Why do Marine Warranty Survey Requirements under Offshore Construction All Risks (CAR) Insurance become unclear?

It is universally accepted that a CAR insurance will require, as a warranty under the policy, that the scope of a marine warranty surveyor (MWS) is agreed within a limited time period from attachment and subsequently implemented during construction activities. Furthermore, there is usually an allowance (as a percentage of premium) that the Insurer makes available and reimburses the Insured upon presentation of paid MWS invoices.

Using the WELCAR 2001 insurance form as an example, the only warranty it contains requires that the MWS approves key construction activities and it provides a generic example of the areas to be considered by the MWS. Finally, it includes a list of surveyors who Insurers pre-approve to carry out this work. The use of surveyors not appearing on this list will need to be specifically agreed.

Being a warranty, the failure by the Insured to meet its requirements will give the Insurer the ability to void the policy from the time of the breach, irrespective as to whether any such warranty breach has a direct bearing on a loss sustained.

In other words, it is essential to get the scope and implementation right to ensure coverage is in place.

INDECS are somewhat baffled about the continuing uncertainty that remains relating to the MWS scope of work –
how it is to be developed by the Insured and the MWS; how it is eventually agreed to by the Insurer; and then how it is implemented.
In 2010, the Joint Rig Committee (JRC) in London, which represents the interests of all insurers – Lloyd’s and
International – who write offshore energy risks, issued an MWS Code of Practice in order purportedly to:

  • Clarify the role of the MWS.
  • Define the function of the MWS Scope of Work.
  • Outline approval criteria for MWS activities.
  • Establish minimum standards for MWS performance.
  • Define lines of communication between Underwriters and the MWS.

This Code of Practice includes various helpful matrices outlining the need for the MWS to review, approve; attend; or issue certificates of approval for certain activities likely to be involved in offshore construction. The activities are “General”, “Fixed Platforms”, “Pipelines” and “Vessel Activity”. We understand that the pre-approved surveyors have previously established these matrices with insurers and their engineers.

When an Insured approaches INDECS, we ensure that they understand the need to engage with the MWS, and once appointed, sit down and fine tune the scopes of work to take into account any specific characteristics of the project in question. Similarly we impress on the Insured that once they have drawn up the revised matrices with the MWS, they, nevertheless, must obtain the agreement of the lead insurers, usually via the CAR broker, following which effective implementation should be managed by the Project Manager.
Unfortunately, what appears to be a simple process falls down for two principal reasons:

  1. The appointed MWS does not produce the matrix that the Insurer is expecting to see.
  2. The MWS produces a matrix, but, inexplicably in the Insurers’ eyes, omits certain sections of the prescribed activities.

Inevitably the Project Manager becomes very frustrated with the genuine threat of delays to Insurers’ sign-off due to such misunderstandings.

The fifth objective set out in the bullet list above, “Define lines of communication between Underwriters and the MWS”, does not appear to be met in this regard. Why?

INDECS have often explained to a Project Manager that the MWS is the “eyes and ears” of the Insurer(s). If there is a breakdown in communication when it comes to agreeing the scope of work at the onset of the project, how can we be sure that there is not a further breakdown in communication if and when the MWS provides information to the Insurer during the work undertaken? It is very rare for the Insured, INDECS, or the broker to be included in such dialogue between the MWS and Insurer, and there is a real risk that an Insured may find itself without insurance cover, if the warranty is unknowingly breached.

INDECS has some suggestions to help avoid these costly misunderstandings:

  • Review the model scope of work prior to implementing CAR insurance. It can be found here
  • Seek Project Management input to ensure an amended MWS scope  aligns with the specifics of your project.
  • Tender the contract with the approved surveyors on the basis of the amended model scope.
  • Prior to award/appointment, present the negotiated MWS work scope to the CAR broker for underwriter agreement.
  • Conclude the MWS contract only once underwriter agreement is received.
  • Manage the MWS and implement the agreed scope.
  • Ensure the MWS flags to the Insured as well as underwriters any issues or potential for breach before a breach is
  • Ensure the MWS provides regular summary reports to both the Insured and underwriters.

INDECS are happy to assist in ensuring that your project has processes in place to minimise the risk of inadvertent
breach of the MWS warranty.