractors and/or suppliers for different parts of the total project. Such projects may be tailor-made for a specific field where the owner has entered into a contract with the field operator for the provision of and/or operation of the FPSO. Very often the charter hire for the FPSO will not commence until the FPSO is ready to start its operations at the field. This means that it is for the FPSO owner, who then normally will be the assured, to ensure that the insurance includes cover in respect of offshore installation, hook-up and commissioning works.

    The rules in Section 6 of Chapter 18 are intended to apply to both newbuildings, conversion work and major upgrade of MOUs. A yard building e.g. an FPSO from scratch as a turnkey project on account of an owner for delivery at the yard’s quayside may choose between covering the insurance on the basis of this Section 6 or Chapter 19. Chapter 19 will probably be the most appropriate alternative for the yard as this Chapter is drawn up for insurance of projects where the yard is taking out the insurance to protect its interests. It is for the parties to evaluate and agree the terms of the insurance contract, including the choice between Chapter 19 and Section 6 of Chapter 18. The parties must see to it that the terms of the individual insurance contract make it clear whether the insurance is effected on the basis of Chapter 19 or Section 6 of Chapter 18.

    Section 6 also applies to offshore installation, hook-up and commissioning works if the project comprises also these stages of the construction work. Thus “the Project”, which is the word used in Cl. 18-81 to describe the scope of application of Section 6, may vary considerably from case to case. It is therefore of utmost importance to specify in the insurance contract exactly the scope of application of the insurance.

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    Clause 18-81. Scope of application

    The rules in Section 6 apply to construction, conversion and major upgrade of MOUs, including, when applicable, offshore installation, hook-up and commissioning works - “the Project”.

  • Clause 18-82. Insurance period/Ref. Clause 1-5

    The Clause corresponds to Cl. 19-2, but as opposed to Cl. 19-2 is focusing also on attachment of the insurance. Sub-clause 1, first sentence, presupposes that the attachment date of the insurance is expressly set out in the insurance contract. If not, the default position of Cl. 1-5, sub-clause 1, will apply so that the insurance attaches immediately when the parties have agreed on the terms. If only the date of attachment is agreed and not the exact hour, Cl. 1-5, sub-clause 2, will apply so that the insurance attaches at 00:00 UTC on that date. 

    Depending on the individual project insured, it may not be anything of substance to insure at the agreed attachment date. That will be the case if the project is to build a new MOU and the insurance attaches before any construction work has begun or any procurement has been made. If the assured has purchased a tanker or other vessel or unit for conversion, he should insure such unit under the construction risks insurance from the moment the risk is transferred from the seller to the assured. He can achieve this by agreeing an appropriate attachment date for the insurance comprising such procurement. For each component, equipment and materials manufactured or procured for the project the insurance will attach from the time the risk is transferred to the assured. This may be at different times depending on the terms of the contracts entered into between the assured and the sellers, suppliers, contractors of each component etc. Often the risk will be transferred only when the contractor or supplier has completed its obligations under the contract, e.g. when the component, part or equipment is completed and delivered to the assured. However, the risk may be transferred at an earlier stage during construction, or the assured may have agreed to carry the risk throughout the construction period. If the assured has entered into several contracts with different contractors or suppliers, each contract must be treated individually in this respect as various components, parts or equipment may attach under the insurance at different times.

    MOUs in operation prior to the commencement of the Project will normally be covered under ordinary insurances for MOUs in operation. If the assured owns and operates the MOU, there may not be any transfer of risk if the assured maintains the ownership and the risk of the MOU also during the construction period. Unless the operation insurance shall cover the MOU during the construction period, the assured must agree with his insurers the date when the operation insurance shall be terminated and the MOU shall be covered under the construction risks insurance. The same applies if the assured owns and operates a vessel which will be converted to an MOU. It is recommended that the assured ensures that the latter insurance attaches when the operating insurance contract is cancelled or expires to avoid any double insurance or gap between the operating insurance and the construction risks insurance. In case of double insurance, whether intended or not, Cl. 2-6 and Cl. 2-7 applies.

    Sub-clause 2 set aside Cl. 1-5, sub-clause 3. The first sentence states that the insurance remains in effect until the date stipulated as the completion of the project. The parties must agree which date shall be set as completion date. Normally this would be the delivery date agreed in the contract between the assured and his contractor, or in the contract between the assured and the field operator, whichever is the latter, ref. Cl. 18-81 above. If the project is delayed, the second sentence entails that the insurance automatically remains in effect until the actual completion date, provided the Project is not delayed more than nine months. The assured must pay an additional premium for the extension period calculated pro rata of the premium agreed for the initial insurance period, unless the parties have agreed in advance the premium for the extension period. If delivery takes place before the stipulated delivery date, the assured may be entitled to a return of premium, cf. Cl. 6-5.

    It is conceivable that the operation insurance intended to apply after completion comes into force before the construction risks insurance terminates when the construction risks insurance is extended. In that event, the rules relating to double insurance shall apply, cf. Cl. 2-6 and Cl. 2-7.

    If the completion is delayed beyond the nine months’ extension period, the parties must negotiate new terms for continuation of the insurance.

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    Clause 18-82. Insurance period/Ref. Clause 1-5

    The insurance period commences at the date stipulated in the insurance contract. The insurance attaches in respect of each component, equipment and materials manufactured or procured for the MOU from the time the risk is transferred to the assured. The insurance remains in effect until the date...

