PROPERTY & PLANT TESTING & COMMISSIONING CLAUSE & QUESTIONNAIRE LMA5197

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1 PROPERTY & PLANT TESTING & COMMISSIONING CLAUSE & QUESTIONNAIRE LMA5197 LMA Market Briefing Old Library, Lloyd s 8 March

2 Introduction Introduction Ron Jarvis, Swiss Re Lloyd s Market Association Neil Smith, LMA Presentation Andy Goddard, Talbot John Attridge, Liberty Panel Q&A Steve Saunders, QBE Nick Hodges, AIG

3 Lloyd s Market Association (LMA) LMA represents the interests of the Lloyd s underwriting and claims community Provides a forum for members to seek solutions to operational and technical issues by pooling knowledge and working together There are a number of LMA business panels representing the different classes of business within Lloyd s

4 Competition Law Compliance with Competition Law Refer to LMA Competition Law guidance: Model wordings Model clauses purely illustrative and distributed for the guidance of members Underwriters are free to agree to different conditions / decide whether or not any contractual language is acceptable on any given risk LMA does not publish written guidelines with regard to application or intent of any specific contractual terms

5 Onshore Energy LMA Business Panel Onshore Energy LMA business panel formed in September 2011 The panel consists of underwriters from syndicates and companies writing Onshore Energy business within the Lloyd s and London market The scope includes onshore hydrocarbon production and processing but excludes power and mining risks The panel meets on a monthly basis and is working on a number of technical initiatives An engineering subgroup has been formed to help develop a number of these technical initiatives, one of which is a review of the Testing & Commissioning (T&C) clause

6 Development of the Original T&C Clause Strong commercial driver to transfer from construction to operational insurance Potential for early transfer of assets leading to operational (Re)Insurers being exposed to construction related risks Historically a lack in clarity of the point of transfer from construction to operational cover Historically underwriters would simply write subject to satisfactory T&C on a policy slip Recognition of the need to have in place minimum requirements to transfer from construction to operational cover The original and existing T&C clause was developed by the market in the 1980s to cover the transfer of major assets (not minor works )

7 So why the review? The original T&C clause was fit for purpose at the time but there have been significant advancements in Process Safety Management over the last 30 years The attachment of assets to an operational policy is often problematic which can be underpinned by: A lack of understanding of the actual requirements of the T&C clause A lack of communication between a Risk Manager and the Project Management Team (PMT) Insufficient time and information provided to (Re)Insurers This can lead to significant delays with potential financial implications or policy coverage issues for the (Re)Insured and/or (Re)Insurers potentially being exposed to construction related risks

8 Problems with the existing transfer process Project endorsements often presented to (Re)Insurers with: Little or no supporting information Lack of clear definition of the scope of the endorsement and associated commissioning plan Limited time to allow review prior to proposed attachment Each (Re)Insurer on the panel will have a similar but different set of information requests resulting in an uncoordinated approach For various reasons there may be problems with compliance with the 72hrs/100% performance test but these are often poorly communicated to (Re)Insurers For practical process reasons the performance test may not be achievable (feedstock restrictions, grade slate, batch processes etc) The T&C clause performance test is sometimes confused with other warranted plant performance tests (licensor, lenders etc)

9 Case study #1 Petrochemical Complex - USD >3,000 million Submission received one day prior to expiry of construction policy with limited supporting information Expectation that attachment would be endorsed on the basis of compliance with the project contractual throughput requirements (less onerous than T&C clause requirements) Significant discussion and information requests ensued whereby it became clear that an unresolved mechanical issue with a particular equipment item was resulting in the rate restriction Endorsement ultimately signed 2½ months later with policy restrictions

10 Case study #2 Petrochemical Unit - USD 300 million Submission received by (Re)Insurers identified non-compliance with the 72hrs/100% performance test Engineering survey prior to attachment highlighted OEM recommendations to shutdown the unit and rectify the problem Endorsement ultimately signed 18 months later with policy restrictions

11 Case study #3 Refinery Unit - USD >200 million Submission received in the form of a single line with no supporting information Information requests identified a number of issues which should have been originally declared Endorsement ultimately signed 1 month later

12 Case study #4 Terminal USD 200 million Unit commissioned in June but not subject to performance test until December due to feedstock restrictions Unit was damaged by an explosion during testing (Re)Insured had not extended the construction policy even though testing had not been carried out Fortunately a settlement was made as the same (Re)Insurer led the construction and operational policies but real potential for a gap in cover

13 Original clause wording with changes highlighted

14 What has changed? The numbered elements of the existing T&C clause have not changed significantly For clarity, element number 4 of the existing T&C clause has been separated into elements 4 and 5 The term operational integrity has been replaced by mechanical integrity, process safety and reliability to reflect current and more readily understood industry terminology and advances in Process Safety Management The key change is the addition of a request for the (Re)Insured to complete an information request template which supports and explains the elements of the clause

15 Benefits of the Information Request template Supports items 1 to 5 of the T&C clause providing a level of assurance for (Re)Insurers and guidance for Brokers and Risk Managers A consolidated template standardising the market s request for information Clearly sets out operational (Re)Insurers expectations for transfer of assets allowing (Re)Insureds to plan the requirements into the project process Industry terminology readily understood by (Re)Insured s PMT and provides a more tangible requirement than the T&C clause alone Requires that the scope of any endorsement be clearly defined as well as early identification of any commissioning and/or performance test issues A useful tool to aid education and communication between the various involved parties

16 Process for submission It is intended that the information request template be completed by the (Re)Insured s PMT It is expected that the template be completed for each and every applicable endorsement to a policy Existing project documentation can be referenced and submitted in response to specific items Considered to be the minimum level of information often more received from the better (Re)Insureds which is encouraged to continue The completed template should be submitted to (Re)Insurers shortly before the anticipated attachment to the operational policy The intent is that the information reflects the status of the asset as close to policy attachment as possible whilst allowing a reasonable time for the information to be reviewed by (Re)Insurers

17 Information Request template test cases To date the information request template has been successfully utilised on two major project attachments Refinery Expansion USD 1,500 million Polyolefin Unit USD 500 million In both cases template fully completed by the (Re)Insured s PMT Template not found to be onerous by the (Re)Insured and all information request items deemed to be clear and reasonable In both cases issues with compliance with the T&C clause were identified however the information submitted allowed (Re)Insurers to make a timely and informed judgement

18 Roll out of LMA5197 The new T&C clause (including the information request template) has been endorsed by the Onshore Energy LMA business panel and is published on the LMA website: Available in restricted.docx format Underwriters promote the mutual benefits of the new clause during market presentations and meetings with (Re)Insureds Brokers use the new clause to help educate (Re)Insureds and promote incorporation within the project process Engineers promote the new clause during risk engineering surveys particularly at those sites with major projects

19 Summary Aims to clarify the expectations for transfer from construction to operational cover for the mutual benefit of (Re)Insureds, Brokers and (Re)Insurers Considered to be a natural evolution of the existing T&C clause Addition of the information request template improves and formalises the existing market practice Enables (Re)Insureds and Brokers to take a planned and proactive approach to managing the transfer to operational cover Allows (Re)Insurers to make a timely and informed judgement whilst retaining the flexibility of the existing T&C clause

20 Underwriting Panel Q&A Steve Saunders, QBE Chairman of Onshore Energy LMA Business Panel Nick Hodges, AIG Deputy-Chairman of Onshore Energy LMA Business Panel