Risk Management in Civil Engeneering

Risk Management in Civil Engineering LNEC
19.11.2008
Risks and Insurance policies
Jos Luis Montull
Risk and Insurance

Risk: it is not only the contingency or proximity of a damage
(hazard), but also each and every contingency that can be subject of
an insurance contract (Risk )
quantifiable ?
the mathematical product of the probability of a damage
taking place, multiplied by the consequences of such
damage:
R=PxC
where: P = Probability of an event
C = Consequences of that event
Risk Management in Civil Engineering LNEC -
Risk and Insurance
The Insurance is nothing else than a financial transaction by which a

party, the policyholder (Insured), through a remuneration (the
premium), promises to himself or to a third party a payment or a
reparation in case of risk producing damages. The other party (the
Insurer) who makes this payment, takes a set of risks, and is able to
compensate them according to the statistical laws.
Risks-Matrix
The Risks-Matrix: Major Risks. (Example)
Risk
Absenteeism
and productivity
decrease
No No
Probability
Intensity
Risk Control Clasification Insurable
Almost sure
Moderate
Not adequate
Extreme
Severe
Not adequate
Extreme
investment's shortage
in I+D, TI, RRHH
Possible
No No
Political inestability
High
No
Rare
No
Catastrophic
Theft of goods
or money
Yes No
Almost sure
Moderate
Manpower costs
explosion
No
No
Probable
Moderate
Specific sectorial
risks: manipulation of
materials,
stress,.. policies
Almost sure
Risks
and Insurance
Insurance
Policy
Not adequate
Not adequate
Not adequate
Extreme
Extreme
Moderate
Adequate
Extreme
Risk Management
in Civil Engineering
LNEC -
Yes
Yes
Risks-Matrix
Risks Matrix: Major risks.
INTENSITY
negligible
Light
Probable
Possible
Unlikely
Rare
PROBABILITY
Almost sure
L Low Risk
Controlled by
skilled
workers and
surveyors.
Moderate
M Moderate Risk
Managed by
middle staff.
Severe
H High Risk
General
Managers
attention is
required
Catastrophic
E Extreme Risk
The Board must be
informed, and a
permanent follow up
is required.
INTENSITY
Risks hierarchy
EXTREME RISK
HIGH RISK
MODERATE RISK
LOW RISK
FREQUENCY
how do we face the Risk?
Retention: establishing enough reserves to

overcome the possible losses
tio
op
Risk
op
ti o
n
Transfer: negotiating a specific insurance in

order to give external coverage to the possible
occurrence of a loss.
Retention or Risk Transfer
Retention?
Risks with high probability and low consequences.
(Risks have
to be taken or "self-insured" if they don't affect the financial stability of

the company).
Risk Transfer?
Risk with low probability and severe consequences
(it is
necessary to establish the limits of significancy of a risk for the

company, individually and combined).
The Cost of the Risk
Expected
Loss Ratio
Costs of the
Risk Control
Costs of the
Financing of Risk
Costs of
Risk Reduction
Unexpected Costs
% on Incomes
What happens actually?

Feb 2005
A high number of companies

never overcome a major loss,
because
of
not
beeing
forewarned
The important thing is not to

find out who will pay (usually an
insurance company), but to
ensure that your business will
not be forced to stop, that you
will not loose either clients or
suppliers and, even, that your
competitors
will
not
take
advantage of the circumstance
to finish off your business.
10
Risks clasification
Identified and Known
assessable.
Identified and Unknown
because it's difficult to

evaluate its
consequences.
Unidentified and Unknown
surely we will be surprised

(development risks).
11
Particularities of Civil Engineering

Risks are often 'Unknown' (identified or not), due to:
Each project is different from the previous, always showing different
elements (ground conditions, climate, workmanship)
Technological development and innovation are steady, both in
machinery and in materials
Frequently there is non-skilled labour in the lowest levels of the chain
Use and maintenance are sometimes not as careful as they should.
12
The Risk in Civil Engineering
RISK FACTORS (material damages):

what do they depend on?
a) of Internal origin:
SOURCE
Project
b) of External origin:
CONSEQUENCES
Works
performance
(incl. materiales)
Natural hazards
(Acts of God)
Acts of third
parties
13

a) of Internal origin:
on the quality of the project itself (its conception and design), not
only regarding the future service's stresses, but also concerning
the stresses during the construction phase, as well as the
construction method chosen
on the approach to the construction works: quality and adequacy
of the resources (personnel, machinery, measurement
instruments, etc), and on the planning, choice and supply
materials and their control, etc.
14

b) of External origin:
They DO NOT depend, in their origin, on the project and
construction works (although in some cases they DO depend
with regard to their probability of occurrence -example: acts of
third parties-) and, in all cases, they also DO depend regarding
the severity of their consequencies example: flood, earthquake,
etc.-)
15
Construction All Risk
Example: Risks distribution
16
Example: Risks distribution

