Commentary

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Section 6-2: Loss of or damage to the MOU

  • Clause 18-87. Objects insured/Ref Clause 18-2

    This Clause is nearly verbatim the same as Cl. 19-9 apart from letter (b), which is not incorporated into Cl. 18-87 as there is no need to distinguish between yard and owner’s supplies in the construction risks insurance when the risk is assumed by the assured.

    Letter (a) comprises all components, parts and equipment constructed, manufactured or procured for the Project, subject to the limitations pursuant to Cl. 18-83.

    Letter (b) includes the assured’s costs in connection with design, drawings and other planning of the Project. Here the object insured is not the specific drawings, models, etc.; these can normally be reconstructed at low cost if they are destroyed, but the general costs incurred by the assured in his own planning department and/or to hiring consultants. If the Project is not completed due to damage or other incidents covered by the insurance, these costs will normally be lost and should be compensated by the insurer.

    If the existing plans etc. may be used in connection with other Projects of the assured, a reasonable deduction of the costs corresponding to the residual value of the plans etc. may be appropriate. However, the burden of proving any such residual value must rest with the insurer. 

    Letter (c) provides that the insurance also comprises bunkers and lubrication oil on board, cf. Cl. 18-2 (c). 

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    Clause 18-87. Objects insured/Ref. Clause 18-2

    The insurance covers: the MOU and components, equipment and materials manufactured or procured for the Project,  the costs in connection with design, drawings and other planning of the Project, and bunkers and lubricating oil on board.  

  • Clause 18-88. Insurable value

    This Clause is nearly verbatim the same as Cl. 19-10 but edited as appropriate to fit construction and rebuilding of MOUs. A new letter (d) is added to sub-clause 1.

    The Clause defines the insurable value in construction risks insurance. 

    Sub-clause 1 defines the insurable value when the Project is completed. The basis for the insurable value is the contract price originally agreed less subsequently agreed deductions. The wording “subsequently agreed deductions” concerns changes that result in a reduction in the contract price. Normally, the insurer will be notified of such deductions for the purpose of obtaining a reduction in premium. In that event, the deductions will also be stated in the insurance contract. However, to avoid that the insurable value exceeds the assured’s real loss, it is necessary to take such deductions into account in the calculation of the insurable value regardless of whether the insurer has been notified.

    The wording “subsequently agreed additional amounts” in sub-clause 1, letter (b), refers to variation work in relation to the original contract that results in an increase in the price. The consequence of such variation work/additions not having been reported to and agreed by the insurer is that this increase in the costs of the construction contract will not be covered by the construction risks insurance. It follows from sub-clause 1, letter (c), that the value of the owner’s deliveries is also included in the insurable value. As opposed to Cl. 19-10, sub-clause 1, letter (c), there is no requirement that such owner’s deliveries are covered by the insurance. This means that owner’s deliveries will be part of the insurable value even if they are not declared to the insurer, see further the Commentary to Cl. 18-89. The same goes for an existing vessel or MOU that shall be converted or upgraded as part of the Project.

    Sub-clause 2 defines the insurable value before the Project is completed. The provision is based on the fact that the insurable value under the construction risks insurance increases as the Project progresses. Deductions shall be made in the insurable value calculated according to sub-clause 1 for work that has not been carried out, and components and materials that have not been procured or manufactured for the Project, cf. letters (a) and (b). Components and materials that have been procured shall be included, provided that they are within the place of insurance, cf. Cl. 18-84. 

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    Clause 18-88. Insurable value

    The insurable value at the completion of the Project constitutes: the original project contract ’ s price less subsequently agreed deductions, subsequently agreed additional amounts mentioned in the insurance contract, the value of the owners' deliveries, and in the event of conversion and upgrad...

  • Clause 18-89. Compensation in the event of a total loss/Ref. Clause 4-1

    This Clause corresponds to Cl. 19-13 but is simplified in accordance with the general rule in Cl. 4-1. 

    In the event of total loss, cf. Cl. 18-90, the insurer covers the sum insured, but not in excess of the insurable value, cf. Cl. 18-88.

