Horizontal directional drilling is seen as one of the higher risk areas in the infrastructure sector. Climate change is further increasing this risk as extreme weather events become more frequent.
As Chief Executive Officer for a leading horizontal directional drilling (HDD) design and construction provider, Maxibor’s Rodney O’Meley highlights the key factors in understanding contract works and equipment insurance policies to ensure adequate cover is in place in this changing risk environment.
Why have insurance?
“Simply put, a business can go broke if it doesn’t. One major unforeseen event can stop a business in its tracks, leaving owners and staff without livelihoods, clients without a delivered project and other stakeholders unpaid,” says O’Meley.
It is just not about having insurance. Operators must know what their insurance policy covers and for how much. A simple certificate of currency explains very little – it is the extent of cover contained in the insurance schedule and policy wording that tells the real story.
O’Meley says it is those HDD providers, with appropriate insurance covers in place, that asset owners and principal contractors should be seeking out to undertake HDD works if they are genuinely serious about mitigating their risk.
Insurable HDD risks
In the HDD world, the main risks are covered under contract works, equipment, public liability, professional indemnity and workers compensation insurance policies.
Understanding which HDD risks are covered by these policies and the extent and nature of necessary cover requires alignment of knowledge between HDD engineering, operational, commercial and financial people from the business, as well as the insurance broker and the underwriter.
“If you do not understand what you are insuring and for how much you are just gambling that you will be covered,” O’Meley says.
He says insurance policies are lengthy documents, rarely visited except in the event of a claim. They are accompanied by a policy schedule which often refers to a policy section rather than providing specific detail of what the cover represents.
It can take years of experience to understand what the wording in the policies and schedules actually means, what events or losses are excluded, and how the policy applies to scenarios which are likely to impact a business.
“Most learnings are unfortunately gained through the experience of claims but by then it is often too late to ensure you are adequately covered or covered at all,” says O’Meley.
Contract works
Contract works covers damage to HDD works and materials under the insured party’s care, custody and control during a project.
It is one of the more complex areas of insurance, but it can be a lifesaver for a business when an unforeseen event occurs.
Claims for loss or damage commonly emanate from events beyond the control of the contractor, including earthquake, landslide, subsidence, collapse, storm, rainwater, flood, tsunami or cyclone.
Factors to watch out for include:
- Contract value limit – the insurer will require a contract value limit to be set under the policy. This limit cannot be set with certainty especially in a growing business or where variations, such as extra overs for rock, come into play.
“If you win a contract in excess of the set policy limit, or have variations causing the contract value to exceed the limit, ensure that you notify your broker with a view to achieving agreement for coverage by the underwriter (at no additional cost),” says O’Meley. - Bore diameter limit – underwriters struggle providing cover over 500 mm, let alone in excess of one meter diameter bores.
“This is where you need the underwriter to have a good feel for the risk associated with the specific project and your business overall so that cover can be readily provided,” says O’Meley. “You also need to know whether your insurer has the capacity to insure larger diameter bores because finding an underwriter with the wording to allow it can be exceedingly difficult.” - Free issue materials – even if materials supply is not part of a works contract, if the materials are in the operator’s care and custody, works contracts can contain clauses making the materials the operator’s responsibility until installed.
“This means you are at risk for loss or damage. Ensure you have cover for free issue materials and up to a value of the materials under your care and custody,” says O’Meley. - Above 26th parallel exclusion – insurers do not like the cyclone areas of Australia. If working above Gladstone, Alice Springs or Exmouth, operators need to ensure that this exclusion does not apply to them.
“If not, it’s a matter of going there at your own risk,” he says. - Flood – drilling under rivers and low-lying areas will always have the risk of flood attached to them.
O’Meley says that it is necessary to ensure that a policy covers flood events and that that there is an effective flood risk management plan in place for the project.
“Also watch the 72 hour rule – if the flood extends over this timeframe then it can become more than one event triggering extra deductibles,” he says.
Principal contractor project contract works policies – in cases where the principal contractor has in place contract works insurance, which covers the work of its subcontractors, operators should not automatically assume they are adequately covered.
“Know what that policy covers and, in particular, what the deductible is. A $250 k deductible set for a tier 1 contractor is not especially useful in providing cover for a smaller subcontractor,” says O’Meley.
Ground conditions – the extended La Niña event has made ground conditions less stable and caused the build-up of underground water levels. This can impact on HDD operations either directly or, where nearby other contractors’ works have water problems, “flow through” onto an operator’s HDD bores.
“In these instances, it’s about knowing not only your policy cover, but those of the other contractors on the project,” he says.
Equipment
Equipment policies cover sudden and unforeseen physical loss or damage to the insured equipment. Policies also provide ancillary benefits such a financial protection for loss of revenue and increased cost of working.
Factors to watch out for include:
- Insured value – getting insured values close to a current market value, particularly on higher value equipment that is critical to the business, is essential.
“Having an agreed value under your policy is preferable on the proviso that it is at, or near, market value,” says O’Meley.
In the event of a total loss, having an agreed value will expedite the claims process as valuers will not become involved in the claim settlement process. - Partial loss – in the event of a partial loss the insurer may compare the market value to the insured value. If there has been under insurance, then they may have a clause in the policy which allows a proportional reduction in the claim to allow for under insurance.
- Valuations – it is good practice to have current valuations of key equipment, especially in the present market where there is the impact of inflation, plus supply shortages, creating all-time high values for used equipment.
- Financial protection – this cover is for consequential loss that occurs if the equipment suffers damage during a flood event. The policy will set both the maximum amount and period of cover. If policies have reference to the average revenue derived over the last year by the individual item of equipment, that amount will be low if utilisation has been low i.e., the benefit of this cover will be limited. In the case of the numerous recent eastern state floods, it can be up to three months before works can recommence.
- Tooling – equipment policies will not generally cover tooling such as drill pipes, collars, rock bits, reamers, core barrels, stabilisers, logging equipment and casings while in the bore hole.
“In case of flood, make sure you get them out before the waters arrive,” says O’Meley
Maxibor is fortunate that it has been able to establish, over time, exceptionally good working relationships with its insurance broker Luke McMahon of Bespoke Insurance Group.
McMahon has provided a truly knowledgeable and professional link into the underwriters, enabling the full spectrum of Maxibor’s insurance policies to provide good coverage of the business.
The company’s go-to valuer, Tony Taylor of Blue Gum Asset Advisory, has also helped ensure the value of its equipment has been at or near market value in a volatile market space.
For more information visit Maxibor.
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This article appeared in the December edition of Trenchless Australasia. Access the digital copy of the magazine here.