INTRODUCTION TO ENGINEERING INSURANCE CONTRACTOR'S ALL RISK ERECTION ALL RISK

Introduction to Engineering Insurance. Including Contractors All Risk, Erection All Risk, Machinery Break Down, Loss of Profit Following Machinery Breakdown

1. ENGINEERING RISKS
/INSURANCES
‘BAYO SAMAGBEYI –FCII, FCIB,FRMN,ARSAN.

2. INTRODUCTION
•A well-known dictionary defines engineering as
“the activities or function of an engineer“ and “the
application of science and mathematics by which
the properties of matter and the sources of energy
in nature are made useful to people in structures,
machines, products, systems and processes”.
•These definitions have strong relationship to the
words “engineering insurance”.

3. ENGINEERING INSURANCE
•This is an overview of a complex and extremely
interesting insurance branch.
•The term "engineering insurance" is used by
the insurance industry as a collective term to
describe various types of policies for the
protection of construction works as well as the
erection and operation of machinery.

4. THE ORIGIN OF ENGINEERING
INSURANCE
•The industrial revolution was between 1760 and 1840
•The use of machines came with some challenges
•The frequent explosion of boilers and the attendant
damages to property and injuries to people led to the
formation of THE MANCHESTER STEAM USERS
ASSOCIATIONIN 1854
•Engineering Insurance as known today, started with
insurance cover for Boilers in 1858.

5. INSPECTIONOF BOILERS
•Use of boilers gave rise to some problems:
❑DAMAGE TO PROPERTY AND
❑INJURIES TO PERSONS
•SO
•To forestall such losses
•Inspection of boilers commenced

6. MSUA
•Members used the services of inspectors
employed by the association
•The associaton advised members on
safety and maintenance
•The MSUAwas not an insurance
company so there existed a gap

7. BIRTH OF ENGINEERING
INSURANCE COMPANY
•Certain members of MSUAin 1858 formed the
first engineering insurance company, Steam
Boiler Assurance Company
•It started with boilers and later other pressure
vessels
•Other companies later followed

8. ENGINE INSURANCE
•Engine insurance now known as
machinery breakdown started in 1872
•Both boiler and engine insurance
spread to other countries

9. •One Mr. Robert Bervick Longridge became convinced that the
Association should supplement inspection with insurance.
Longridge, having been unable to secure the support of the majority
of the members of MSUA to supplement inspection with insurance,
pulled out of the Association to become Chief Engineer and General
Manager of the newly formed Steam Boiler Assurance Company
•In 1877, substantially high losses led to the discontinuation of
insurance of Boilers.
•Since Longridge could not convince his fellow Directors against the
decision to discontinue insurance, he pulled out again to form “The
Engine and Boiler Insurance Company Limited” in 1878.

10. CONTRACT WORKS AND OTHER POLICIES
•Between 1920 and 1930 some German and British
companies issued Contract Works policy to cover
both building and civil works
•The Contractors All Risks policy was fully developed
following the post second world war reconstruction.
•With advance in technology computer all risks , loss
of profit,low voltage and electronic equipment,
advance loss of profit, deterioration of stock
following machinery breakdown insurance were born

12. NATURE OF ENGINEERING INSURANCES
•HIGH VALUES
•FINANCING REQUIRED
•COMPLEXITY/TECHNICAL IN NATURE
•INSPECTION IS KEY
•- SOME STATUTORY
•- SOME UNDERWRTING
•TERM – SHORT - LONG TERM

13. A POWER PLANT

14. AN INDUSTRIAL PLANT

15. •15
Engineering Facilities & Operations
Examples of Engineering Facilities and Operations
include:
▪Oil & Gas Exploration & Production
▪Manufacturing Facilities & Operations
▪Telecommunications Infrastructure
▪Construction Industry
▪Marine Assets & Operations
▪Aviation Assets & Operations
▪Logistics Assets & Operations
▪And many others.

17. ENGINEERING INSURANCE COVER
•Engineering insurance is a highly specialised
and technical class of insurance.
•Itcovers some of the largest construction
projects, including airports,rail networks, power
plants and manufacturing complexes.
•These projects are typically of very high value
and can run for many years, even decades.

18. HIGH VALUES
•The expansion of Al Maktoum International
Airport in Dubai, will not be completed until 2030.
It is expected to cost $36bn.
•London’s Crossrailproject, currently Europe’s
largest infrastructureproject, will take over 10
years to build at a cost ofover£17bn($21bn).
•The total estimated cost has risen to £18.7
billion, as of August 2020.

Originally planned to
open in 2018, the project continues to be
delayed.

19. DUBAI GOVERNMENT SECURES $3BIllion
Financing for Airport expansion

20. DANGOTE REFINERY

21. LONG PROJECT LIFESPANN
•AJAOKUTA STEEL PROJECT – FG has spent over $10Billion over
34 years and required $2Billion to complete the 2% left of the
project
•DANGOTE REFINERY – Started in 2016 projected to be concluded in
2022
•The Dangote Refinery, when completed, will rank as the largest oil
refinery in Africa—and one of the largest in the world—processing
650,000 barrels of crude oil to produce 50 million liters (13.2 million
gallons) of gasoline and 15 million liters (4 million gallons) of diesel fuel
per day. And it will create nearly 35,000 jobs in and around Lagos.
•The refinery is expected to begin production in 2022.

22. HIGH VALUES COMES WITH CLAIMS
POSSIBILITIES
•The high values in engineering insurance
comes with claims possibilities.
•When the site is a hydroelectric plant
oran oil and gas facility, claims can be
extremelyexpensive and complex.