    According to Cl. 18-88, the insurable value is defined as the original contract price with any deductions or additions and the value of the owner’s deliveries including existing vessel or MOU. If the assured wishes to insure all of the elements mentioned, they must be declared to the insurer and included in the agreed sum insured. If a sum insured has been agreed at the inception of the insurance and notice of additional work is later given to the insurer, the assured must also ensure that the sum insured is increased correspondingly. The same goes for owner’s supply. If not declared, the sum insured may be lower than the insurable value at the time of loss. This will according to Cl. 2-4 constitute under-insurance. However, the wording of Cl. 18-89 does suggest that in case of total loss the full sum insured shall be paid if the sum insured is lower than the insurable value. This means that the proportion rule in Cl. 2-4 shall not apply.

    Likewise, the assured must ensure that the sum insured is reduced in the event of deductions resulting from parts of the work not being carried out. If this is not done, the sum insured will be higher than the insurable value, and the compensation will be limited to the insurable value. This rule corresponds with the rule on over-insurance in Cl. 2-5. In that event, the assured will have paid premium on a larger sum insured than he can recover under the insurance.

    In the event of a total loss before the Project is completed, the sum insured will normally be higher than the insurable value and the compensation will be limited to the insurable value calculated according to Cl. 18-88, sub-clause 2. The calculation of the insurable value if this is the case is commented on in more detail under Cl. 18-88, sub-clause 2. 

    If the insurer pays total loss compensation pursuant to Cl. 18-89, he has a right to take over the title to the Project including any undamaged components or materials, cf. Cl. 5-19, sub-clause 1. The insurer can therefore utilize the residual value that the Project or the components or materials may have after the damage triggering the total loss compensation. If the assured should find it expedient to complete the Project after having received the total loss compensation, he cannot utilise any residual values or undamaged components or materials unless the insurer agrees. Normally, it would be in the insurer’s interest to come to agreement with the assured on an appropriate reduction in the compensation payable in consideration for leaving the title to any residual values or undamaged components or material with the assured.

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    Clause 18-89. Compensation in the event of a total loss/Ref. Clause 4-1

    In the event of a total loss the insurer covers the sum insured, but not in excess of the insurable value, cf. Cl.18-88.

  • Clause 18-90. Total Loss/Ref. Section 2-2

    The Clause was amended in the 2019 Version.

    The concepts of insurable value and sum insured is of particular relevance when deciding if the conditions for claiming compensation for a total loss under this provision is fulfilled. These amounts and the relationship between them are explained in Cl. 18-88 and Cl. 18-89, and the commentary to these provisions. The solution in Chapter 19 is a bit different where Cl. 19-11 has to be considered together with Cl. 19-12.

    Cl. 18-90 expressly provides that the rules on total loss in Section 2-2 of Chapter 18 shall apply also to the construction insurance pursuant to Section 6, but with an important amendment of Cl. 18-10. First of all, the assured may claim compensation for total loss if casualty damage to the Project is so extensive that the costs of repairs amount to more than 100% of the insurable value calculated as provided in Cl. 18-88. As the calculation of the insurable value during the construction period is dynamic and increases during the performance of the Project, the threshold for claiming total loss compensation will also be dynamic and develop during the construction period. In Cl. 18-10 the market value will be put into the condemnation formula if this value is higher than the insurable value. This alternative is not included in the wording of Cl. 18-90 and will therefore not apply to construction risks pursuant to Section 6. If the Project is extensively damaged, the only relevant criteria to determine whether the Project is condemnable is to compare the estimated costs of repair calculated in accordance with Cl. 18-10, sub-clause 4, last sentence, with the insurable value calculated in accordance with Cl. 18-88. This goes also for damage to the Project occurring before completion. If the estimated costs of repair exceed the insurable value as calculated pursuant to Cl. 18-88, sub-clause 2, the assured is entitled to claim total loss compensation, limited to the insurable value if this is lower than the sum insured.

