Insure against big bangs

Let us assume that an explosion occurs at a chemical factory in the UAE, causing damage worth millions of dirhams. The factory owner claims its insurance policy to recoup losses. However, there is a problem: the policy excludes payouts in case of accidents caused by corro- sion, and this explosion hap- pened when sulphuric acid corroded the walls of its con- tainer and came into contact with metal.

Legal advisers in the UAE say the claim is valid. They argue the exclusion only applies to naturally occur- ring corrosion, for instance, caused by saltwater.

Unfortunately, the policy was insured with Lloyd’s of London, and lawyers in the UK understand corrosion to refer to both natural and non-natural forms. They say the insurance company should not pay out.

Which interpretation is correct? The answer can be found through a costly and time-consuming arbitration, which the plant owner does not want but has to pursue.

This example may seem highly technical, but there can be millions of dirhams at stake in legal arguments of this kind. Insurance to protect against risks in industry and construction is big busi- ness. And there is an increas- ing desire in the UAE to get the wording of policies right to avoid such disputes.

Efficient handling

How companies should handle this process was the main topic of discussion at the Bonds and Insurance in Construction: Principles, Policies, Notices and Claims conference, organised by consulting firm Hill Interna- tional in November in Dubai, featuring experts from the world over.

James Lyall, Director at Hill International, who spoke at the event, says expertise is of the essence as construc- tion in the emirate is picking up again. “There’s definitely an uptick in construction. You only have to look down Shaikh Zayed Road and the Al Safa detour to see the extent. And it’s not only in Dubai, it’s in the Middle East as a whole.”

Building firms and devel- opers are looking carefully at insurance because they want to learn from what went wrong in the 2008 crash and weave extra risk protection into their policies. They are aided by a wider range of insurance and bond con- tracts available on the mar- ket today, as well as legal assistance from UAE courts, which ought to give more support to various commer- cial operations.

Risk factors

So what are the dangers that developers are trying to protect against?

“The Middle East is not resource-rich for construc- tion,” says Lyall. “It has to bring a lot in from outside.” It is because of the region’s reliance on overseas suppli- ers that many construction firms protect themselves against rising material pric- es, shipping delays or port costs. They may take policies to protect themselves against a shortage of labour, strikes or lack of necessary visas for staff. “Those are the pre- dominant risks,” adds Lyall. There are also policies for industrial accidents.

In Dubai, there is another category of risk. If a gov- ernment agency such as the Roads and Transport Author- ity decides to dig up a road, build a new metro line or, as is happening now, create a waterway beneath the city’s busiest highway, construc- tion firms in nearby areas are affected. Companies seek to limit their risks by taking out policies that would protect their interests in such cases.

But there is a trade-off. The more you insure against, the higher your premium. Construction firms must have a pragmatic approach — it is simply not cost-effec- tive to insure against every possible pitfall.

Keep records

What Lyall and the other speakers aimed to emphasise at the conference is that buy- ing an insurance policy or a bond contract is only a part of risk management. In order to make a successful claim on an insurance policy, the claimant has to prove actual delays and costs.

“As bland as it is, one of the issues is record-keeping,” says Lyall. “Countries in the Middle East are horrendous at keeping good records.”

These should include documents covering every aspect of the business — pro- duction records, site records, records of labour, travel time and costs expended. As Ly- all points out, these are “the things you think would be kept automatically but seem to be missed more often than not”. Construction firms need to produce all the docu- ments to make a claim.

For instance, in the ex- ample of the hypothetical chemical factory explosion, the insurer would need to see documents showing the value of the plant and stock destroyed in the accident. If a claimant cannot produce accurate records, the claim may become invalid.

Construction firms in the UAE are prone to poor record-keeping because they tend to rely on a large num- ber of subcontractors, says Lyall. If there are a lot of par- ties involved in a particular project, record-keeping is dispersed. Another prob- lem UAE companies face is high turnover of staff. Senior workers who leave the com- pany after two to four years take their experience and knowledge with them, often leaving little information for their successors.

Interpretation issues

Another hurdle insur- ance claimants are facing is that arbitration is becoming increasingly international, which means more than one jurisdiction is involved. It is common for a negotiation in the UAE to proceed first by soliciting local legal opinion and then seeking the advice of a UK-based expert.

“If both agree, life is fine,” says Paul Reed, Queen’s Counsel, a barrister at Hard- wicke in London, who has advised on many UAE cases. “But if they don’t reach the same conclusion, they end up with unnecessary disputes, affecting the cash flow of an institution or company.”

The main difference be- tween the UK and the UAE’s interpretations of insurance policies lies in the fact that UK courts have a document- ed history of cases, which indicates how future matters will be resolved, whereas “in the UAE, you have a set of principles that is applied uniquely in every dispute”, says Reed.

The complexities of in- ternational arbitration do not only affect UAE disputes. A construction firm might find itself in a similar situation if it was doing business in Sin- gapore. However, the UAE is the most international of the Gulf states. In Saudi Arabia, for instance, most disputes are resolved by Saudi courts only, in proceedings con- ducted entirely in Arabic.

There are other local characteristics that must be considered as well. One way to insure against construc- tion risk is by buying a con- struction bond. An investor might purchase one to pro- tect himself in case the con- tractor builds an infrastruc- ture or part of it that’s not fit.

Let’s say, for example, that the project is a dock. 

The builder fails to include adequate flood protection, and it’s damaged in a storm. The owner of the dock might try to call on its bond to re- coup some costs.

Unfortunately, in the UAE, calling a bond requires powers of attorney to be signed and various other of- ficial tasks that are usually not required in other juris- dictional systems. If the dock owner was unprepared for these steps, it may take time and effort to gain the payout on its bond, potentially caus- ing a cash flow shortfall.

“There are a load of hur- dles and hoops. [Various sit- uations] require local opin- ion and help,” says Reed, who also spoke at the conference. His aim was to educate busi- nesses about the particulars of UAE law so they don’t face nasty surprises.

Moving forward

Laws and interpretations are not fixed but can develop over time. Reed says UAE courts are becoming more supportive of commercial factors in their decision- making while being more influenced by international standards such as the UK system. And it’s not a one-way street. The UK’s courts are also influenced by other jurisdictions, such as the Eu- ropean civil code system.

What this means is that some of the different lo- cal problems, including the red tape needed to call a construction bond in the UAE, may fall away over time. The country has al- ready taken strides in be- coming a more open and business-friendly jurisdic- tion with initiatives such as the Dubai International Fi- nancial Centre courts, which base their system on com- mon English law that is often used for arbitration.

Other countries in the re- gion, such as Oman and Qa- tar, seem to want to move in this direction as well. Over time, one hopes the differ- ences in legal interpretation between different countries will be ironed out and dis- putes over the meaning of corrosion, for example, will cause fewer problems.

This state of affairs is still some distance away in the future, though. In the mean- time, if you are involved in insuring industrial or con- struction projects you need to read the insurance poli- cies very carefully.

Source: Mark Gordon, Special to Property Weekly

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