Put to Use

The period of cover in a Project insurance policy (Contractors’ all risk or Erection all risks) begins with the unloading of the first project material at the site or beginning of construction (which ever is earlier). It ends with first test operation of the machinery but this is further limited to four weeks from the day on which after completion of erection a trial run is made and/ readiness for work is declared. However if a part of a plant or several machines is/ are tested and put into operation the cover under project insurance policy seizes.

The intent of the policy maker is quite clear - project insurance policy shall only cover the risk during the construction phase. The moment a plant in full or part is ready for use, it goes out of the ambit of construction policy and needs to be covered by an operational policy, like Fire, Machinery insurance etc.

Let's try to understand the logic of this position from the insurers' prospective:

1. As a Project progress, additional amount gets added to value at risk under the policy.
2. The cover under the project insurance policy is on All risk basis where as operational policies like fire, machinery breakdown are specified peril policy.

So from Insurers’ viewpoint, there is an obvious need to limit his liability for Project components that are no longer required to be e covered by all risk terms of the project insurance policy. 

Even from the Insured’s perspective, the situation is beneficial-  since the deductible for claims under project policy are higher than under say fire or engineering policy. eg. A flood claim under Standard Fire policy has a deductible of 5% of claim amount subject to minimum of Rs. 10,000. But a flood claim under Project Insurance policy (CAR/EAR) is subjected to deductible of 10% of claim amount subject to minimum of Rs. 30,000/ 40,000

The utility of this condition can be understood by a few examples from real life situations: 

Contractor's all risk policy for construction of various blocks of proposed University building spread over few acres. Once the main administrative block and one or two teaching blocks are ready, they can be put to use for conducting classes and consequently can be taken out from the project insurance policy.

Erection all risk policy for construction of a sugar factory including power generation and storage godowns. Once the power generation or storage unit is ready, it can be used for electricity generation or storage respectively.