Engineering Insurance Engineering Insurance

“Advanced Loss of Profits” refers to a

Advance Loss of Profits particular class of Consequential Loss
Delay in Start-up insurance and covers financial

Insurance consequences of a delay in estimated

commercial operation date (COD) of a
project, as a direct result of accidental
damage to the project materials, admissible
under Material Damage Section of an EAR
or CAR insurance policy.
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Value ALOP / DSU ALOP follows in principle characteristics of
an annual Consequential Loss insurance

T&C
policy, but is issued in advance of the actual
O & M Period
Delay Period

commencement of business.
It is always issued in conjuction with and as
an extension of EAR / CAR insurance policy
under a separate section.
ECOD

NCOD

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The Need :
ALOP, even today remains a very
With liberalised economies in different
specialised class of business with high loss
parts of the world a good number of
exposures.
infrastructure plants /production facilities
A
are privately funded by banks and
Lot
financial institutions. It is only with the
Of
compulsion of financiers of such projects,
Problems
that the need for this insurance is on the

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rise, especially in countries like India.
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Financial Consequences of Project Delay :

Critical Issues :
The financial consequences of any delay in
1. Practicability of connecting a loss of commissioning of a plant under construction
income to a material damage event long may relate to
after its occurrence, • Liquidity i.e. short-term-flow.
• Profitability i.e. long-term-cash-flow.
2. Realistic financial projections to decide
• Growth.
adequacy of insured values, • Standing charges & a variety of continuing
3. Accurate definitions of coverage in the expenses during the period of delay in
commissioning of the plant / production
policy wordings.
facility
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Speculative or trade risks - political, social

Classification of Causes for Delay :
A wide variety of causes – both internal and
external to an organisation – lead to delays
in commissioning of a new project which
can be broadly classified into two groups :
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or economic reasons or shortcomings in
the management and errors in judgement.
Not Insurable.
Occurrences related to natural perils,
inherent defects and human failures that
lead to material damage of an accidental
nature.
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Financial Interests at Stake following Delay Insurable Interest :
Principal Affects anticipated earnings, interest on Thus, the principal alone and his financiers
capital, wages, depreciation etc.
have an insurable interest in the financial
Contractor Affects his payments receivable, may invoke
contractual penalties consequences of a delay in the project.
Sub Same as for contractor
contractor Accordingly ALOP policy is issued only to
Suppliers Same as for contractor
principal / owner of the project with the
Customers Affects business plans
interest of the financiers suitably
Financiers reduces the security of their loan, delays loan
repayments & interest payments. recorded.
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 Critical Differences - Operational LOP Vs. ALOP
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Existing Operating New Venture
Plant Insurability of Delay Depends upon :
Market established only projections

Product Proven & accepted Product, demand & 1. Defining and estimating the sum insured.
market, acceptance
uncertain
2. Segregating the insured incident from
Experience Technology / No experience newness of
weaknesses well m/c & inexperienced staff
known, staff well others which may contribute to project
trained
Machinery / Process Tested & time proven unknown & proto- type delays
Revenue / Cost Trading figures Only projected figures
Structure available for 3. Computing the financial impact of the
previous years
Infrastructure / Established Only assumptions
Legal Frame Work
delay.
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Basic Elements: ALOP Sum Insured :

The Insured – Principal + Financiers Annual Gross Profits Net Profits + Standing Charges
Turnover minus Variable Cost
Sum Insured
Debt Service Charges Principal & Interest
Period of insurance coincides with policy period
Fixed Overhead Daily values on such charges an
Indemnity Period (IP) ECOD to NCOD Charges Actual Loss Sustained basis.

