Insurance coverage for infrastructure projects is limited. 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, namely, 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 the need for purchasing policies for each component separately. However, given the large 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. Generally, insurers consider infrastructure projects under the engineering projects segment and the available products cover four to five years of the early project life cycle of a project. The composition of products for infrastructure project insurance and for components therein are largely similar in nature in both the public and private sectors.
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. This is an ideal cover for all kinds of plant and machinery and reimburses the insured party for the cost of repairs or replacement of damaged parts as a result of unforeseen and sudden physical damages. It also provides protection to the insured machinery whilst at work or at rest and also when it is being dismantled for the purpose of cleaning, inspection and overhauling, removal to another position, in the course of operations or subsequent re-erection, provided these are performed on the same premises. All types of machinery such as water and electrical pumps, turbines, transformers, electrical motors and telecom equipment can be covered under this policy. 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 and compressors, which is usually used for the construction of roads and bridges. The policy pays the full cost of replacement of parts along with repair charges, and 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, boiler explosion or pre-existing faults and damages 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 increased cost of working arising out of unforeseen physical loss or damage to electronic equipment. The policy provides cover against any damage other than specified perils and forms of damage. The policy also considers coverage to related systems software on computers/electronic data processing systems. This policy is particularly common amongst telecom operators to provide cover to telecom equipment. The premium amount depends on the market value, nature and use of the insured equipment. The maintenance agreement for the equipment is also considered while calculating the premium.
Boiler and Pressure Plant Policy
This policy provides covers 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, type of fuel and the age of 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 the site for erection, testing and commissioning. 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. The policy is designed to protect the interests of the principal contractor against damage or destruction of infrastructure projects where the value of the plant and machinery comprises more than 50 per cent of the total project cost. The protection extends to accidental damage to project works, contractors’ plant and machinery employed and also to damages and defects during the subsequent maintenance period. 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 and damage to property due to strikes, floods, storms and earthquakes. Besides, any damage caused due to natural heating, own fermentation or unconstrained burning is not included. Premium rates are generally dependent on the physical occupancy of the structure to be insured. Discounts are given based on past claims experience of the company in question and the installation of fire extinguishing appliances. The policy also provides cover against losses on account of earthquakes, spontaneous combustion, deterioration of stocks in cold storage and impact of damage due to own vehicles. This policy is common in industries involved in setting up power generation plants and oil and petrochemicals plants, airport authorities and telecom operators.
Marine or Transit Insurance
This policy covers the risk involved during the transportation of goods by sea, inland waterways, road and rail both within India and abroad. The cover is provided for marine voyages, offloading and storage at ports and inland transit to the site of unloading and erection. Marine cover is provided under separate subpolicies including Marine Cargo Insurance, Liability Insurance, Freight Insurance, Marine Import Transit, Marine Export Transit, Marine Inland Transit and Marine Hull. Marine cargo insurance covers third-party liabilities arising from any loss or damage caused to the ship, port or other transport mode by the insured cargo. 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 material damage to the property insured. 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 thus provides cover against loss of profit arising from interruption of business consequent upon damage to the insured property. The policy also covers financial turnover losses due to fire at the company premises which is not covered by other standard insurance policies and additional expenditure incurred to maintain normal business activity during the period in which the business is affected is also covered. This policy covers risks that may arise due to the inability to use the business premises for product or service delivery resulting in a loss in profits. Also, some insurance companies provide rider options that cover power failures or inability to use public utilities after a fire in the insured property which may result in the halt of business operations. 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 a consequent loss of profits, thereby affecting repayment schedules. The policy pays for actual loss of gross profit, increased cost of working and special expenses such as penalties.
Contractors All Risks [CAR] Insurance Policy
CAR insurance offers comprehensive coverage for all types of civil engineering projects such as construction of flyovers, roads and dams. This policy covers physical loss or damage to property, as well as third-party liability related to work conducted at the contract site. Most of the plans under this insurance policy cover civil engineering projects where the civil work is more than 50 per cent of the total value of the contract. The premium for such a policy depends on factors such as the 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 material used or poor workmanship.
Erection All Risks [EAR] 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 at the contract site. Like CAR, this policy too covers all perils unless specifically excluded. EAR cover begins from the time of unloading of the first consignment at the project site and terminates upon completion of testing or handover of the project to the owner. 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 with a higher concentration of electromechanical works or large-sized projects such as erection of thermal power stations, fertiliser plants and oil refineries.
Industrial All Risks Policy
This is a comprehensive package policy that 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 as compared to taking each policy separately. Damage to property caused by faulty or defective design materials or workmanship, inherent vice, wear and tear, collapse or cracking of the building, wilful act or gross negligence, damage direct or indirect by nuclear weapons/material and contamination by radioactivity are not covered under this policy. The premium rates work out to be at least four times lower under this policy as compared to taking each policy separately and usually the minimum sum insured for such a policy is Rs 1 billion. This policy has been particularly popular for power projects.
Conclusion
Insurance companies today are coming up with new ideas to stand out and are offering existing and prospective customers new technology platforms that would streamline the business and would also be beneficial to them. However, for the infrastructure sector, more products tailor-made to cover the risks involved in project development 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.