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31 October 2012
Norwegian plan versus institute clauses
Ensuring that adequate insurance is in place is essential for a vessel under construction as the losses can be substantial if a peril strikes. Builder's risk insurance is tailormade to meet the needs of the parties who have an interest in the building contract, typically by providing hull insurance cover for the vessel being built coupled with partial third-party liability cover.
Shipbuilding contracts will invariably address which of the parties is required to take out insurance cover, and will often specify the standard insurance terms to be used. In the Norwegian market, particularly where the shipyard is Norwegian or the parties use the Standard Form Norwegian Shipbuilding Contract (SHIP 2000), the builder's risks insurance will be based on the Norwegian Marine Insurance Plan (the current edition is 1996, version 2010). Alternatively the Institute Clauses Builders Risks may be used (the current version is June 1 1988). This update examines important differences between the plan and the institute clauses.
Usually, the builder will own and have title to the vessel or the insured object under construction and its appurtenances, and will carry the risk of loss or damage to the new building. The builder will therefore normally take out builder's risks insurance and be named as the assured in the policy. However, the buyer may also have an interest in the insured object, which he or she needs to insure, such as buyer's supplied equipment to be installed on board the vessel. The buyer may therefore request to be named as co-insured in the policy; provision for this may also be set out in the building contract.
The losses covered are both for total loss of or partial damage to the insured object, as well as costs incurred through an unsuccessful launch attempt and wreck removal costs.
Norwegian plan versus institute clauses
Both the plan and the institute clauses provide standard terms for all risks. However, there are some important differences in the cover provided.
Co-insurance of buyer's interest
Under the plan the buyer will automatically be co-insured unless the insurance policy states otherwise. The institute clauses, on the other hand, do not provide for the automatic co-insurance of the buyer and, as such, the buyer must seek the specific agreement of the underwriter to be co-assured. This may cause difficulties if the underwriter does not wish to provide co-assurance cover.
Place of insurance
The place of insurance is where the insured object must be located at the time when the peril strikes in order for the insurer to be liable. Usually the place of insurance will be the main shipbuilder's shipyard, including the geographical areas where sea trials or delivery shall take place.
The plan's definition of the place of insurance seems less beneficial for an insured than the institute clauses. The clauses generally cover manufacturing and transit outside the main shipbuilder's yard without a specific agreement to this effect, while under the plan coverage for such additional locations must be separately agreed with the insurer. This is of particular importance as hulls are often built in low-cost countries such as Romania, Poland or Turkey before being towed to the main shipbuilder's yard for completion.
Earthquakes and volcanic eruption
The institute clauses, contrary to the plan, exclude cover for damage and losses caused by earthquakes and volcanic eruption. Such cover can be important for the insured party where the hull is built in a country where these perils occasionally occur, such as Turkey.
Faulty workmanship, faulty material and error in design
The plan covers damage caused by faulty materials and faulty workmanship, but it does not provide cover for the damage to the faulty part itself. Cover under the institute clauses does not distinguish between the faulty part and other parts - that is, between primary and consequential losses. Hence the clauses can be considered to provide a better solution for the assured as the full loss will be covered. However, both conditions exclude cover for the primary loss when this is caused by a design error.
Strikes and lockouts
The institute clauses exclude cover for loss and damage related to strikes and lockouts, but such cover may be obtained under Institute Strikes Clauses Builders Risks. The plan provides cover for these perils automatically. This cover may be important in the context of hulls being built in low-cost countries, as workers of subcontractors in these countries are not unlikely to suffer from poor working conditions, which in turn can lead to labour disputes.
Failure to make payment
Contrary to the institute clauses, the plan does not provide cover for damage and losses caused by a failure to meet payments obligations. Where a shipyard does not pay its creditors the vessel may be sold through a compulsory sale to cover creditors' claims. The present financial situation makes this a practical problem for many buyers, who must seek to have financial guarantees in place instead to mitigate this risk.
Under the plan the buyer will automatically be co-insured unless the insurance policy states otherwise.
The buyer may have an interest in the insured object which he needs to insure, such as buyer's supplied equipment to be installed on board the vessel.
For further information on this topic please contact Gaute Gjelsten, Øystein Meland or Kaja Oftedal Rasting at Wikborg Rein by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
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