Interest Charges Additional interest burden

Lead period
during the period of delay
Time Excess (TE): Loss of Rental Residential and office buildings

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Definitions :
Annual Turnover:
Turnover:
The turnover which would have been
The amount of money (less discounts
allowed) paid or payable to the Insured for achieved, had the accident not occurred,

goods, products or services sold, delivered during the 12 months after the planned date
or rendered in the course of the insured
of completion of the insured works.
business conducted at the premises.
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Annual Gross Profit :

Rate of Gross Profit :
The amount by which the annual turnover
The rate which would have been earned,
exceeds the amount of specified working
had the accident not occurred, on the
expenses. Specified working expenses are
those costs which vary directly with turnover during the Indemnity Period.

turnover, such as those for the acquisition of

goods, raw materials or auxiliaries,
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Period of Insurance : Special Exclusions :

Same as EAR / CAR • Endorsements on MD unless agreed,
Indemnity Period :
• EQ, volcanic eruption, tsunami, unless agreed,
Starts with ECOD completion of full
operational testing (if applicable) or at the • Loss /damage to surrounding property, CPM,
planned date of completion of the insured • Operating media or feedstock, shortage,
works stated in the Schedule, whichever
destruction, deterioration of or damage to any
shall occur first.
Time Excess : materials necessary for the insured business,
Contd.
From ECOD to agreed days
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Contd.

• Any restrictions imposed by a public authority,

Special Conditions :
Duties of the Insured
• Non-availability of funds,
take all reasonable steps to complete works as scheduled
• Alterations, additions, improvements, Change in Degree of Risk
rectification of defects or faults or elimination of changes of the envisaged works progress programme,
testing procedure, etc.;
any deficiencies carried out after the occurrence;
alteration, modification or addition to any item of
• Any loss due to fines or damages for breach of machinery or work, etc.;
departure from prescribed construction or operation
contract for late or non-completion of orders, or
conditions ;
for any penalties of whatever nature changes in the Insured’s interest (such as
discontinuation or liquidation of the business or its
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 Engineering Insurance
UNDERWRITING OF ALOP RISK
Declined List – Rating of ALOP Risks :
• Prototype machinery,
Since no insurer has a sufficiently large
• Second hand machinery or plant
• Imported machinery, without adequate local repair portfolio, statistically supported rating
facility, spare parts,
• ALOP in foreign country , systems could not be developed to date
• Risk without complete underwriting information insurers have to depend upon the
• Marine risks
• Manufecturer’s risk at supplier’s premises, international reinsurance market for
• Supplier’s extension, guidance on a case to case basis
• Cover restricted to testing,
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• Mobile plant and machinery

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Conditions Relating To Claims :

1.Immediate notice
Underwriting Information
2.Steps to minimise or to avoid or diminish the
claim amount or any delay in completion of the
works
3.Discontinue use of damaged machinery
4.To preserve evidence
5.Access to insurers / representative
6.Comply with insurer’s recommendations.
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X’mer - US $ 1.7 Mln EAR

Bldg. - US $ 100000 Fire
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UNDERWRITING OF ALOP RISK UNDERWRITING OF ALOP RISK

NOT TO BE COVERED NOT TO BE COVERED
• PROTOTPE MACHINERY, • RISK WITHOUT COMPLETE UNDERWRITING
INFORMATION,(CONSTRUCTION TIME SCHEDULE,FLOW
SHEETS,CONTRACT DOCUMENTS,LOP QUESTIONAIRE,)
• SECOND HAND MACHINERY OR PLANT
• , • MARINE RISKS
• FOREIGN MACHINERY,WITHOUT ADEQUATE LOCAL • ,
REPAIR FACILITY,SPARE PARTS, • MANUFECTURER’S RISK AT SUPPLIER’S PREMISES,

• ALOP IN FOREIGN COUNTRY WITHOUT LOCAL • SUPPLIER’S EXTENSION,

REPRESENTATIVE OF LEAD INSURER,
• COVER RESTRICTED TO TESTING,
• RISKS WITHOUT THE POSSIBILITY TO PARTICIPATE • MOBILE PLANT AND MACHINERY
IN THE FUTURE COVERSFOLLOWING THE
COMMENCMENT OF COMMERCIAL OPERATION.