The Wet Risks Elements in the underwriting of Construction, Erection and Infrastructural Projects

Is the project site on or near any water filled environment? What is the percentage of the contract value that is of wet elements? Does the project has any incidental wet elements or is the whole project being a wet risk?

check fine printLooks like this underwriter is making himself an impediment in the negotiation process. But we just can’t blame him for hassling the broker, agent or client for more information as “Wet risks and Incidental wet risks” are normal treaty exclusion in Malaysia, which means underwriter cannot write “wet risks” without gaining the necessary approval from the company’s treaty leader(s).

So what are wet risks? In simplistic form, the characteristics of such risks are best summarised as follow:

  • the project site and/or the any part of the contract works are or would be in contact with or in close proximity to a reasonable and relatively large body of water or any aqueous environment, and
  • such contact or proximity must have resulted in the project site/ part of the works predominantly exposed (or under threat) or very much susceptible to the forces of water (flooding, waves and/or related currents). This shall include all constructions in respect of  foundation and substructure works that are exposed to action of the wave or increase in water levels (ie. high tide) shall fall within this category.

These following “marine-works” projects are  therefore wet risks:

Construction of Harbour, Breakwaters, Seawalls, Quays, Jetties (or terminals), Caissons, Piers, Docks, Power Plants’ water intake or outlet, River drainage (or dredging) or enlargement, Dams, Flood mitigation and Bridges including the piers in river or sea.

The construction of Infinity Tower in Dubai (2007):

The construction of Inffinity Tower (2007) - A sea wall was constructed around the site to block out the water.

The construction of Infinity Tower (2007)

Water seep through some fractures in the sea walls

Water seep through some fractures in the sea walls

The water forces through the enlarged cracks.

The water forces through the enlarged cracks.

The water gushes through uncontrollably

The water gushes through uncontrollably

Water, water, water... irreversible

Water, water, water... irreversible

The whole site is full of water with everything inside submerged

The whole site is full of water with everything inside submerged

 

 

 

 

 

 

a hole in paper
a hole in paper
a hole in papera hole in paperThis compelling sequence of photographs shows the sudden and rapid flooding of a large construction site. Nearly 100 workers at the site of the ‘tallest building with a twist’ had a lucky escape as a wall holding back the Dubai Marina waters breached and flooded the foundation site. Excavation works on the 80-floor Infinity Tower was nearing completion when there was a sharp and loud sound occurring. The workers then saw sand pouring down the sides. Within 4 minutes the site was completely covered with water. The rest was history.

It is not at all difficult to understand that this project is “wet risk” in nature with the water from Dubai Marina being blocked off by a water-retention wall. But you can still argue with the reinsurer, that this is not “wet” simply because the inside of the site is totally dry and moreover the original site dubai-before-the-flooding-iduring the ground-breaking was actually dry (see photo-shot), and has no contact with water. The project requires further downward excavation (photo-shot depicting how dubai-after-extensive-excavdeep was the excavation) with the retention walls constructed to further strengthen the existing walls around it.

quote

Nevertheless the verdict is “it is wet as to a larger extent it conforms to the definition above”.

companydetails_3

Generally we do not see much issues in differentiating the “wet” and those that are “not wet”. The treaty exclusion in respect of wet risks does not stop here however……

The treaty wordings normally go on to exclude “incidental wet risks” from the said exclusion where the total contract sum of the wet-works does not exceed a certain percentage of the total contract value, example, 15% of total contract value.

Fingering

Even if the project is not a wet risk by definition, underwriters must still ensure that there is no incidental wet elements (or wet-works) within the project and if there are, it is their duty to ensure that this incidental limit is kept beyond a certain percentage of the total contract value in compliance with the treaty exclusion.

While having said this, in reality the exact identification of the percentage of wet-works to be carried out is quite impossible in the absence of the Bills of Quantity (BQ) and relevant details. Most contractors in Malaysia do not provide this, firstly because it is very bulky and secondly they would rather keep the details on pricing as confidential as possible. It may also be, many of the contracts are actually negotiated rather than appropriately tendered. If pressed on, the best that they can do for us folks is to provide with a write-up of how the project is being constructed. We believe this still would not help in the computation of the percentage of the wet-works elements with certainty. Without certainty in arriving at the percentage, it can be frustrating underwriting on the basis of that part of the treaty exclusion. Where percentage of incidentals cannot be determined with certainty, it is usual for underwriters to seek the opinion of the treaty leader(s) but more often than not, it is turned into a “special acceptance” taking the uncertainty factor into consideration.

quoteThe real issue is in the uncertainty of that “percentage of wet-risks” computation…. for incidental part of the main contract. But is this actually necessary?

What would be the next best step…. can we have the definition of “incidental wet” risks reviewed?

Our opinion is that of no necessity to have such special provision for incidental works with wet risk elements below x% of tcv. The characteristics of what constitute “wet risks” are already well defined – it is either wet or not wet. The definition is such if the project is deemed wet, then it is reasonably well exposed to the threat of the action of water – there is always an imminent danger to destruction of a sizeable portion of the entire project. The project is not wet if the threat of such nature of destruction is limited relative to the entire project value.

A potential floodgate for pumpkins biting your fingers unnecessarily

Potential of the pumpkin biting back!

As far as the definition of wet risks characteristics is clear from perspectives of underwriting, reinsurers need not dig a hole to widen the cover. in a contrary fashion… otherwise the entire Infinity Tower project cannot be deemed a wet risk!

quoteThere is actually no necessity to have such thing called incidental wet elements must not < x% of tcv in order for underwriters to escape the said treaty exclusion on wet risks.”

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