'insurable' Risks
'not insurable' Risks
17
Risk's analysis
Deterministic analysis
Based on scientific theories or empiric formulations: identical result if
you take the same assumptions for the process (ex.: rust)
Probabilistic analysis
Based on occurrence probability of different risk's scenarios, estimating
their consequences (ex.: flood)
Statistical analysis
Based on previous experience on existing statistics of losses
(ex.: personal accidents at work)
18
Pilars of insurance activity
Sufficient statistical base

Financial stability
Risks heterogeneity
Geographical compensation
19
Statistical base for the analisys

Very difficult to
apply to Civil
Engineering, due to
the analyzed
particularities:
- projects are all
different ,
- climate conditions
influence in each
and every case,
- heterogeneous
coverages
- etc.
Study of historical losses

Number of losses.
Date of occurrence and close
date.
Insured.
Location.
Description.
Branch,
guarantee,
policy
number and insurer.
Split of losses's amount:
- total losses,
- insured losses,
- not covered losses.
- deductibles.
- pay back from other insurers,
- pay back from third parties,
- fees.
20
Exemple: Construction All Risk
Risks distribution
Losses >180.000
(period 1990 2001)

SOURCE: Mnchener Rck
21
Engineering Insurance Policies
1. Annual policies
(MB)
Machinery Breakdown
(BI-MB)
Business Interruption, resulting from a loss

covered under the MB policy
(DOS)
Deterioration of Goods
(EEI)
Electronic Equipment
(CPM)
Contractors Plants & Machinery
(CECR)
Civil Engineering Completed Risks
22
2. Temporary policies
(CAR)
(EAR)
Erection All Risks
(CAR-ALoP) Advanced Loss of Profit in CAR

(EAR-ALoP) Advanced Loss of Profit in EAR
Comprehensive policies (BOT, BOO,..)
23
3. Multi-annual policies
Decennial (10 years cover)
Inherent Defects (2, 3 or more years cover)
....
24
4. Special policies
Off-shore Risks (Oil-Platforms, Undersea-Pipelines,...)
Technological Risks (Manufacturer's Guarantee,...)
Space Risks (Moon Shots, Space Stations, ...)
25
Civil Engineering Insurance Policies
Construction All Risk (CAR)

Target policyholder?
each and every company taking part in the
construction process (having interests on the

construction itself)
Owner / Promoter
Main Contractor
Policyholders
Subcontractors
[actually, the 'insured' is the Construction itself]
26

what types of works can be insured?
All kinds of works and facilities
Housing and buildings:
residential, offices, hospitals, schools,

industrial buildings, car parks,
shopping centers, stadiums, power stations,
etc.
Civil works, infrastructures:
tracks (motorways, railways, pipelines,

tunnels,...), bridges, hydraulic works
(dams, water treatment plants,...), weet risks
(breakwater, harbours,...), etc.
27

what is/can be included under the coverage?
All works, goods and tools which take part in the
construction process or which are adjacent to the

construction site:
CONST.WORKS:
stored goods & materials, works brought on-site as part of the

contract (earthworks, foundations, structures and finishing,..)
temporary works erected or constructed on-site,...
MACHINNERY:
cranes, bull-dozers, dumpers,

pave-machinery...
EQUIPMENT:
hand and machine tools, scaffolding, frames, pumps, ...
EXISTING
PROPERTY:
in property or in custody of the insured (susceptible to
suffer damages arising from the insured works)

28

SUMS INSURED:
The construction work itself (main coverage):
total contract value

at the completion date to regularize
a margin should be foreseen (long time
works)
Machinery (optional guarantee):
List with following data:

individual values (new replacement)
identification, technical features
manufacture year
internal elechtrical
and/ormmechanical
damage are excluded
29

SUMS INSURED
Construction Equipment (optional guarantee):
total value of set (new replacement value) (a list should

be attached)
no heavy machinery
Existing Property (optional guarantee):

"first risk value" (it should be sufficient for the
reconstruction or replacement of the damaged goods)
30

SCOPE OF COVER
It is an "all-less" policy (all damages are included,
but the damages which are specifically excluded)

Condition:
Sudden and unforeseen physical loss or

damage to the property insured, occurred
during the period of insurance, in the
construction site, due to any accidental
cause not specifically excluded
31

