Insuring Infrastructure: Limited options for tailor-made coverage

Limited options for tailor-made coverage

Insurance coverage for infrastructure projects is limited. The infrastructure insurance segment accounts for only 7 per cent of the total general insurance pie, a paltry proportion compared to the value and size of projects involved. There are only a few specialised covers available to suit the special insurance needs of infrastructure projects. Further, most of the available products are standardised covers of the “one-size-fits-all” mould.

The insurance products available in the market come under two categories – products covering specific risks and comprehensive packages covering several risks under the same policy. The advantage of comprehensive packages is that these insure a bundle of construction and project risks under a single package rather than having to purchase policies for each component separately. However, given the high value of the projects involved, many covers are available only for projects with a sum insured over Rs 1 billion.

Infrastructure projects require customised insurance covers. Insurers generally consider infrastructure projects under the engineering projects segment. The products available cover four to five years of the early project life cycle of an infrastructure project. The composition of products for infrastructure project insurance and the components therein are largely similar in nature in both the public and private sectors.

The availability of comprehensive insurance options goes a long way in providing comfort to project developers as well as project financiers. Further, administrative costs pertaining to insurance are lower and comprise only a marginal portion of the overall costs involved.

Broadly, the following types of insurance products are currently available in the market…

Machinery Breakdown Insurance

This policy covers losses due to accidental, electrical and mechanical breakdowns of any type of machinery, plant and equipment arising due to both internal and external factors. It reimburses the insured for the cost of repairs and the replacement of machinery.

All types of machinery such as water and electrical pumps, turbines, transformers, electrical motors, telecom equipment, etc. can be covered under this policy. The policy, however, does not cover loss or damage arising from fire and allied perils. The premium rate depends on the type of machinery to be insured. Discounts are offered on the basis of standby facility, availability of spares and past claims experience.

Contractors Plant and Machinery Policy

This policy is yet another way of providing cover to plant and machinery owned by a contractor. The policy covers a wide range of construction equipment, including bulldozers, cranes, excavators, compressors, etc., usually used for the construction of roads and bridges.

The policy pays the full cost of replacement of parts along with repair charges, and the cost of dismantling and re-erection. The premium charged depends on the type of equipment and the location of operation. Loss or damage due to electrical or mechanical breakdown or due to boiler explosion is not included under this policy.

Electronic Equipment Insurance Policy

This policy covers material loss or damage to all electronic equipment and data mediums as well as the increased cost of work arising out of the unforeseen physical loss of or damage to electronic equipment. The policy provides cover against any damage other than specified perils and forms of damage. The premium rate is 1 per cent for equipment valued at more than Rs 0.1 million. This policy is particularly common among telecom operators to provide cover to telecom equipment.

Boiler and Pressure Plants Policy

This policy provides cover against damage caused due to explosion of boilers and pressure vessels, not covered under fire insurance. The premium charged depends on the type of boiler, the type of fuel and the age of the equipment. Discounts could be allowed for seasonal factories and standby facilities.

Storage-cum-Erection Policy

This policy provides cover against all physical risks a project is exposed to right from the warehouse of the equipment supplier to its erection, testing and commissioning at the site. In case the supplier has arranged transit insurance up to the site, such a policy can be limited to cover risks at the project site only. For projects exceeding Rs 15 billion, specially designed policies are available.

Fire Insurance

This policy is called the Standard Fire and Special Perils Policy. It provides cover against losses arising due to fire, lightning, explosions, aircraft damage, overflowing of water tanks and pipes or damage to property due to strikes, floods, storms and earthquakes. Premium rates are generally dependent on the physical occupancy of the structure to be insured. Discounts are given based on the past claims experience of the company in question and the installation of fire extinguishing appliances.

Extensions offered under the policy include earthquake, spontaneous combustion, deterioration of stocks in cold storage, impact of damage due to own vehicles, etc. This policy is common amongst industries involved in setting up power generation plants and oil and petrochemical plants, airport authorities and telecom operators.

