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New guidelines promise better cover for builders(Lloyds List Via Thomson Dialog NewsEdge) AFTER almost two years of intense work, the London marine insurance market will soon unveil new guidelines and clauses for shipbuilding risks. The market's joint working group chaired by Peter Mcintosh, who also chairs the joint hull committee, was faced with a herculean task when it started the job of modernising the ancient clauses underwriters have been struggling with. Officially, the nomenclature will be changed to London MarCAR 2007 (marine construction all risks). The first Institute Clauses for Builders' Risks were drafted in 1963, followed by a small revision in 1972 and then revised again in 1988 to incorporate the move from the Lloyd's SG Form to the new MAR Form. Of course, tremendous changes have taken place in the shipbuilding industry over nearly 20 years, and construction techniques are now very sophisticated. As ships became bigger and more complex, the industry moved to modular construction, under cover in many yards, the use of third-party suppliers, and the employment of armies of sub-contractors' staff in building ever-larger cruiseships, containerships and liquefied petroleum and liquefied natural gas carriers. Underwriters' exposures have in-creased concomitantly to an extent that could not be envisaged not so long ago. The new wording will be a very different animal, therefore, to reflect these changes and satisfy underwriters' needs at a time when shipyard orderbooks worldwide are full. However, the basis of all risks will be unchanged. There was also the desire for contract clarity between assureds and their underwriters that was not catered for in the 1988 clauses. The working group has comprised practitioners from all disciplines within the market: underwriting, claims, average adjusting, marine law and broking (from Marsh, which has liaised with the technical sub-committee of Lloyd's Insurance Brokers' Committee). The group, whose members have given their time freely, started work with the aim of updating the 1988 clauses, but soon found this was not the answer and had to start again. 'Now,' says Mr Mcintosh, 'the results of two years' work have produced a clearly drafted wording divided into five parts'. Part I contains the main cover, part II the general exclusions from cover, part III claims provisions, part IV general provisions and definitions, and part V optional buyback clauses. There are a number of major changes compared with 1988. For example, earthquake and accidental pollution risks are now included as standard, while a due-diligence provision has been introduced under part IV. 'In general,' Mr Mcintosh notes, 'we have incorporated accepted adjusting practice combined with modern legal interpretation. 'Also, due to there being several potential co-assureds with separate interests, we have attempted to make clear the extent of cover provided to contractors and other parties.' The working group spent time clarifying what is insured and when major items, parts, spares and the like, are covered. Also, the group debated what actually made up the (insured) value. This included a definition of 'works of value', which is an important trigger for abandonment. The ICBR contains a navigating CTL (constructive total loss), lifted straight from the Institute Time Clauses of 1.10.83. This means that a CTL can only be claimed if the cost of recovery and repairs exceeds the insured value being the final value. Consequently, a CTL could only ever be claimed towards the end of the building period. Mr Mcintosh explains: 'We have introduced an alternative measure of indemnity, based on abandonment; in short, where the cost of repairing a serious damage does not exceed the sum insured but does exceed the works value or, in other words, the sums spent to date. The buyer and the yard can decide with underwriters' consent to abandon the project. This allows for the policy to pay a CTL part way through the building period.' He says that MarCAR confirms current practice. Cover is given for 'physical loss' and 'physical damage'. The simple presence of a defect, without more, is not covered. 'We have also listed in Clause 45 the various multiple limits of liability covered by this wording, and we have introduced detailed arbitration provisions.' 'In the feedback we have received, several comments are supportive of this, with encouragement for more specific mediation and alternative dispute resolution provisions.' This long overdue overhaul of outdated clauses follows substantial losses in this sector. Between October 2002 and January 2004, it was estimated that insurers' income totalled $125m, while losses amounted to $740m. Still fresh in the memory of underwriters are the Diamond Princess ($310m), Westerdam ($75m), Pride of America ($228m) and an LNG carrier in a French yard. Such losses would all be covered under the new wording, though insulation of tanks on LNGs is not, it being felt this is best left to underwriters' discretion when quoting on specific risks. However, according to Mr Mcintosh, the new wording is not intended to prevent the recent spate of losses. 'The wording will not help return this book of business to profit,' he says. 'That is up to us as underwriters through our pricing, risk selection and loss prevention or mitigation actions.' Late in 2003, the joint hull committee introduced a shipyard risk assessment form, drawn up by the joint hull construction risks sub-committee in consultation with BMT Salvage Association surveyors. This form which covered 14 separate parameters to review and test safety management, quality assurance and quality control of shipyard systems and procedures has been widely used by underwriters. However, the JH 143 survey has been deliberately left out of MarCAR, allowing the market to adapt or amend and develop JH 143 as experience grows. Members of the working group are: Peter Mcintosh (Ark), chairman; Haydn Costin (O'Farrell), Colin Gilchrist (Marsh), Nigel Rogers (Association of Average Adjusters), Geoff Sutherland (Swiss Re), Richard Tomlin (Atrium), Richard Turner (Royal & SunAlliance), Chris Zavos (Barlow Lyde & Gilbert) and Neil Roberts (Lloyd's Market Association), secretary. At next month's annual conference of the International Union of Marine Insurance in Copenhagen, the loss prevention workshop will include a presentation on 'Quality Control of Sub-contractors in Shipyards' by John Lillie, former managing director of BMT Marine & Offshore Surveys, and who played an important role in helping to frame JH 143. He now runs his own independent surveying company. Copyright 2007 Informa Maritime Trade and Transport , Source: The Financial Times Limited |