SCOPE OF COVER
which Risks are actually covered?
Natural hazars
("Acts of God",
based on a defined
threshold)
CONTRACT
WORKS (basic
cover)
Risks arising in
connection with the
execution of the project
(unless that ones
excluded)
CONSTRUCTION
MACHINERY
(optional cover)
CONSTRUCTION
PLANT&EQUIP.
(optional cover)
Risks arising from

acts of third parties
(unless that ones
excluded)
EXISTING
PROPERTY
(opcional cover)
THIRD PARTY
LIABILITY
(optional cover)
G O O D S to be C O V E R E D against D A M A G E S
32

PERIOD OF COVER
Main (basic) Cover
Before
Maintenance
cover (optional)
During construction works
After const.w.
construction works
guarantees
previous
storage
completion of works
inception of works
Dowloading material on-site

order of
commitments
with the works
(for the main Contractor)
33

PERIOD OF COVER
Main (basic) Cover
Before
During construction works
Natural hazars
("Acts of God",
based on a defined
threshold)
Risks arising in
connection with the
execution of the project
(unless that ones
excluded)
Maintenance
cover (optional)
After const.w.
Risks arising from

acts of third parties
(unless that ones
excluded)
34

PERIOD OF COVER
Special cases (information required) :

advanced works
(status of works: progress, ...)
extensions / delay
(reasons, occurred losses)
interruptions, suspensions (reasons, status of works,

security measures,...)
early termination
phased handover
(status of works, occurred losses)

(situation, delimitations)
35

MAIN EXCLUSIONS (1)
Conventional exclusions
war, armed conflicts
nuclear risks
expropiation, confiscation
penalties (contractual or not)
willful misconduct of the insureds or of the technical which
are responsibles for the construction works
consecuencial losses (indirect losses)
documents, cash values
36

MAIN EXCLUSIONS (2)
Specific exclusions
Gradual deteriorations
wear and tear
'normal' effects of climate
rust or oxidation
Defective design and workmanship (rectification)
regarding materials
regarding designs , calculations and drawings
Deductibles (always have to be borne by the insured)
37

MAIN 'PROBLEMS'
Exemple 1
'Normal' effects of climat
excluded
but...
what is 'normal'?
38

MAIN 'PROBLEMS'
Exemple 2
Rectification of defective
design or workmanship
excluded
but...
what is the 'defective part'?

39

RISK ASSESMENT:
An individual analysis is required for each construction work:
configuration and exposition of the construction site

(natural hazards, acts of third parties,..)
type of works and materials
construction method
safety measures in the planning
costs assesment regarding several scenarios of losses
Questionnaire and Application for Insurance

40

SPECIAL ENDORSEMENT (1)
To include some additional or extended cover (optional)
001 :
SRCC (strike, riot and civil commotion)
002 :
cross TPL
003 :
006 :
maintenance visits
extra costs of acceleration (overtime, night work,..)
007 :
airfreight
113 :
national transport
116 :
contract works taken over or put into service
119 :
existing property
41

To delimitate some covers and/or exclusions (some examples)
008 :
structures in seismic zones
101 :
tunnels, galeries, subsurface structures
104 :
dams and water reservoirs
106 :
sections
107 :
camps and stores
109 :
110 :
construction material
safety measures (with respect
112 :
fire-fighting facilities and fire safety on site
121 :
piling foundations and retaining wall works
to rain, flood and inundation)
42

To exclude directly some usual coverages
009 :
010 :
103 :
damages arising from earthquake

damages arising from flood and inundation
damages in crops, forest and cultures
43
Civil Engineering Completed Risks (CECR)

Target policyholder?
the owner or the operating company
What types of works can be insured?

civil works, infrastructures, with a low fire risk
44

SCOPE OF COVER
It is a policy that covers "nominated risks" (a risk
is covered only if it is referred specifically in the policy):
Unforeseen and sudden physical loss or damage caused during

the period of insurance by:
a.
Fire, lightning, explosion, impact of landborne or waterborne vehicles
b.
Impact of aircraft and other aerial devices or articles dropped therefrom
c.
Earthquake, volcanism, tsunami
d.
Storm (air movements stronger than grade 8 on the Beaufort Scale)
e.
Flood or inundation, wave action or water
f.
Subsidence, landslide, rockslide or any other earth movement
g.
Frost, avalanche, ice
h. Vandalism of single persons.

