Examining Welcar 2001: A Contractors Perspective

Examining Welcar 2001:A Contractors Perspective Mary Shaddock Jones AGC and Director of Insurance and Compliance Global Industries Offshore LLC

Agenda Typical Contractual Risk Allocation between Owner/Operator and Contractor in offshore construction contract. Does it really matter who negotiates and purchases the CAR policy? i.e. Principal Assured vs. Other Assured Hypothetical Questions and Answers Session Conclusion

Risk of Loss vs. Insurance

Contractor = “Other Assureds” • Special Conditions for “Other Assureds” • “It is a condition precedent for any party listed under Other Assureds…that they perform their operations according to a Quality Assurance/Quality Control system which complies with the Quality Assurance/Quality Control provisions passed on by the Principal Assureds” … • “The rights of any Assured under this insurance shall only be exercised through the Principal Assureds”…. • “As a condition precedent to their benefiting from the automatic waiver of subrogation in this clause, Other Assureds must perform their operations according to the provisions passed on by the Principal Assureds through each and every written contract awarded within the scope of insured works as scheduled under the Policy.”

Communication is Crucial • “Communication and consultation between the underwriter and the insured buyer is crucial in seeking to develop a policy that is sustainable to both the insured and the insurer in order to provide “pre-event” certainty of coverage”. • In situations where the owner/operator purchases the CAR policy, the contractor generally has no opportunity for communication and/or consultation with the underwriter; therefore, its voice is silent. Yet, it is the contractor who generally assumes risk of loss or damage for the Work being performed. • As a result, it is critical that Contractors know and understand the Welcar 2001 policy and the particular terms and conditions contained in the owner purchased policy.

Question #1 • I understand that there is a “standard” Welcar 2001 policy. If this is true, why would/should I need a copy of the owners CAR policy provided they contractually agree to provide a standard Welcar 2001 policy?

Answer: • There is no “regulated” or “printed” Welcar 2001 policy which ensures that all of the basic Welcar 2001 terms and conditions are actually purchased by the owner.

Lesson #1 • If the owner is providing the CAR policy- make sure to either obtain a draft policy before you bid on a job (and if awarded the job obtain a true and correct copy of the policy) and read it or include within your contractual qualifications that certain items must be included in the CAR policy or risk of loss shifts back to the owner with a defense and indemnity clause.

Question #2 • The owner isn’t providing me with the Schedule B attached to the Welcar policy. I was provided with a copy of Schedule A which shows the TCV at $100 million. Is this all I need?

Answer: Policy Limit? • Underwriters’ total liability under Section I for all claims arising out of any one Occurrence shall not exceed 125% of the latest agreed Schedule “B” values, including payments made under the sue and labour clause, the additional work clause and the removal of wreckage and/or debris clause (each of which is separately limited under the appropriate coverage clauses). • In the event of escalation as provided under clause 5 of Section I, Underwriters’ total liability under Section I for all claims arising out of any one Occurrence shall not exceed 150% of the initial Schedule “B” values, including payments made under the sue and labour clause, the additional work clause and the removal of wreckage and/or debris clause, and the Escalation Clause (each of which is separately limited under the appropriate coverage clauses). • Notwithstanding anything contained herein, Underwriters’ maximum limit of liability in respect of Section I shall not exceed the Schedule “A” value in the aggregate.

Answer: (cont) Example A: Example B:

Lesson #2 • It is critical that a contractor understand: • (i) if the Welcar policy purchased by the owner requires a Schedule B and • (ii) if yes, how the owner is structuring the breakdown of the project costs and milestones in the original Schedule B and any updated Schedule B’s submitted to the underwriter.

Question #3 • The owner didn’t provide me with the detailed requirements for the Marine Warranty Surveyor before we started the project. We had an accident and the adjuster is asking for the Marine Warranty Surveyor certifications. Am I in trouble?

Answer: Warranty Clause WARRANTY (EXEMPLAR-FINAL VERSION TO BE AGREED) Warranted London Offshore Consultants and/or Global Maritime and/or Noble Denton Associates and/or London Salvage Association and/or MatthewsDaniel approve and issue as applicable Certificates on the project as follows: Conceptual – Certificates to be issued prior to relevant load-outs/installations. i. Procedures for laying, burying, jetting and rock dumping, trenching (all if and as applicable) including the tie-ins of same and installation of spool pieces and risers. ii. Positioning and orientation procedures for jackets at offshore site(s). iii. Piling in procedures in respect of ii. above.

