Shipbuilding Insurance: Complete Guide to Construction Coverage

What is Shipbuilding Insurance?

Shipbuilding insurance (also known as builders risks or construction risks insurance) is a specialized marine policy that protects vessels during the construction process. Coverage typically begins when materials are first delivered to the shipyard and continues until the completed vessel is delivered to the buyer.

This form of marine insurance shares characteristics with both property insurance (protecting a physical asset) and construction insurance (covering a project in progress). It recognizes the unique risks of shipbuilding, including:

• Extended construction periods (often 2-4 years for large vessels)
• Progressive increase in value as construction advances
• Multiple risk phases: construction, launch, fitting out, sea trials
• Complex subcontractor relationships
• Technical risks from new designs or technologies

Major Shipbuilding Markets

Global shipbuilding is concentrated in a few countries, with insurance programs often reflecting local market practices:

• South Korea: Hyundai, Samsung, Daewoo (complex vessels, LNG carriers)
• China: Multiple state and private yards (bulk carriers, containerships)
• Japan: Mitsubishi, Imabari, Oshima (high-quality construction)
• Europe: Specialized vessels, cruise ships, offshore units

Who Needs Shipbuilding Coverage?

Multiple parties have insurable interests during ship construction:

Shipyards (Builders)

The shipyard typically carries insurance during construction until risk passes to the buyer. Key interests include:

• Materials and work in progress
• Liability for damage during construction
• Contractual obligations to maintain insurance
• Protection of their reputation and relationships

Ship Buyers (Owners)

The buyer's interest depends on the shipbuilding contract terms:

• Pre-delivery payments at risk if the yard fails
• Contractual right to require insurance
• Interest in the vessel upon passing of risk
• Delay in Start-Up (DSU) exposure

Lenders and Financiers

Banks providing construction finance require:

• Insurance as security for advances
• Loss payee status on the policy
• Notification of any policy changes
• Direct claim rights in some cases

Risk Transfer in Shipbuilding Contracts

The shipbuilding contract determines when risk passes from builder to buyer:

• Traditional terms: Risk passes at delivery
• Progressive payment terms: Risk may pass with title
• Refund guarantee structures: Complex risk allocation

Policy Structure

Shipbuilding insurance policies are typically based on the Institute Clauses for Builders Risks, adapted for each project's specific requirements.

Institute Clauses for Builders Risks

The standard policy forms include:

• Institute Clauses for Builders Risks 1/6/88: The most widely used form
• Institute Clauses for Builders Risks (Limited Conditions) 1/6/88: Narrower coverage

Coverage Sections

A typical builders risks policy includes:

• Section 1 - Physical Damage: Loss or damage to the vessel under construction
• Section 2 - Third-Party Liability: Damage to other property during construction
• Section 3 - Launch: Specific coverage for the launch event
• Section 4 - Sea Trials: Coverage during testing
• Section 5 - Delivery Voyage: Transit to the buyer

Construction Phase Coverage

Pre-Launch Phase

Coverage during the main construction period includes:

• All materials incorporated into the vessel
• Materials on-site awaiting incorporation
• Fire, explosion, and theft risks
• Damage from construction activities
• Weather damage to the incomplete vessel

Launch Coverage

The launch represents a significant risk moment:

• Slipway or floating dock operations
• Stability during launch
• Damage to hull during the process
• Collision with other vessels or structures

Fitting Out and Testing

After launch, the vessel is completed afloat:

• Installation of machinery and systems
• Quayside testing of equipment
• Progressive testing of systems
• Protection against weather and vandalism

Sea Trials

Sea trials coverage is critical as the vessel operates for the first time:

• Machinery testing at full power
• Navigation equipment verification
• Speed and fuel consumption trials
• Crew familiarization
• Coverage for damage discovered during trials

Delivery Voyage

Coverage for the transit from yard to buyer's delivery point:

• May be included in builders risks or separate voyage policy
• Coverage limits may need adjustment for longer voyages
• Geographic limits must be appropriate

Key Policy Extensions

Delay in Start-Up (DSU)

Also known as Advance Loss of Profits (ALOP), DSU covers the buyer's financial losses when delivery is delayed due to insured damage. Coverage includes:

• Lost revenue during the delay period
• Continuing fixed costs
• Increased costs of working
• Contract penalties (if insured)

Escalation Clause

Provides for automatic increases in sum insured to account for:

• Inflation in material and labor costs
• Change orders and modifications
• Currency fluctuations

Sue and Labor

Covers reasonable expenses incurred to prevent or minimize an insured loss.

Removal of Debris

Covers costs of removing wreck or debris after a casualty.

Express Freight and Airfreight

Covers additional transportation costs to expedite delivery of replacement parts or materials after a loss.

Common Exclusions

Standard Policy Exclusions

• War and strikes: Require separate cover
• Nuclear risks: Standard exclusion
• Wear and tear: Normal deterioration
• Inherent vice: Characteristics of materials
• Defects in design: But consequential damage may be covered
• Delay: Unless DSU extension purchased
• Loss of use: Unless DSU extension purchased

The Faulty Design/Workmanship Conundrum

Builders risks policies typically exclude the cost of correcting faulty design, materials, or workmanship. However, they may cover resulting damage to other parts of the vessel. This mirrors the approach in construction insurance (similar to LEG3/DE3 clauses).

Contractual Penalties

Penalties for late delivery are not automatically covered. Specific coverage may be available but is subject to underwriting.

Sum Insured and Valuation

Determining the Sum Insured

The sum insured should reflect the completed value of the vessel:

• Contract price between yard and buyer
• Cost of buyer-supplied equipment
• Anticipated variations and modifications
• Escalation allowance
• Professional fees for reconstruction

Adjustable Premium Structures

Given the long construction period, premium may be structured as:

• Fixed premium: Based on estimated final value
• Adjustable premium: Initial deposit with adjustment at completion
• Progressive premium: Premium paid as value increases

Multiple Vessels

For shipyards building multiple vessels, coverage may be arranged as:

• Individual policies per vessel
• Fleet builders risks covering all vessels at the yard
• Annual policies with declarations

Claims Considerations

Common Claim Types

• Fire and explosion: Welding, hot work accidents
• Crane drops: During block assembly or equipment installation
• Weather damage: Flooding, storm damage to hull
• Machinery damage: During testing and sea trials
• Launch casualties: Damage during launch process
• Collision during trials: Navigation incidents

Notification Requirements

Prompt notification is essential:

• Notify insurers of any incident that may give rise to a claim
• Special notifications may be required for launch, sea trials
• Keep detailed records and photographs
• Preserve damaged materials for inspection

Survey and Assessment

Insurers typically appoint surveyors to:

• Monitor construction progress
• Attend at launch and sea trials
• Investigate any casualties
• Approve repair methods

Conversion and Refit Coverage

Similar coverage is available for major vessel modifications:

Types of Projects

• Conversions: Changing vessel type (e.g., tanker to FPSO)
• Lengthenings: Extending the hull
• Re-engining: Major machinery replacement
• Life extensions: Major refurbishment programs

Coverage Considerations

• Pre-existing vessel value plus conversion cost
• Distinguishing between conversion work and existing vessel
• Coordination with existing hull insurance
• Coverage during transit to and from the yard

Loss of Hire

For conversions of existing trading vessels, loss of hire coverage may be appropriate to cover lost earnings during the yard period if extended by insured damage.

Frequently Asked Questions