45

BASIS OF LOSS SETTLEMENT
a) in case of damage wich can be repaired:
the cost of repairs necessary to restore the items to their condition
immediately before the occurrence of the damage(less savage and r.o.d.)
b) in case of a total loss:
a) If the loss occurs within the period stated in the schedule
the replacement costs
b)
If the loss occurs after the period stated in the schedule

the actual value of the insured items immediately before
the occurrence of the loss (less savage) -> [deducting a proper
depreciation from a)]
46
Privately Financed Infrastructure Projects

and Their Insurance
PFI
Privately financed investments
Most important models:

BOT
Build - operate - transfer
BOO
Build - own operate
Examples of other models:

BLT
Build - lease - transfer
ROT
Rehabilitate - operate - transfer
ROO
Rehabilitate- own - operate
DBFO
Design - build - finance - operate
47

and Their Insurance
BOT and BOO

In both models, a project company builds, owns and operates a plant.
BOT: the plant is transferred to a public operator after a period of

e.g. 15 years at a low price.
BOO: a transfer is not intended.

48

and Their Insurance
Typical for private financing of infrastructure projects :
Sponsors invest only small fraction of the required capital
Major funds borrowed from banks
Liability of the sponsors in case of increased cost or delay in
completion is limited
Construction phase particularly critical: Major funds are spent
without the project generating cash.
49

PFI: Finance and Contract Structure
Host Government (Principal)
Banks/
Lenders
loan agreement
project
agreement
Project Company
shareholders'
agreement
Sponsors
insurance
policy
Contractor
construction
contract
supply
contract
Suppliers
O&M contract
Operator
Insurers
50

PFI: Finance and Contract Structure
A Project Company is formed to erect and operate the plant or
the infrastruture by means of a network of contract agreements.
It often is a stock company.
Banks will provide the funds necessary beyond the Sponsors'
investments.
The Principal, i.e. the initiator of the project, may be the host
government, a licencing governmental agency or a public utility.
The Principal agrees the project terms with the Project
Company.
The Contractor and Operator are normally shareholders in the
Project Company.
The Insurers are vital in view of the limited-recourse financing
scheme.
51

PFI: Flow of Payments (Operating Phase):
Banks
Sponsors
Interest
payments
Interest and principal

payments
Project Co.
Payment for fuel,

materials and services
Suppliers
Price for
electricity
Principal
52
Typical examples of PFI Projects
large and communal:
Commercially used buildings or civil works:

- Large public buildings, hospitals
- Air ports
- Bridges, highways, tunnels
Power stations (IPPs) and power distribution
Water distribution and water treatment plants
53
PFI Insurance Requirements:
Privately financed projects have a higher

need for security. The project partners require a
comprehensive insurance cover.
The insured for construction and operation

is always the project company.
54

Insurance covers of industrial projects
Marine
Insurance
Erection/Contractor`s All Risk Ins.

incl. Liability Cover
Marine
Loss of
Profit
Contractor`s Plant and Machinery Insurance
Transport
Maintenance
Cover
Advance Loss of Profit

Storage
Construction/Erection Works
Testing
Guarantee
Insurance
Maintenance
Operation
Fire Ins. and Fire Loss of Profit
Machinery Ins. and MLOP
Electronic Equipment Ins.
Workmen's Compensation Insurance

Public and Prod. Liability Ins.
55

Staged Erection and Insurance
Conventional Approach:
1st gas turbine
+ 200 MW
Erection
2nd gas turbine

+ 200 MW
Steam turbine
+ 200 MW /
combined-cycle unit
600 MW total
(Example of a combined cycle power plant)
Commercial operation
Tests
Erection covers
Operational covers
Erection
Tests
Erection covers
Erection
Operational covers
Tests
Erection (All Risks)

covers
Com. op.
Op. cov.
56

Staged Erection and Insurance
Typical PFI Approach:
1st gas turbine

+ 200 MW
2nd gas turbine
+ 200 MW
Steam turbine
+ 200 MW /
combined-cycle unit
600 MW total
Erection
(Example of a combined cycle power plant)
Test
Erection
Test
Erection
Com. oper.
Tests
Erection All-Risks cover

Com. op.
Annual
operational
covers
57
LoP insurance for a PFI

LoP is an essential cover due to the scarce financial resources
of the Project Company
ALoP difficult to monitor:
Delays in early project stages may have

- full impact
- partial impact
- no impact
on the commencement of operation
Requires detailed and updated project schedules
Constant follow-up with insured and non-insured delays
Suppliers Extension intensifies the problem: The EAR/CAR

insurer is normally not the manufacturer's local property insurer
58
LoP insurance for a PFI

Time excess:
ALoP: 60 days not uncommon, related to the
total erection phase
Operational LoP cover: 7 - 30 days, related to each

loss event individually.
59
What do the Banks ask for in a PFI ?

a) the Project Company shall obtain the widest
possible insurance cover from the market,
b) the banks' or lenders' interests shall be included,
c) payment of indemnity shall be made to the banks or their trustees,
d) all rights of recourse against the banks shall be waved,
e) disregarding any right to refuse indemnity to the Project Company for any
breach of conditions, the indemnity shall be paid to the banks including any
loss
of profits.
60
In PFI, beware of terms which aim at:
! an invalidation of policy conditions which would release the

insured project contractor from the usual obligations,
! a direct claim or direct influence of a party outside the insured

project contractors or principal executing the works,
! the imposing of obligations on the insurers towards the banks.

