FIDIC Silver Book

Conditions of Contract for EPC Projects

[Edition 2017 vs Edition 1999]

Foreword

As an attempt to analyze the main differences between FIDIC Conditions of Contract EPC/Turnkey Projects [2017 edition] and FIDIC Conditions of Contract EPC/Turnkey Projects [1999 edition}, this paper in hand sketches out the major modifications and  touches the issues to be careful about that taken together, are likely to relieve the Contractor during Works.

This paper does not claim to cover all aspects of FIDIC Conditions of Contract EPC/Turnkey Projects [2017 edition] or offer a solution to every problem. The author actively encourages feedback from fellow colleagues, insurers and reinsurers, in the hope that their contribution will further help Contractor to be at ease during negotiations.

Introduction

Contractor and Employer usually tend to underrate the insurance section of FIDIC contracts which are in direct relation with risk and responsibilities sections because of the complicated wording. The very name of insurance promise more than insurance covers entails and both parties are often disappointed as a result.

FIDIC 2017 edition seems to solve this issue, with more direct and more comprehensible insurance conditions for all involved. It is certainly clear that the drafters of the new editions have gone to great lengths to address previous criticisms from users, including greater emphasis on Risk and Indemnities clauses and mostly under the Insurance clause, the required type of insurances are in conjunction with today’s insurance market offerings.

1.  Insurance - Article 19 (2017 edition) vs Article 18 (1999 Edition]

The most obvious difference is the number of the Insurance Article being Article 19. Former version of FIDIC handled Risk distribution  under Article 17, “Risk and Responsibilities“ , Article 18, “Insurance”, and Article 19, “Force Majeure” whereas the new version addresses  Risks under Article 17, “Care of the Works and Indemnities”, Article 18, “Exceptional Events” and Article 19, “ Insurance”.

1.1   Article 19.1 - General Requirements of Insurances

Most of the wording under this article remains the same except, the term “insuring party”.  One can easily argue that FIDIC is challenging the OCIP (Owner Controlled Insurance Programs) strategies which have become more popular hence more frequent especially with large construction and erection projects. One of the major problems with the OCIP is Owners tend to place the covers with large deductibles to reduce premium costs and place the responsibility of these deductibles on Contractors.  Unfortunately,   most of the well-known insurance markets do not have any appetite for insuring deductible portion of covers and in most cases Contractors are facing high deductible policies which are suitable for cat events and large losses.

“Information concerning deductibles of policies should either be stated in contracts or agreed with Owners.  This is obligatory in the new edition of FIDIC. 

As in 1999 books Insures, wordings cover and limits should be subject to consent by the Employer, terms and conditions may be agreed by both parties prior to sign the contract. Showing the proof of premium still exists so does the Employer’s right to place the insurances if contractors fail to insure.

Contractor’s responsibility to keep the insurances adequate and valid has been stated openly. In all insurance policies the insured must communicate with the insurers about all the changes in nature, extent and work program.  The contractor must pay extra attention to the maintenance of the policies, failure to do so may cause problems in insurance covers as well as contractual breaches.

1.2 Article 19.2 - Insurance to be provided by the Contractor

The required Insurances under the policy has been clearly stated under this article. This makes the new books easier to understand in terms of requirements and coverage of the required insurances.

1.2.1   Article 19.2.1 - The Works

Old books, used to handle the insurance for Works (Construction All Risk /Erection All Risk) and Contractor owned materials under the same paragraph.  The new book’s approach does not only handles the CAR/EAR policy separately, the required coverage is explained in details clearly. However the Contractor must be careful before signing the new contract for some of the requirements may not be placed in the Insurance Markets. According to Article 19.2.1, the insurance for Works must cover;

• All Risks
• Full Replacement Value
• Damage as consequence of defective design, defective materials and workmanship
• 15%  above the Replacement Value
• Professional Fees
• Cost of Demolition and Removal of Debris
• All loss or damage from all risks until Taking over Certificate.
• Extension until Performance Certificate
• Betterment of defects after taking over
• Cover for Tests and Commissioning.