23. JUMBO PROJECTS
•Engineering and construction projects in
Nigeria have experienced significant growth
in recent years. No thanks to the constant
devaluation of our currency.
•Project sites are now much larger, more
expensive and much more complex.
•These have significant implications for
underwriters’ capacity and loss estimation.

24. Hidroituango
Hydropower Dam
•Flooding of the
Hidroituangohydropowe
r dam in Colombia in
2018 duringconstruction
cost insurersalmost
US$1.4bn, making it
one of the
largestengineering
claims in history.

25. DANGOTE SUGAR REFINERY, APAPA

26. HIGH VALUE –RISK OF
UNDERINSURANCE
•To the insured, the biggest risk that must be
avoided with high values is 'underinsurance’,
•With these high value projects, the insured values
can be inadequate to reinstate property when
things go wrong.
•Proper valuation and revision of values following
continuous currency devaluation is required.

27. DESIGN DEFECTS
•According to a research by the
Alliance Group, design defects
and poor workmanshiphave
risen to become leading causes
of engineeringclaims.
•This calls for appropriate
insurance cover
recommendations to your
clients so there is no gap in
cover

28. WHO CAN INSURE?
•The owner(s) of the machinery
•Lessor /Lessee of the machinery
•Jointly where financial interest can be established for
more than one party such as bankers financiers.

29. TODAY’S ENGINEERING RISKS
1.New technology ands its attendance implications
2.Entry of China Machines into the Nigerian Market
3.Privatization of the Power Sector
4.Emergence of Independent Power Plants
5.Solar Panel on House Tops
6.New methods of financing projects
7.Increased Values following significant devaluation
8.Inflation

30. ROLE OF TECHNOLOGY
•Technology plays a major role in the
engineering insurance including
construction.
•It affects the types of risks in the market
as well as how the work is done
•It also affects how insurance companies
assess risks and manage claims

31. FIRE/EXPLOSION – MAJOR CAUSES OF LOSS
•According to a Swiss Re report, ‘the insurer’s
analysis of more than 13,000 engineering and
construction insurance claims worldwide and over
the last five years showed that fire/explosion is the
biggest cause of loss for the sector’.
•Another major cause of loss is natural disasters like
flood.
•What the implications of these for underwriting?

32. CLASSIFICATION OF ENGINEERING
INSURANCES
•Engineering insurances can be classified as
•RENEWABLE AND
•NON-RENEWABLE INSURANCES
•It can also be classified as Property and
•Business Income Protection Policies

33. PROPERTY ENGINEERING
INSURANCES
•PROPERTY
-CONTRACTORS ALL RISKS
-ERRECTION ALL RISKS
-BOILER AND PRESSURE VESSSEL INSURANCE
-MACHINERY BREAKDOWN
-LOW VOLTAGE AND ELECTRONIC EQUIPMENT
INSURANCE

34. BUSINESS INCOME PROTECTION COVER
•ADVANCE LOSS OF PROFIT
•LOSS OF PROFIT FOLLOWING MACHINERY
BREAKDOWN
•DETERIORATION OF STOCK FOLLOWING
MACHINERY BREAKDOWN

35. RENEWABLE
•BOILER AND PRESSURE VESSSEL
•MACHINERY BREAKDOWN
•ELECTRONIC EQUIPMENT INSURANCE
•LOSS OF PROFIT FOLLOWING MACHINERY
BREAKDOWN
•DETERIORATION OF STOCK FOLLOWING MACHINERY
BREAKDOWN

36. NON RENEWABLE
•Non renewable policies are those policies
usually taken out for the duration of a
contract term
•Most financial institutions will not finance a
project without insurance
•There is usually the need to cover the
contractor/sub contractors and principal
depending on the contract terms

37. NON RENEWABLE COVERS
Under this classification are:
-CONTRACTORS ALL RISKS
-ERRECTION ALL RISKS
-ADVANCE LOSS OF PROFIT (DELAY IN
START UP)

38. ENGINEERING CLAIMS

39. EXAMPLES OF LOSSES IN
ENGINEERING INSURANCE
•Sudden accidental & unforeseen physical loss of or
damage to machinery & plant arising from
mechanical/electrical breakdown, whilst in operation, at
rest, or during relocation or re-erection, at the client’s
premises.
•Consequential loss of gross profit, loss of revenue or
increased costs of working, arising form indemnifiable
loss or damage sustained under the Machinery
Breakdown policy.

40. EXAMPLES OF LOSSES IN ENGINEERING
INSURANCE CONT’D
•Damage to stock of all descriptions caused by a
change in the controlled environment of the holding
rooms or chambers, arising from indemnifiable
damage to the insured machinery that creates the
controlled environment.
•Accidental loss of or damage to plant and machinery
during the operations insured against, including
dismantling, movement, loading, transit, offloading,
re-erection etc.

41. EXAMPLES OF LOSSES IN ENGINEERING
INSURANCE CONT’D
•Impact cover causing loss or damage to the clients own plant
and machinery, to goods being manufactured, or to goods
under the custody & control of the client.
•Loss of or damage to Computer & Electronic Equipment and
associated ancillary equipment arising from Fire and Allied
Perils.
•Loss of or damage to construction plant & equipment from any
cause whilst in storage, transit, on site & being use as a tool of
trade.

42. WE SHALL NOW PROCEED TO EXAMINE
ENGINEERING INSURANCES UNDER TWO
HEADINGS
•1. RENEWABLE ENGINEERING POLICIES
•2. NON-RENEWABLE ENGINEERING
(PROJECT) POLICIES