  • Clause 18-83. Place of insurance – Project Locations

    Sub-clause 1 provides that the insurance is in effect anywhere in the world, subject to the requirements under sub-clause 2, see further below. Thus the assured is free to place orders with suppliers and constructors wherever they may be located. At what time the insurance will attach for the various components, parts or equipment must be decided according to Cl. 18-82, see the Commentary to this Clause. 

    Sub-clause 1 implies that once the component, part or equipment is attached to the construction risks insurance, subsequent transport for incorporation into the project at another port or place where assembly takes place is comprised by the insurance as long as this takes place within the insurance period, cf. Cl. 18-82, sub-clause 2. 

    Sub-clause 2 requires that all locations of yards, workshops and/or work sites for construction and assembling of main components shall be agreed with the insurer. This may probably most conveniently be done in connection with the review of the project and initial risk assessment required pursuant to Cl. 18-1, letter (e), no. 3. What is a main component must at the same time be agreed in order to avoid any subsequent dispute on whether such agreement should have been reached. Any change of location shall be notified to and agreed by the insurer. Failure to notify must be treated as an alteration of the risk, cf. Section 2 of Chapter 3.

    Sub-clause 3 provides that sea trials are covered within the area allowed by the MOU’s certificate. Such certificate will be issued by the flag state. Temporary certificates may be issued prior to completion, which will suffice for this purpose. If sea trials should be carried out outside the area of operation according to Cl. 18-1, letter (h), Cl. 3-15 will apply unless otherwise agreed. 

    Sub-clause 4 requires that when it is agreed that the insurance also covers offshore installations, hook-up and commissioning, the offshore location shall be set out in the insurance contract. If for one reason or another the offshore location is not set out in the insurance contract, it may imply that the insurance does not comprise any work offshore. But it may also imply that such location is not important to the insurer. The latter seems to be the reasonable conclusion if the insurer has agreed that the insurance should comprise offshore installations, hook-up and commissioning, but not secured agreement on the offshore location. Any change of the offshore location must be treated as an alteration of the risk, cf. Section 2 of Chapter 3.

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    Clause 18-83. Place of insurance – project locations

    The insurance is in effect anywhere in the world.  All locations of yards, workshops and/or work sites for construction and assembling of main components shall be agreed with the insurer. Any change of such location shall be notified to and agreed by the insurer. Sea trials are covered within the...

  • Clause 18-84. Escalation

    This Clause is verbatim the same as Cl. 19-7. Reference is made to the Commentary to Cl. 19-7. 

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    Clause 18-84. Escalation

    If the value of the Project exceeds the sum insured, the assured shall notify the insurer of this as soon as possible. The assured shall pay a premium for the value increase and the insurer shall accept the value increase. Under no circumstances shall the sum insured exceed 110 % of the original...

  • Clause 18-85. Deductible

    This Clause is verbatim the same as Cl. 19-8 apart from correcting the cross references as appropriate. Reference is made to the Commentary to Cl. 19-8. 

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    Clause 18-85. Deductible

    For each casualty, the deductible stated in the insurance contract shall apply. If the same casualty entitles the assured to compensation according to Sections 6-2 and/or 6-3, only one deductible shall apply.  Total loss, cf. Cl. 18-89 and Cl. 18-90, costs in connection with the settlement of...

  • Clause 18-86. Premium in the event of total loss

    The combined effect of Cl. 6-3, cf. Cl. 1-5, sub-clause 4, is that for insurance contracts attaching for more than one year, the insurer would be entitled to only one year premium in case he pays the sum insured as a result of total loss, constructive total loss or payment pursuant to Cl. 4-21. This solution is workable for MOUs in operation. For MOUs under construction, conversion and/or major upgrade, Cl. 18-83 set Cl. 6-3 aside and provides that the insurer is entitled to the entire agreed premium if the insurer compensates for total loss pursuant to Cl. 18-88, sub-clause 1. If so, the project is completed and pursuant to Cl. 18-89 the assured is entitled to payment of the whole sum insured limited to the insurable value calculated according to Cl. 18-88, sub-clause 1, if the latter is the lesser amount. Cl. 1-5, sub-clause 4, is not applicable as neither Cl. 18-88 nor Cl. 18-89 is listed therein. Therefore, the entire agreed premium is the whole premium for the total period of the project even if this period is longer than one year. 

    Sub-clause 2 provides that the insurer is only entitled to a proportion of the entire agreed premium if the insurer compensates for total loss pursuant to Cl. 18-88, sub-clause 2. If so, the project is not completed and pursuant to Cl. 18-89 the assured is only entitled to compensation for the insurable value calculated according to Cl. 18-88, sub-clause 2. In short, this is the value of the project as far as it has been completed at the time when it is deemed a total loss, see further the Commentary to Cl. 18-88 and Cl. 18-89. This compensation will be lower than the sum insured, which normally will be agreed to the same amount as the total costs of the completed project. The proportion of the entire agreed premium payable under sub-clause 2 is the proportion corresponding to the ratio between the compensation paid and the sum insured. If the project is deemed a total loss after it is 50% completed and the compensation paid is e.g. 50% of the sum insured, then the insurer is entitled to 50% of the entire agreed premium. 

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    Clause 18-86. Premium in the event of total loss

    If the insurer compensates for total loss pursuant to Cl. 18-89, cf. Cl. 18-88, sub-clause 1, or pays the sum insured pursuant to Cl. 4-21, he is entitled to the entire agreed premium. If the insurer compensates for total loss pursuant to Cl. 18-89, cf. Cl. 18-88, sub-clause 2, he is only entitle...