It pays to address insurers' concerns about unproved technology
When a new machine comes to the market – even if it’s an upgraded version of a well-known, reliable model – there is a high likelihood that insurers will view the machine as ‘prototypical’. This therefore requires special considerations when arranging construction insurance.
Knowledge of these considerations for unproven technology is crucial for insureds in order to be on the front foot should a claim arise due to damage or loss, and of course to ensure the best terms and conditions for insurances are commercially and reasonably available.
What is prototypical equipment?
Simply, anything that has not been done before must be a first of a kind; a prototype. Technology is evolving constantly, with commensurate improvements in efficiency. It is what the customer insists upon.
Upgrades are common, and tweaks to improve performance of a machine in its ambient surroundings are both sensible and essential, and aid in mitigating the risk of an unplanned outage.
Factors such as humidity, temperature and local meteorological or geological features can all mean different exposures exist. These exposures must be catered for accordingly when conducting a construction risk assessment.
Upgrades or the changes to the configuration of a machine due to the factors above could reach a point where they are considered to be extensive enough to render the equipment prototypical.
How do I know if an insurer will class my equipment as prototypical?
The ‘yardstick’ for a typical process industry risk is that the equipment should demonstrate at least 8,000 hours of continuous, trouble-free use ‘in the field’. Configuration is also important and technical validation of components themselves is essential.
The fact that the equipment is unique, however, does not necessarily make it prototypical in the eyes of an insurer.
There must be an evaluation to ascertain if the change is an evolution of the equipment to improve its performance or if it is a revolution that comes with uncertainties around the equipment’s ability to function.
How does unproven technology impact insurance cover?
Clients need to consider the implications to their cover when they install equipment that’s viewed as prototypical by underwriters. It is a crucial part of the construction risk management process.
Every case involving prototypical equipment has its own unique characteristics. When installing unproven technology, clients might come across challenges when negotiating suitable construction insurance terms.
As there is an increase in risk to insurers, they treat unproven technology as special and some impacts in construction insurance terms could be:
- A change to design cover, such as provided by the LEG clauses, is the most likely amendment that insurers will request. Insurers would expect to see some restriction around this depending on the technology selected by the client.
- The insurance premium could increase. The premium is expected to be in line with the increased risk that insurers are taking.
- The policy deductibles could increase, since insurers might expect a higher retention from the insured in the event of a claim.
- Particular attention may be paid to the warranties provided by original equipment manufacturers (why indeed should insurers wish to take the risk that the developer of a machine is unwilling to bear?)
- Any combination of the above. Insurers might request that more than one of the above points could be considered in the construction insurance terms.
Three ways to assess the construction risk profile of prototypical equipment
The good news is that construction insurance underwriters are amenable to understanding prototypical equipment and working to find a solution for all. The key for the insured is to provide information that will make an insurer comfortable with underwriting the risk.
It’s often said that underwriters fill information gaps with premium. The more information provided, the greater the likeliness of more affordable premiums and wider cover. This depends, of course, on the current underwriting market conditions and performance.
Insureds must present the risk clearly to underwriters to minimise the impact to their insurance terms. They should work with their advisors or a construction insurance broker on the three steps illustrated below:
1 Identify, examine and define
Consider questions such as:
- What is the project’s need? Identify what needs to be built/installed and research the available equipment options.
- What changes have been made to the equipment? What does the manufacturer say about these changes? How will the manufacturer warrant their product?
- How could the changes in the equipment react at your plant? Take both internal and external factors into consideration.
2 Prepare an information pack
Gather all information available so that you have a better picture of the situation. The more information you get, the better position you will have in front of underwriters when arranging construction insurance.
3 Isolate the change and make your own examination
Isolate the change found in the analysis mentioned above and try to understand how the prototypical equipment can impact your project in the event of the need for a repair, replacement, or complete re-design and what needs to be done in terms of risk management. It is also important to examine how the manufacturer can engage with you and assist during both the installation and testing processes.
Partner with your construction broker
Savvy clients know that working with a specialist construction project insurance broker sends a message to the insurer that they take unproven technology and its risk mitigation seriously.
When arranging insurance for specialist risks such as those associated with prototypical equipment, clients stay in regular contact with their project insurance brokers.
Brokers of this type will have expert knowledge of the prototypical equipment, along with good relationships with insurers who understand these risks. They know who has appetite for this type of risk and who understands the specific prototypical equipment.
Their role is to make the risk more attractive to insurers in order to lessen the potential restrictions of cover or increase in pricing. Brokers must find a balance between what the client wants and what the market can do/offer. They will show you what the acceptable balance is and will offer you advice on how to proceed. A broker is also able to help with most forms of construction site risk assessment.
Talk to an expert
For further information, please contact Joe Charczenko of Construction Risk Partners at email@example.com.