Natural catastrophes (NatCats) can cause significant damage to infrastructure, property, and people. In Asia, where the risk of NatCats is high, it’s essential for project owners to protect themselves from such risks. One way to do this is by transferring the risk to insurance or reinsurance companies through project insurance. In this article, we’ll discuss how project insurance works and what project owners should consider when choosing a policy.
How does project insurance work?
Project insurance is a type of insurance policy that covers the risks associated with a specific project. The policy covers the project from start to finish, including the design, construction, and operation phases. Project insurance can cover a range of risks, including NatCats, delay in start-up, business interruption, and liability risks. The policy is usually taken out by the project owner, but it can also be taken out by the contractor or the lender (for non-recourse financing projects).
When taking out a project insurance policy, the project owner pays a premium to the insurance or reinsurance company. In return, the insurer provides coverage for the risks specified in the policy. If a loss occurs, the project owner can file a claim with the insurer, who will then compensate the project owner for the loss up to the policy limit.
Contractors’ All Risks (CAR) insurance is a type of insurance that provides coverage for construction projects against damage or loss to the property being constructed, as well as third-party liabilities that may arise during the construction process. It typically covers risks such as fire, theft, natural disasters, and accidental damage, among others.
Delay in Start-Up (DSU) insurance, also known as Advance Loss of Profit (ALOP) insurance, provides coverage for financial losses that may occur as a result of a delay in the completion of a construction project. It typically covers losses such as lost revenue, additional expenses, and increased financing costs. It is very cricital for lenders because insurance could ensure the bankability of the special purpose vehicle.
Third-Party Liability insurance covers the legal liabilities of the insured in the event of bodily injury or property damage caused to a third party during the construction project. This insurance typically covers risks such as accidents, negligence, and product liability.
Terrorism Insurance covers damage or loss caused by acts of terrorism. It typically covers risks such as property damage, business interruption, and liability for third-party claims.
The basic coverage of these insurance policies varies depending on the specific policy and the insurance company offering it. Generally, these insurance policies cover the risks and liabilities mentioned above, subject to certain exclusions and limitations. The coverage typically includes the cost of repairing or replacing damaged property, as well as legal expenses and compensation for third-party claims. To obtain coverage, the insured party pays a premium to the insurance company, which then assumes the risk of loss or liability for the insured party.
Key considerations for project owners / SPV
When choosing a project insurance policy, project owners should consider the following factors:
- Sufficiency of sum insured: The sum insured should be sufficient to cover the potential losses associated with the project. Project owners should work with their insurance broker to determine the appropriate sum insured based on the project’s value, the potential risks, and the insurance market conditions.
- Delay in start-up and business interruption: Project owners should ensure that their policy covers delay in start-up and business interruption risks. These risks can result in significant financial losses, and coverage for them should be included in the policy.
- Deductible level: Project owners should consider the deductible level when choosing a policy. A higher deductible will result in a lower premium, but it will also mean that the project owner will have to pay more out of pocket if a loss occurs.
- Exclusions: Project owners should carefully review the policy’s exclusions to ensure that they understand what is not covered. Some policies may exclude certain types of risks or losses, and project owners should be aware of these exclusions before choosing a policy.
- Additionally, project owners should also consider whether the policy includes a NatCat sub limit, which may limit the amount of coverage available for NatCat events.
- Lenders requirements: Project owners should also consider any requirements that their lenders may have regarding insurance coverage. Lenders may require specific types of coverage or minimum policy limits, and project owners should ensure that their policy meets these requirements.
Conclusion
Project insurance is an effective way for project owners to transfer NatCat risks and other risks associated with their projects to insurance or reinsurance companies. When choosing a policy, project owners should consider factors such as sufficiency of sum insured, coverage for delay in start-up and business interruption risks, deductible level, exclusions, NatCat sub limits, and lenders’ requirements. By carefully choosing a policy that meets their needs, project owners can protect themselves from financial losses and ensure that their projects are completed successfully.
Should you want to understand more about project insurance or obtain quotation for your project budgeting purpose, please feel free to email us: leo.c@projectriskinsights.com