61

PFI: Breach of Contract / Vitating Act
in case of a Multiple Insureds Policy
No indemnification of the violating party
Other insureds to be indemnified for their direct loss
Recourse against violating party not to be waived
However,
No indemnification of the banks
62

PFI: Multiple Insureds Clause
(London Engineering Group)
"In the event of any vitiating act committed by any one or more insured
parties, the lenders shall not be entitled to any indemnity under this policy
for or arising from loss or damage in respect of which insurers are
otherwise no longer liable to indemnify..."
63
PFI: Who has an Interest in Insurance?
The Principal
Host Government
Indirectly
The Banks
Indirectly
The Project Company

(manufacturers, site contractors,
operators included)
Project Insurances
64
Insurance from a single source

Desirable for the Project Company
No interfacing problems from one risk phase to the next
Comprehensive insurance scheme requested by the banks from the beginning
However,
!
Covers traditionally underwritten by different markets and branches
Manufacturers, suppliers, hauliers, operators may engage their own insurers or

brokers
Local insurers normally more engaged in operational than erection covers

65

Insurance / Reinsurance Arrangement:
Project Company
Intermediary
Project insurance
Package Policy
P.
Mar.
Bond M-BI
Credit
Marine
Direct Insurer
CAR/EAR+BI
MB/CECR+BI
F
F-BI
Engineering
Fire
op.
TPL
Reinsurer
Liability
66

Mortgage default
Legal protection covers
Homeowners Liability (TPL)
CAR/EAR
Loss of Rent
A&E Liability
Inherent
defects
One-stop shop
NatCat
Real estate
wrap-up protection
Fire
Contractor
insolvency
Residual value
insurance
Vandalism
Accident covers
Bonds
67

Different treatement of damages by inherent defects in
buildings in european area
Is it necessary an insurance ?
Property or Liability insurance ?
voluntary or mandatory insurance ?
68

Decennial insurance in Europe
Mandatory Insurance
Sweden and Finland ?
Voluntary Insurance
In developpment
U.K.
Holland
Benelux
France
Italy
Portugal
Spain
Greece
Turkey
69
Example 1: France => mandatory dual insurance system

indemnification
Prom./User
DO Ca. A
Perito Experto
Recurso
DO
DL
Contractor X
DL
Ca.Aseg. X
DL
DL
Ca.Aseg.Y
Liability share on damages between X and Y (CRAC)
Contractor Y
70
Many thanks for your attention!
Jos Luis Montull

Mnchener Rck

Risk Management in Civil Engeneering

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Risk Management in Civil Engineering LNEC

Risks and Insurance policies

Jos Luis Montull

Risk and Insurance

Risk Management in Civil Engineering LNEC -

Risk and Insurance

The Insurance is nothing else than a financial transaction by which a

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

Risk Control Clasification Insurable

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

how do we face the Risk?

Retention: establishing enough reserves to

Transfer: negotiating a specific insurance in

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

Retention or Risk Transfer

to be taken or "self-insured" if they don't affect the financial stability of

necessary to establish the limits of significancy of a risk for the

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

The Cost of the Risk

Risk Management in Civil Engineering LNEC -

What happens actually?

A high number of companies

The important thing is not to

Risk Management in Civil Engineering LNEC -

Identified and Known

Identified and Unknown

because it's difficult to

Unidentified and Unknown

surely we will be surprised

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

Particularities of Civil Engineering

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

The Risk in Civil Engineering

RISK FACTORS (material damages):

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

The Risk in Civil Engineering

RISK FACTORS (material damages):

Risk Management in Civil Engineering LNEC -

The Risk in Civil Engineering

RISK FACTORS (material damages):

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

Construction All Risk

Example: Risks distribution

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

Construction All Risk

Example: Risks distribution

Risks and Insurance policies

'not insurable' Risks

Risk Management in Civil Engineering LNEC -

Risks and Insurance policies

Risk Management in Civil Engineering LNEC -

Pilars of insurance activity