Principles of Project Finance

§7.6 INSURANCE

Insurance requirements in project finance are demanding, and as a result insur-

ance costs are high, but this tends to be a neglected area of project development.

This can lead to an underestimation of project costs because all required insur-

ances have not been taken into account or to the financing being held up because

the insurances required by the lenders are not in place. At an early stage of the

project’s development, therefore, the Sponsors need to appoint an insurance bro-

ker with specific experience both in insurance for project finance in general, and

in insuring major projects in the country concerned, to advise on and eventually

place the insurance program.

The broker also plays an important role in communicating information about

the project to the insurance company. This is important because insurance is an

uberrimæ fidei (“of the utmost good faith”) contract; if any material information

is not disclosed to the insurer there is no obligation to pay under the policy (cf.

comments on non-vitiation cover in §7.6.4). The broker must therefore work with

the Project Company and the Sponsors to ensure that this does not happen.

Brokers are often paid a percentage of the insurance premiums, but this is ob-

viously not an incentive to keep premiums down, and it is preferable to negotiate

a fixed fee for their work.

The insurance is arranged in two phases: first, the insurance covering the whole

of the construction period of the project (including start-up and testing), and sec-

ond, annual renewal of insurances when the project is in operation. It should be

noted that the operating phase insurances (other than perhaps the first year) can-

not be arranged or their premiums fixed in advance (cf. §8.10.1).

In addition, normal insurances required by law, such as employer’s liability, ve-

hicle insurances, etc., have to be taken out by the Project Company or the EPC

Contractor, as appropriate.

§7.6.1 C

ONSTRUCTION

P

HASE

I

NSURANCES

In construction contracts that are not being project-financed, it is common for

the contractor to arrange the main insurances for the construction phase of the

project and to include this as part of the contract price. This is logical, because

under a standard construction contract the contractor is at risk of loss from insur-

able events: if part of the project is destroyed in a fire, the contractor is required to

replace it, whether it is insured or not.

However, contractor-arranged insurance is not always suitable in project

finance for several reasons:

• As will be seen, lenders require Delay in Start-Up insurance, which cannot

easily be obtained by the EPC Contractor, who is not at risk of loss in this

§7.6 Insurance 127