Mind the gap

Builders’ risks insurance traditionally comes within the marine definition of risks even if most of the ship’s construction process starts and develops on shore, just as with an ordinary building such as a housing project, a bridge, a dam or a factory.

The marine aspect of shipbuilding only becomes fully apparent when the hull is completed (generally already fitted with propulsion and auxiliary machinery), the structure is launched and begins floating and the process of construction then goes ahead with the addition of superstructures (if not already built before launch) and fitting out of all the components in accordance with the design.

The result of the construction process is the ship ready to be delivered to her buyers and the aim of the builders’ risks insurance is to protect the interests of the builders against loss or damage occurring during the period of construction, from the beginning of the building “since the first steel slab has been laid” on the construction platform till the moment the vessel is delivered to her buyers, after completion of all necessary tests and sea trials.

Among the many clauses produced by the Institute of London Underwriters (ILU) to cover ships, the Institute Clauses for builders’ risks have the unique feature of covering the subject interest against “all risks”, whereas all other marine clauses are usually on “named perils” basis.

Latent Defects

Clause 5 (Perils) reads: “...this insurance is against ALL RISKS of loss of or damage to the subject-matter insured caused and discovered during the period of this insurance including the cost of repairing replacing or renewing any defective part…” due to latent defect.

The “all risks” concept is further expanded by Clause 8 (faulty design) which includes “loss of or damage to the subject-matter…arising from faulty design of any part or parts thereof …” but excluding “the cost or expense of repairing, modifying, replacing or renewing such part or parts, nor any cost or expense incurred by reason of betterment or alteration in design.”

In addition to the traditional marine cover, ICBR includes also protection and indemnity risks such as, for example, damages to or raising, removal, destruction of any fixed or movable object, removal of the wreck, loss of life, personal injuries, fines and the like.

Hence, it is submitted that these conditions are the widest among the Institute London Clauses, with the main exclusions being only “war and strike risks” and “earthquake and volcanic eruption”.

Limitations To Cover

There are some limitations to cover as is to be expected - one example is that any loss or damage should have been “caused and discovered” during the period of the insurance. In this regard, problems may arise in respect of damage discovered, or fully assessed, after the expiry of the policy, which usually terminates when the new build is delivered to buyers.

Based on previous cases, an example might be that very minor leakages from piping systems of a large passenger ship were found during final tests. After delivery to buyers, it developed into extensive corrosion damage to piping because of errors made during construction. It was undisputed that the damage was caused during the period of insurance but was unclear if it was also discovered during that period. As the buyers made specific reservations on this particular issue, although it was minimal at time of delivery, builders risks cover was found to apply. Otherwise, the outcome might have been different.

In general, there is a presumption that the buyers have been admitted to the necessary pre-delivery inspections and that a check list of any remarks has been exchanged between builders and buyers.

If any of these remarks could give rise to a “claim” under the builders’ risks insurance, then a notice of claim should be sent to the insurers, possibly prior to delivery to buyers. Otherwise, the builders might remain bound to perform the necessary repairs or replacements at their own cost, under the builder’s guarantee unless a specific extension of cover is agreed with the insurers for the guarantee period. This is possible, sometimes, under payment of an extra premium. Occasionally similar problems could instead arise at the inception of cover. Again, by referring to previous cases, the construction of newbuilding involving extensive prefabrication of blocks, welding of plates and structures (begun before the commencement of the policy) were damaged because of errors in the welding process. The same damage was discovered during the insurance period but was not covered as it was caused before the inception of risk.

Faulty Design

Another important limitation might be found in respect of “faulty design”.

Only consequential losses or damages are covered but not the alteration or betterment of the design itself. This distinction is not straightforward in practice.

In a past case, a propeller line was designed wrongly so that, when tested during sea trials, excessive vibrations to the propeller line and to the ship’s stern were noticed. The cost for correcting the design and for re-building the propeller line to eliminate vibrations were not covered. However, the repairs of the ship’s structures and some components of the line (damaged by the vibrations experienced during sea trials) were covered.

Loss Or Damage Cover

Builders’ risks insurance covers only “loss or damage” but does not cover lack of performance such as the vessel not achieving certain contractual requirements (particularly speed or fuel consumption).

The spirit of the policy behind this is that such kind of problems are usually caused by errors in design. In fact, a faulty design might result in a ship to be heavier than expected, so unable to comply with the agreed contractual speed.

There is no physical damage to the newbuild, but, it is simply unable to satisfy the agreed contractual terms and therefore there is no basis to claim under the builders’ risks policy.

However, in practice, the clear distinction between faulty design and error in construction, or between mere lack of performance and loss or damage, are not always easy to be drawn.