Stated Exclusions are:

• The cost of making good any part of the works which is defective
• Indirect or Consequential Losses
• Wear, tear, shortage, pilferages
• Risks arising from Exceptional events (Clause 18)

1.2.2   Article 19.2.2 - Goods

The article clearly requires the Contractor to provide insurance for all its own goods on full replacement value basis. The cover should be placed and continue to be in place until the goods are no longer present at site. However; the type of insurances required are not clear and there are no details about any specific coverage. Probably, the aim of this sub clause is to relieve the Employer from any sort of liability by requiring a joint name insurance.  The Contractor should note that accepting this clause as it is, may lead to different interpretations from the Employer and its consultants who may force the Contractor to procure Machinery Breakdown insurance which is not cost effective nor practical for contractor especially who are working in remote locations and/or high risk zones.

Contractors should be able to handle this clause with 2 types of insurance, both of which can be purchased as an extension to CAR/EAR policy or as separate covers.

• Insurance for Camps & Temporary Facilities: The Contractor may add this cover as an extension under Section I of the insurance for the works. As the requirement under the policy is based on full replacement value, the Contractor must take into account to include all material costs, logistics, and custom duties besides erection costs.
• Insurance for Machinery and Equipment the Contractor may add this cover as an extension under Section I of the insurance for the works. As the clause dictates the Contractor is obliged to submit the new replacement value of the machinery park in order to avoid underinsurance problems in case of a loss.
• Both of the above required insurances can be arranged as standalone policies; Camps & Temporary Facilities as a property policy and Machinery and Equipment as Construction Plant & Machinery (CPM) policy.

1.2.3 Article 19.2.3 - Liability for breach of professional duty

One of the important difference between Edition 1999 and Edition 2017 is the addition of Professional Liability Insurance (PI) into the contract. The Contractor should be aware of the fact that PI is not an easy cover to place. There are very few markets who are interested in Professional Liability Insurance, and the ones that are interested apply heavy underwriting guidelines and high rates.

Choosing the right limits and time period is essential. The Contractor must understand that PI insurance is in place primarily to protect the interest of the Contractor not the Employer. Therefore required limits and indemnity period should be stated under the Contract and should be agreed with the Employer before signing the Contract. In order the PI policy to be triggered, the claimant (usually the Employer) has to establish legal liability for the occurred loss. Depending on the jurisdiction, this can be a hard and very lengthy process. The Contractor should be careful to include defense and legal costs while arranging such a policy.

Another obstacle is high limits and lengthy time and/or extended reporting period requirement for the capacity for such insurance is limited is limited, and the underwriters will not be willing to tie their capacity for such long tail businesses.

Under paragraph 19.2.3.b “Fit to purpose cover” is requested.  In most wordings “Fit to purpose cover” is excluded from PI covers, and very few markets would be willing to offer this extension.  One thing is certain that it will be economically almost impossible to enable to fulfill this requirement. This requirement should be a subject of negotiation with the Employer and clearly stated in the Contract.

 1.2.4  Article 19.2.4 - Injury to persons and damage to property

This section of the new edition describes the required cover for Third Party Liability insurance. Although the wording here is simpler, there is no change in the dictated requirements.

TPL cover arranged by t Contractor should include the following;

• Cross liability clause
• Cover during Maintenance Period
• Joint name of the Contractor and the Employer. ,
• The limits should be stated under the Contract Data or agreed with the Employer.

1.2.5 Article 19.2.5 - Injury to employees

As in the former edition, here Contractor is required to insure its liability for claims arising of work related injury, sickness, or death. Contractor must purchase an Employer’s Liability Insurance.  It should be noted that limits for such an insurance is left for the negotiation between Contractor and Owner.   Contractor must consider the jurisdiction of the Project Country and/or residential jurisdiction of its workforce for deciding on limits.

1.2.6  Article 19.2.6 - Other insurances required by laws and local practice.

This section is a new addition to the new edition of FIDIC. International Contractors must get familiar with the insurance legislation as regards to the mandatory insurances for Project’s resident country.

2.  Recommendations

As can be seen, new version of FIDIC puts the burden of insurance only on Contractor.  So Contractors should be more alert on the provisions and requirements of contracts to be signed.

Although the new edition of FIDIC is easier to understand, as always, the Contractor should make sure that everybody in the Project Management understands what level of insurance cover is required. Prior to the negotiation of the limits for Contract Document and/or coming to an agreement for the required cover an insurance broker/advisor  involvement is highly recommended.  Insurance markets tend to change and react very fast, and Contractor must be sure of the market availability for the required limits and covers.

Please contact AtaGlobal and we will be happy to provide further guidance, including, if required, a full review of your current Contract and, if available, we can compare your current insurance policies’ adequacy with the contract requirements.

March 2019

by B. Mehmetali Dölen