Answer: Due Diligence DUE DILIGENCE It is a condition of the Policy that the Assureds shall exercise due care and diligence in the conduct of all operations covered under the Policy, utilizing all safety practices and equipment generally considered prudent for such operations. In the event any hazardous condition develops, including with respect to any well from which consequential damages covered by the Policy may arise, the Assureds shall at their expense make all reasonable efforts to prevent the occurrence of a loss insured against under the Policy

Answer: Forfeiture FOREFEITURE If an Assured shall breach any provision of the Policy, there shall be no coverage for that Assured as to the particular claim in connection with which the breach occurred, provided that there is no statute to the contrary in the country or state in which the insurance was made. If any Assured shall make any demand for indemnity under this Policy that is false or fraudulent, as regards amount or otherwise, this Policy shall become null and void, and all coverage hereunder shall be forfeited.

Lesson #3 • Every Welcar Construction All Risk Policy contains the Due Diligence clause and some type of Marine Warranty Survey clause. It is critical that you are provided with a copy of the clauses from the owners prior to commencing work so that you can provide the requirements to the Project Management Team. Failure to have the proper certifications from a marine warranty surveyor or to comply with the Due Diligence clause as required by the policy can void coverage in the event of a loss.

Question #4: • We buckled a pipeline late one night. We couldn’t start the repair until the next morning, but when we tried to begin the repairs the weather turned bad and we had to wait three days. The owner and the adjuster appear to be saying that the Welcar policy doesn’t cover the three day downtime on our marine spread. Is this correct?

Answer: Basis of Recovery Basis of Recovery In the event of an Occurrence covered under Section I of the Policy, Underwriters agree to indemnify the Assured on the following basis:- a) Items repaired or replaced- “New for Old” plus towage, installation and all other costs necessarily incurred and duly justified in repair or replacement- as per latest agreed Schedule B.

Answer: Stand-By Charges STAND-BY CHARGES Subject to a sub-limit of US$ (AMOUNT) any one Occurrence aggregated at US$ (AMOUNT) over the Policy Period, Underwriters shall indemnify the Assureds for the cost of stand-by time on vessels and/or craft and/or equipment actively engaged in the course of repair following an Occurrence covered under Section I, where the Assureds are prevented from working in, around or about the damaged property by bad weather, including named hurricanes.

Lesson #4 • When an accident occurs, make sure that the vessel personnel are specific in their vessel logs as to what they are doing to repair the damaged work in order to carefully put your claim together. • One of the first things you will be asked to produce will be the vessel logs showing the activity on the barge to support your claim for costs related to the repair.

Question #5 • We were in the process of installing a jacket when all of a sudden the jacket tipped over on its side and fell to the seabed. We had a cable attached to the jacket so were able to begin lifting the jacket up to recover it and place it on a cargo barge for inspection. After a couple of hours the waves kicked up. We were afraid of capsizing the barge, so we laid the jacket down and retrieved it a couple of hours later. When it was inspected, it did not look like it was damaged, but our client wants us to take it in for stability testing – Do we have a claim under the Welcar 2001 policy form?

Answer: Different Options! • Stand-By Time • Physical Damage • Sue and Labour • Additional Work

Sue and Labour Clause SUE AND LABOUR CLAUSE It is further agreed that in the case of any imminent physical loss or physical damage to the property insured hereunder, which is the direct result of a peril insured against, the Assureds, their servants and their agents may sue, labour and travel for, in and about the defense, safeguard and recovery of the subject matters insured without prejudice to this insurance and may incur reasonable expenses in efforts to avert or minimize a loss which may fall under Section I. The expense so incurred shall be borne by the Assureds and Underwriters proportionately to the extent of their respective interests. No acts of Underwriters or the Assureds in recovering, saving, or preserving the property insured shall be considered as a waiver of acceptance of abandonment. Underwriters limit of liability under this clause shall be 25% of the scheduled value contained in the latest agreed Schedule B at time of loss of the item or items that are the subject of such sue and labour.

Additional Work Clause ADDITIONAL WORK In the event that the structure or insured property is set down or wrongly positioned, which is the direct result of a peril insured against, Underwriters shall indemnify the Assureds for the cost of additional work that is required in respect of positioning or repositioning, sinking, submerging and stabilizing the property insured herein insofar as such cost does not fall within the cover afforded by the sue and labour clause. However Underwriters’ liability under this clause shall not exceed the percentage amount that would be recoverable under the sue and labour clause and then only to the extent that the Policy Limit is not exhausted by a claim under the sue and labour clause.

