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Maintenance cover under WELCAR considered - Munich Re Capital Ltd v Ascot Corporate Name Ltd [2019] EWHC 2768 (Comm)

News / 31-03-2020 / Mexico

In its first decision on the WELCAR 2001 Offshore Construction Project Policy (“WELCAR) terms, the Commercial Court considered whether insurance cover for the 12 month “Maintenance Period”, would apply in circumstances where the construction phase intended to be covered by the “Project Period” had not yet been completed. 

The case highlights the need to ensure appropriate extensions of insurance cover have been obtained were construction is delayed beyond the period contemplated in the original policy and that any ancillary cover is clearly defined.

Background

The dispute in this case was between insurers and reinsurers under a facultative excess of loss reinsurance contract (the “Reinsurance Policy”).  The Reinsurance Policy followed the wording of the underlying policy (the “CAR Policy”) which provided cover for Chevron’s Bigfoot project in the Gulf of Mexico involving the creation of an oil and gas drilling facility using an extended tension length platform (the “Project”).  

The Project commenced in 2011 and, at the time the insurance was placed, was estimated to be completed by September 2014 at the latest when the facility would be handed over to operations.   That this was the case was communicated to the primary insurers in the Underwriting Information Report, which Report was passed by the insurers to the reinsurers.  The insurance cover for the Project Period was premised on this basis and stated to attach until 30th March 2014 but not beyond 30 September 2014 (the “Project Period”). Upon expiry of cover for the Project Period a limited coverage continued for a maintenance period of up to 12 months (the “Maintenance Period”).

Under Clause 21 of the CAR Policy, coverage during the Maintenance Period was limited to physical loss or damage resulting from or attributable to:

 

 

  1. a) faulty or defective workmanship, construction, material or design arising from a cause occurring prior to commencement of the maintenance period; and

b) operations carried out by Other Assureds during the maintenance period(s) for the purpose of complying with their obligations in respect of maintenance or the making good of defects as may be referred to in the conditions of contract, or by any other visits to the site necessarily incurred to comply with qualifications to the acceptance certificate.

There were significant delays in construction as a result of which three extensions of cover for the Project Period, up to 31 December 2018, were agreed under the CAR Policy.   No similar extensions were sought or agreed under the Reinsurance Policy.

Between the end of May and beginning of June 2015, 9 of the 16 tendons intended to anchor the hull to the seabed collapsed to the seabed.   The tendons were to be connected to the hull through clamp assembly modules which were suspended on the water by temporary buoyancy modules designed to hold them in place pending their connection to the hull.  Chevron’s investigation concluded that there had been a fatigue failure of the bolts in the flanges of the clamp assembly modules when exposed to the forces incidental to the procedures necessary to keep them in place.   Substantial claims were made under the CAR Policy and, following settlement of those claims, the insurers sought to recover the proportionate amount under the Reinsurance Policy, asserting that the failure was due to faulty and defective construction, material and/or design arising from causes occurring prior to 31 December 2013.

Although the Reinsurance Policy had not been extended in line with the CAR Policy, the insurers’ contentions on construction were broadly that the physical loss/damage resulted or was attributable to faulty or defective workmanship, construction, material or design arising from a cause occurring prior to commencement of the maintenance period, as required by Clause 21 and that:

i) under its terms the Project Period expired on 30 September 2014, following which cover continued for the 12 month maintenance period; or

ii) alternatively, cover continued in respect of each item, portion or part insured which had been completed at the time the Project Period  expired

The reinsurers’ primary position was that upon expiry of the Project Period, as defined, limited cover would continue over the completed project for a period of 12 months.  Because, contrary to the parties’ expectations, the project was not completed by expiry of the Project Period, there was no completed project in respect of which that limited cover could continue.  

Alternatively, if effect was to be given to the parties’ intention that limited cover would be provided for a 12 month Maintenance Period, the reinsurers argued that cover would commence when the Project was completed which was on 1 January 2019.  However, under Clause 21, that cover would be limited to physical loss or damage arising from a cause which occurred prior to expiry of the Project Period on 30 September 2014. 

The Outcome

While the Court considered a literal approach to construction of Clause 21 would favour the insurers, the wording had to be construed in its commercial context.   Taking into account the context and various provisions of the CAR Policy, the Judge held that the insurers were not entitled to recover from the reinsurers the sums they had paid to Chevron under the underlying policy.

The key factors taken into account by the Judge were as follows:

i) The intention was that the CAR Policy and Reinsurance Policy would mirror one another;

ii) The definition of Policy Period indicated that the Parties contemplated the possibility of the need for an extension;

iii) A reasonable person, being someone with substantial expertise of the off-shore construction all risks market, familiar with that market and ordinary expectations of parties to such a CAR policy, would:

a) ordinarily expect the Project Period to cover all operations up to the completion of construction;

b) in the event of delays, expect an extension of the Project Period beyond the date originally agreed, on terms and at a premium to be agreed; and

c) understand the general rationale for maintenance cover was to provide limited cover during an additional period of post-completion maintenance to avoid any potential gap in coverage between CAR and operational policies.

iv) The definition of the Estimated Project Period of “until 30 March but not beyond September 2014” was inconsistent with an intention that the cover was to be date defined irrespective of the state of construction and confirmed it was linked to completion of construction and handover.

v) That Clause 21 was headed “Maintenance” and referred in 21(b) to the “acceptance certificate” were consistent with an expectation the construction would be completed at the time the maintenance cover attached.

vi) As maintenance cover ran from the expiry date of the Project Period, it could not have been intended that cover under each of the sub-clauses would operate from different start dates and for different periods.

For the above reasons, the Judge held the reinsurers were correct in their primary case that, upon expiry of the Project Period, limited cover would continue over the completed project for a period of 12 months.  Because the project was not completed on expiry of the Project Period, there was no project to be covered during the maintenance period.

While the construction issues in this case were between insurers and reinsurers, much of the reasoning would similarly have applied if the dispute had been between the underlying assured and their insurers.  While there was no issue as to whether Chevron had obtained the necessary extensions of cover in this case, if they had not done so and relied on the maintenance cover, it appears highly unlikely the losses in connection with the lost tendons would have been covered by the policy.  

Fionna Gavin

Fionna Gavin Joint Head of Insurance, Partner

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