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OBSTRUCTION IN CONSTRUCTION? NOT ANYMORE..
September, 2013
 

Bilal Qadoura, ACII, Senior Manager – Distribution Channels, SEIB Insurance & Reinsurance Company LLC elaborates on DSU insurance and how it could avoid delays in deliveries of Qatar’s construction projects. 

Please tell us about yourself, have you always been a part of the (re)insurance industry? 

I started my career with Middle East Insurance Company in Jordan, where I filled the position of a property insurance underwriter. 

In 2006, I moved to Aon Risk Solutions, to provide insurance and reinsurance intermediary and risk consultancy services for the MENA region out of their hub office in Bahrain. 

In the end of 2012, I came to Qatar after joining SEIB Insurance and Reinsurance Company (‘SEIB’) to take on the management of key accounts and brokers’ relations. 

Please tell us about the inception of SEIB in Qatar. 

SEIB is a Qatari company licensed and regulated by Qatar Financial Centre Regulatory Authority and is a joint project between local and international partners. 

After its incorporation in the end of 2009, SEIB actively commenced its operations by following the company’s vision of contributing to the overall development of Qatar’s insurance market. 

So far, we have been successful in achieving the planned milestones and we continue to have a positive outlook for the future of Qatar’s insurance industry. 

Bilal Qadoura, ACII, Senior Manager – Distribution Channels, SEIB Insurance & Reinsurance Company LLC

 

Focussing on DSU insurance, please tell us how is the demand for the product in the State of Qatar? 

Delay in Start-Up (‘DSU’) or as some may interchangeably call it Advanced Loss of Profit (‘ALOP’) is relatively new when compared to other lines such as fire or marine insurance. For this reason, many do not understand DSU. Also because of its inherited complex and technical nature, it is not purchased in Qatar very often. 

Observing the other GCC countries that have had a construction boom in the recent past, we identified the growing interest and need in obtaining DSU protection. In many cases, DSU has become a standard insurance requirement – as a contractual obligation or as an adopted best practice and is predominantly procured by mid to large-sized projects. 

Moving closer to the 2022 FIFA World Cup Qatar and Qatar National Vision 2030, we anticipate and are seeing signs that Qatar is likely to be heading towards replicating the same experience of its fellow GCC neighbours

What is OCIP and CCIP

Owner Controlled Insurance Program (‘OCIP’) and Contractor Controlled Insurance Program (‘CCIP’) are commonly known as ‘wrap-up’ programs. 

The purpose of using a wrap-up package policy is to have a single project party (the project owner or contractor) to purchase all insurances required and cover all involved parties to the extent of their rights and interest in that particular project. 

OCIP Vs. CCIP was and remains a hot topic with pros and cons to be weighed primarily by project developers. 

Historically, project owners preferred to absolve themselves from the burden of managing the project insurances and have commonly passed this responsibility onto the main project contractors. 

Doha International Airport 

As the market developed, project owners were intrigued to look more closely at the benefits and pitfalls of having a CCIP and came to realise the importance of retaining control over the project insurances as part of a holistic approach to risk management. This is evident by the shift towards the OCIP concept. 

By design, DSU covers fit well into an OCIP, where the principal and their financiers are the main beneficiaries of the cover. Hence the emerging need for DSU protection has helped expedite the transition from CCIP to OCIP structures. 

Contractors can also benefit from a standalone cover that compensates them for extra expenses they are bound to bear due to delays that trigger a DSU cover. The cover is called Contractors Extra Expenses insurance and may be purchased on a stand-alone basis. 

Qatar Airways has filed USD 600 million claims against Lindner Depa Interiors (LDI) for delay in opening the new Doha international airport. What is your opinion on the same? 

 

Before addressing this question, I need to mention that SEIB did not have direct involvement in this project and our forthcoming opinion is based on the particulars of the case that were made available on the public domain. 

 

Reading different statements issued by each party, it seems that the delay was either a result of denying the contractor LDI “full access to the project site for the first nine months of the 16-month project,” as claimed by LDI or that the contractor “had failed to complete the project in time,” denoting poor performance as alleged by Qatar Airways. 

Either way, the proximate causes for consequential losses incurred would not be covered under the scope of a standard DSU policy. 

 

Following this incident, we received few enquiries about ‘Denial of Access’ clause (an extension to Business Interruption policies for operational facilities) and whether the principal would have been compensated in this case for loss of anticipated revenues under such insurance. 