Lesson #5 • The Welcar Policy is intended to cover physical loss or physical damage to the Work arising out of an occurrence. There should be some tangible evidence of damage, such that the part insured is altered physically and requires repair. • That said, there may be some coverage under the Sue and Labour or Additional Work clauses that don't necessarily require actual damage to the Work.

Question #6 • We just performed a shore pull using the HDD method with steel pipe that was not coated. During a routine inspection of the pipe that was laid, it appeared that there were some latent defects in the pipe as manufactured. The owner has refused to accept the pipe and insists that we purchase new pipe and perform a new HDD shore pull. Is there coverage under the Welcar 2001 policy?

Answer: Defective Parts DEFECTIVE PARTS The insurance afforded by Section I covers physical loss and/or physical damage to the property insured herein occurring during the Policy Period and resulting from a Defective Part, faulty design, faulty materials, faulty or defective workmanship or latent defect even though the fault in design may have occurred prior to the attachment date of the Policy. Section I, however, does not provide coverage for loss or damage to (including the cost of modifying, replacing or repairing) any Defective Part itself, unless all of the following are satisfied: a. such Defective Part has suffered physical loss or physical damage during the Policy Period; b. such physical loss or physical damage was caused by an insured peril external to that part; and c. the defect did not cause or contribute to the physical loss or physical damage.

Answer: Defective Parts (cont) DEFECTIVE PARTS In no case shall Section I provide coverage for any cost or expense incurred by reason of betterment or alterations in design. In the event of the total physical destruction of one or more of the items listed in the Schedule “B” attached to the Policy, then this exclusion shall only apply to an identifiable part or parts of such scheduled item or items. For the purposes of this clause a “Defective Part” shall mean any part of the subject matter insured which is or becomes defective and/or unfit or unsuitable for its actual or intended purpose, whether by reason of faulty design, faulty materials, faulty workmanship, a combination of one or more thereof or any other reason whatsoever. The term “Defective Part” shall also include such ancillary components, which are not themselves faulty, but which would normally be removed and replaced by new components when the component that is faulty is rectified.

Defective Part Buy-Back DEFECTIVE PART EXCLUSION BUY-BACK Notwithstanding the provisions of the Defective Part Clause in Section I of the attached Policy, this insurance will pay for the cost of repair or replacement of defective parts which have suffered physical loss and/or physical damage during the Policy period, but the recovery of such costs is subject to: a) deductible $ each part, each accident or Occurrence; and b) a total aggregate limit of $ for all losses during the Policy period, including the Maintenance Period; and c) the provisions of the Basis of Recovery Clauses in Section I of the Policy; and d) an additional premium $ being paid in full. However, it is specifically understood and agreed that this endorsement will not provide recovery for cancellation charges, stand-by costs or consequential costs or expenses that would not be recoverable under the terms and conditions of the Policy in the absence of this clause.

Lesson #6 • It is important to determine who is supplying and who is assuming responsibility for the materials being installed. If the owner is supplying the material, then the contract should exclude any risk of loss on the contractor for defective material. • If the contractor is purchasing the material and/or has assumed liability for it in the contract, then it is critical to determine the likelihood that the material could be defective so that you can cover either all or part of it through a Defective Part Exclusion Buy-Back and/or contractually with the manufacturer of the material. • If the owner buys the CAR policy, then it will be critical to request information prior to the bid as to the value of the material and the availability of coverage under the owner provided CAR policy for Defective Parts.

Conclusion • As I stated in the beginning of my presentation, I do not proclaim to be an expert on the Welcar 2001 policy. • I am simply relaying to you how I interpret the language of the Welcar 2001- from a contractor’s perspective. • There is a balance that can be struck between the insured and the insurer, but it does take communication. Unfortunately, when an owner/operator buys the CAR policy, yet places risk of loss on the contractor, the necessary communication from the contractors perspective may not be heard. • I am positive that there are counter views to what I have said. I encourage discussions so that all of us, Owners/Operators, Contractors, Underwriters, Brokers and Adjusters are on the same page so that we have the required pre-event certainty that we look for when transferring or assuming risk.

Questions? Mary Shaddock Jones Global Industries Offshore, LLC 8000 Global Drive Sulphur, LA 70665 337-583-5324 Office 337-499-3689 Cell maryj@globalind.com

Examining Welcar 2001: A Contractors Perspective