Offshore Floating Production
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CHAPTER 9
Insurance
A Introduction
9.1 There are a large number of insurance policies that are relevant for any one field development. Section B of this chapter endeavours to provide an introduction to each insurance policy before Section C addresses in more detail the insurance policies that can be used to insure the physical property of the FPSO and its liabilities during its operational phase.B Introduction to the different types of policy relevant for any one field
(i) Operators' extra expense/energy exploration and development/control of well insurance
9.2 Oil companies will typically purchase a policy to protect themselves against the risk of a control of well incident (i.e. pollution escaping from the well). As stated in ,1 it is common for an oil company to take the risk of pollution emanating from the well. Some of this risk is commonly passed on to insurers through an insurance policy. 9.3 There are a number of different standard policy wordings available (including LSW 614) that may be used as the starting point for the negotiation of the terms of the insurance policy. The policies are typically structured in three sections:- • Section A covers the costs of regaining control of a well;
- • Section B covers the costs of re-drilling the well; and
- • Section C covers liability for pollution and clean-up costs.
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(ii) Construction all risks insurance
9.7 During the design and construction phase of the project the FPSO will typically be insured under a construction all risks policy.2 The most commonly used policy wording is the WELCAR form, albeit it is often subject to considerable amendments, which vary from project to project. The WELCAR form is widely used for newbuild FPSO projects and also projects for converting tankers into FPSOs.3 Subject to the applicable terms, conditions and exclusions, the insurance provided under the WELCAR form covers the following activities undertaken during the course of the construction project: procurement, construction, fabrication, load out, loading/unloading, transportation by land, sea or air, storage, towage, mating, installation, burying, hook-up, connection and/or tie-in operations, testing and commissioning, initial operations and maintenance, project studies, engineering, design, project management, testing, trials, pipelaying, trenching and commissioning. 9.8 The WELCAR policy covers works executed anywhere in the world in performance of all contracts relating to the FPSO project, including materials, components, parts, machinery, fixtures, equipment and any other property destined to become a part of a project or to be used or assumed in the completion of a project. This broad approach is helpful for FPSO projects as it is common for large items of the facility (such as topside modules) to be fabricated in locations other than at the yard where the FPSO’s hull is being fabricated. 9.9 The WELCAR wording consists of two sections: the first covering the risks of physical loss or damage to the FPSO under construction and the second covering the liabilities that may arise from the construction project. 9.10 Section 1 of the WELCAR policy relates to physical damage and insures against all risks or physical loss and all physical damage to the property covered, provided such loss or damage arises from an ‘occurrence’ within the policy period. In order to recover under the policy, the insured has the burden of proving physical loss or damage to the property insured arising from an occurrence. The inclusion of the requirement for an occurrence requires the insured to prove that a fortuity has caused the physicalPage 148
(iii) Delay in start-up insurance
9.12 Delay in the commencement in production due to incidents occurring during the construction may be insured under a delay in start-up policy. Such policies are not commonly purchased, however, as most insureds perceive the premium sought by insurers to be disproportionately high for the cover provided. Not only is the premium considered to be high, but the cover only responds when there is delay in start-up caused by a fortuitous occurrence (such as a fire). Accordingly, the insurance only responds in limited circumstances. For instance, the cover does not respond if the FP Contractor is late for reasons such as delay in finalising the design, procuring equipment, completing the build or in commissioning (i.e. in practice, the most frequent causes of delay in start-up of production). 9.13 The driver for purchasing delay in start-up insurance can sometimes be the banks financing the project, which may be very keen to limit their own exposure as far as possible and may be less concerned about the cost of the insurance which is borne by the borrower. 9.14 Typically, this type of policy provides for a deductible expressed as a number of days by which the project needs to be delayed beyond the start-up date before the cover responds. As with all insurances, there is also a limit. It is common to have an agreed value for each day of delay. Care needs to be taken because both parties will be fixed with this amount, even if the insured’s losses are later found to be greater or less than the agreed daily amount.(iv) Business interruption/loss of production income
9.15 During the operational phase of the field life, many oil companies will insure against business interruption and loss of production income when such is caused by an occurrence that gives rise to physical loss or damage that is insured under the Company’s property insurance policy. 9.16Page 149