Marine or Transit Insurance

This policy covers risks involved during the transportation of goods by sea, inland waterways, and road and rail both within India and abroad. The cover is provided for marine voyage, offloading and storage, and inland transit to the site of erection and unloading.

Marine cover is provided under separate sub-policies such as Marine Import Transit, Marine Export Transit, Marine Inland Transit and Marine Hull. Marine insurance policies are issued on an “agreed value” basis.

The premium rate for this policy depends on key factors such as the nature of cargo, scope of cover, packing, mode of conveyance, distance, and past claims experience.

Consequential Loss Policy

Apart from providing cover for material damage to the property insured, insurance companies also provide protection against loss in profits suffered by the insured while the damaged property is being repaired or replaced. For instance, the standard fire and machine breakdown policies provide cover only for material damage to the insured property. However, they do not provide protection against the loss in profits suffered while the damaged property is being repaired or replaced. The Consequential Loss Policy, however, provides cover against loss of profit arising from the interruption of business consequent upon damage to the property insured.

Besides, many infrastructure projects are subject to delays due to unforeseen events during storage, commissioning, transit, erection, etc. Such factors often result in delays in project commencement and in consequent loss of profits, thereby affecting repayment schedules.

For instance, in the erection of a thermal power plant, the turbines may be manufactured and assembled abroad and shipped to India. There may be a delay in the shipment, causing severe financial loss to the contractor and the principal as a result. Even after the project starts, there may be an event that

causes material damage to some part of the project. As a result, the insured may have to incur significant costs in redoing and redesigning work on the project. The delay, however, should have occurred due to the claim payable under the Marine-cum-Erection Policy, Storage-cum-Erection Policy, Contractors All Risks (CAR) Policy or Erection All Risks (EAR) Policy.

All such risks can be covered under the Consequential Loss Policy, which is also termed as the Business Interruption Policy or Loss of Profit Policy. The policy pays for actual loss of gross profit and negative impacts of debt service charges, the increased cost of work and special expenses such as penalties. The indemnity period is the maximum period required to resume normal business operations after damage to insured property by an insured peril. This period could vary from six months to three years.

Contractors All Risks Insurance Policy

CAR insurance offers comprehensive coverage for all types of civil engineering projects such as construction of flyovers, roads, dams, etc. This policy covers physical loss or damage to property, as well as third-party liability related to work conducted on the contract site. The premium for such a policy depends on factors such as type, value and duration of the project. The CAR Insurance Policy provides an “all-risk” cover, thereby covering all perils unless specifically excluded. However, the policy does not cover damage due to faulty design, defects in materials used or poor workmanship.

Many construction majors such as Hindustan Construction Company Limited, Gammon India Limited, Punj Lloyd Limited and Ideal Road Builders have opted for such a policy.

Erection All Risks Insurance Policy

EAR insurance offers comprehensive coverage for plant and machinery construction risks. It covers physical loss or damage to such property, as well as third-party liability related to work conducted on the contract site. Like CAR, this policy too covers all perils unless specifically excluded. The premium for such a policy depends on factors such as type, value and duration of the project and the period of testing. The policy is often used for infrastructure projects involving a higher concentration of electromechanical works or large-sized projects such as the erection of thermal power stations, fertiliser plants, oil refineries, etc.

Industrial All Risks Policy

This is a comprehensive package policy which provides cover against fire and special perils, machinery breakdown, boiler explosion,

electronic equipment, consequential loss and natural calamities such as earthquakes. The premium rates work out to at least four times lower under this policy compared to taking each policy separately. Usually the minimum sum insured for such a policy is Rs 1 billion. This policy has been particularly popular for power projects.

Conclusion

The competitive general insurance sector with a plethora of private players has led to the introduction of and improvements in product offerings. Competition has ensured lower rates of premium for different products and the quality of services has also improved. However, for the infrastructure sector, more products tailor-made to cover the risks involved in the development of projects are an urgent requirement, particularly with the large-scale investment planned in the coming years. On the contractor side, more awareness is required about the available products as well efficient risk management by choosing the most appropriate cover.