By Keith Norbury
Since project cargoes come in many shapes and sizes, from wind turbine blades to construction cranes, and can be worth millions of dollars, figuring out how to insure them isn’t easy. “There’s really no technical science to it,” said Kevan Gielty, President of Vancouver-based Coast Underwriters Limited, part of the Royal Sun Alliance Group. “A lot of it is judgment.”
A past Chairman of the International Union of Marine Insurance, Mr. Gielty specializes in underwriting project cargo, such as equipment for co-generation power plants, pulp mills, infrastructure projects, and cranes. Some of those have $100 million exposures. Yet, even with 20 years’ experience in insurance, he leaves the heavy lifting of evaluating those exposures to risk management specialists who “understand it better than I do as an underwriter at a desk.” In some cases, the risk management surveyors will be in attendance to ensure that a cargo is loaded or unloaded with appropriate care.
“Typically the problem with cargo is every time somebody has to lift it and put it down, that’s a risk,” Mr. Gielty said. Typically, an insurance broker deals with a client to gather information about the cargo before passing the information along to the underwriter. That information includes the nature of the equipment, its end use, destination and the actual routing of the cargo. “The underwriter may say we don’t have enough information to complete a quote here. So we would then ask for more information,” Mr. Gielty said. “And once we have that information, we then assess the premium.” Other considerations are the size and weight of the cargo, whether or not it is exposed to the elements, or whether it has an awkward shape. For example, will it fit under highway overpasses?
Who insures the cargo depends on the terms of the sale, Mr. Gielty pointed out.
“If you’re a customer in Canada buying this, the terms of sale may put the onus on you to insure it. Or you may put the onus on the guy that’s exporting the goods to you.”
Such terms are known in the business as Inco terms, an acronym for International Commercial terms, which are defined by the International Chamber of Commerce. Examples of Inco terms include the familiar acronyms FOB (free on board), CIF (cost, insurance and freight), and DAF (delivered at frontier).
In most cases, the insurance covers only against physical loss from external causes, and does not cover the cost of delays of a shipment blocked by protesters, for example. “On the other hand, if protesters vandalize the cargo then, yes, that’s covered.”
An exception to the exclusion for coverage of delays is an element of insurance called delay and start up consequential loss, or DSU, Mr. Gielty said. Typically those who buy DSU insurance recognize the potential for an interruption to result in a major business loss.
“We are talking millions and millions. I’ve seen some projects of $200 million to $300 million.”
In many cases, financial institutions require the purchase of DSU, he noted. One of the requirements for DSU coverage is that the project be risk-managed. Obviously, the idea is to reduce the risk of a loss happening in the first place. “If you were shipping machinery that’s in a container, that’s fine. Give us the information. We understand it,” he said. “But if you want to insure something that’s big and bulky and represents a lot of value, or it’s attached to a potential business interruption loss, yes, we’re going to require that it gets risk-managed properly.”
So far, he has not had to pay out a DSU claim, although he has paid out other claims. He declined to go into details or even be pinned down on what the premiums might be, although he gave a ballpark range of $10,000 to $50,000 to insure a hypothetical $10-million cargo going from Vancouver to Alberta. Out of that premium, which represents a fraction of the cargo value, the insurer has to pay the costs of evaluating the risk and for the surveyor if required. “Then if you have a claim, you’re really paying.”