(v) Contingent business interruption
9.17 Some companies also purchase contingent business interruption insurance which reimburses lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier. 9.18 Again, this cover is typically purchased as an extension to the oil companies’ standard property insurance. Coverage is usually triggered by physical damage to customers’ or suppliers’ property or to property on which the insured company depends.(vi) Hull and machinery insurance
9.19 In the case of the FP Contractor owning and operating its own vessels when performing offshore work, one of the risks that it is exposed to and agrees to indemnify the Company against is the risk of physical loss or damage to its vessels. 9.20 Hull and machinery insurance provides insurance cover for the risk of physical loss or damage to the vessel itself, as well as the equipment on board the vessel, including the propulsion and auxiliary machinery, cranes, cargo handling and navigation equipment. Hull and machinery insurance also provides cover for the FPSO’s contribution to general average and salvage and part of the liability for damage to another ship in a collision. 9.21 Hull and machinery insurance is typically underwritten on a ‘named perils’ policy and therefore responds if the loss is proximately caused by certain named risks, such as perils of the seas.(vii) War risks insurance
9.22 The hull and machinery insurance policies generally exclude liabilities arising from war risks. In addition, liabilities, costs and expenses arising from terrorism are also usually excluded from normal cover, irrespective of the nature of the terrorist act. There is a separate market and insurance policies that provide specialised cover for the various types of risk associated with war and warlike acts.(viii) Strike insurance
9.23 The hull and machinery insurance policies generally exclude liabilities arising from strikes. Strikes by stevedore labour, ship’s officers and crew or others that can disrupt the normal working of the ship can have financial consequences. Insurance is available to alleviate the losses that may arise from strikes.
(ix)
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Loss of hire insurance
9.24 Loss of hire insurance protects the ship owner (the FP Contractor) from a daily loss of income arising from physical damage to the vessel. Typically, the insurance cover only responds when the FPSO has sustained damage which is covered under the relevant hull and machinery policy. Loss of hire cover is based on the number of days that the vessel is off-hire due to a claim recoverable under hull and machinery insurance. There is typically a deductible of an agreed number of days where the ship owner bears the risk. Thereafter, the ship owner is covered subject to a set upper limit per claim, specifying the number of days that the insured is paid under the insurance. There is normally also an overall aggregate limit on the insurers’ liability per policy year.
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(x) Protection and indemnity insurance, including specialist operations cover
9.25 Vessel owners are exposed to liabilities arising in respect of the vessel. Protection and indemnity (P&I) insurance provides insurance cover for the liabilities towards third parties while operating ships. The P&I insurance covers maritime liabilities incurred by the insured in direct connection with the operation of the insured vessel. The cover protects the insured against loss and liability to third parties. The main heads of cover for P&I insurance include: death/personal injury, pollution, wreck removal, collision/contact damage, cargo damage and fines. 9.26 As a matter of principle, normal P&I cover responds to liabilities imposed upon the member at law (for instance under the tort of negligence). Liabilities assumed by the member under the contract are not normally insured by P&I insurance. An exception to this is where the member has contracted on acceptable knock-for-knock provisions. 9.27 This type of insurance is most commonly provided by mutuals, known as protection and indemnity (P&I) clubs. P&I insurance is also available on a fixed premium basis from P&I clubs and from the commercial insurance market. The principle of ship owners sharing costs is based on sharing claims with fellow members in their own P&I club. The 13 mutual clubs in the International Group of P&I Clubs share claims in excess of US$9 million through the ‘pool’. The pool is covered by excess reinsurance layers totalling US$3 billion. In addition to the reinsurance, the entire membership of the 13 clubs pools its liabilities up to in excess of US$7 billion. Because P&I cover is mutual, if the losses recorded exceed the amounts budgeted for, the P&I club can issue a supplementary call to its members, i.e. a demand for additional premium. This is to be contrasted with fixed premium P&I cover, which is often purchased from third-party commercial insurers. 9.28 Whilst the amount of liability cover available through P&I clubs is considerable, the high limits of cover are very rarely called upon, given the commonly available right to limit liability under the Convention on Limitation of Liability for Maritime Claims 1976. 9.29 Certain specialist operations are typically excluded from the scope of the P&I cover. For instance, Gard, the largest member of the International Group of P&I Club, has the following cover limitation:5