Rob Bates explores how the right insurance structure can prevent shipping setbacks from becoming revenue losses.
Supply chains for the energy and infrastructure sectors in which NARDAC operate are global, interconnected, and complex. We have a solar client in the US who ordered solar panels from Vietnam, transformers from China, and a tracking system from a factory up the road. Getting this kit from factory to site means at least some ocean transit. While the probability of a claim has fallen substantially in the past few decades, events like the 2021 Suez Canal obstruction, where the Ever Given container ship ran aground, expose the fragility of these networks.
Pushing the risk of these ocean conveyances onto suppliers can therefore seem like good risk management. Often, a Chinese supplier may have access to cheap marine coverage in their local insurance market and offer to insure their goods at least until they enter the country of final destination (some offer cover right up to project site). Then, the project can concentrate on construction policies and may similarly be able to access a competitive domestic insurance market for ‘pure’ construction risks that may not have appetite for ocean marine cargo. Savings can be achieved and risks transferred – the purpose of any good risk management function.
But issues arise when these projects require Delay in Start-up insurance. Lenders may require revenue protection insurance is maintained throughout the project’s lifetime, including the transportation and installation stages. However, the Chinese supplier has no insurable interest in the project’s revenue; they can’t buy insurance to protect someone else’s revenue. This risk has to be transferred by the project owners instead. It’s also quasi-axiomatic that claims in revenue protection insurance, whether during construction (DSU) or operations (business interruption), can only be paid when there’s a covered physical damage claim paid by the same policy (the ‘material damage proviso’). How can we cover the revenue a project owner would lose if cargo is lost or damaged when that same cargo is already insured under another policy, by someone else who has no insurable interest in that revenue? Insurers regularly say that standalone DSU policies are not within appetite.
Contingent cargo and primary DSU insurance offers some solutions to these challenges. These policies are taken out by the project owner and cover the same equipment as the supplier’s cargo insurance on a contingent basis for physical damage, but on a primary basis for revenue. Put simply, if there’s a claim, the intention here is that the supplier’s policy pays for the cost of repairing or replacing the damaged equipment, while the owner’s policy reimburses any lost revenue and / or increased cost of working incurred as a result of the loss. In some circumstances, the owner’s policy may also offer broader coverage than the supplier’s.
Care must be paid to the wording of these policies. The material damage proviso is so comprehensively incorporated into insurers’ thinking that if no payment is due under the cargo section of their policy, they can sometimes believe that no payment is due under the revenue section of that policy – despite the intention being, from the outset, that the supplier’s policy would pay the former while the owner’s pays the latter. We would therefore suggest that language specifically referring to the owner’s policy being triggered by cover under the supplier’s policy is included, as well as those losses that would have been covered but for application of the supplier’s policy deductible. For these policies to work effectively, everyone along the insurance chain, including the claims departments of insurers selling these contingent / primary policies, should be made aware of their intended function and application to avoid disputes. Experienced brokers can make navigating these issues considerably easier for all parties, and given our international team and local presence, NARDAC are uniquely positioned to help clients spend less time and money on insurance and more on getting their projects built and operating.