Practically, however, projects rarely follow this simplistic model for several reasons:
The project owner commences partial operation prior to construction being fully complete
This is a common occurrence across major building projects, power and process plant construction, usually driven by delays in parts of the project and the commercial need to start generating revenues. From a technical risk perspective, this results in SimOps (Simultaneous Operations), which is a particularly higher risk period for a project. For example.
- Ongoing construction processes (e.g., hot works) increase the risk of an incident occurring while there is still significant exposure. This could lead to situations where neither the Operational nor Construction Insurer's requirements are met
- The introduction of feedstock or fuel raises the risk of fire or explosion to assets, even though the project is still covered under a construction policy for parts that are not yet operational
- Damage to operational assets may result from work being conducted on adjacent assets under construction, particularly when shared utilities and services are involved
- Punch list items for the asset might not be correctly categorised due to a misunderstanding of the risk or a failure to account for the ongoing risk changes when part of the asset is already in operation
Delays in issuance of the final acceptance certificate (FAC) due to contractual dispute
Where a contractual dispute arises between the project owner and the Engineering, Procurement, and Construction (EPC) contractor, the final acceptance and handover certificate may not be signed. This document is typically essential for operational insurers to accept the risk associated with the asset. If the asset begins commercial operations without this certificate, it can lead to complexities, particularly if construction insurance needs to be extended while the asset is operational but not officially accepted by the project owner. This scenario can create challenges in maintaining appropriate insurance coverage and managing risk effectively during the transition from construction to operations.
An asset or machinery installed can't be initially run at design rates
When a new asset meets technical challenges on commissioning or is designed for higher rates, so begins commercial operation at lower than design basis, unique challenges for maintaining cover exist. The contractual terms between the owner and the EPC contractor, along with the operational insurer's requirements for risk acceptance, play a crucial role in this scenario. If performance cannot be satisfactorily demonstrated, it can lead to difficulties in securing transfer to operational insurance coverage.
The terms of acceptance should be understood and agreed pre-construction placement, while open communication through the project and commissioning phase between project stakeholders and insurers is vital to ensure the coverage aligns with the project's operational realities and issues can be dealt with prior to expiry of cover.
The works have been completed, but the project has not commenced operation
This is a growing risk especially in the Middle East construction market, as more and more projects get awarded based on growing demand for goods and services, changes in the market, the geopolitical situation or impact from external events (e.g. trade wars) may result in projects being completed and then not entering commercial operation due to lack of feedstock, lack of customers or change in commercial viability. In addition to ensuring appropriate insurances are in place for the asset, this also presents additional risks to project owners who need to consider the impact of these types of changes to the enterprise risk of the organisation.
Engineering the transition
While the Project Owner, Principal and EPC are focused on navigating the many technical and contractual challenges of moving the new asset into one that is revenue generating, many insurance challenges can be put into two main areas:
- A lack of clear understanding by the project owners of operational underwriter requirements
- Underwriters do not have a clear understanding of issues due to unclear or challenging lines of communication
Insurance Brokers like Gallagher, with extensive technical expertise, should support clients in navigating these challenges, becoming a bridge between Project Owners and their Insurers.
The Risk Advisory team at Gallagher recommend several steps that are followed through the project lifecycle to ensure a seamless transition between Construction and Operational Insurances:
Pre-placement
- Review project contractual agreements to ensure alignment with operational insurance requirements prior to placement of the construction policy.
- Engineering review of start-up and commissioning risk prior to placement of construction policy (e.g. early engagement from Project owners with Gallagher Risk Engineering).
- Broker to issue construction underwriting report (CUR) for complex and high-value risks:
- Ensure alignment in the understanding of risk between UW and the Insured
- Ensure the hot-commissioning period of the policy is suitably aligned with the policy
- Identify any key controls to be implemented & key areas of monitoring for the construction phases
During the construction period
- Regular risk surveys of projects by competent engineers to help reduce the risk of loss and ensure more complex handover processes and SimOps are managed from a technical risk perspective and communicated clearly with insurers
- Surveys should monitor project progress to ensure both the project owner and insurers are aware of any extensions or changes in Total Insured Value (TIV) as early as possible.
- If Delay in Start Up is purchased, then assessment should also include monitoring to ensure transparency of delay causes in the event of a claim
Pre-attachment to operational policy
- Engage with a specific technical review by a competent Risk Engineer on the attachment to operational policy, reviewing key technical areas around readiness for operation and identifying any specific items that need to be addressed prior to attachment.
- Ensure that operational insurer clauses (e.g. LMA5197a) are only applied where the project or industry is applicable.
- Understand the basis of values used to place operational insurance and recognise that project value is not equivalent to a replacement cost value (especially on larger, longer-term projects)
- Review punch list items to ensure that there is accuracy in the classification of key punch items
Regrettably, there have been a growing number of cases where transitioning projects to Operational cover has proven challenging, leading to significant frustration, stress, confusion and cost for everyone involved. It is crucial to address the discrepancies between the Construction and Operational Insurance wordings and align Insureds' expectations with Operational Insurers' requirements.
Achieving this, demands increased effort and transparency from all parties. However, with a Broker with strong technical engineering expertise, supporting the program during the project phase, this goal becomes more attainable.
Additional considerations
While ensuring suitable and effective risk transfer is crucial for project owners during this period, it is not the only risk consideration for a new project startup. Thus, comprehensive risk management, covering both insurable and uninsurable risks, is essential and often overlooked in the nascent stages of a project's operational life.
Some of these additional risk considerations include:
| Enterprise risk management |
- For new project owners, have enterprise-level risks been identified and considered, and is there a structured approach to this in place
- For existing companies adding new assets to their portfolio, have the changes in Enterprise risk (i.e. supply chains, financial, people, operational) been considered at the Enterprise level?
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| Business resilience planning |
- Has the project team considered, prior to operation, how they will ensure continuity of the business in the event of interruption?
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| Cyber risk |
- The evolving IT and OT infrastructure during construction and operational phases poses a cyber risk. Have cybersecurity controls been tested, scenarios planned, crisis responses organised, and penetration testing scheduled?
- Ensure policies and procedures are established before operations begin
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| Emergency response planning |
- The formation of new security and emergency response teams can leave critical gaps in incident preparedness during a project's early stages.
- Early life incidents are more likely, as indicated by the bathtub curve, and therefore require strategic planning for both operational and security responses to ensure project resilience before a project moves into its operational phase.
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