Contact: David Wardle
Telephone: (02) 8864 8283
Banks and financial institutions (financiers) often require assurance that the risk exposures of a project have been adequately insured. This is particularly true when using non-recourse project financing. Marsh conducts independent insurance due diligence reviews for a range of organisations.
Two of the most common areas requiring due diligence reviews are construction projects and business acquisitions. Merger and acquisition services can be a form of due diligence.
In construction projects, a contractor will typically offer the following insurance coverage as a minimum during the construction phase:
- contract works / equipment
- surety bonds (or bank guarantees)
- workers' compensation
- professional indemnity
- third party liability
Such insurances address the physical and liability risks of the project but do not offer solutions to the non-physical risks of the project. The owner relies on the liquidated damages clause in the contract to obtain compensation for delay.
By requiring owners to arrange project-specific insurance, financiers have more control over the insurance placement and can influence the claims settlement process. Financiers will want to influence the level of self-insurance based upon their perception of the financial resources available to the project.
Project-specific insurance programs are arranged by the project owners on behalf of all project participants. Depending on the nature of the project, additional project-specific insurance-based solutions can be purchased to insure the financial consequences of non-physical risks. These can include:
- delay in start-up
- efficacy rectification and cost over-run
- liquidated damages and force majeure
- owner's protective professional liability
- enhanced environmental liability during construction
The project-specific insurances must be tailored to satisfy the needs of the parties ultimately bearing the risk, that is the owner, the contractor and financier.
When insurance-based solutions address both physical and non-physical risks this can have a positive impact on the overall cost of financing.
On completion of the due diligence, Marsh will issue financiers with an appropriate closing document confirming our opinion on the adequacy and security of the insurance program.
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