Denial of Access is defined as “Insurance cover that compensates for loss caused by restriction or prevention of access to a business place due to fire or other damage to nearby structure(s) or access road(s) or demolition thereof.” 

As a rule of thumb, DSU insurance would protect against consequential financial losses due to delay in project completion following an event that triggers physical damage insurance policy (be it project cargo policy, ‘construction all risks,’ sabotage and terrorism cover etc). 

 

To exemplify, if a water pipe bursts while testing the airport facilities and causes damage to the interior fittings or fixtures and if such damage is covered under the construction all risks policy, then a DSU cover would be triggered to compensate the project company i.e. New Doha International Airport for any loss of anticipated revenue during the period that is needed to fix such damages and handover the facility. 

DSU insurance would protect against consequential financial losses due to delay in project completion following an event that triggers physical damage insurance policy. 

 

Does DSU cover the entire life cycle of a project? Does it cover delay in commencement of a project due to supply chain bottlenecks or regulatory issues? 

The cover should incept at the commencement of project works and continue through the entire construction period. The term of the cover may be extended if the project suffers delays that affect the estimated commercial operations or guaranteed handover date- whether such delays are caused by insurable or uninsurable incidents (for eg. anticipated delays from work change orders). 

 

DSU cover expiry date must align with the inception of Business Interruption cover when the project moves from the construction into the operations phase to ensure a dovetail transition with no gaps that may impair the cover effectiveness. 

 

Special attention is given to projects with phased handover – where details of each phase needs to be discussed at an early stage with the insurers to have a clear mutual understanding of when the cover seizes to provide protection and when a Business Interruption cover needs to kick in. 

Delays that are purely attributable to regulatory issues such as withholding of licenses or delay in award dates are excluded from the scope of a standard DSU cover. 

What are the exclusions of the DSU cover? 

Given DSU cover is not commonly traded in this market, it is even more crucial to ensure DSU insurance buyers are aware of what protection the cover actually provides and its limitations. 

The policy form or wording dictates the scope of cover and there are different variations in the market and different basis of cover for DSU insurance (eg. gross profit Vs. fixed costs or debt service basis). 

‘Caveat emptor’… Let the buyer beware: 

No one enjoys reading the fine prints of an insurance policy. That is why we always encourage people to seek the advice of an insurance company while purchasing policies. Representatives or insurance consultants – whichever the case may be are more than happy to clarify any areas of ambiguity or concern. 

Some exclusions of DSU insurance cover, which are common among varying DSU policies offered, are enlisted as under: 

Non-performance, liquidated damages and penalties, late delivery of equipment 

Redesigning, expanding or improving projects 

Inadequate funding, loss of feedstock 

Cancellation of licenses, embargoes 

No one enjoys reading the fine prints of an insurance policy. 

 

 

“DSU cover expiry date must align with the inception of Business Interruption cover when the project moves from the construction into the operations phase to ensure a dovetail transition with no gaps that may impair the cover effectiveness.” 

The fact that the market is still in its soft cycle and has been that way for almost a decade now, has dropped its shadows on the philosophy of technical pricing for the construction insurance market. This has invariably pushed many insurance companies to make compromises on the scope of the cover. Now the approach has become more conservative and thus restrictive cover alternatives at a friction of the standard cover cost is more viable to keep up with the ongoing trend of price-driven decision making methodology. This also helps to compete with the price-oriented segment of the market. 

DSU is typically used for projects owned and financed by private entities. Given that in this region projects are typically owned and financed by the Government or affiliated entities, is DSU still used? 

It is important to observe the developmental course of the construction boom in the region to have a better understanding of the potential demand for DSU insurance cover in the State of Qatar. 

Taking KSA and the UAE as examples, the demand for DSU insurance cover has exponentially inclined as those economies began to divert more towards Public Private Partnership (PPP) and Private Finance Initiates (PFI) procurement alternatives. 

Government funded projects may equally reap the benefits of DSU insurance protection. However, basis past experiences, they almost never opt for it as they usually rely on their government’s strong financial credit worthiness to protect against financial risk exposures associated with the projects. 

Developers with mixed ownership structures (and more so the private sector) have seen the benefits of securing DSU insurance cover and accordingly are investing more in DSU to provide further relief to their balance sheets as no balance sheet can absorb spikes in losses due to delay in delivery of projects! 

 
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