    At the completion of the Project it is presumed that the insurable value will be equal to the sum insured. To harmonize the condemnation formula in Cl. 18-90 with the condemnation formula under Cl. 18-10, the assured has an alternative option to claim for total loss compensation if costs of repairs amount to more than 80 % of the sum insured. This secures a seamless transfer from the construction risks insurance to the operations insurance under Section 2.  

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    Clause 18-90. Total Loss/Ref. Section 2-2

    The provisions contained in Section 2-2 above shall apply. Cl. 18-10, sub-clauses 2 and 3, is replaced with the following: The assured may claim compensation for a total loss if casualty damage to the Project is so extensive that the costs of repairs amount to more than 100 % of the insurable val...

  • Clause 18-91. Damage/Ref. Section 2-3

    Cl. 18-91 expressly provides that Section 2-3 shall apply to the construction risks insurance, but as amended by Cl. 18-92 and Cl. 18-93. If the Project (or components and materials for the Project) are damaged without constituting a total loss pursuant to Cl. 18-90, the insurer shall indemnify the costs of repairing the damage or re-acquiring lost objects.

    It is conceivable that a damage can be repaired but the assured nevertheless demands new equipment rather than repairs; e.g. water damage to a generator may be repaired but the assured fears that the generator may be subject to future damage due to undiscovered defects caused by the water damage. Here the insurer’s liability must be tied to the contractor’s obligation vis-à-vis the assured according to the construction contract. If under the contract it is sufficient for the contractor to carry out repairs, possibly combined with a warranty against future damage, the insurer’s liability is limited correspondingly. If the assured, out of consideration for its customers or for other reasons, chooses to buy a new object rather than repair the damaged, any amount incurred in excess of the costs of repair will be for the assured’s account and is not recoverable under the construction insurance. 

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    Clause 18-91. Damage/Ref. Section 2-3

    If the MOU or parts thereof have been damaged without Cl. 18-90 being applicable, the rules in Section 2-3 shall apply, as amended by Cl. 18-92 and Cl.18-93.

  • Clause 18-92. Error in design, etc.

    Sub-clause 1 is verbatim the same as Cl. 19-15. Reference is made to the Commentary to Cl. 19-15.

    Sub-clause 2 provides that for parts or components that are completed, Cl. 18-20 shall apply. This entails that for such parts or components there will be the same cover for error in design etc. under the construction insurance as under an MOU hull insurance. Sub-clause 2 will give somewhat wider cover than the cover under sub-clause 1 because sub-clause 2 also covers the defective part(s) if the part(s) have been approved by the classification society. Reference is made to the Commentary to Cl. 18-20, which again refers to the Commentary to Cl. 12-4 as Cl. 18-20 is verbatim the same as Cl. 12-4. 

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    Clause 18-92. Error in design, etc.

    If the damage is a result of an error in design, faulty workmanship or faulty material, the insurer is not liable for the costs of renewing or repairing the part or parts of the hull, machinery or equipment which were not in proper condition. For parts and components which are completed, Cl. 18-2...

  • Clause 18-93. Costs incurred in order to save time/Ref. Clauses 18-24, 18-28 and 18-29

    Cl. 18-93 corresponds to Cl. 19-17 and exclude from the construction risks insurance the so called 20% p.a. rule. This limitation of the cover as compared with the cover for MOUs in operation only applies when damage to the Project occurs and is discovered whilst at a yard or any other onshore project location. For any damage occurring or discovered offshore, the cover for costs incurred in order to save time will be the same as for the hull insurance including the 20% p.a. rule, provided the insurance also comprises any offshore part of the Project, cf. Cl. 18-81. 

    Reference is made to the Commentary to Cl. 19-17 and to the Commentary to Clauses 18-24, 18-28 and 18-29, cf. also the Commentary to the respective corresponding Clauses 12-7, 12-11 and 12-12. 

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    Clause 18-93. Costs incurred in order to save time/Ref. Clauses 18-24, 18-28 and 18-29

    For damage to the Project which occurs and is discovered whilst at a yard or any onshore project location, the insurer is not liable for costs incurred in connection with: temporary repairs according to Cl. 18-24, sub-clause 2, beyond the amount he saves through the postponement of the permanent...

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